Infosys BPM has reached its 18^th birthday, in many cultures the age of maturity, achieving a major milestone of $1bn in annual revenues. Infosys BPM today is a very different company from its birth in 2002 when it was set up as a JV in India with Citibank, and there have been some significant developments in the last couple of years.

We recently caught up with Infosys BPM CEO Anantha Radhakrishnan, and while he is intensely conscious that it not a time for celebrations when a pandemic is raging, there is a clear confidence about Infosys BPM’s future trajectory. While not quite celebrating, there is a quiet pride about what the company has been doing to help fight the spread of the infection in the state of Karnataka.

Delivering effective COVID-19 programs

What has been achieved in Karnataka (population 64m+) in a contact, inform and track program in a very short time is quietly remarkable (it certainly appears so to me; my own government, a nation with a similar sized population, has yet to introduce any such program). Karnataka is vulnerable to the virus coming into the state via international travellers flying into Bangalore and Mangalore airports. Its state government turned to Infosys BPM to help launch and manage a program to respond to this specific threat, also a second broader program focusing on citizens across the state.

In the first program, Infosys BPM designed and managed a program to reach out digitally to all travellers coming into Karnataka from March 1 onwards, capture their relevant health data via an app, monitor their health for 14 days, provide a help number should they develop any COVID-19 type symptoms, and also advise on quarantine procedures.

In the second larger program, citizens have been encouraged via an extensive multimedia outreach program to log relevant health and non-health information on an app or helpline number. On the basis of the data they provide, they are given advice on appropriate action to take, with help being arranged in exceptional circumstances. The system integrates with the state’s own hospital and ambulance systems. And in the event of any infection hotspots, it can be used to send localized messages to citizens living in a particular cell phone tower or village. Infosys BPM helped define the outreach strategy, designed the ‘Apthamitra’ app (‘close friend’ in the local language), and assembled a consortium of nine BPS companies that have operations in the state to operate the inbound and outreach program. This activity illustrates the maturity of Infosys BPM in its ability to design and launch a major program from scratch.

In terms of transforming its service delivery operations during the pandemic, Infosys BPM has equipped all its centers outside India to reach 95% WFH enablement. China has returned to a hybrid model with about 70% office-based employees, 30% WFH. The India BPM operations are 75% WFH enabled (the 25% including personnel not yet in production). Radha referred to having received 300 emails from clients expressing their appreciation of Infosys going above and beyond to maintain service delivery.

$1bn milestone & beyond

Against the backdrop of COVID-19, Infosys got to the end of its fiscal year achieving its 1$bn revenue target. This has been done through a combination of market-leading organic growth (nearly 17% CC growth in its FY20) and two interesting JVs set up in 2019, in both of which Infosys has a majority stake.

In Japan, Infosys has an 81% stake in Hitachi Procurement Service Co., Ltd. (HIPUS), which handles indirect materials purchasing functions for some Hitachi Group businesses in Japan. Also part of the JV are Panasonic and staffing company Pasona. Normally with JVs such as this, the primary focus is to commercialize and expand the operation. The size of the unit operated by Infosys is already significant and the immediate focus is slightly different. The initial priorities include:

• Transforming the operations by bringing in modern thinking about procurement processing, including the application of RPA, AI and analytics to streamline operations and improve the UX of buyers
• Expanding its coverage within the Hitachi Group, as well as offering indirect procurement services to Japanese-owned corporations, serving both their domestic and international needs.

The CPOs of Hitachi and of Panasonic are on the board of HIPUS, which will help in driving both of these priorities.

And in Europe, Infosys has a 75% stake in Stater, a mortgage administration services provider headquartered in the Netherlands; ABN AMRO, its largest client, retains a minority stake. As with HIPUS, there is an emphasis on digital transformation of the service (in this case, transformation of the whole mortgage and loan experience by leveraging dynamic workflow, API layers, RPA, analytics and AI), and of course Infosys will also continue to enhance Stater’s mortgage platform. In addition to developing a next-gen mortgage offering, the opportunities for growth in the JV lie in:

• Further expansion of its service offerings, for example beyond those around mortgages to adjacent unsecured loan types, also in expanding its activities in supplementary services such as risk models for fraud prevention, leveraging Infosys’ analytics capabilities
• Expansion of the client base. An obvious opportunity is expansion in Germany (though this remains a market where home ownership is relatively uncommon): for example, Deutsche Bank, with whom Infosys has a strong relationship, is a relatively small account for Stater.

These JVs are a significant expansion of Infosys BPM, one in back-office enterprise services, the other in an industry-specific offering. Infosys BPM has reached a point where its revenue mix is 60% from enterprise services and 40% from industry-specific services. Radhakrishnan’s ambition is for Infosys BPM to reach a roughly 50/50 split, with at least 30% of this being platform-, or quasi-platform, based. In the U.S. Infosys BPM has a longstanding insurance platform business with McCamish, and it is also providing mortgage services to clients including one of the largest U.S. regional banks.

As well as these JVs, Infosys acquired last year a 1,400 person contact center in Northern Ireland that has clients in the telecoms, social media, healthcare, ed-tech and fintech sectors. Its largest client is BT, also an Infosys client: here, BT benefits from the investment that Infosys BPM can make to transform this onshore service by applying digital technologies.

The year ahead for Infosys BPM

So, what might we expect from Infosys BPM over the next year? Every crisis presents its own opportunities; and while its scale is larger than anything we have seen in our lives, COVID-19 is no different. For example, there are going to be lots of BPS captives up for sale as enterprises look to raise cash: but interested vendors should be careful to select those ones that will enhance their capabilities. Infosys BPM is proactively pitching for opportunities for targeted captives of clients in the wider Infosys Group (there is plenty of scope: Radhakrishnan points out that Infosys Group has around 1,200 clients, mostly large enterprises, of whom just 200 are also Infosys BPM clients). It is possible, therefore, that Infosys BPM might be completing more structured deals in 2020, where it will look to modernize, simplify and digitally transform the operation, possibly extending its capabilities into more sectors and/or expanding its capabilities in certain back-office areas.

As it reaches its $1bn revenue milestone, the mood at Infosys BPM is more appreciative than jubilant, but there is a quiet confidence and sense of purpose as it looks to take advantage of new opportunities.

NelsonHall recently attended BearingPoint’s analyst event in Lisbon. As it starts its second decade with a new Managing Partner (Kiumars ‘Kiu’ Hamidian, only the second in the company’s history), the strategy that has served BearingPoint well in its first ten years is now evolving in ways that reflect significant developments in the nature of the consulting market.

In its first decade as a company since the 2009 MBO, BearingPoint has been something of a success story in the European management and IT consulting market, achieving sustained topline growth supported by geographic expansion, and steady improvement of its EBIT margin. 2017 revenues were up 13% to €712m, with growth in all geographies and service lines, and the firm is well on its way to achieve its targeted €1bn revenues by 2020.

Key elements of strategy

Elements of BearingPoint’s strategy in recent years that remain key pillars going forward include:

• The ‘One Firm’ mindset, with a common set of offerings and consistency of delivery methodologies across geographies
• The focus on clients headquartered in Europe, achieving a ‘global reach’ to be able to support them in projects outside Europe through an alliance ecosystem (West Monroe Partners in the U.S., ABeam Consulting in Asia, Grupo ASSA in LATAM)
• The business model, comprising:
  • Strategy, made up of four service lines: digital & strategy, finance & regulatory, operations, IT advisory
  • Solutions: the Solutions unit, launched in 2015, has three product lines: IP in regulatory technology, in particular fintech (e.g. its Abacus suite); advanced analytics; and digital platform solutions for the CSP and entertainment sectors (based on Infonova R6, now offered on AWS)
  • Ventures, a more recent capability; e.g. an investment in Norwegian insure-tech start-up Tribe in April 2017. Also includes employee ventures, typically coming from its ‘Be an Innovator’ initiative, and client ventures, emanating from consulting projects with start-ups
• Selective acquisitions, for example in 2017 of retail supply-chain specialist LCP Consulting in the U.K., and an automotive consulting unit in Italy
• An increasing emphasis in recent years on innovation, e.g. the introduction of the ‘Be an Innovator’ process and of shark tank events.

Forward-looking priorities

While BearingPoint’s next five-year plan has yet to be finalized, Hamidian outlined four priorities in the following dimensions:

• Markets
• Portfolio
• People
• Culture.

Markets

BearingPoint is looking to build up capabilities in several European countries, including the U.K. (where the practice is relatively small, focusing on sectors such as financial services) and the Netherlands. In terms of headcount, BearingPoint remains very focused on Germany and France, and has product units in Austria (ex-Infonova) and Switzerland (Abacus): the ambition is to have a minimum of 300 people in each of the major European markets. Outside Europe, BearingPoint is also looking to work with its partners to expand its presence in the U.S. and China, including Singapore, where it has a joint hub with ABeam Consulting in Asia focusing on IP-based reg-tech projects.

Portfolio

There is a very clear drive to shift from the classic process redesign work of traditional consultancy services and focus much more strongly with clients on projects that leverage IP assets, and are more transformational in nature (for example, looking at new business models). The role of the Solutions unit is critical in this. Since January, the unit has had its own P&L and regional managers, encouraging, inter alia, entrepreneurialism in both product development and GTM.

In addition to some well-established assets around reg-tech (for which it is best known), the unit has also developed IP such as its Factory Navigator, which simulates production and logistics processes; LOG 360 vehicle emissions calculation, built on SAP HANA; and Active Manager, used for coaching and training front-line managers, e.g. in call centers, to be more active/effective. All are SaaS-based offerings. One of the clients presenting to whom we spoke is a very strong advocate of Active Manager, having implemented it at a major telco and subsequently introduced it in his next role in a different sector.

Expect to see further developments to the portfolio, including industry-specific solutions. But the strategic element lies in the intersection between Solutions and Consulting – the aim is for consulting projects and also managed services increasingly to have embedded IP. 

As well as its own IP, BearingPoint is looking to increasingly position around its abilities to orchestrate an ecosystem of technology partner alliances: having started with Salesforce (now a Platinum partner), the emphasis has expanded to RPA and AI and emerging technologies such as blockchain. The last two years have seen a large increase in the number of technology partnerships, and more are to be expected.

The role of the Ventures unit is also important here. While BearingPoint also refers to employee ventures, most coming from its ‘Be an Innovator’ initiative, and to client ventures, emanating from consulting projects with start-ups, the primary focus is on market ventures. It is working with incubators such as LeVillage in Paris and weXelerate in Vienna (see our 2017 blog here) and hosting events like the BearingPoint Insurance Dialog in Cologne that offer speed dating opportunities for early stage start-ups. A recent investment was in Insignary, a South Korean startup with a binary level open source software (OSS) security and compliance scanning solution, BearingPoint’s first investment in an Asian start-up. BearingPoint is leveraging Insignary’s Clarity solution to offer a managed SAST (static apps security testing) binary scanning service in Europe.

The expansion of IP-based services is a key element of BearingPoint’s Digital & Strategy (D&S) offering, which we note has new leadership.

People

BearingPoint’s new Managing Partner has spoken repeatedly about his desire for the firm to provide a very positive employee experience, an important element in both the recruitment and retention of younger talent. Other priorities he has expressed include increasing the firm’s diversity, of generation as well as of gender (one target is 20% female Partners by 2020), and talent development. We do not know the age or experience profile of BearingPoint personnel, but we do detect a desire to have a workforce that is perhaps more balanced in terms of age and experience, and a slight shift away from a traditional consultancy profile.

We also note an evolution in leadership style with a stronger emphasis in transparency and communication: several personnel mentioned in conversation that Hamidian encourages colleagues to email him and is responsive when they do.

Culture

As part of its ambition to change the nature of much of its consulting work beyond operating model improvement to projects that have more radical transformation in mind, BearingPoint is looking (like many consulting and IT services firms) to nurture a culture where entrepreneurialism and innovation are encouraged (for example through initiatives such as shark tank events), and overall to become a more agile organization.

Hamidian is also looking to develop partners’ management and team leadership skills through initiatives such as new partner training programs.

Summary

In its first decade since the MBO, BearingPoint has succeeded in putting in place a strong foundation of an integrated European consulting firm that can claim, through its strategic partnerships, to have a more global reach. The next five years will be marked, not by global expansion, but by an evolution in positioning, with an increasing emphasis on services that leverage its own and partners’ IP to assist clients in their digital transformation, potentially also boosting margins. Expect to see more partnership announcements around IP-based offerings; shortly after the event, for example, BearingPoint announced its regtech product unit and IBM is partnering to offer a BPO service around regulatory reporting to smaller institutions in the DACH region.

Expect also to see an increase in tuck-in acquisitions of small firms operating in its target geographies (including the U.K.) that bring in industry domain and or specialist capabilities. Again, shortly after the event, BearingPoint announced its acquisition of Inpuls, which brings in capabilities in data governance and analytics and also doubles its headcount in Belgium.

As a final note, there were several aspects of the analyst day that stood out from other vendor events we have attended recently:

• The total absence of PowerPoint presentations, with a heavy focus instead on clients telling their stories and describing how BearingPoint has supported them
• The level of female representation (roughly 50% of the speakers) – an all-too common experience is that the only female speakers at analyst and advisory events are those from clients. Large organizations in Europe and the U.S. are increasingly demanding a level of female representation from suppliers bidding for work in certain areas of professional services; for a variety of reasons, lack of gender diversity in the talent mix will increasingly be an impediment in IT and consulting services). The level of female representation was doubtless a deliberate move; gender diversity is clearly a high priority.

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 50^th 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.

This month, NelsonHall has attended the IBM Services analyst/adviser events in New York and Paris and we noted a distinct evolution in emphasis, with a much closer alignment between IBM's two services divisions. In recent years, IBM’s Global Business Services (GBS) and GTS businesses have been somewhat in the shadows of its Cognitive Solutions segment, although together they represent around 60% of total IBM revenues. However, 2018 looks to be a year when these two divisions, under the umbrella branding of IBM Services, really come back into the IBM limelight, benefiting from several factors coming to fruition, including:

• An increase in Watson use cases, providing real differentiation around cognitive-based offerings across GTS and GBS portfolios
• Investments in GBS to shift its practices around digital, cognitive, and automation and cloud
• GTS transforming to what it calls a ‘services integrator’, leveraging IBM assets
• A much closer alignment between GBS and GTS.

In this, the first of several blogs on IBM, we will look at some of these overall developments.

GBS aligning around three ‘growth platforms’

While GBS has been focusing on IBM’s strategic imperatives for years now, the influence of Mark Foster, who has headed GBS since September 2016, is very evident. Under his leadership, GBS has aligned and focused its capabilities around three ‘growth platforms’ centered on digital, cognitive and cloud:

• Digital strategy and iX: integrated strategy and design capabilities, extending to road map creation. iX is already at scale: IBM now has 36 iX studios globally, the latest one opening in Washington DC last month. A newer area of focus is building a larger digital strategy practice
• Cognitive process transformation: combining GBS’ business and process change advisory (including RPA design and build), BPO and analytics capabilities into an integrated play. GBS is one of few organizations that has significant capabilities in helping clients both transform their processes internally and also in operations. With BPO, there is a very clear focus on higher value services enabled by AI (embedding Watson), also blockchain
• Cloud application innovation: here, the ongoing emphasis is on reinventing strategic partnerships with the likes of SAP, Apple, Salesforce, and Workday for next gen enterprise application services, also leveraging automation/Watson to bring innovation into application maintenance and cloud application migration services.

Followers of Accenture will recognize that ‘growth platforms’ was a term used by Accenture for many years, then quietly dropped, so I was surprised to see the phrase now being used at GBS. Having coined the term when he was at Accenture, Foster told me, he feels no hesitation in continuing to use it as an apt description of the ambitions for GBS. Foster unveiled the growth platforms at the IBM Investor Day back in March; since then, GBS has aligned its personnel around these three areas. This year, he has brought in a slew of external hires to scale or revitalize certain parts of the portfolio, including digital strategy consulting, automation advisory, and SAP services. Expect to see a further crystallization of core GBS offerings next year.

What else are we likely to see at GBS in 2018? Here are a few suggestions…

• Will there be some niche acquisition activity bringing in digital strategy consulting capabilities?
• Clearly, in the cognitive process transformation growth platform, work will continue on the infusion of Watson capabilities in different use cases
• Perhaps closer interaction between the Cognitive Process Transformation unit and the blockchain practice set up in 2016 and headed by Bridget van Kralingen (who moved there from heading GBS), for example in developing more blockchain-based use cases (that eliminate any need for queries that a transaction, say in supply chain processing, has taken place)
• Possibly a greater emphasis on industry-specific offerings within GBS, again boosted by closer integration with the Industry Solutions practice. Will we also see some inorganic growth?
• As GBS’ business mix continues to transform (and the proportion of its revenues coming from more price sensitive traditional IT services declines further) GBS may at last return to topline growth
• Similarly, margin expansion, both from revenue growth and as increasing efficiencies in delivery and project management begin to outweigh the level of investments in the growth platforms and sales.

GTS: cloud and cognitive now embedded in all offerings, emphasis on ‘services integrator’

GTS, the larger and more profitable division, has also been going through a quiet transformation, also powered by IBM cloud and cognitive assets, with it positioning as a ‘services integrator’ to capture opportunities around large managed hybrid cloud and multivendor tech support services.

Its Technical Support Services unit (a large business, with a current revenue run-rate of $7.2bn) continues to target larger opportunities around multi-vendor support services in complex environments, inside and outside the datacenter, with (no surprises) embedded cognitive and automation components in the service delivery. Our next blog will look at solutions such as Augmented Remote Assist, which is already rolled out to most of its field force.

IBM’s huge infrastructure services business (revenue run rate $22.7bn) is beginning to recover from the market decline in – and its shift away from – traditional services, with cloud and cognitive now embedded in all offerings. IBM has been talking about the application of analytics and automation in GTS for over three years; cognitive is now also a reality, noticeably with the ‘IBM Services Platform with Watson’. Announced in July, the cloud-based IT operations platform, designed for hybrid cloud environments, can identify or predict potential problems and self-heal, and provide visibility via role-based dashboards. There are four key elements:

• IBM’s data lake, containing 30+ years of systems operations data from thousands of engagements, plus other structured and unstructured data, for use in incident analysis
• A broad set of automated capabilities for environment build, system hygiene, and dynamic automation (IPCenter), to support the design, management and optimization of IT environments
• IBM Watson providing insights and recommendations for future automations
• Client insights dashboards, powered by the Watson Insight Engine.

A big emphasis is on the platform’s full lifecycle management capabilities and on its flexibility to compose modular services from IBM and third-party providers. As such, it is another key asset in IBM’s armory (in addition to the nearly 60 IBM cloud data centers globally across 19 countries) in its positioning for large managed hybrid cloud services deals.

What are we likely to see at GTS in 2018?

• TSS start to deliver revenue growth, driven by expansion in multivendor support services, also margin expansion and improved service with more widespread use of predictive analytics and solutions like Augmented Remote Assist and the use of blockchain (for sharing operational data)
• IT infrastructure services also start to return to topline growth, driven by managed hybrid cloud
• An expansion in AI/automation advisory services capabilities, to target the enterprise transformation agenda
• Further developments in the use of Watson in support of infrastructure and endpoint security. We blogged in July about IBM's work to date in training Watson in the 'language' of cybersecurity (see here).

​Closer alignment between and GBS and GTS

A few years ago, the migration of IBM’s BPO business from the GTS division to GBS appeared to be a lengthy and difficult process. In contrast, this year has seen more branding around a single ‘IBM Services’ capability. Noticeable at both the New York and Paris analyst events was the number of sessions, both plenary and roundtables, which were co-hosted by people from GTS and GBS. The positioning now centers on their combined capabilities, powered by IBM assets, to support clients in addressing five ‘core needs’, which IBM classifies as:

• Finding growth in a low-growth, digitally disrupted world
• Innovation and data leverage as a basis for new growth
• Taking out structural costs, for competitiveness and to fund investment in growth
• Winning the war for talent, to access intelligence and automation
• Transforming enterprise processes and systems, to enable growth and competitiveness.

But how far does this alignment go in terms of the sales organization? Historically, collaboration has tended to be client-specific, for example in large multi-tower outsourcing pursuits. This is now changing. Apparently, in Europe alone this year IBM has invested over $7m in retraining on the new portfolios, with $30m earmarked for next year. There have also been appropriate changes to incentivization metrics and to internal processes.

In short, 2017 appears to have been a foundation year in the transformation of GBS and GTS; the prospects for both in 2018 look better than they have done for some years, with Watson, at last, really beginning to make an impact in the delivery of core and next-gen IT services.

In the next blog in this series, we will look at examples of where IBM is deploying cognitive and automation assets across its services portfolio.

NelsonHall recently attended a TCS analyst event in Boston, the theme of which was Business 4.0: Intelligent, Agile, Automated, and on the Cloud. A few months ago, soon after Rajesh Gopinathan took over as CEO, TCS undertook its first major service line revamp for many years (we provided details of this in our Quarterly Update on TCS – see here). As such we were keen to learn more about how the reorganization is progressing and what this means in terms of investment priorities and any changes in market proposition. While the rationale for the new service line structure is convincing, we were left with some questions about whether TCS is in danger of creating new silos, silos moreover which have the potential to leave its large Cognitive Business Operations unit looking like a legacy business.

The opening keynote focused on what Business 4.0 enables, namely the ability to:

• Achieve mass customization (availability of data to target every interaction within a segment of one)
• Create exponential (business) value
• Leverage ecosystems (an increasing differentiator)
• Embrace risk.

As a generic positioning statement, this is an attractive cross-industry proposition by TCS, one that is a business-centric evolution from the notion that TCS has been promoting over the last year or two of the Digital Enterprise. It is positive in tone: the ‘disruption’ word doesn’t appear; also, one messaging statement is about ‘harnessing abundance’.

Major regroup and revamp of service portfolio

The importance of the new service line structure should not be underestimated: we were reminded that this is the first time TCS has undertaken such a restructure for 15 years.

The ambitions behind the revamp, as described, include wanting, inter alia:

• For all service lines to be business outcome focused, and their offerings to address issues of board-level significance
• To be able to deliver seamless service integration (full services play)
• For the new set of offerings to address CXO priorities (full stakeholder)
• To be able to offer new engagement types and non-linear pricing models (new models)
• To go to market offering a combination of domain and digital capabilities (contextual thought leadership).

The overall emphasis is on evolving from an old model of 'Consult/ Build/Operate' to a ‘Broker/Integrate/Orchestrate’ model.

To summarize, TCS’ new Business and Technology Services (BTS) organization comprises three groups:

• Digital Transformation Services (DTS), which has new standalone practices for areas such as IoT, Cyber, Analytics & Insights. Applications services are now broken down into smaller units such as EAS, Cloud Applications, Micro-services and APIfication
• Cognitive Business Operations (CBO), which includes BPS, infrastructure services, applications support services, former ‘run the business’ services
• Consulting and Systems Integration (C&SI).

Simultaneously, other established service practices that have reached scale (including some industry-specific BPS businesses and the Engineering Services unit) have been carved out and merged into the Industry Solution unit structure, enabling these vertical units to have a more integrated portfolio.

When TCS makes a big play in a new area, it invariably succeeds: its BPS and IT infrastructure services businesses, for example, have grown in not that many years to contribute nearly 28% ($5bn) of TCS’ total revenues in FY17 – and this has been achieved through organic growth.

The priorities now are clearly with:

• The new digital practices. The importance being attached to these is reflected in the appointments of some very experienced execs to lead these; for example, Dinanth Kholkar, formerly head of TCS’ large BPS business, is now heading the much smaller Analytics & Insight practice. Investments will focus on these new practices (this is unlikely to include any significant M&A activity: unlike most of its peers, TCS has succeeded very well so far on essentially organic growth, and the messaging is that this will not change)
• The ignio subsidiary. What will happen to ignio ultimately is not yet clear: one ambition is that ignio will be used by third parties – indeed, in discussions with ignio head Harrick Vin we heard of an organization that has asked two other systems integrators to deploy ignio. There is, of course, the possibility that ignio might eventually be spun off, though we do not see this as likely in the foreseeable future.

TCS has, to date, been highly successful in cross- and up-selling into major accounts: its ability to ‘penetrate and radiate’ is reflected in the ongoing expansion in the number of high-value accounts. And the company has been promoting its full services play for many years now.

Nevertheless, following discussions with several execs, we are left with some questions as to the potential effectiveness of the new service line structure in facilitating the development of new digital-led offerings, and this is why...

• A new Enterprise Intelligent Automation (EAI) unit, sitting within C&SI, offers deployment of third party RPA and AI tools, as well, of course, as ignio. These are customized solutions for client-specific environments
• Meanwhile, ignio, a standalone company, is essentially going alone to develop new use cases for ignio, for example in working out new process models within supply chain management
• And then there is the Cognitive Business Operations unit. While the focus is on enriching the offerings with Intelligent, Agile, Automation, and Cloud, it does not appear to be spearheading TCS’ development of the kinds of new digital process models that are the hallmark of next generation managed services.   

A key challenge for TCS is harnessing both EAI and ignio to be able to develop and go to market with innovative and replicable new digital process models that will be delivered by CBO. This means a level of collaboration that is difficult to achieve across organizational boundaries. The risks include duplication of efforts and tardiness of innovation. I must emphasize at this point that this is not a challenge that is unique to TCS; we see it also in some other very large IT services/BPS providers that, like TCS have an extensive portfolio of service offerings and their own cognitive platforms. Finding ways to enable collaboration across organizational boundaries in the development of new cognitve-based offerings that benefit managed services businesses will be critical to future differentiation.

Two postscripts

• Marketing: TCS has a new group CMO, and we were told that marketing will get a big boost in terms of promoting TCS’ services strategy
• Innovation: one highlight of the event was CTO Ananth Krishnan providing an update on Research & Innovation at TCS. This merits a separate blog.

Genpact announced another acquisition today, that of TandemSeven, a design thinking (DT)-led CX /UX innovation consultancy based in Boston, with offices also in New York and Chicago. This is Genpact’s fourth acquisition in the U.S. this year; all four clearly supporting the company's drive to radically evolve its portfolio from traditional BPS to a coherent set of offerings designed to help enterprises in their operational digital transformation. What distinguishes TandemSeven from other recent acquisitions is that the primary capability it brings in is not software nor domain-specific BPS, but consulting & methodology.

Quick Overview of TandemSeven

Firstly, let’s take a quick look at TandemSeven, then how its capabilities will align with Genpact’s ‘Lean Digital’ positioning:

• Size: the firm has 65 associates, located between Boston and New York
• Client base: large U.S. enterprises, with many engagements in BFS sectors, particularly capital markets. Client references include LeggMason, Risk Management Solutions (RMS), APAX Partners. It has also worked in B2C sectors such as utilities, air travel, automotive
• The work: TandemSeven’s focus areas cover B2E and B2B as well as B2C process areas, with quite a lot of its engagements having looked at support functions. For example, for Legg Mason, TandemSeven designed a new global Intranet for its employees; and in an engagement with an investment banking firm, the focus was on the reimagination of the UX of staff in the middle office supporting the traders in the front office. This aligns with Genpact’s focus on transforming enterprises’ middle and back office activities
• The IP: TandemSeven’s consultants are supported by a platform for standardizing human-centered design. TandemSeven’s ‘UX360’ platform is a key differentiator for the company relative to other design agencies which formalizes the collection of research with customer journey mapping & modeling, and integrates these with task modeling and alignment with developers in an agile environment. It consists of a set of tools for persona modeling, customer journey mapping and task modeling with a research repository for KM which creates a System of Record for each project as well as providing linkages with agile development platforms.

Genpact’s ‘Lean Digital’ framework combines the operations view of Lean processing, DT, and digital tools to fundamentally re-architect business processes. TandemSeven provides a key building block here by enhancing Genpact’s consulting capabilities and frameworks in human-centered design, an essential element in digitalizing processes across the organization.   

TandemSeven Becomes Part of and Enhances Genpact’s Digital Solutions Unit

Genpact’s Board is fully aware that TandemSeven will be culturally different from Genpact’s BPS core operations and is accordingly adopting a careful approach to its integration. The firm’s head of consulting and head of sales will report to the head of Genpact’s Digital Solutions practice, who is also based on the U.S. East Coast; the practice will also act as a kind of family group for TandemSeven within Genpact’s larger Digital Unit, which has1k people).

Integration plans:

• In the first instance, TandemSeven’s UX360 tool will be leveraged by ~80 Genpact DT workshop facilitators. It will provide a very strong framework and mechanism for incorporating human-centered design into the interfaces associated with redesign of industry-specific and back-office processes
• Secondly, some TandemSeven staff will act as coaches to Genpact employees, and help create protocols for DT sessions. Genpact has been providing extensive employee training on DT for over two years; TandemSeven, and UX360, will help sharpen up the methodology
• Thirdly, some TandemSeven staff will become involved, within multi-functional groups, in Genpact sales pursuits. As with any consultancy acquisition, a key success factor will be in the extent to which the acquirer leverages the new capabilities across its broader portfolio and client base.

First stage of a Buy and Build strategy

Rather than following with similar, possibly smaller, acquisitions in other target geographies, Genpact’s intention is to transplant a few resources from TandemSeven into the U.K and Australia and then hire locally to build local regional units.

Genpact Building Digital Hubs in Boston, NY

TandemSeven’s model to date has been to work primarily on client sites; it does not bring in a studio environment for Genpact to leverage. However, Genpact will complement this on-site capability by creating UX studios in Boston, where it has inherited space from the Rage acquisition, and also NY, where it will redesign some existing office space. And of course, OnSource is also based near Boston.

In term of cross-fertilization with West Coast capabilities, there is also some interaction with the  ‘Innovation by Design’ software engineering capabilities based in Genpact’s Palo Alto Lean Digital innovation center.

TandemSeven Strategically Important in Incorporating Human-Centered Design in Genpact Digital

This is a strategic acquisition for Genpact in its journey to evolve from traditional BPS, where it has been an eminent pureplay, to become a wider digital operations transformation partner for organizations. The TandemSeven acquisition complements Genpact’s existing DT and operations transformation capability by providing a distinctive methodology and nicely visual tool for applying human-centered design in support of digitalized middle and back-office functional areas.

We continue to keep abreast of unfolding developments in RPA and cognitive intelligence. In October and November, John Willmott wrote a sequence of three handy blogs on RPA Operating Model Guidelines:

• Laying the Foundations for Successful RPA
• How to Identify High-Impact RPA Opportunities
• From Pilot to Production & Beyond – The Keys to Successful RPA Deployment

Turning to Andy Efstathiou and some of his musings on FinTech and RPA developments in the Banking sector:

• Having discussed in February How Banks Can Develop a FinTech Roadmap to Drive Performance Improvement, in December he looked at FinTech in the Commercial Banking Sector: From Mass Market to Custom Processing Efficiency
• And in July, Andy looked at How RPA is Helping Banks to Enter New Markets & Diversify Offerings

Regarding developments in Customer Management Services:

• In April, Ivan Kotzev declared that Chatbots Are Back & Here to Stay
• In June, Vicki Jenkins looked at Alorica’s growth story: Alorica Acquires EGS to Become Global Top 3 CMS Vendor: Healthcare Business Key to Growth
• In September, Ivan looked at the changing role of analytics in CMS: Analytics are the Key to Disruptive Customer Experience

Fiona Cox and Panos Filippides have been keeping an eye on BPS in the Insurance sector. Two of their blogs looked at imminent vendor M&A activity:

• In February, Panos considered the significance of Wipro planning to acquire HealthPlan Services: Wipro Makes Fresh Start in U.S. Healthcare Payer BPS
• In July, Fiona looked at EXL’s planned acquisition of LISS: EXL Enhances LA&P Platform Digital Front-End Capabilities

Blogs in the HR Outsourcing domain have included innovation in RPO, and in employee engagement, learning at the beginning of the employee life cycle, talent advisory and analytics services, employer branding, improving the candidate experience, benefits administration and global benefits coverage, cloud-based HR BPS, and more! Here’s a couple on payroll services, so often an overlooked topic, that you might have missed:

• In April, Amy Gurchensky took a One Year Check-In with Excelity Global: Diversifying APAC Business to Address Demand for Cloud Payroll
• In November, Gary Bragar wrote Payroll Services Vendors Need to Redouble Efforts to Introduce New Digital Models

Dominique Raviart continues to keep a close eye on developments in Software Testing Services. For example:

• In October, he looked at Testing Platforms – The Emerging Opportunity to Commercialize Vendor Testing IP
• In August, he wrote about crowdsourcing: Passbrains Expands Crowdtesting Offering to UX

Dominique also keeps abreast of unfolding developments in the IT Services vendor landscape. For example, in November he wrote about Dell Services: the Glue for "One NTT DATA" In North America.

Staying with IT Services, David McIntire:

• In July, described 3 Key Ways IT Service Vendors Are Enabling Clients’ Cloud Journeys
• And, following a visit to Ukraine in July, wrote about Luxoft Diversifying Offerings, Clients & Delivery as it Eyes $1Bn Revenues by 2018

Meanwhile, Mike Smart has been blogging about IoT. Here are two of his earlier ones:

• In February, he reported that IoT Connected Vehicle Market Driving Towards $1.5Bn by 2020
• In March, he wrote: IoT in Manufacturing: It’s Not Just About Efficiency

And Rachael Stormonth continues to consider the significance of unfolding developments in the larger and more interesting IT Services and BPS vendors:

• In writing about HCL Technologies – Automotive, Autonomics & Partnerships Key Elements of its Future Growth, she posited that HCL would be an engineering services consolidator, a month before the announcement of the acquisition of a business from Butler Aerospace
• In May, she described Capgemini as Looking to U.S. for Makeover as it Prepares for 50th
• In June, she wrote about a BPS specialist opening an innovation center in Silicon Valley: Genpact Combining Design Thinking & Digital Technologies to Generate Digital Asset Utilities
• And in October, she described Atos Getting Into Health in the U.S. with Anthelio

That’s just a small sample of the wide-ranging themes and hot topics covered by NelsonHall blog articles in our trademark fact-based, highly insightful style.

Keep up with the latest blogs from these and other NelsonHall analysts throughout 2017 here, and sign up to receive blog and other alerts by topic area, or update your preferences, here. 

Genpact recently hosted an advisor/analyst session at its new Innovation Center in Palo Alto. So why is a BPO specialist opening a center in Silicon Valley? Genpact is using the center as a hub for the development (and showcasing) of platform-based digital assets aimed at mimicking the industry disruptors by being based on standardized, simplified operating models and distributed technology that can be deployed at web scale as utilities. The center is also being used to house design thinking (DT) workshops, and as a co-innovation Lab.

Genpact views its role as bringing domain knowledge and understanding of process and then leveraging DT and digital technologies, and emphasizes it is prepared to destroy existing BPO revenues in the process. It recognizes that operating to traditional upper quartile and best-in-class standards is no longer adequate as organizations look to compete with new forms of digitally-based competition. The emphasis in Genpact’s digital strategy is to continue to focus on middle- and back-office processes but to reorganize these processes with greater emphasis on straight through processing (STP) and on real time insights. So, while Genpact continues to put process before technology, the company is focusing on the application of 12 key technologies, specifically cloud/SaaS, mobility, dynamic workflow, advanced visualization, RPA, machine learning, cognitive computing, NLP, NLG, IoT, data analytics, and autonomic computing.

In general, Genpact is partnering with, rather than acquiring, companies with these technologies, though it has acquired PNMsoft due to the critical importance of dynamic workflow technology as a backbone for new digital processes, and it also continues to invest in IT services companies with expertise in applying these technologies, hence its acquisition of Endeavour Technologies to strengthen its mobile capability. Key technology partners who attended the session are:

• PNMsoft, an Israel-headquartered provider of workflow, BPM and case management (HotOperations) software and Microsoft Gold partner, recently acquired by Genpact.  Though Genpact does not yet have experience of using PNMsoft solutions with a client, it will have been attracted by the ability of software such as PNMsoft Sequence to enable organization to establish multiple versions of workflows for a particular process, e.g. loan origination, and judge the impact of moving work between each of these workflows in terms of process SLAs and cost. This approach also means organizes can test multiple workflows and change/optimize processes without service interruption
• Automation Anywhere, combining cognitive, analytics, and RPA technology
• Rage Frameworks, developing “intelligent machines” for a platform-based approach to knowledge work. Seven of the current 16 “intelligent machine” platforms being developed by Rage Frameworks are being developed in conjunction with Genpact
• Arria, a small U.K. based Natural Language Generation specialist.

Genpact is increasingly emphasizing its role in assisting organizations in creating new digital business models, and is looking to build digital assets based on combinations of the 12 technologies. Pilots and live examples demonstrated at the Innovation Center included:

• Insurance policy servicing automation. Here the utility service on offer takes policy change feeds from a variety of channels, potentially including portals, emails, contact centers via use of voice-to-text technology, and uses NLP technology to identify appropriate data and update the policy administration system (PAS). Where exceptions occur, it can send details to an agent or request more information automatically, generating a NLG response to the originator. This utility is currently live at two Genpact insurance BPS clients
• Using neural chat in support of opening corporate banking accounts. This incorporates use of OCR technology to extract data from images of documents taken via smartphone, using neural chat to present details of missing information to both the agent and the customer simultaneously for validation
• Wind turbine predictive maintenance. In this example, live since Q3 2015, sensor data is being used to monitor a fleet of 5,000 wind turbines to identify the failure rate of parts including the likelihood of part failure in a particular location and month (taking into account the age of parts, the location of the part, and the impact of the weather). This data is then combined with information from the ERP system to identify the potential cost in terms of lost production and wider damage of a part failure, together with the cost of holding individual parts to optimize the number of parts held by individual location. It has enabled the client to move away from scheduled seasonal maintenance to a more predictive response to maintenance. The client has benefited from increased uptime (more revenues) and a significant reduction in maintenance costs. This approach is clearly applicable in areas such as cable network management and aircraft maintenance
• Use of NLG in support of management reporting to produce a commentary on the underlying data and charts, aiming to produce one version of the truth and focusing the interpretation of the data and graphs onto the most salient points, thereby avoiding individual managers coming to differing conclusions from the same data
• Reimagination of the quotes process for an electrical distributor. In the current process, the distributor receives electrical blueprints from which it manually extracts SKU-based orders to enter into its order management system. This is typically taking 3-hours per blueprint. Genpact has developed a pilot incorporating computer vision to input the blueprint, NLP to identify table data within the image, and machine learning to enhance the identification and interpretation of table data, which can then be input into the order management system. In this instance, the supervised learning exercise in support of the machine learning involved ~12 personnel over a 6-week period. This example, which is not yet live, illustrates Genpact looking at areas of a client’s operations that could be completely digitized; its proposed solution eliminates all manual processing.

Some of these examples are not yet in production, but all are evidently transformational. Clearly, Genpact is at an early stage in its development of digital assets, and the technologies and the technology vendors with which it works will evolve considerably. But it is clearly investing in Lean Digital Innovation in earnest: with examples such as the reimagination of the quotes process for an electrical distributor, Genpact has come up with an offering that is very different from its legacy in BPO services: presumably the commercial model, which I was told has yet to be finalized, will be transaction-based.

Among the strengths of Genpact’s approach with Lean Digital are its:

• Emphasis on using combinations of emerging technologies rather than on single technologies to create point-based digital assets
• Domain knowledge and understanding of process (its heritage): the approach starts with a focus on transforming a business process rather than with the application of automation/AI
• Evident understanding that emerging technology companies just want to try some pilots with real clients rather than spend time on contractual arrangements and joint marketing.

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See also Genpact Assists Client in Targeting 10x Process Improvement, Applying Design Thinking to Order Management by John Willmott, published this week here.

Capita states it believes the acquisition would:

• Position Capita as a leading provider of technology-enabled BPS
• Provide a stronger platform for Xchanging to accelerate sales growth and to develop its offerings
• Enable Capita to secure £35m+ in cost synergy benefits
• Be immediately earnings accretive.

Capita has been in discussions with Xchanging since early August regarding a possible offer, upping its initial 140p offer to its final 160p proposal on September 24 - which Xchanging’s board confirmed it would be willing to recommend on September 29 should Capita make a firm offer. Capita was granted due diligence access and had until 5pm on November 2 to make an announcenent.

There is another suitor, Apollo, with whom Xchanging has been having discussions about a potential 170p offer. Will this announcement push Apollo into making a counter offer? Xchanging's share price has surged since the news of the potential talks (over 165p at the time of writing, though still below its one-year peak).

Xchanging has been contending with a range of issues, and its global portfolio lacks coherence, partly a reflection of its heritage in a few large and diverse “Enterprise partnerships”. Xchanging is currently between CEOs, Ken Lever having announced his intention in July to step down at the end of the year, and new CEO Craig Wilson not yet started.

If Capita were to complete, this would be its largest ever acquisition, dwarfing its second largest, the £157m acquisition of avocis this February (though there have been a number of £50m+ acquisitions since 2011, helping Capita expand into new markets or extend its IT capabilities).  So why is Capita so interested?  

In recent years, Xchanging has repositioned and invested to emphasize its capabilities in “technology-enabled BPS”- exactly what Capita is emphasizing with its own various BPO offerings.  Also, the private sector is increasingly important to Capita (over 60% of its current pipeline is in commercial sectors) and Xchanging would increase its presence in the Lloyds market, where Capita already has a presence for specialist services.

Looking in more detail at Xchanging assets that would be attractive – or at least very relevant - to Capita:

1. Xuber software suite for the non-life commercial market: the biggest investment to date (a whopping $200m+ in total investments since 2011), both in platform development and in acquisitions: in 2014, Xchanging invested £75.6m in acquiring Total Objects, whose binder software is now integrated into the Xuber suite, and Agencyport Europe,extending its software into the health insurance sector, with software for international private medical insurance and exposure modeling (acquisition was delayed), plus a further £11.7m on development of Xuber. Xchanging has found converting interest in Xuber to sales more challenging than anticipated, particularly in the U.S. Will Capita’s greater commercial clout help? It would inherit sales teams from Xuber, Total Objects and Agencyport Europe that need integrating into a single unit to cross-sell, where relevant, the portfolio. Would Capita place the Xuber business in its newest operating division “Capita Digital and Software Solutions”, or would it place it in an insurance sector division?
2. The Xchanging Claims Services BPS unit : Capita is already active with a range of specialist services in the London insurance market: this capability would neatly expand its portfolio
3. Xchanging’s business in Germany, where it provides investment account administration BPS for Fondespot Bank, will also be of interest to Capita, who is building a presence in the DACH region, via an acquisition spree in the CMS BPS market, also via an insurance BPS contract with Zurich. The complex administration services in Germany that Xchanging would bring in to Capita would fit well in its Asset Services division
4. Procurement: Xchanging has been through a significant change of direction with its procurement services in recent years, to technology-led offerings, boosted by the acquisitions of MM4 (which was U.S centric) and Spikes Cavell Analytics Ltd (SCAL, which was U.K public sector centric). These offerings may find traction in the Capita client base
5. Expanded offshore IT services capabilities: in India, Xchanging has centers in Chennai and Pune, Bangalore, and tier 3 cities such as Shimoga (Karnataka).  It also has a center in Kuala Lumpur, Malaysia, most providing IT infrastructure services to YTL Communications, and a smaller ADM unit in Singapore (where Capita also has a small presence, targeting the reinsurance sector). There is also some offshore BPO activity in India and Malaysia. Capita may rationalize some of these sites, but would certainly be interested in the expanded offshore application services and BPO delivery capabilities
6. IT services: Xchanging has some networking capabilities, with a client base in the education and health sectors, as well as Lloyds – this would fit well into the Capita IT Enterprise Services division, which has grown through a series of acquisitions in recent years

And less attractive to Capita?

• The Australian operations, where Xchanging’s New South Wales Workers’ Compensation contract was not renewed, and where its procurement business has not really gained traction.
• The U.S. business: Capita’s international efforts are currently focused on Northern Europe. It would be a major change of strategy for Capita to start targeting the U.S., and its management will be highly aware of other service providers who have tried and failed to penetrate the U.S.

But overall, Xchanging’s portfolio is particularly well suited to Capita's business and where it is looking to develop over the next few years. And the cost synergies from the head office rationalization are also a particularly good match.  

We thus believe is highly unlikely that, even if there is a higher counter offer from Apollo, the Xchanging board will change it recommendation to shareholders: Capita presents a better option longer term. Howver, a counter offer from another IT services vendor might be more attractive.

NelsonHall has just published a comprehensive Key Vendor Assessment on Capita. We have also historically included Xchanging in the KVA program.

What a difference in 18 months!

Back in November 2013, EXL received a notice of termination from its largest client at the time (an event that was unfortunate, but not due to under-performance). The impact of this on 2014 results was significant: a $38m reduction in revenues from this client (of which $26m from the reimbursement of disentanglement costs).

In spite of what could have been a major setback, EXL has since proceeded to:

• Achieve revenue growth, on both an organic and an inorganic basis. On a constant currency basis and excluding transitioning clients, EXL achieved 12.4% growth in 2014, which has further expanded to 14.6% y/y growth in Q1 2015 
• A key area of growth at EXL is its analytics business: in Q1 2015, excluding the contribution from RPM, analytics revenue grew to $18.5m. a growth of nearly 40% y/y, and 42.7% on a constant currency basis.
• Made some key acquisitions that bring in IP:
  • Blue Slate, acquired in July 2014, now part of the Analytics and Business Transformation segment
  • Overland, a provider of premium audit services, commercial and residential underwriting surveys and loss control services to P&C insurers using a BPaaS model, acquired in October. As well as IP, Overland brought in ~750 U.S.-based employees based in regional offices and a nationwide network of auditors and surveyors
  • RPM Direct, closed in March, specializes in analyzing large consumer data sets. It has its own database and supports data on ~250m U.S. consumers and ~120m households
• As well as inorganic investments that will grow its insurance business, EXL has also been investing in growing its clinical healthcare business, including hiring a Chief Medical Officer and Chief Actuarial Officer, and upgrading its CareRadius care management platform
• Expand its global delivery capabilities: opening new operations centers in Mumbai; Alabang and Cebu in the Philippines; and Dallas. This year, EXL will be able to offer delivery from Colombia for Spanish language delivery services, working with foundation client and partner Carvajal
• Recruit onshore data scientists in the U.S. Data scientists, of which there is a talent shortage, are key resources in being able to foster client intimacy around using analytics to support the client’s business. EXL estimates that its overall analytics headcount in the U.S. has increased by 50% in a year
• Roll out the EXLerator Framework across its operations, developing industry-specific BPaaS solutions and building proprietary technology enabled products. This is key in helping EXL strengthen existing client relationships, also in acquiring new clients
• Make some key structural reorganizations: the different consulting practices, for example, have now been consolidated into a single body - watch this space
• Change its reporting segments nomenclature to Operations Management (formerly called Outsourcing Services) and Analytics and Business Transformation (formerly called Transformation Services) “in order to more accurately reflect the changing nature of its engagements with clients”
• See an ongoing increase in its share price, from a low of under $23 in Q4 2013 to  current levels of around $35.

At end Q1 2015, EXL raised its revenue guidance from prior guidance in the range of $570-590m to $600-620m, with a 1% currency headwind, an increase of $30m at the midpoint. RPM is expected to add ~$35m of revenue. EXL’s revised guidance represents annual revenue growth of 14% to 18%, including organic growth of 11% to 14%. Margins will be dampened in the short term, partly because of increased investments in sales and marketing.

20:20:60 Targeted Change in Business Mix

So, in less than 18 months, EXL has handled the (very unlucky) upset of Travelers’ decision and is guiding on above market growth acquisition-led growth. These acquisitions are helping lead to a change in the nature of its revenue mix, with two revenue engines, each expected to contribute ~20% of 2017 revenues (a figure we estimate could be at least $150m)

• BpaaS, leveraging
  • Proprietary platforms such as Subrosource, LifePro, CareRadius, more recently developed offerings such as MedConnection, and the more recent capabilities around premium audits and property surveys brought in by Overland
  • also SaaS solutions from partners such as Coupa, Blackline and Sungard
• Analytics, where EXL has been building its capabilities through both inorganic and organic investment, including setting up an analytics CoE. EXL’s analytics business delivered 44% revenue growth in 2014 to $66m, representing 13% of total revenues (up from 9.5% in 2013).

EXL anticipates that operations management will move from ~76% of 2014 revenues to ~60% of total revenues in 2017. This does not mean declining revenues from operations management, in spite of the cannibalization effects of automation. As we have noted before, EXLerator marks a fundamental shift in EXL’s value proposition in operations management (BPS), which it defines as “architecting as well as managing” operations, to higher level, more complex activities. Being seen by clients as both the BPS provider and also an expert go-to resource for high end analytics services that can support in helping them formulate their business decisions - this will help EXL engage with clients more deeply in their business, especially in an environment of business model reinvention because of digital

What is clearly apparent at EXL is a strong focus on selected markets, notably healthcare and P&C insurance, and on applying a powerful combination of domain expertise, process knowledge, enabling technology, automation, and analytics to be able to go to market with differentiated offerings.

What about the U.K.?

The U.K. currently contributes around 20% of global revenues (the U.S. ~74%). It was notable that, in addition to EMEA leadership, EXL representatives attending the client event included CEO Rohit Kapoor, Chairman Garen K Stagli, at least one other board member, and several representatives from BlueSlate and Overland, all of whom had flown over from the U.S. This indicated to us a clear focus on growing the U.K. business.

One area of interest is developing a near- or on-shore contact center capability to be able to serve the U.K. market. And it looks like EXL has selected South Africa, where it is setting up a legal entity and operations this year. South Africa is a great choice for complex non-scripted voice interactions in sectors such as insurance, banking and utilities. This would give EXL a richer set of BPS delivery capabilities to service these sectors.

EXL appears to have invested very well for future profitable (and already achieving non-linear) growth in the U.S. for operations management, BPaaS and also analytics services - and with RPM it will be looking to combine RPM’s database management and digital marketing with EXL’s existing analytical modeling capabilities to offer a broader marketing analytics set of offerings. RPM currently is a U.S. business. Could EXL also leverage some of those capabilities in the U.K.? One area EXL is exploring is expanding the RPM Direct database (developed through credit agency partnerships), into other geographies, also possibly extending its usage from insurance and healthcare into other verticals such as banking and utilities.

.................

Given the range of its recent and ongiing investments as well as its existing IP and capabilities, there are several directions that EXL might take over the next year or so with both existing and new clients - any of these will be a significant development in its evolution. 

• Revenue was $4,817m, down 15.5% y/y, and down 10% in constant currency (CC), reflecting key account run off and weakness in EMEA
• Segment earnings before taxes (EBT) were $194m, a margin of 4.0%, up 143 bps y/y.

Q2 FY 2015 revenue by service line (with y/y revenue growth) was:

• IT Outsourcing $2,871m (-20.2%, -10% in CC)
• Applications and business services $1,946m (-7.6%, -2% in CC).

HP ES contributed 18% of HP Group revenue and 8% of Group EBT (up from 5% last quarter)

HP Group is nearing the completion of its 2012 restructuring plan. In Q2 FY 15, ~3.9k people exited HP making the total reduction to-date ~48k. The program has a total of 55k people expected to exit by the end of FY 2015, so a further 7k departures over the next two quarters.

HP has maintained full FY 2015 guidance for Enterprise Services of a revenue decline of between 4% and 6% on a constant currency basis, with an improvement in H2.

So where are the positives in HP ES' performance this quarter?

• A significant improvement in revenue performance in the Apps and Business Services segment, with a CC y/y decline of just 2%. This is led by the BPO business. And some geos are showing flat to slight CC growth
• Signings were up year over year, even without the $2bn Deutsche Bank deal closed at the beginning of the quarter (see our commentary here).
• And “Strategic Enterprise Services” signings continue to grow.... though no details are provided.

But the problems continue at  HP ES’ ITO business. It not only continues to be impacted from contract runoff from three large accounts continues, but is also being challenged by the evolution in the market. Meg Whitman refers to “risk in the longer term sustainability of this profit level if we don’t do further cost reductions”. As such, the current intention is to streamline HP ES and take up to $2bn of gross annualized costs out of the business over the next three years in pursuit of a longer term EBT margin target of 7% to 9%. The likely charge represents around 9% of HP ES overall revenues - and 14% of the revenues of the ITO business.

The restructuring actions in HP ES and in particular ITO will include initiatives such as further offshoring, data center automation, pyramid management… the same actions highlighted by CSC earlier this week.

Nevetheless, Whitman has made a clear statement of commitment to the future of HP ES: "the Services business in ES - (and the) -  TS Consulting businesses are  becoming more strategic to the future of Hewlett-Packard Enterprise…. “increasingly, services is becoming the tip of the spear”.

However, IBM is in the midst of a major adjustment of its portfolio. In line with this, the company is reporting $25bn in revenues (and 16% revenue growth) in 2014 (out of a total of $92.8bn) from its "strategic imperatives". IBM's acquisition of Softlayer, where it continues to invest strongly, appears to be delivering $3.5bn annual "as-a-service" run rate and IBM reports that its "Cloud" business had 2014 revenues of $7bn and 60% revenue growth (this includes hardware, software and services),

The revenue growth reported from IBM's other "strategic initiatives" were:

• Analytics +7% (2014 revenue approx $17Bn)
• Security +19%
• Mobile >200%.

Maintaining a high mix of software remains important to IBM but its strategy is now much more nuanced than the simplistic "software good" strategy the company sometimes appeared to adopt in earlier years, with the company rediscovering success in IT infrastructure management. Indeed IBM's acquisition of SoftLayer and its ongoing investment in Cloud infrastructure including in additional in-country SoftLayer data centers and cloud enablers such as security and its Bluemix cloud development platform is arguably having more impact on its signings than any of its investments outside Watson and analytics. In Q4, IBM's cloud infrastructure business moved way beyond the standard fare of IaaS contracts with start-ups to facilitating major infrastructure transformation contracts with values of a $1bn+ with the likes of Lufthansa and WPP.

Indeed, while the impact of SoftLayer was insufficient to lead to material growth in IBM's outsourcing revenues in Q4 2014, its impact is certain to be felt on outsourcing revenue growth  in 2015 as a result of these and additional major transformations to cloud infrastructure. Led by these deals, IBM's outsourcing signings transformed in Q4 2014, up 31% (in constant currency and adjusted for disposals). IBM now just needs its application management business, which is continuing to decline under competitive pressure, to undergo a similar transformation.

The tone was very upbeat:

• FY 2014 was a good year, with HP ES winning 11 out of the 12 BPO deals for which it bid, for an overall TCV of $1bn+
• And management described its pipeline for FY 15 as “very strong”.

HP has been winning business recently against competition from the likes of Accenture, Capgemini, Genpact and IBM… plus some sole source deals.

So what is HP ES in Europe doing so well that is boosting its BPO business, a business that a few years back was almost in hiding from a former CEO, but  which this year has had Meg Whitman making public comments of appreciation as being a part of the HP ES that is both growing and also profitable.

During the event, a number of things were featured by HP.

One of these, the integratation of its GBS organization with the BPO (which HP ES now refers to as “BPS”) business,  means that HP ES can refer to its own experience when looking to support a client that is moving to a GBS environment. This positioning has helped it win at least one major F&A deal this last year.

And a refresh of the sales force over the last few years has certainly helped the re-energizing HP is now enjoying.

HP ES is targeting deals which afford it opportunities to leverage its capabilities in security, automation and analytics, within a managed services wrapper.

The key offerings in Europe continue to be:

• F&A, where HP EA has re-launched the value proposition underpinning its services with six business-value oriented themes focused on CFO priorities (e.g,. cash acceleration)
• CEM, in which it has been investing recently.
• And in the U.S. HP ES has a large healthcare (largely Medicaid) business.
• With HR, HP is seeing its experience in implementing Worday internally is standing it in good stay for Workday-based HR BPO opportunities; a  recent win at IHG (see our article here http://research.nelson-hall.com/search/?avpage-views=article&searchid=40685&id=203973&fv=2) is one example.

Investments highlighted by HP included those in:

• Internally developed IP such as BPAT (Business Process Analytics Tool), currently configured to support F&A BPO engagements. It has six “views” including one that highlights risk and compliance issues, and a seventh that gives an executive overview.
• Robotic automation, with the BPS organization now starting to using Blue Prism and GBS using Leo for assisting agents. HP has adopted a CoE approach to foster reuse
• Analytics:  we are seeing evidence of HP ES having moved on from talking the talk to walking the walk with Autonomy within its BPO engagements. And of course, HP ES’ ability to leverage HP Labs is an advantage. Offerings being developed include “in context” and predictive analytics, which enhance the capabilities of agents and operators in taking "next best" actions during customer support interactions.

HP ES also highlighted various examples of commercial innovation, including a contingent financing model, where it puts its initial transition and transformation fees at risk, with the client only paying these fees after the benefits have started to accrue. NelsonHall research shows that transition risk in BPO remains a major hygiene factor for vendors in winning contract awards; HP’s offer to delay T&T fees until after benefits have started to accrue, should be effective in persuading potential clients of their capability and confidence to deliver an effective and speedy transition.

We also got a flavor of what we should expect to see from HP BPO in the next year or so.

• In its F&A business, for example,  HP is looking to go to market with more specialist services, e.g. financial planning and reporting services, also offering maturity assessments. Significantly, HP is also looking to GTM with a transactional procurement BPO service that will complement its F&A portfolio
• In its CEM business, the positioning will be more clearly articulated on the multi-channel customer experience (CX), with HP leading with advisory and transformation consultative selling. A recently announced alliance with Avaya (in which HP is providing ITO services to Avaya) will enhance its contact center infrastructure capabilities.. this is a space to watch
• Another key area will be expanded offerings around digital, for example to support digital banking and digital marketing, with managed services sitting on top of a stack of HP assets.

HP ES is one of very few BPO vendors that possess deep experience in its selected BPO areas and global delivery capabilities, combined with extensive IT services capabilities that include cloud and analytics solutions. It is positioning on being able to offer “transformational” BPO services that have a business outcomes focus, powered by technological innovation and supported by innovative commercial models.

In its new reenergized form, HP ES BPO in Europe is now increasingly one to watch.

Wipro’s Energy and Utilities unit, boosted several years ago by the June 2011 SAIC unit acquisition , continues to be a major revenue growth engine: E&U contributed an estimated 31.5% of the y/y growth this quarter. Wipro’s Healthcare and Life Sciences unit has also delivered two quarters of double digit growth.

BFSI continues to contribute around 20% of the y/y revenue growth, but it has been two years since BFSI, Wipro's largest industry group, achieved double digit growth. There will be some revenue contribution to BFSI in Q4 FY 2014 from the imminent acquisition of mortgage origination and servicing specialist Opus CMC. Optus will boost Wipro's BPO revenues in FY 2015, also expanding its onshore delivery presence in the U.S. Wipro is looking to leverage Optus to build an end-to-end mortgage BPO offering introducing more automation and increasing the application of analytics.

While Wipro’s telecoms business continues to be soft (the company does a lot of R&D work in the telecoms sector), it has now had two consecutive quarters of positive growth and appears to have bottomed out after seven quarters of negative growth.

If we look at service line performance, IT infrastructure services and Business Application Services between them contributed $81m of the $101m incremental y/y growth for Wipro. Its Analytics & Information Management is not the growth engine it was in FYs 2012 and 2013; it is now regularly delivering quarterly revenues of around $120m.

Where Wipro is underperforming, in particular compared to TCS, is in bread-and-butter ADM services. For TCS, ADM delivered an estimated $173m in additional revenue this quarter, more than Wipro achieved across all its service lines ($173m in incremental revenue for Wipro would have meant a growth of 10.8% for the company). In contrast, Wipro’s ADM business has now had six quarters of negative growth. Infosys has been focusing on getting back to basics and is now seeing a recovery in its ADM business: we imagine Wipro is looking to do likewise (though in its service line reporting, ADM is just 20% of its business).

With headcount down 814 sequentially and y/y growth trailing topline growth, expect to see utilization improve next quarter. Attrition in both the IT services and BPO businesses continues to increase, to a level that is possibly of concern.

To finish on a positive note, we have been keeping an eye on y/y revenue growth from Wipro’s top 10 clients; its efforts to strengthen key account management continue to pay off, with these accounts growing faster than Wipro overall.

If we look at where the growth is coming from:

• The more established ADM services (where Infosys took its eye of the ball in FY 13) contributed an estimated $173m in additional revenue, or 35.4% of the y/y growth of $490m. (Infosys achieved $53m growth in its ADM businesses). Enterprise solutions contributed over 19% of the growth. Assurance services and IT infrastructure services both continue to enjoy very strong growth and between them contributed over 27% of the y/y growth. IT infrastructure services and BPO both crossed the $400m revenue mark this quarter. The only service line not delivering double digit topline growth is the software business (TCS BanCs), for which the market is soft
• By vertical, the y/y growth is dominated by BFSI, which contributed an impressive $200m (nearly 45 of overall growth) in incremental revenues this quarter: full FY 2014 revenues are likely to approach $5.8bn. TCS is confident of sustaining ongoing growth in this vertical. In two other verticals, the difference between TCS and Infosys is marked:
  • Telecoms: Infosys continues to experience negative growth (down 10% in Q3 FY 14) and says its client budgets for next year are down. In contrast, TCS saw accelerated revenue growth this quarter (17.8% estimated, or $50m)
  • Life sciences & healthcare, which Infosys indicated a few years back was a new target market but now considers is soft.  TCS, in contrast, is enjoying over 30% growth, again with $50m in additional revenues.

These data points, are, of course, simplifications, but they do expose significant gaps between the two.

Among the regions, y/y revenue growth, unsurprisingly, continues to be dominated by North America (an estimated $232m in additional revenue. But Continental Europe contributed an impressive $122m in additional revenue. If anyone is in any doubt about its penetration of Continental Europe, TCS is likely to achieve over $1.5bn in revenue in the region this FY, with the U.K. delivering around $2.3bn. It is a major player in EMEA, and by far the largest IOSP.

Looking ahead, TCS is very bullish about prospects for FY 2015. CEO N Chandra commented on expecting FY 2015 to be a "much stronger" year than FY 2014. With 16.5% topline growth in FY 2014 nine months year-to-date, that indicates very aggressive targets for next fiscal. Should we expect some acquisition activity for IP-based capabilities, to boost efforts to drive non-linear growth?

This is the third quarter of improved topline growth. Management has raised revenue guidance for full FY 2014 to growth of 11.5-12% (up from prior guidance of 9-10%, and double the level of growth achieved in FY 2013). This would mean Infosys is getting back to Indian IT services market growth rates (NASSCOM predicted 12-14% for FY 2014).

So where has the growth come from this quarter? It is the last quarter of acquisitive growth from Lodestone (acquired Oct 2012) contributing 41% of the y/y growth (55% last quarter).  Infosys’ traditional areas of ADM (which underperformed for much of FY 2013) contributed a healthy 28% of the overall growth. This indicates the effectiveness of the recent drive at Infosys to go back to basics; its BITS businesses overall contributed 55% of the overall growth this quarter. Management commentary on client budgets emphasized their ongoing focus on initiatives cost optimization, is where Infosys BITS service lines play.

In terms of service lines, BFS and Manufacturing continue to be the growth engines. But Telecoms continues to be a major drag (down an estimated 9.6% y/y): it has declined from contributing 12.9% of revenue in FY 2011 to 7.9% this quarter.

The revised FY 2014 revenue guidance implies anticipated y/y growth in Q4 of between 8 and 9.9%, thus H2 overall will deliver slower growth than was achieved in H1. Accenture also saw a slowdown in its quarter ended November 30: the indications from these two bellwethers are of slower revenue growth in Q4 CY 2013: we shall know more next week when more results are published.

The operating margin of 25.0% is up 322 bps sequentially (up 150 bps excluding the one-time visa provision last quarter). Infosys has been stripping out costs by offshoring both billable (where relevant, depending on service type) and non-billable roles (notably in marketing: sales & marketing expense is 5.0% of revenue, down from 5.8% last quarter, with management referring to increased investment in sales). Narayanan Murthy commented on ensuring that “all jobs that can be done in lower cost locations are done in lower cost locations”. Increased pricing also contribute to the sequential margin improvement. Nevertheless, this is the sixth consecutive quarter when operating margin is down y/y.

Another factor contributing to the sequential improvement in margin is the 1.1% q/q decline in headcount (the last time this happened was four and a half years ago, in the June 2009 quarter), or 1,823 employees.

Infosys has been looking to get utilization up to its 78% to 82% target range, but it has again declined sequentially to 76.9% (from 77.5% last quarter).

Attrition continues to increase, to 18.1%; this may be part of the drive to weed out underperformers, but is also possibly indicates a trend in employee morale, in spite of the wage hikes from July 2013. There has been a string of departures of senior execs in the last six months (since the return of N.R. Narayana Murthy) and this is likely to have caused some short-term disruption.

As part of a reshuffle at the top, B. G. Srinivas and Pravin Rao have been appointed as Presidents, with B. G. Srinivas focusing on global markets and Pravin Rao focusing on global delivery and service innovation, on top of their existing portfolios. These are clearly the two front runners for the next CEO after S D Shibulal retires in May next year, unless Infosys elects to go for an external hire. One indication of the level of rethinking that is going on at Infosys is that just a couple of months ago it significantly expanded its Executive Council. That same Council is being disbanded from April 1 with the two new Presidents being given responsibility to put in place “appropriate governance sectors for their respective areas”. Historically, Infosys was a company where any major changes tended to focus on its long-term vision and were planned in detail beforehand; today it appears to be focusing on shorter term imperatives.

Infosys continues to enjoy a very strong balance sheet, ending the quarter with $4,236m in cash, up from $4,130m in the prior quarter.

Looking ahead, management shared its outlook for FY 2015 client IT spending; the tone was cautious, referring to “a mixed bag” across segments.

So what should we expect from Infosys in FY 2015? The company is clearly making progress on getting back to basics with its BITS offerings and it continues to enjoy the boost from the Lodestone operation; next quarter will indicate whether Lodestone is helping drive organic growth in its consulting business. It is still too early to tell whether the newer PPS offerings, on which Infosys places so much store, will pick up steam this year and begin to approach, even outstrip overall company growth. PPS businesses currently contribute 5.3% of company revenue, down from 7.1% back in FY 2012. PPS is key to Infosys' long-term vision, but two years on it is hardly a success story. Indian media is speculating on setting up a separate subsidiary for PPS; we would expect to see some inorganic growth in the next year. Meanwhile, there are several new key roles still to be appointed including a global Head of Sales. Infosys is looking in a better shape now than it was three quarters ago but it going through an unsettling period.

NelsonHall will be publishing an updated comprehensive Key Vendor Assessment of Infosys within the next few days. For details, contact [email protected]

Capgemini first developed a BPO capability in Brazil through the transfer back in May 2008 of a Unilever shared service center in São Paulo as part of a multi-process F&A BPO contract (which also involved the transfer of a SSC in Santiago). We were keen to see what has happened in the last five and a half years: has Capgemini succeeded in transforming a client SSC to a multi-client operation?

The first thing of note is the level of expansion: from an initial 250, Capgemini BPO Brazil’s headcount has quadrupled to nearly 1,050 FTEs, representing 7.5% of Capgemini’s global BPO delivery capability. This expansion has come from providing, mostly F&A, services in the Portuguese language to both multi-national and local clients. Since 2008, Capgemini BPO is servicing an additional eight clients out of Brazil, and also providing support to Capgemini group: a total of ten clients. In most cases, Capgemini is servicing the Brazilian operations of multi-national clients such as Syngenta, Avon and Nokia Siemens Networks (the latter for supply chain operation services). Capgemini BPO won its first domestic deal in Brazil in 2011: a 13-year multi-tower contract with conglomerate Grupo Algar covering F&A, HR and supply chain operations. Capgemini was tasked with standardizing processes across two Algar business units and nine companies covering agribusiness, aviation, security, technology and media, with a remit to increase productivity by over 45%. Earlier this year, Capgemini won its second domestic client: White Martins Gases Industriais Ltda (the Latin American subsidiary of Praxair).

This headcount growth has been accompanied by an evolution in the delivery location strategy. Soon after winning the Unilever Brazil contract, Capgemini opened a center in Campinas (a lower cost location than São Paulo), to which around 250 positions relocated. Then in January 2010, Capgemini acquired Sonda Procwork's BPO facility in Gaspar, Santa Catarina state, which had ~200 employees providing F&A and HR support to clients such as Bunge; Capgemini bought the assets to service Bunge, with whom it had secured an F&A deal in 2009. That center is no longer being actively used by Capgemini for BPO delivery.

The Campinas operation has seen signifcant growth; in 2010 Capgemini opened a new office within the Technopark campus, and it now has nearly 700 employees in the center. Campinas has a well-educated labor market (for example, Campinas University is one of the most prestigious in Latin America) - but it is also the 10th richest city in Brazil and there are many other cheaper locations in the country. Having sought a suitable cheaper location, in 2012 Capgemini opened a site in Blumenau, in the south west of the country, in a €2.2m investment to expand its BPO delivery capabilities in Brazil.  The Blumenau site currently houses nearly 350 employees and has the capacity for ~600; it also offers the potential for further expansion. With Blumenau, Capgemini can offer clients in Brazil a lower-cost alternative delivery location to Campinas.

In addition to this evolution in its location strategy, Capgemini BPO Brazil is also working on portfolio development, with an offering specifically for the Brazilian market: tax management.

This is an offering that meets a real local need. The Brazilian fiscal environment is notoriously complex - the World Bank claims Brazil's tax code is the most complex in the world. Companies have to comply with a plethora of federal, state and municipal taxes, some of them overlapping, plus new taxes being introduced, and existing ones regularly being changed – all this makes accounting errors easy. This year Brazil’s federal government has increased its focus on corporate tax collections because of reduced tax revenues (the economy grew less than 1% in 2012, less than the government had budgeted). Non-compliance can be very expensive, as companies like mining firm MMX (faced a fine of R$3.8bn, ~US$1.87bn, equivalent to around 80% of its market value at that time) and cosmetics producer Natura (fined ~$380m) have found out. Other companies targeted by Brazil’s federal tax agency have included pulp producer Fibria, logistics firm Santos Brasil Participações (fined R$2bn in total), even partly government-owned mining company Vale and state-run Petrobras. Even if fines are successfully protested, the damage, to share price, management disruption, can be considerable, and legal fees expensive. And tax processing consumes resources: Capgemini Brazil estimates that in some of its F&A BPO accounts, around 30% of the delivery staff are deployed on tax processing.

Capgemini’s new offering, about to be piloted by a major account, combines preventive controls (for example, checking the right filings and obligations are being done on time and documented), with detective controls, checking compliance at the transactional level, such as the results of calculations. Capgemini is partnering with a local software vendor for the software for the detective control elements. Expect to see this launched as a formal offering in 2014.

Capgemini shared its ambition is to double its Brazilian BPO operation by end 2016, with expansion focused on Blumenau.

Clearly the new tax management service, which it will offer on a standalone basis, will drive part of this growth, presenting new opportunities in the local market. As before, Capgemini will continue to target is multi-national F&A BPO clients that have operations in Brazil: it has just signed such a contract with one of its oldest clients. We also expect to see a new focus on cross-selling with the client base of the former CPM Braxis, acquired by Capgemini in 2010; this will mean an increased focus on the financial services sector.

And finally, more client acquisition activity is a possibility.
 

Zurich is a key insurance sector client for Accenture, for a range of consulting and application services; for example in 2010 it was awarded a ten-year, $50m contract to build and maintain a core insurance system and provide underwriting, policy administration and claims management support for Zurich’s P&C business in LATAM. Accenture did not win several back-office BPO contracts at Zurich; for example it lost a major procurement contract against Procurian – a competitor which it is now in the process of acquiring – and lost in an F&A BPO award against Capgemini (initial contract was renewed for five years in Q3 2012).

So why is Accenture announcing this 2012 contract with Zurich now? The emphasis in today’s press release is the extent to which Accenture is involved in and knowledgeable of Zurich’s finance IT processes through its work in this initiative to help Zurich better align its finance IT function to support its business objectives and reduce costs. There are some clear benefits of having one service provider for finance AM and for F&A BPO. Is this a statement of intent by Accenture that it remains interested in also providing some F&A processing as well?

(NelsonHall recently published an updated comprehensive Key Vendor Assessment on Accenture, available to subscribers of the KVA Program)

There are some clear positives in Wipro’s performance this quarter:

• Revenue just topped prior guidance ($1,620-$1,630m), and the constant currency growth of 7.9% was the highest for five quarters
• This is the first quarter since Q3 FY 2012 when Wipro has reported revenue growth across all its vertical units, with even media and telecoms achieving low single digit growth
• Operating margin is the strongest it has been since FY 2011, albeit boosted by currency benefits
• Utilization has picked up after being below 72% for three quarters - though it remains significantly below that of Wipro's peers
• Revenue growth in the top 10 clients continues to outstrip overall growth.

The Americas (essentially the U.S.) continue to be the weakest region at Wipro in terms of overall topline growth. Elsewhere, Wipro continues to see double digit growth in APAC and other emerging markets, which together crossed the $200m revenue mark this quarter and accounted (by NelsonHall’s estimate) for ~35% of the overall y/y revenue growth, with EMEA accounting for another 40%.

In terms of service line, Technology Infrastructure Services and Business Application Services continue to be the growth engines for Wipro, although the rate of growth in the former is slowing slightly. Encouragingly, two weak areas, ADM and R&D services (the latter exposed to softness in the telecoms market) are showing signs of stabilization.

The revenue guidance for next quarter indicates we should expect to see similar, or slightly stronger growth next quarter.

Looking firstly at the HP group-wide picture, turnaround measures till now have included restructuring, retooling, and reducing costs.  Successes so far include:

• Outlook given during the Q3 earnings call is above the midpoint of the full-year outlook that the company announced at the 2012 Securities Analyst Meeting
• Cashflow was $7bn during the first three quarters of fiscal year 2013, ahead of guidance for the full year
• In Q3 cash conversion cycles have been reduced to just 18 days, lower than initial target of 24-26 days
• Operating net debt, excluding the debt associated with the financing business, was lower by $8bn
• HP is on target with its restructuring plan to get costs in line with its revenue trajectory; to reduced run rate of labor costs by >$3bn in 2014
• Reduced costs and during the first three quarters of fiscal 2013, an operating margin at the high end of the outlook given last year.

At HP Enterprise Services (HP ES), the program so far has resulted in:

• The elimination of red or underperforming accounts: this is almost complete
• Headcount reduction:  average headcount in the first three quarters of 2013 is down by 9% versus a revenue erosion of < 7% in constant currency
• Growth in the “new style of IT” business: HP ES is focusing on growing its “new style of IT” services business which largely includes cloud, mobile and big data. It estimates that the total addressable market is $131bn and growing, compared with the traditional IT services segment which is $410bn and declining. HP ES claims “new style” currently represents about 7% of overall signings. It sees plenty of opportunity for growth in the “new style of IT” which it expects to grow to represent ~25% of the market in 2016, at about $179bn
• Focusing on transitioning clients to the new-style of IT has helped with increasing renewal rate to > 90% in FY13.

The turnaround program is now in full swing, and the initial steps to rebuild the company have already started to deliver results.

HP ES has also started to extend the scope of its strategic measures in its multi-year turnaround program to include:

• Flattening the labor pyramid, in terms of both skill sets and locations: currently HP ES is weighted towards high-cost location with over-skilled personnel in relation to their duties. In future it will take more advantage of its  global delivery centers including those in Bangalore, Manila, Sofia, and Costa Rica
• Focus on getting better at taking contracts away from competitors: in FY 2013, ~ 4% of HP ES’ sales force has been deployed on proactive new logo wins. In FY 2014, this is going to increase to 29%, with a clear focus on new business and selling the new style of IT
• Build-up HP ES’ advisory offerings, to put itself in a stronger position to shape the transformation activity that comes from advisory work
• Build client road maps in every area to help clients go from the traditional to the “new style of IT” e.g. for workforce or workplace mobility with the addition of advanced analytics and integrating multiple devices with enterprise applications.

Each of these measures is a logical evolution, given HP ES capabilities and broader market dynamics.

Building its advisory services is key for HP ES to shape the transformation programs that it undertakes for its clients. This will enable HP ES to expand its customer interactions well beyond CIOs, to include heads of business units that are becoming increasingly influential in IT decision-making and who want agility and speed to market. HP ES’ cloud capabilities are already a good fit to this changing market. The advisory and transformation services should dovetail into them and so substantiating HP ES' mantra of advise, transform and manage.

The roadmaps for transformation to the new style of IT make up a strong addition to the portfolio. We expect to see more such offerings in the future, more focused on verticals. These will also increase HP ES’ ability to interact with the new IT decision-influencers.

HP ES is increasingly facing direct competition from Indian-centric vendors, e.g. it recently lost a major IT infrastructure outsourcing contract at Anglo American to HCL. HP ES needs to pull all the cost levers that it can and so it is increasing delivery from off-shore and lowering cost of transformation for its clients with pre-built road-maps. Increasing its portfolio of vertical offerings can help reduce costs further.

Costs continue to dominate ITO decisions and in the IaaS market in particular, where companies such as Amazon have established a strong presence. While HP has always competed on the added value enterprise ticket, this might not stand the test of time and an acquisition or two may be necessary.

Overall, HP ES is completely on track. It is quietly reinventing itself within its turnaround program and should not be underestimated.

Related article: HP Updates Analysts on Its Turnaround Strategy: Revitalization of HP Enterprise Services.

The Brazilian market is particularly important both as the largest economy in Latin America and as a gateway country to other Latin American countries (due to Brazil having many of the same lenders and regulatory thought leadership for the rest of Latin America). Because Accenture's credit services are focused on loan origination, this market entry should help propel Brazil's overall mortgage market growth.

Accenture is looking to replicate the success of Accenture Credit Services in the capital markets sector, last month launching a post-trade securities processing business with Soc Gen as the foundation client.

It has not experienced a similar level of success in insurance industry-specific BPO in recent years, though acquisitions such as Duck Creek would indicate this was the ambition.

(NelsonHall recently published a comprehensive Key Vendor Assessment on Accenture, available to subscribers.)

It is not possible to determine the precise level of organic growth (excluding Lodestone) as Infosys is folding some of its consulting capabilities into Lodestone Consulting: this has happened already in the U.K. and is occurring now in the U.S. and Germany; the incremental $20m in revenue contributed by Lodestone this quarter ($90m, up from $70m last quarter) also includes a benefit from a change in accounting policy for revenue recognition. Nevertheless, we estimate organic revenue growth is around 9%, making it Infosys’ best quarter since Q4 FY 2012. Infosys management referred on several occasions to being ‘cautiously optimistic’ for FY 2014, though maintaining the 6% to 10% revenue growth guidance. We expect this guidance to be refined slightly by end fiscal H1

Looking at some of the service lines:

• Both applications development and application management have had their best quarter of topline growth for a year, though still far short of the double digit growth that Infosys used to enjoy
• Testing and infrastructure services continue to see double digit growth but at 15% of group revenue are not the growth engines, accounting for just 20% of the y/y growth this quarter
• Over 60% of the growth was from consulting and systems integration, mainly due to Lodestone, though revenues are also starting to come through from the 12 month $49.5m contract to build a health exchange for the District of Columbia. Management incidentally commented that there is likely to be less opportunity than it had anticipated for similar work to support other states’ health exchanges because of states opting for the federal exchange
• It is pleasing to see BPO back to growth; last quarter’s negative growth appears to have been a blip.

In terms of geographies, the U.S. continues to outperform Europe, which, excluding Lodestone, is achieving minimal y/y growth (we estimate under 2%) and was down 3% sequentially. This is attributed to being a consequence of some projects coming to an end, though clearly bookings to replace these fell short. Lodestone will clearly bring revenue synergy opportunities to Infosys and should ultimately boost the European business in those countries in which it operates. In the U.K., where Lodestone does not have a presence, and where Infosys has folded its consulting business into Lodestone, it will take longer for this type of benefit to be seen. The recent (from May 1) 8% wage hike for the global sales force was an important boost: when Infosys recruits a new global head of sales, it will be interesting to see what the geographic priorities are.

Management highlighted both some of the uncertainties, e.g. currency volatility, that led to the decision not to provide margin guidance, also the various levers being applied to offset impacts such as wage rises, price sensitivity in rebids, costs in the ramp up stages of large outsourcing deals, and also to drive margin growth. Key among these is improving utilization to the 78% to 82% target range, which Infosys seems confident of achieving.  Slightly less was made by management of improving productivity through increased automation and reuse, though Infosys is working on this in its BITS service lines.

TTM attrition is the highest it has been for over two years; presumably the wage hikes from July 1 will go some way to address this.

As part of the agreement, Accenture will create a new business service,  Accenture Hospitality Services (AHS), built in part around the operations and capabilities coming from Marriott’s MBS unit, including also Accenture software and analytics capabilities for the hospitality sector. Services to be offered by AHS to the hospitality sector will include management consulting, technology and BPO services.

MBS was set up in 2001.  The intention is that Accenture will not only enhance MBS’ operations but also attract new clients in the leisure and hospitality sector.

The acquisition of MBS' operations is a further evolution of Accenture’s relationship with Marriott International that has seen Accenture provide a number of services over the years including:

• Management consulting, including on process initiatives
• A range of IT projects, for example around the marriott.com website platform
• Enterprise applications services: for example Accenture implemented Marriott's Oracle-based accounting platform. The relationship around financial processes and systems goes back to around 2002.

The Louisville center has ~560 employees currently, and will provide Accenture with another sizeable rural onshore U.S. BPO capability. But this is more than the transfer of an onshore captive to a BPO provider, a known and trusted partner for other services, who then proceeds to offshore part of the operation in a standard F&A outsource. The stated rationale is to commercialize the transferred operation and potentially build an integrated services offering for the hospitality sector that could also include industry-specific HR, business analytics and procurement services. This is a well trodden path for Accenture with examples in F&A dating back to its acquisition of BP's accounting centers in the 1990's in order to serve the oil & gas sector.

This is not Accenture's first attempt to build a back-office BPO business in the U.S. hospitality sector: anyone remember its acquisition of Savista back in 2006?

Accenture has had a long history of providing FAO services to manufacturing companies in the Scandinavian market including Finnish steel manufacturer Outo Kumpu. Other clients have included Yara and Volvo. NelsonHall is seeing increased interest by organizations for multi-tower outsourcing, in particular that spans F&A and procurement, especially by organizations such as SSAB (a $6bn group that is currently loss-making) that urgently need to strip out costs.

SSAB is headquartered in Stockholm, and employs ~9,000 FTEs in 45 countries. The Scandinavian market, which the scope of this contract covers, accounts for ~70% (6,500 FTEs) of the workforce and 38% of global revenues.

Weakening of steel markets globally, following reduced demand from China, has led to pricing pressures, and the European market is also challenged with over-capacity. SSAB has gone from being one of the more profitable steel manufacturers in the world to reporting significant operating losses since H2 2012.

In 2012 SSAB introduced an efficiency program for its EMEA operations targeting annual cost savings of SEK 800m from 2014. The program is also intended to increase flexibility to better address market fluctuations. Outsourcing is clearly seen as the lever needed to help address both these challenges: to strip costs and to increase flexibility.

Accenture, like IBM and Capgemini are one of very few organizations globally that have the capability to provide all the three BPO service areas in scope in this contract. The appetite for multi-process outsourcing deals, including in northern Europe, remains undiminished.

Turnaround activity includes:

• Investments in internal systems, such as a new CRM system (salesforce.com) for the sales force, revising its quote to cash system, implementing a new resource management system
• Centralization of marketing and communications, and a new advertising campaign.

The commitment to services, and also specifically to BPO, was reiterated by Mike Nefkens who leads HP Enterprise Services (ES). Nefkens stated that he was “committed 150%” to ES which he referred to as “a strategic asset” and as being a “stable and profitable” business. He also reiterated that BPO is a core part of the portfolio.

Stated priorities for HP ES in FY 2013 include:

• Stabilizing HP ES services and delivery
• Showing progress on its financial goals
• Reinvigorating the sales force and creating a growth culture
• “Increasing value to our clients’ agenda”.

HP ES is looking to shift its business mix from lower margin activities such as traditional workplace services, and take advantage of its skills and capabilities in the newer areas of mobility,   information management & analytics, application modernization, security and cloud services. These will become more and more embedded in its core portfolio of data center management ADM, enterprise application services BPO, and industry solutions.

HP ES is also looking to grow its capabilities for “advise and transform” services, by which it means helping clients shape, implement and manage their journeys in what Whitman calls “the new style of IT” which includes big data, mobility, BYOD, cloud and security.

HP ES is becoming more selective about the contracts that it takes on. Deal governance is being tightened with more consideration given to ensuring appropriate deal framework and appropriate management of contracts.

There is much that is going on internally to re-align and re-energize HP ES. This includes:

• A focus on setting realistic goals matched with rewards and recognition. Increasing employee engagement is another objective, with the executive management meeting with leadership teams, and providing clear messaging for the workforce
• Increasing internal accountability and visibility of responsibilities, performance, budgets and over expenditure
• Enhancing internal capabilities, for example, there is working progress in dynamic allocation of resources and integration of key enterprise systems.

Other activity includes Applications and Business Services (ABS) developing its approach to application development, including agile methodologies and use of social tools.  A KM platform has helped with productivity improvement and the group has been flattening its pyramid: a significant share of new hires in ES has pay rates that are 20-30% lower those that have left.

On the delivery side HP ES is looking to hire more project managers. It is also hiring for vertical and technical specializations for business development.

(A description of the various initiatives the multi-year turnaround program for HP ES outlined in October 2012 is provided in article 76420, also more comprehensively in the Key Vendor Assessment on HP Enterprise Services).

In its fiscal Q1 2013, (the quarter ended December 31, 2012) HP Group revenue beat expectation and cash flow and net debt improved also. HP ES reported:

• A year-over-year revenue decline of 7% (revenue guidance for full year FY 2013 is a decline of 11% to 13%)
• An operating margin of 1.3%, within the target range of 0-3% for the year.

For HP Group overall, revenue beat expectation and cash flow and net debt improved also. Since the announcements of Q1 FY 2013 results on February 21, HP share price has risen by nearly 25%.

The turnaround at HP ES (and indeed at HP overall) is still in its early stages - FY 2013 is labeled the “Fix and Rebuild” year. There is a palpable sense of reinvigoration of HP ES, which has a new very experienced COO, JJ Charhon, and a new global head of sales. Larry Stack previously helped revitalize sales in Accenture’s Health & Public Service operating group; and he already has insider knowledge of HP ES, having previously worked for the Group. Among the measures that Stack is proposing to reinvigorate sales at HP ES is the revival of its Sales Academy, and as part of the drive to empower accounts execs, expect also to see a refresh of account execs over the next year or so, with an increased emphasis on recruits with industry knowledge. Among the service lines, HP ES particularly needs to strengthen its BPO sales ability to engage with clients about supporting them with their business issues.

There has been progress in sorting out unprofitable or underperforming accounts, the so called “red accounts”. On the project side of the business in Applications Services the number of red accounts is a fraction of what they were a year ago. BPO has no red accounts and is profitable. With IT infrastructure management red accounts, HP has sought to engage with clients’ senior execs to reach a new consensus on the work to be delivered and thus restructure the client relationships. In some cases, HP has elected to exit the contract. There remain a number of low-performing contracts, and addressing this will clearly continue to be a priority in the short term.

In investing in service enablement and automation and seeking to flatten its labor pyramid, HP is playing catch up with competitors who started these measures some time ago.

An obvious point, but one which is easily overlooked, is that HP ES is the enterprise services arm of HP Group, in particular its Enterprise Division, and is thus fundamentally different from standalone IT services providers. The CIO is the key target audience, and the focus is on bringing together relevant components of HP’s hardware and software and services capabilities into engagements. Cloud was a recurring theme during the two-day event, and where HP ES used to emphasize its ‘Converged Infrastructure’ abilities, it now highlights the ‘HP Converged Cloud’, offering clients both build and operate cloud services, and “consume” cloud services (managed IaaS and SaaS, public cloud). For HP ES, expect to see the messaging focus on its abilities to enable client’s journey to the cloud, even if the service is BPO.

There was no mention by HP ES during the event of its thinking about expanding in growth markets: this is something we would expect to hear more about in FY 2014.

The investment in portfolio is clearly in the areas of mobility, information management & analytics, apps modernization, security (one of HP ES’ fastest growing areas) and cloud services.

HP ES also arguably needs to invest more in its vertical capabilities, including within existing strongholds such as U.S. state government healthcare, where it has led the Medicaid market for decades. The contracts for health information exchanges (HIXs) are starting to be awarded. These would take HP ES into the new era of U.S. state healthcare following the reforms that are underway. However, competitors and new players are winning the contracts. For example Vermont, where HP recently won a Medicaid Fiscal agent contract renewal, awarded the contract to build its HIX infrastructure to CGI. And at Nevada, where HP ES is also the Medicaid fiscal agent, Xerox has won the contract to design and implement the state’s HIX.