Conduent’s FastCap service covers:

• Contract audits
• AP post-payment analysis and recovery
• Vendor statement solicitation
• Freight audits
• Spend forensics.

Extending Beyond Contract Audits to Accounts Payable Recoveries

Conduent has always had a strong contract analytics group focusing on legal contracts. The company has a tool, going back to Xerox days, that can handle millions of documents and search for keywords, etc., to identify key leakage areas. Conduent used the FastCap tool for one client to identify $8m in recoveries opportunities related to contract compliance.

Conduent is now leveraging that tool to data found in finance and accounting processes to look at contracts and invoices to identify erroneous payments, duplicate payments, open/unapplied supplier credits, contract/PO terms compliance, pricing errors, and missed discounts. FastCap uses 12 different algorithms to analyze AP data.

In addition, vendor statement reconciliation is another way of reducing the level of unreconciled items between organizations and their key suppliers, resulting in working capital improvements. Here, Conduent’s accounts payable audit teams analyze statements to identify credit recovery opportunities. This can involve combing through millions of records to validate statement credits and find the root causes of issues. The level of credits that companies can be owed can be huge, with their having little or no knowledge of this. Either the client or Conduent can handle the resulting discussions with the client’s key suppliers.

With freight audits, Conduent is leveraging a third-party tool to analyze and check freight statements from major carriers to find inappropriate billingsConduent has recently done this internally and estimates it has identified over a million dollars of savings.

FastCap is also used for procurement spend forensics. With spend forensics, Conduent personnel use the FastCap tool to analyze spend in targeted categories, typically in areas such as IT, facilities, and contingent labor and then provide recommendations and opportunities for quick wins. The client typically provides 1-2 years of spend data and enables Conduent SMEs to understand the buying process and systems used.

Achieving $20m in AP Recoveries

Conduent currently has eight clients using its FastCap solution. The strongest interest has been in the AP recovery audit solution. Conduent estimates that it has delivered over $20m in recoveries for clients to date. For one client, a mid-market organization, Conduent identified 210 duplicate payments to suppliers on an analysis of 12,567 transactions over an 8-month period, preventing duplicate payments of over $3.4m. There has also been some keen interest in the freight audit service, which is similar to an AP recovery audit in being low-hanging fruit.

Perhaps the most prominent of Conduent’s FastCap clients is an auto OEM, a longstanding major F&A client, that also uses Conduent for various procurement services. In its freight audit work for GM, Conduent was able to find erroneous payments that another provider missed during their audit.  Conduent also showed the client what changes could be made to prevent these from reoccurring by working with freight carriers to make sure they are more accurate in the future.

The FastCap Service Offers a 90-Day Timeline for Initial Recovery of Funds and Zero Up-Front Costs

The FastCap proposition is based on speed of recovery and outcome-based pricing, specifically:

• Speed and minimal disruption: Conduent offers a 90-day timeline from data collection and analysis to initial recovery of funds from suppliers
• Zero up-front costs: Conduent offers the FastCap solution with a managed services wrapper on 100% outcome-based pricing. The gainshare level on recognized savings differs slightly according to the service.

There is also a growing awareness by finance organizations that AP recovery audits can be useful not only for improving working capital but also for identifying system issues or process gaps. Conduent highlights that it can use FastCap for root cause analysis and then help clients put controls in place. Within BPS, the central value proposition has long moved from solely emphasizing efficiency improvements to helping clients develop more effective business processes; FastCap can clearly be useful here.

High Relevance to Major Multinational Manufacturers

So what type of organization should consider Conduent FastCap?

Clearly, FastCap is a no-brainer for Conduent’s existing F&A client base of around 45 accounts, both within finance and accounting and for wider contract and spend analysis.

However, Conduent FastCap also offers a quick return at zero risk to organizations that have retained their finance & accounting and procurement functions in-house, but lack the tools and expertise and desire to invest in areas such as AP recovery. This service offers a way of rapidly recovering an element of working capital while also identifying loopholes in current systems and processes without the need to adopt a full finance & accounting outsource. This particularly applies to large complex companies with many accounts payable or procurement transactions,

The AP recovery and freight audit offerings are especially likely to resonate for initial engagements.

Genpact has signed a procurement BPS contract with a multinational conglomerate to manage a spend of $10bn covering all major categories of indirect spend (except IT) including logistics, FM, MRO, professional services, travel, and contingent labor, globally.

The contract is of strategic importance to Genpact in that it involves the transfer of 130 category management and sourcing personnel, approximately doubling the scale of Genpact’s existing sourcing & procurement practice. Before the deal, Genpact had ~100 personnel in its sourcing & procurement practice, with an additional 50 S&P personnel elsewhere within the company.

The deal provides Genpact with nearshore sourcing category management delivery centers in Budapest and Monterrey together with additional capability in Bangalore (where Genpact already has a sourcing & procurement team) and a small center near Shanghai.

So it will have a major impact on the scale and level of expertise within Genpact procurement services. Genpact expects this new capability will enable it to maintain 20%+ growth over the next few years, and be instrumental in underpinning its new procurement BPS strategy consisting of:

• Integrated P2P
• Consulting in support of procurement optimization
• Sourcing & category management for leveraged indirect spend categories.

Taking Advantage of Accounts Payable Delivery to Target End-to-End P2P

Genpact has a major and longstanding presence in accounts payable, with ~14,000 personnel deployed on transactional P2P processing. While the majority of Genpact’s accounts payable clients do not currently purchase end-to-end P2P, the opportunities are increasing. Large enterprises with GBS operations have commonly appointed global process owners for P2P and these process owners are frequently looking to achieve “zero-touch” AP – and this can only be achieved by an end-to-end approach to P2P and ensuring that all purchases are digitized and coded and approved in error-free fashion at the procurement stage.

Accordingly, there is a major potential opportunity for Genpact to add procurement to at least some of these clients and provide end-to-end integrated procure-to-pay services.

Consultancy Services in Support of Procurement Optimization

Genpact recognizes that few major organizations will want to change their existing procurement platforms while at the same time frequently recognizing that their procurement capabilities require optimization. Here, Genpact expects its recent partnership with Celonis to be important, with digital twinning being used to show CPOs the “fact-based” reality of their operations.

Key tools then include micro-solutions such as dynamic workflow and elements of Cora, along with third-party point solutions.

Genpact has seven procurement consultancy offerings:

• Developing procurement target operating models
• Blueprinting, developing the execution plan to get to the target operating model
• Systems, small implementations around Coupa with the business growing organically and by word of mouth. Genpact is unlikely to acquire further implementation capability inorganically but has relationships with Coupa and Ariba and may look to add additional platform partnerships
• System optimization, firstly helping organizations optimize what they have bought and secondly helping them do procurement better. The latter could be around tail spend using solutions such as Tradeshift or using Cora dynamic workflow
• P2P optimization via process modifications and change management
• Sourcing diagnostics, using category expertise to identify possible opportunities
• Executing on the resulting short-term sourcing programs.

In addition to process analytics, sourcing analytics is also key, with Genpact’s F&A practice potentially a major source of category benchmark data.

Targeting Leveraged Indirect Sourcing & Procurement

Where the acquisition of these personnel is expected to have the greatest impact is in fundamentally facilitating Genpact in changing its offerings and delivery model for sourcing and category management.

Genpact will focus solely on sourcing indirect spend, and is aiming to own the execution and the delivery of sourcing & category management work by offering leveraged indirect sourcing and procurement services with a one-to-many model.

Genpact will not target high value, high-risk categories but will position as offering greater scale, repeatability, and savings in sourcing in the “leverage” category and in assisting organizations in eliminating, automating, and simplifying sourcing & procurement in very low risk, low-value categories. Genpact will target companies looking for a combination of “taking the noise out of the system” to improve the UX, potentially releasing some personnel to concentrate on more important categories, alongside achieving realized savings.

The contract with the conglomerate assists Genpact in acquiring centers “optimized for procurement with the right skill sets at the right price.” Clients will be offered a choice of delivery location, including onshore, nearshore for regional dependencies and language support, and offshore, with Bangalore being used for back-office support and for sourcing analytics. Genpact will look to use front-end category managers to serve multiple clients in a one-to-many model with resources in Bangalore and Budapest used to magnify their capacity and capability. Approximately 40% of Genpact sourcing & category management personnel are center-based with the remainder, including onshore personnel, more widely distributed.

Genpact will focus on the high-tech, manufacturing, & services, consumer goods, retail, life sciences, and healthcare sectors where it has gained experience of F&A BPS, and will aim to take prospective clients to “visual factories” based in their delivery centers where they can be walked through the sourcing & procurement process and also meet the category managers.

Sourcing & procurement BPS has traditionally been a difficult nut for vendors to crack; challenges have included its high geographic and category diversity, lack of talent (scaling category managers in this environment), lack of realistic offerings for tail spend management, and buy-side slowness to embrace S&P BPS, the latter partly because of limited choice in the vendor landscape. Genpact’s pragmatic approach to extending its business beyond transactional accounts payable to focus on S2P for low-risk indirect spend categories addresses some of these challenges. This approach, its newly expanded category management capabilities, and the fact that it has an extensive F&A client base to mine, position it well for future growth in a market where competition remains scarce.

• 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”.

The acquisition will enhance Accenture’s digital capabilities in analytics, cloud and mobility for federal agencies. It also will add agile delivery expertise. Agilex brings in capabilities in agile software development for digital solutions. The company currently serves a number of federal departments and independent agencies, such as the VA, DoD, DHS, and Department of Commerce.  Commercial sector clients have included Amtrak.

Agilex was founded in 2007 by the late Robert La Rose (who had previously founded Advanced Technology Inc. and Integic, both of which were subsequently acquired), Jay Nussbaum (ex. Citibank and Oracle) and John Gall and quickly attracted senior talent to its leadership. The company offers services around

• Mobile applications for activities such as field inspection, emergency response management, performance dashboards, biometric identification, asset management, case management, personal productivity, etc.
• Healthcare IT - for example Agilex was involved in the deployment of the NHIN CONNECT Gateway. Also m-health - for example in May 2014 it was awarded a contract by the VA to develop and implement an enterprise web and mobile application image viewing solution
• CRM solutions.

Agilex has grown from 20 employees in 2007 to about 800 today. Nussbaum and Gall will leave when then acquisition closes, while the company’s leadership team will be integrated into AFS.

So why the acquisition? 

• AFS is already one of the largest U.S. federal systems integrators – this is about continuing to evolve its capabilities to be at the forefront of newer areas of demand; quite simply, Agilex brings in capabilities around digital technologies – and digital is clearly among the top priorities of the government sector
• And governments, not just in the U.S., are looking with much more interest in agile delivery as they move away from massive monolothic projects (for example, agile delivery has been a key element in the U.K. in the development of a new Universal Credit system for the DWP)

Accenture’s 2013 acquisition of ASM Research expanded its presence in the military healthcare market (DoD and VA) - and Accenture has worked alongside Agilex in projects at the VA. 

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.

There is no significant change in contract scope or direction in the renewal, largely a recognition that Philips and Infosys are part way through a major program of change in the way that Philips carries out its finance and accounting operations, including a major change in Philips' system landscape with simpler IT platforms and a simpler master data structure underpinning all IT platforms. Accordingly continuity is very important to Philips.

Overall, the number of personnel in Philips' finance & accounting function is split 50:50 between Philips in-house and Infosys, with the split for operational activities being approximately 2:1 in favor of Infosys. Infosys' service employs 2,800 personnel, uses eight delivery centers and is based on three major hubs: two in India and one in the Philippines. The scope of the contract covering purchase-to-pay, order-to-cash (mainly cash application), and record-to-report will remain unchanged on contract renewal.

The nature of the governance is clearly very important to Philips, with the implementation of joint objectives and a single leadership team across Philips and Infosys. Philips' finance operations have moved from a geographically based organization structure to a process-based organization structure, with the emphasis on each party holding the other accountable. To this end:

• End-to-end common dashboards are used to monitor finance operations
• Global process owners within the Philips team are mirrored by global process owners within the Infosys team
• Infosys is accountable for the end-to-end KPIs and the analytics used to identify scope for improvement.

The goal in five years' time is to have very standard processes that are easy for Infosys to operate, and Philips has approximately 20 process improvement projects planned over the next 2-3 years to improve process effectiveness and efficiency. These are relatively evenly spread across the major processes areas with an emphasis within P2P, for example, on increased automation, e.g. through use of e-invoicing.

As in many mature F&A BPO contracts, there has been a move from FTE-based pricing to transaction-based pricing, with the latter regarded by Philips as the ideal end-point. Currently approximately three-quarters of the contract is priced on a per transaction basis with a quarter of activity (in areas such as compliance) still FTE-based. In addition, there are bonuses and penalties, each around 5% , associated with targeted improvements in end-to-end KPIs. Philips has set improvement targets for six key indicators, tasked Infosys with identifying the three main factors for underperformance in each KPI, and also baked efficiency targets into the contract.

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)

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.

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.

This is a plug the gap acquisition for Xerox, bringing in IP to help it better manage the end to end O2C process, especially in the collections domain. With CVG already attracting attention from other BPO providers including Infosys and EXL, the acquisition can be seen as both an offensive and defensive play. In June, Xerox signed an ~200 FTE MP FAO contract with a Swiss headquartered CPG manufacturer, beating the incumbent, Genpact. Half of the services in scope are related to O2C (order management, MDM, collections and cash application) - and the platform used to support those processes was the CVG Value+ platform.

CVG will continue to operate from its London office.

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.