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CGI: Combining Effective Consolidation with Platform-Based Services

In August 2015, we asked ‘Is CGI Ready to Pull the Acquisition Trigger?’It’s been four years CGI’s last big acquisition (Logica), and CGI watchers are still waiting to see what big move CGI will make next. Here I take a look at what’s driving CGI’s growth plans, and what we should expect next.

As a consolidator, CGI positions on taking a long-term strategic view (it does not provide financial guidance), and indeed long-term shareholders have clearly benefited. When it announced its intended acquisition of Logica in May 2012, its market cap stood at ~$5.3bn; at the time of writing, its market cap is over $14bn. Share price has nearly trebled in the last four years. As we were reminded, CGI remains the only company to have acquired a CDN$6bn IT services company effectively.

At CGI’s recent industry analyst event in the U.S., its first for some years, we were keen to find out more about how CGI’s operating model works (their model is very different from its peers, which tend to be more vertically focused), and about its near to mid-term ambitions. Several weeks after this event we also caught up with Colin Holgate (heads CGI’s global delivery capability, as well as the APAC region) and Doug McCuaig (EVP Global Client Transformation Services) in London.

What is the CGI Management Foundation – and what does it enable?

CGI refers to its Management Foundation as the secret sauce behind the effectiveness of its acquisitions, and being central to CGI’s continuing success. Former Logica clients also tell us they have noticed a difference since CGI took over.

The CGI Management Foundation is more of a bible than a secret sauce, covering every aspect of managing a business unit. First seeing light in 1992, it continues to serve as the backbone for the company’s management frameworks, policies, and guidelines. It covers every area of an organization, from corporate and BU processes through to clients, shareholders and employees (members). The Client Partnership Management Framework, for example, provides a guide for every phase, from the proposal through to delivery and deal closing for each type of service (outsourcing, projects, consulting).

The Management Foundation is extremely strong on financial processes; for example, it prohibits the signing of contracts with unlimited liability. And the fact that CGI has one accounting system globally (Logica, in contrast, had 22) makes it easier to have financial controls. For example, one aspect of the Management Foundation looks at how much time it takes to invoice a client and the milestones for payment, to make these as short as possible. Collections are scrutinized closely. When late payment is apparently delivery-based, CGI will look at KPIs such as the CSAT and project health-check report to understand if there is an issue behind non-payment. CGI charges BUs interest for significantly overdue payments. Red contracts (e.g. margin leakage from plan) are reviewed monthly, with the CEO involved, and the BU presenting on action plans. This means, inter alia, very early contract issue identification and a focus on profitable business (what CGI calls “quality revenue”), and alignment of management incentives with financial goals. In contrast, Logica struggled to get to grips with its problem contracts. CGI claims that it has elected to exit unprofitable former Logica business that has impacted revenues by over $400m over the last four years.

So, the Management Foundation makes for a rigorous environment, and a company that operates with a common global set of operational KPIs. It speeds up the integration and alignment of acquired capabilities. Its transparency means that non-adherence at local level is not possible.

It has enabled CGI to operate successfully an operating model that is probably unique for an IT services company of its scale and geographic presence, one that is based on a series of locally facing BUs (some of these are metropolitan areas in the U.S., a few are client-specific), with accountability pushed right down to the BU. This is a level of accountability and client proximity that other vendors aspire to. Along with local accountability, the Management Foundation also brings local empowerment, as long as it is followed; among other things this means shorter decision making.

So how does the Management Foundation support and encourage the sharing of best practice, of industry domain expertise, or the development of leading-edge solutions, global delivery, etc.? Clearly it does, otherwise CGI would very quickly be losing relevance and competitiveness and the evidence is otherwise. Our forthcoming Key Vendor Assessment on CGI will look at all of these. Considering the use of global delivery, there appears to have been an evolution in the last couple of years from CGI’s offshore capability (primarily in India) acting as a delivery organization waiting to be fed. Resources from India are being increasingly used in strategic deal pursuits, including as solution architects. India is now also being used for the maintenance and development of CGI’s own IP (more of which below). And, unsurprisingly, the offshore unit in APAC is driving the use of IT process automation and of distributed agile. Rather than a scaling of the offshore organization, expect to see an increasing focus on automation for improved efficiency speed, also on analytics and AI.

CGI’s Build & Buy Strategy

CGI management frequently refers to the Build & Buy strategy which it has successfully followed in profitably doubling its revenues every five to seven years. Logica is now integrated and CGI is on the path to profitable organic growth with the former Logica operations, having achieved margin improvement in all those regions and now delivering constant currency growth in France and the U.K.

So what next? Its messaging about current focus areas is clear. Let’s look at the twin components of ‘Build’ and ‘Buy’ in a little more detail.

Build strategy: IP30 ambition is central

CGI highlights three key focus areas in its ‘Build’ strategy:

  • Building consulting capabilities in DCX, agile, big data and analytics, and cyber
  • Its IP30 ambition, for IP-related business (which tends to be higher margin) to grow from 18% (~CDN$1.8bn) of FY15 revenues to 30% of FY19 revenues
  • Large outsourcing deals.

With IP30, CGI has unusually shared a financial goal, one that is very ambitious, and as such it is one that has attracted a lot of interest. CGI estimates it has a portfolio of around 175 IP solutions, of which ~85 are commercial software with a formal GTM strategy (the others are frameworks, toolsets, etc.). Around 10 of these account for ~50% (~CDN$900m) of FY15 IP revenues, and five, including Payments 360 and Advantage, are dominating recent bookings.

Simple math shows that, given CGI’s ambition to double revenues every five to seven years, this could mean a target as high as CDN$6bn, one that is only achievable through a mix of organic and inorganic growth.

For organic growth, CGI is relying on four main levers for its IP:

  • Bringing IP-based offerings  to new geos: CGI claims its migration of IP solutions across geographies is now accelerating, and points to recent successes with Payments 360 in the U.K. and with Collections360 in Australia, as examples of platforms that have transferred from the U.S.
  • Enhancing the functionality of the existing IP portfolio, sometimes with partnerships
  • Launching and accelerating new solutions
  • Expanding SaaS and BPaaS models.

The largest revenue opportunities for IP-related revenues will be those where the platform is part of an outsourcing engagement. CGI has a track record for this in services such as Managed Advantage, less so in BPS. But it is not yet clear the extent to which CGI is looking to grow a more substantial BPaaS business based on some of its IP.

A second pillar of CGI’s organic growth strategy remains large, long-term IT outsourcing deals. While these are fewer on the ground, it has been awarded two such deals this year, with SNC-Lavalin ($500m over 12 years) and Sears Canada ($200m over 10 years). CGI is one of a decreasing number of vendors that is interested, where appropriate, in deals that involve personnel transfer. It also highlights its ability to both run clients’ legacy environments, reducing the ‘run’ spend, and also support them in their change agendas.

Buy strategy: acquiring for IP/industry presence

CGI has indicated clearly for some time its ambition to acquire in the U.S. (or U.K.) commercial sector, most probably in utilities or financial services, both sectors where it already has IP. While the market waits for CGI’s next large acquisition, it has been highlighting how active it has been in its identification and assessment of appropriate targets, and also, naturally, how rigorous is its M&A management process as laid down by the Management Foundation. In the U.S., for example, CGI has identified nearly 400 niche and over 60 ‘transformational’ targets. Meanwhile, it has made a couple of niche acquisitions this year in Canada and France, both of which extend its presence in the retail banking sector. These two have combined annual revenues of ~CDN$50m.

But clearly, CGI’s primary focus is a large acquisition, ideally one (or ones) bringing in IP as well as scale. The indications are that it will have acquired ‘the right company, in the right location, at the right price’ within the next 12 months. Where the primary focus with Logica was gaining a scale presence in Europe, the primary focus with the next acquisition is more likely to be IP – and this could also have an impact on other service lines. There are also likely to be further niche acquisitions, probably including in cyber consulting.

Summary

CGI positions on:

  • Reliable delivery, achieved by leveraging the Management Foundation
  • Client proximity, co-location and domain knowledge
  • End-to-end services, and its suitability for larger long-term engagements
  • Its enabling IP.

And the emphasis on the last of these is becoming more pronounced. CGI’s stated IP30 ambition may be bold, but it is useful in reflecting a shift in positioning, one that emphasizes digital transformation, industry and innovation.

Will CGI achieve organic growth by FY17? Will it double its revenues in the next few years? And will IP-related business represent 30% of FY19 revenues? These questions are arguably less important than its ongoing ability to drive profitable growth, even if that growth is primarily inorganic. And of that there is little doubt.

NelsonHall will very shortly be producing its first ever comprehensive Key Vendor Assessment on CGI. For details, please contact Guy Saunders.

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