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.

WNS has just closed its acquisition of Denali Sourcing Services.  An investment of around $40m, funded primarily with long-term debt, this is WNS’ largest acquisition in a decade (since that of Marketics Technologies, which enhanced its ability to offer offshore analytics services in 2007). And it is paying over 2x revenues for Denali Sourcing Services. So this is more than a tuck-in acquisition for WNS.

Who is Denali Sourcing Services?

Denali Sourcing Services was one arm of the Denali Group (other entities such as Denali Advisory and Denali recruitment have not been acquired by WNS).

The majority (~80%) of Denali Sourcing Services’ revenues are derived from largely recurring services within multi-year contracts. Within this, approximately:

• 20% of recurring revenues are derived from enabling services, typically category management enablement, where it provides ongoing spend analytics, training and coaching around category management, including on-demand access to advice from Denali’s specialist category managers. Denali Sourcing Services also owns the Category Strategy Network which enables organizations to tap into a knowledge network for on-demand category expertise
• 80% of recurring revenues are derived from sourcing, contracting & contract management, and, to a lesser extent supplier management services including some transactional procurement.

Around 95% of its revenues are from U.S. based organizations.

Denali Sourcing Services has ~200 personnel. Its delivery structure includes:

• Centers in the U.S. in Seattle, Pittsburgh, and the Bay area, accounting for ~50% of delivery personnel
• A center in Pune, India, providing elements of delivery and support all geos
• A center in Istanbul, providing all delivery to the European market. Personnel from this center visit client sites as required. It also has a few personnel on client site in Amsterdam and Dublin
• A small center in Shanghai.

Denali Sourcing Services’ delivery is supported by its SmarTrak platform which it looks to use to embed its operating model into client companies. SmarTrak is used by procurement in support of stakeholder management, provides elements of workflow around the procurement process and supports:

• Intake and management of procurement requests
• Tracking the progress of request
• Tracking operational parameters such as capacity, productivity and cycle time
• Measuring changes in spend under management.

Denali Sourcing Services also brings in its spend analytics methodology, currently underpinned by Tableau and Excel-based models.

So why?

Well, the immediate and obvious takeaway is that Denali Sourcing Services expands WNS’ existing current capabilities beyond transaction processing within P2P into services that span sourcing through to pay.

Denali Sourcing Services brings in a specialist capability which remains in short supply.

And WNS and Denali Sourcing Services have worked together already.

WNS had been under increasing pressure from some of its P2P clients to expand its services upstream and began working with Denali Sourcing Services about three years ago. In one example, the companies jointly bid on, and won a source-to-pay BPS contract in the U.S. The client was previously using another BPS provider for accounts payable, with source-to-contract activities being kept 100% in-house. Within this contract, Denali Sourcing Services provides category management, sourcing, and contracting with WNS providing procure-to-pay services. The contract started with all indirect categories, including professional services, construction, travel, IT, and marketing covering spend of ~$2.5bn; over an 18-month period this has expanded to include direct spend around some raw materials, including logistics and MRO, taking the spend under management to ~$5bn.

F&A has been one of WNS’ fastest growing areas recently and now represents over 21% of its total revenues: this is a logical expansion of the portfolio.

Like Value Edge has been doing, Denali Sourcing Services will immediately boost WNS’ revenues in the U.S., which is fast becoming as significant a revenue producer for WNS as the U.K. And it brings in access to clients in sectors such as E&U and high-tech and FS.

So as well as being a significant expansion of WNS’ portfolio into a service that generates recurring revenues, Denali Sourcing Services will bring in a new client base, in a new geography, and in new sectors, in line with WNS’ ambition to reduce its dependence on the U.K. and the insurance sector.

And what next?

WNS is setting up an independent horizontal procurement business unit, based on Denali Sourcing Services, headed up by Denali Sourcing Services founder Alpar Kamber. We may thus see WNS start reporting revenues for procurement services separately from F&A.

While the short-term badging of the acquired entity remains undecided, Denali Sourcing Services will retain the Denali name (Denali Advisory is undergoing a rebranding exercise).

WNS is looking to grow the Denali Sourcing Services business by >20% per annum, with strong emphases on

• Doing “large” deals combining S2P and P2P services
• Expanding the Denali Sourcing Services footprint in Europe and APAC. At present, ~95% of Denali Sourcing Services business is derived from the U.S. Significantly, Alpar Kamber has moved to London
• Cross-selling S2P upstream into WNS accounts initially and subsequently selling WNS’ P2P downstream into Denali accounts.

WNS and Denali Sourcing Services are currently in discussion with a number of prospects across the insurance, travel & hospitality, banking, and manufacturing sectors. Whereas with F&A, WN has been taking an industry-specific approach, WNS is viewing procurement more as a horizontal capability, certainly initially while the bulk of the activity lies in indirect procurement.

WNS is looking enhance Denali Sourcing Services’ analytics capability and may develop its own tool or partner.

Significantly – and sensibly we feel - WNS has no immediate plans to offer a wider platform-based procurement service. Instead, the company will increasingly provide enablement services and bolt-on solutions around the main procurement platforms such as Ariba and Coupa which client organizations are already likely to have.

Elsewhere, a key focus is on building “communities of practice” around categories including marketing, facilities, IT, construction, and professional services.

Denali Sourcing Services will continue with its existing delivery centers, and is looking to scale particularly in support of the European and Asian markets.

Conclusions

Procurement BPS is a market where growth has not quite lived up to expectations in recent years. One of the factors hampering its growth has been a lack of choice of vendors possessing real source-to-pay capabilities. WNS is tackling this head on.

At first glance, this appears an audacious move by WNS: its largest acquisition in a decade, and bringing in a new capability where the client bases and sector strengths are complementary rather than overlapping.

But the selection of Denali Sourcing Services and the approach being taken to its integration indicates this is a move that has been extremely well thought through by WNS, one that will immediately expand its portfolio, extending the value chain for existing F&A clients, in a service where specialist expertise is in short supply, and for which it already has strong client demand.

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]

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)

This is a major consolidation of the procurement BPO vendor landscape, with, by NelsonHall’s estimate, the number two player globally buying up the number three player.

What does this mean for Accenture?

As well as making Accenture by far the largest procurement BPO vendor globally, Procurian will bring in industry capabilities in a range of sectors including discrete manufacturing and consumer goods, extending Accenture's own industry capabilities in procurement BPO in the financial services and E&U sectors.

Procurian will also strengthen and broaden Accenture’s strategic sourcing and category management expertise bringing in both skill and scale for source-to-contract (S2C) engagements. Procurian also has technology assets, which include proprietary tools for contract management and supplier performance management tools and its SavingsLink tool for measuring and analyzing forecasted and realized savings.

This is not Accenture’s first investment in this space: three years ago this month, it acquired Ariba’s strategic sourcing practice (the former FreeMarkets, based not far from Procurian) for $51m. Of course Ariba is now part of SAP, with whom Accenture is getting even closer (look at recent partnership announcements).

The acquisition of Procurian will position Accenture very strongly, particularly in the U.S., for multi-tower back-office opportunities spanning F&A and procurement – although examples of these being outsourced simultaneously are few, NelsonHall has seen much greater buy-side interest in the last two years around the concept of a combined F&A and procurement outsource. And it presents Accenture with a great opportunity to cross-sell S2C services into its existing F&A clients, particularly in those sectors where Procurian has client references.

Procurian will also bring to Accenture a client base that includes some organizations which present opportunities for cross-selling, in particular services which can help them take costs out from other corporate functions.

Procurian has been nurturing industry-specific client communities, and at times this has helped secure new deals. This practice will doubtless continue at Accenture.

What does this mean for other Procurement BPO service providers?

Clearly the ultimate intention of majority stakeholder (85%) ICG has been to sell Procurian (by far its largest investment) when the time and money was right: the question was always when?

ICG has got a great price for Procurian: Procurian generated revenue of $140m in 2012 and an operating margin of 12.3% (down from 16.4% in 2011 due to start-up costs associated with the Zurich contract), so based on 2012 data Accenture is paying a whopping 29xEBIT or 3x revenue. Procurian also has a term debt of around $23m.

Accenture would appear to have won in a bidding war. It is not difficult to guess which other vendors would have been interested.

By far Procurian’s largest client is Zurich (contributed around 15% of its revenue in H1 2013), where it is providing services in partnership with Genpact, who is providing the procurement transaction processing. And of course, Zurich is also a major Accenture client, particularly for application management services. It doesn’t take a genius to see that Accenture, who lost out to Procurian/ Genpact in the procurement BPO deal, will be taking a very close interest at this engagement for any opportunity to expand into the P2P space.

Another vendor who will be discomfited by this acquisition will be Capgemini, who only recently won a contract at Ferro in partnership with Procurian. And of course, among the swings and roundabouts, we must not forget that Capgemini ousted Procurian at Kraft and Procurian (again with Genpact) beat Accenture back in 2006 at Kimberly Clark, in what at the time was a landmark outsource.

So what are other vendors with F&A BPO capabilities doing in order to build or expand sourcing and category management capabilities, which require both specialist skills and market knowledge?

Genpact has been trying to ‘go it alone’. But this is not easy and it cannot be done fast: one major challenge is a general shortage of sourcing talent; another is that strategic sourcing and category management is not easily offshorable. It is an approach that Infosys tried to take, before it acquired Portland Group. At the time, Infosys indicated that further regional acquisitions were a possibility.

Capgemini’s major investment to date in procurement BPO (ignoring its separate supply chain BPO business) has been its acquisition of IBX which brought in a platform and network – but this has mainly led to SaaS rather than BPO wins.

Now that Procurian has been snapped up, should we expect F&A vendors looking to beef up their procurement BPO capabilities to look at other sourcing specialists? The truth is, there are not many out there (illustrative that this is a specialist capability), and the few there are do not have the scale or geographical reach that Procurian has continued to develop over the years.  It has itself recently been making niche acquisitions bringing in very specialist capabilities. In 2012, for example Procurian acquired MediaIQ for capabilities in media audits (its largest acquisition to date at a total consideration of $175m, it will possibly complement Accenture Interactive) and UAI, an energy procurement specialist, for $6.7m.

NelsonHall does not speculate on specific vendor names (at least not in print!) but should we expect further M&A activity in the next 18 months? Probably.

What does this mean for the Procurement BPO market?

Under Mike Salvino’s leadership Accenture BPO has been on an investment spree. For example, Accenture Credit Services, based on the acquisition of Zenta, is about to be boosted with the acquisition of Mortgage Cadence. And earlier this summer, Accenture announced the launch of Accenture Post-Trade Processing Services in partnership with Broadridge with Societe Generale as the foundation client. Accenture Credit Services has been successful since its launch in 2011, and the timing of the launch of Accenture Post-Trade Processing Services is opportune in Europe.

Accenture’s significant investment in boosting its Procurement BPO business indicates its confidence in the likely continued – even accelerated - growth of this market over the next few years. And Accenture generally gets its investments right.

We have seen organizations frustrated by the lack of service providers who possess deep and broad capabilities that span S2C and P2P – in our view this has been a major impediment to market maturity. Accenture now genuinely has across multiple sectors and major regions.

We have already referred to increased market interest in combining procurement with F&A – this move by Accenture might spur some of that interest into action.

Finally, expect to see a much stronger focus at Accenture Procurement Service on how the application of analytics across the sourcing and procurement lifecycle can deliver business outcomes to clients that go far beyond simply measuring spend compliance or assist in demand forecasting.

We have long said that one hallmark of excellence in an F&A BPO vendor is their application of analytics for both process insights and business insights: we expect to see analytics also becoming increasingly valuable in procurement BPO.

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.

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.