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NTT DATA Services: First Look at the Newly Married Couple

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In our blog last November (see here) at the time of NTT DATA Inc.’s closure of its acquisition of Dell Services, we summarized that Dell Services was a strategic but expensive acquisition for NTT DATA, and that while the former Perot Systems did not thrive as part of Dell, now it is part of NTT DATA Services it is back to being a services pureplay, also that the applications, IP and BPO businesses are likely to receive more investment.

We recently attended NTT DATA Services’ first analyst and advisor event since the acquisition. We were keen to see how the integration is progressing, learn about the immediate priorities in North America, and identify what we should expect to see in the near to mid-term. It is very early days (the enlarged company has just held its first ever senior leadership meeting, also in Dallas) but we came away impressed on several fronts. There is a palpable sense of positive purpose in the company.

Firstly, the enlarged business

The addition of Dell Services to the $1.7bn NTT DATA Inc. business has formed NTT DATA Services, a $4.3bn business with 48k employees.

In terms of:

  • Vertical, Dell Services has brought in a significant presence in the U.S. healthcare and life sciences industry (now a $1.4bn business for NTT DATA Services), also sizeable businesses in BFSI, manufacturing, and select public sector segments
  • Portfolio, NTT DATA Services can now position as an end-to-end services provider, with a portfolio extending from consulting through infrastructure/cloud/security (massively expanded with Dell Services), applications, and now also BPS (a capability that John McCain emphasized his pleasure at having).

Supported by a new branding campaign (“we live for this stuff”, “IT rock stars”), NTT DATA Services is looking to raise its brand awareness in the U.S. as a Tier 1 alternative IT services provider. Growth ambitions center in the existing client base and on increasing wallet share; Dell Services brings in experience in landing and delivering large deals.

Immediate priorities

These include:

  1. Operational integration
  2. Deepening consulting, industry and technology expertise, and promoting innovation
  3. Industrializing delivery, standardizing on processes, tools and methodologies, and accelerating automation
  4. Packaging the portfolio: a recurrent theme in our one-one-one sessions was a broad drive to package industry-specific (and horizontal) aaS solutions
  5. Business continuity (obviously critical): doubling down on delivery quality

Looking briefly at the operational integration, initiatives span (inter alia):

  • Go-to-market: NTT DATA Services is adopting Dell Services’ vertical-led go to market approach for four industry groups: Healthcare & Life Sciences; FSI, Manufacturing and Commercial; Public Sector
  • Portfolio standardization
  • Corporate functions: the acquired entity was a carve out from Dell, so extracting everything from shared corporate functions takes time; the plan is for everything to be merged on April 1
  • Integrating IT applications: will take around 18 months. For HR, for example, Dell Services is moving to SuccessFactors
  • Standardizing on reporting, e.g. client satisfaction metrics (possibly on NPS), productivity metrics.

We spoke briefly with John McCain about the levers being applied to improve the operating margin of the former Dell Services business, which in its FY16 was around half of NTT DATA Inc. He expressed confidence that significant margin expansion was achievable from pulling four major levers: utilization (including through improving demand forecasting); procurement; usage of sub-contractors, and organizational delayering.

In terms of deepening consulting, industry and technology expertise, NTT DATA Inc. had gained business consulting capabilities in the insurance sector with its 2015 acquisition of Carlisle and Gallagher Consulting Group. And Dell Services brings in domain expertise in sectors including healthcare (provider and payer) and public transportation systems. Further expansion of industry consulting capabilities was referred to several times at the event; will we see some tuck-in acquisitions?

So what about digital and innovation capabilities?

We remain bemused by how some IT services providers are able to signal to the investor and analyst communities what proportion of their revenues are from “digital services” (this is a separate blog!), though we do of course take a close interest in the specific “digital” capabilities that each services provider is developing.

NTT DATA Services does not have a standalone “Digital X” unit -but it does have a nicely articulated description of the value that “digital services” can bring to clients, in:

  • Measuring the unmeasurable
  • Understanding the inscrutable
  • Predicting the unpredictable
  • Improving the perfect
  • Accelerating beyond maximum speed.

Dell Services brought in a digital experience studio in Plano: we were told that a next-gen version is currently under development.

An approach that went down well with advisers and analysts at the event was the “Customer Friction Factor” (CFF, discussed in a recent NelsonHall vendor profile), a framework which quantifies, from a customer's perspective, any aspect of customer interaction that has a negative impact on their experience. It can be used across interactions which are both internal and external to an organization). A near-cousin to customer journey mapping, CFF provides NTT DATA Services with a compelling narrative for engaging with clients in discussions about where and how it can support them in their digital transformation. As such it is a useful tool to support the drive to position on its industry consulting capabilities and should help in increasing wallet share in target accounts.

Another current development is the CUE2 (Continuous User Experience Engineering) approach to Agile/DevOps; expect to hear more about this.

Will NTT DATA invest in acquiring digital marketing agencies in the near term? Probably not. Is it investing in portfolio development around digital themes in the delivery of IT and business process services? Certainly.

There appears to be an increasing focus on leveraging IP developed by NTT DATA parent’s R&D arm (has a $2bn annual budget). Among the examples mentioned at the event (which included immersive telepresence technology), the one that is likely to gain traction at NTT DATA Services in the short term is ‘hitoe’, a material developed with Toray that can measure bio-med signals: applications include its usage in the public transport (jackets worn by bus/tram drivers to measure fatigue/health), sports and construction sectors.

So what should we expect to see from NTT DATA Services in the near- to mid-term?

Firstly, margin expansion of the former Dell Services business (5.3% in its FY16) is highly likely.

There is a clear drive to identify within the organization:

  • IP that can be more widely leveraged
  • Opportunities to co-innovate with clients, including leveraging NTT Data parent R&D
  • Industry and technology SMEs
  • Automation and AI tools on which it can standardize.

We also learnt a little at the event about the broader ambitions of the NTT DATA Group; these include further expansion in Europe.

But for NTT DATA Services: why did we come away impressed when it is still only the honeymoon period for this recently enlarged player in the U.S. IT services vendor landscape?

In short, beyond the narrative, it comes down to gut feel. This is one of those rare integrations where both the acquiring and the acquired entities are palpably very happy with their new union, and where there are clear ambitions for growth.

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