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Capgemini: “In Shape and On the Move”

 

We have delayed the publication of this event note until after Capgemini’s Capital Markets Day this week, when Capgemini confirmed its mid-term ambitions of 5-7% organic growth and an operating margin of 12.5-13%.

“In Shape and On the Move” were among the first few words of COO Thierry Delaporte’s closing address at Capgemini’s global analyst and advisor meet in NYC, and this claim nicely sums up what is happening at Capgemini in 2018. Let’s take a closer look.

Examining the claim

In shape

The company is in relatively good shape. In 2017 Capgemini achieved a recovery in its North American operations and delivered organic topline growth of 3.6%, an adjusted operating margin of 11.7% (its third consecutive year at over 10%) and FCF of €1,080m. Guidance for 2018 includes >7.5% CC growth, of which ~1.8% inorganic, and an adjusted operating margin of 12.5-13%. This is solid execution, especially for a European headquartered IT services major.

On the move

Having celebrated its 50th anniversary last October, Capgemini is also very evidently on the move: it has been expanding its capabilities in Digital and Cloud, including making several acquisitions around experience design, as well as making progress in renovating some of its traditional services (e.g. around agile development). It is also getting to grips with long-term challenges in presenting a unified face to the client and in gaining access to CXOs other than the CIO to position for opportunities in supporting clients with their digital transformation (where any growth in IT spend is coming from). The reorganization taking place at Capgemini today, impacting both go-to-market and portfolio management, is perhaps the most radical and most significant in its history. Certainly, it is one that is required for Capgemini to be able to position on its slogan of ‘A Leader for Leaders’.

Overview of organizational changes

In attending the event, we were keen to check whether the new group organization that had been publicly announced a few days before is as fundamental a reengineering, particularly around portfolio, as it sounds (or perhaps just an application of lipstick). After many conversations with Capgemini folk, we came away convinced. So, here’s a brief overview of the organizational changes.

Firstly, around go-to-market

Historically, Capgemini’s decentralized structure meant on occasions a lack of coordination at the account level outside the very largest strategic accounts (which have been covered for some years via dedicated account managers or country boards); the group has been seeking to address this for some years. Back in 2016, it looked as if Capgemini might start replicating the success of its Financial Services SBU – which has expanded from application services to selling the full Capgemini portfolio – to other verticals. And with the development of the portfolio around Digital Manufacturing, it looked as if this might be the case with manufacturing, rather than, as we expected in 2016, retail.

What Capgemini has opted for is more realistic for the group. There is more sector relevance, without a wholescale group-wide verticalization. FS remains a purely vertical SBU. Elsewhere, each major geographical SBU (North America & APAC; EMEA) is now aligned by sector in the go-to-market. This means the taxonomy of sector offerings is now globally standardized; also, Capgemini’s model has moved from parallel P&L structures to a more unified GTM at the account level. For smaller accounts, the GTM is by vertical within a service line.

So, there is both increased account centricity and some increased sectorial focus.

Secondly, around portfolio management

This is perhaps the more remarkable aspect of Capgemini’s restructuring. There are seven current priorities across the portfolio, which Capgemini classifies in three groups:

  • ‘Rejuvenating core IT’ (still a major part of the business; Capgemini claims ~45% of its business is in Digital and Cloud):
    • Next gen AMS
    • Digital core (S/4 HANA, ERP to cloud, intelligent process automation in BPO)
  • ‘Reinforcing high growth offers’ (with an increasing sectorial dimension around some of these):
    • Digital CX
    • Cloud
    • Cyber (will be boosted in Q4 by the Leidos commercial sector acquisition)
  • ‘The New’:
    • Digital manufacturing
    • AI & analytics.

We assume emerging technologies such as blockchain and AR/VR are either being subsumed within areas such as Digital Manufacturing or will in time appear as separate priorities within ‘The New’.

Capgemini is changing the way it is working. There are now five global business lines, with effect from July 1:

  • Capgemini Invent, comprised of Capgemini Consulting and a series of recent acquisitions: LiquidHub, Fahrenheit 212, Idean, Adaptive Lab (also Backelite, acquired back in 2011)
  • Engineering & Manufacturing Services, comprised of different units, including Sogeti in France and the U.S., IGATE’S engineering services unit, and Digital Manufacturing Services
  • Business Services
  • Cloud & Infrastructure Services
  • Insights & Data.

We would expect the service line reporting to change to reflect this in 2019.

The first two of the five global business lines are brand new practices.

The two geographical application services capabilities held within APPS.1 and APPS.2 remain as local practices – clearly this was too big a pill to swallow currently.          

Across all of these, Capgemini is, unsurprisingly, looking to inject an innovation agenda, e.g. injecting automation/AI tools and analytics into traditional IT services and BPO, and building scale and reusable solutions in the newer areas.

One minor distinction is that there is not a central unit with responsibility for developing AI models: the approach, that AI is infused everywhere, prevents the potential siloed approach to developing uses cases across service lines that we have noted with some other services providers

The big change: Capgemini Invent

The priority in terms of portfolio development is with Capgemini Invent, launched externally in September, and covering consulting, transformation, and invention activities. It has six practices:

  • Innovation and strategy, led by Fahrenheit 212, focusing on new products and services and business models
  • Customer engagement, focusing on CX to handle complexity (e.g. channels) and IT modernization. It competes with digital agencies
  • Future of technology, using emerging technologies such as AI, robotics, and blockchain
  • Insight-driven enterprise, data analytics and AI
  • Operations transformation, with a focus on industrial operations
  • People and organization.

If we are to believe what we have been told, Capgemini Consulting ceases to exist.

Speed of integration of LiquidHub shows momentum

Where Fahrenheit 212 may have helped changed the mindset of the group, LiquidHub has added scale and is the heart of Capgemini Invent in the U.S. The intended level of integration of the various units that make up Capgemini Invent is evident in the immediate retirement of the LiquidHub brand name. This is a significant difference from what we see happening in some other major service providers, where their Digital practices include acquired entities that have retained their brand names – thereby distinguishing them from the core IT services practices. There are a number of advantages if Capgemini Consulting – and the other acquired assets that make up the practice – all operate under the Capgemini ‘Invent’ brand. For example, the Invent brand could be helpful in attracting younger talent.

Conclusion

The creation of Capgemini Invent (and the concomitant retirement of Capgemini Consulting) is a bold move by Capgemini in helping it position much more strongly around business innovation. The new organization structure should also be instrumental in driving change across the group.

We were expecting to see some tuck-in acquisitions in Europe to help build a full set of Capgemini Invent capabilities across geographies, and indeed Capgemini has just announced its acquisitions of June 21 in France and of Doing in Italy; we expect there will be others, perhaps in Germany or the Nordics.

There is some progress in terms of sectoral dimension, and the fact that there is a practice in Capgemini Invent focusing on industrial operations is significant (it is not just looking at digital marketing and UX). But we think Capgemini has some way to go in certain key target sectors, and we expect sector-specific offerings to feature more prominently in the next few years.

The joint COO structure is unusual, but as well as providing a clear indication of CEO succession planning it also provides a clear dual focus for corporate developments, for example with Thierry Delaporte driving the sector plays.

During the event, Capgemini cited an example of a client where the relationship has evolved from being a volume partner (a large application maintenance contract), to a value partner (Capgemini is now their main digital partner). This illustrates neatly the ambition of the group.

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