NTT DATA Moves Away from Holding Company Approach to Be More Region-Centric as it Pursues International Growth

NTT DATA Inc. recently held its first ever analyst day in Boston.

For those readers who may not be fully up to date of where NTT DATA Inc. fits into the NTT DATA organization: NTT DATA Inc. is the North American subsidiary of Japanese-headquartered NTT DATA, the largest IT services firm in Japan, which itself is a 54.2% subsidiary of NTT Group, which also owns NTT Communications and Dimension Data.

NTT Group has been pursuing an international expansion strategy for some time, to reduce its dependence in Japan and benefit from opportunities in other regions, in particular in North America and EMEA. As part of this corporate ambition, a series of acquisitions within the NTT Data organization have included:

• In North America, Keane (2011, 12.5k personnel of which 7K in India), Intelligroup (2010, ERP services, 2,500 employees, of which 2,000 in India) and last year Optimal Solutions Integration, a SAP services specialist headquartered in Irving, TX, revenues ~$170m, headcount of 1k, including 200 in India)
• In Europe, itelligence (Germany, 2008, €164m revenues, SAP services), Cirquent (Germany, former BMW captive) and more recently value Team (Italy, 2011, €308m in revenues and headcount of 3k), EBS Romania (2013, ~600 personnel servicing mostly Germany) and everis (Spain, 2014, €591m, 10.6k).  Everis, a major player in Iberia has also brought in delivery capabilities in LATAM which could potentially be leveraged by NTT Data Inc.

NTT DATA globally is today perhaps larger than many industry watchers are aware: revenues for FY14 are around $13bn, of which 21.8% outside Japan.  NTT DATA International revenues have grown from just $150m in FY07 to around ~$2.7bn in FY14.  The ambition is to reach ~$3.4bn by FY16 (or 25% of global revenues).  The long-term perspective in NTT DATA’s international strategy reflects a Japanese culture: the focus is on expansion rather than, at least in the short term, on margin: Q1-Q3 FY14 EBIT margin in NTT DATA’s international operations was negative, partly due to goodwill amortization.

A priority is clearly to absorb and integrate all its acquisitions to a federated region-centric structure that has several areas of coordination, evolving NTT DATA’s operating model from a holding company scenario. As part of its integration effort, NTT DATA has focused initially on North America, its largest market, where it has integrated Keane with Optimal and other smaller acquisitions into regional business with a single management structure and now goes to market under the NTT DATA brand. Elsewhere, brands such as Itelligence and everis remain – at least for the time being, although the EMEA region is also spearheading a “One NTT DATA” initiative across the region. Other initiatives that should help in both integration and ultimately margin improvement include setting up of shared services for some back-office activities.

NTT Data Inc: at the Forefront of the "One NTT Data" Inititative; Looking for Further Expansion

NTT DATA Inc. today is now a significant player in North America: revenues have reached ~$1.5bn. The company retains the application services centricity of Keane (65% of revenues): offerings include ADM, legacy modernization and testing (40% of revenues) and ERP services (25%). It has some proprietary software IP, in particular in the healthcare industry, for example a revenue cycle management (TCM) platform. Other offerings include cloud services (10% of revenues) with a professional service offering; BPO: 7%; and staffing: 7%.

Major longstanding clients include Honeywell, Morgan Stanley, Unisys; more recent big wins include Yum! Brands and Daimler.

Its sweet spot, in terms of deal size, for ERP and ADM services is around $5m, rather than larger deals. Having said that, last year NTT DATA Inc. secured one of its largest ever deals in the government sector, winning a sizeable $200m+) ITO deal at Texas Dept of Transportation (TXDot) over Xerox (see http://research.nelson-hall.com/search/?avpage-views=article&searchid=21640&id=200003&fv=2). A factor that helped it secure the deal was its ability to bring Dimension Data capabilities to the table for the network management services as part of the NTT family.  It has brought DiData into clients such as Honeywell. We would expect to see over the next few years an increasing focus on integrating various parts of the NTT Group (other regions of NTT DATA, or DiData, or NTT Comms) into selected target accounts. But the bread and butter business in the U.S. will continue to be on mid-single digit opportunities, including growing accounts brought in by Optimal

One thing that management highlighted was that NTT DATA Inc. has very few red accounts.

So what should we expect to see happening at NTT DATA Americas over the next year or so?

• Further inorganic growth, for any of the following
  - Increasing its domain capabilities in target sub-verticals, which include P&C insurance (a Guidewire SI capability would be highly desirable: but would also be highly attractive to other vendors; among the larger IT services vendors,  only Capgemini has so far built up a sizeable Guidwire practice) or healthcare payer
  - Expanding its geographical reach in North America, in particular the west coast or Canada
• Continuing to build its rural/near/onshore delivery capabilities. A BPO and apps support contract with Yum! Brands last year brought a 200-personnel presence in Louisville, KY which NTT DATA intends to leverage to serve multiple client and at least double in size (see our comment at the time of the contract announcement at http://research.nelson-hall.com/search/?avpage-views=article&searchid=21639&id=201928&fv=2)
• Increasing its focus on mid-sized, high-growth organizations such as Palo Alto Networks, where NTT DATA can be a strategic IT services partner and support the client in its expansion
• Replicating what it has done in Texas (where it spent several years developing relationships before winnng the TxDoT deal) to develop a presence in other states
• Acting as a central point for cross selling opportunities for NTT Comms and Dimension Data. This NTT Group approach is determined on a bid by bid basis and is not systematic
• Setting up and building R&D and customer experience centers in North America to showcase the IP of NTT DATA in Japan. The first, a new center in Palo Alto, CA, is opening this summer. This R&D initiative is in the context of the wider NTT Group

**************

Clearly, NTT DATA as a whole is taking a very systematic approach to its international expansion, with a long-term view. It has also been very pragmatic about its international expansion: the U.S. is the largest IT services market worldwide and has rebounded. Europe is a work in progress: NTT DATA now has a significant presence in Germany and Spain and will want to expand in other major geographies: the U.K. comes to mind as a key priority.

The core of the NTT brand is using IT innovations: did we see much evidence of that at the NTT DATA Inc. analyst event? Perhaps not – but for most, if not all, analysts there, the event was about getting to understand where NTT DATA Inc. is today. And we were convinced that this is an operation that has attracted many seasoned execs in its leadership and has the wallet and appetite for further growth, combined with a realistic sense of the types of opportunities for which it is well positioned in the short term. Looking ahead, opening up R&D and customer experience centers in the U.S. will provide the opportunity to bring capabilities from other parts of the other NTT Group to clients’ attention and to underpin portfolio development. And any acquisition activity will provide clear indicators of where and how NTT DATA Americas will continue its growth. 

Dominique Raviart and Rachael Stormonth