For some time, life & annuities carriers have suffered from a multitude of legacy platforms, with each implemented to handle a particular style of product that was either not handled by its predecessor or was added through the acquisition of a set of blocks from another carrier. The resulting stable of platforms has always been expensive to maintain. In recent years, this has been compounded by the increasing importance of digital customer experience and the ability to launch new products quickly.

The pandemic has further emphasized these needs with consumers increasingly moving online, the need for new types of insurance products, and the vast majority of companies increasing their digital transformation emphasis. While most of Infosys McCamish’s current pipeline is driven by mergers & acquisitions and platform rationalization and optimization to modernize legacy environments, they have also onboarded new clients to provide end-to-end services for open blocks, becoming a viable partner for organizations looking to expand their new business pipeline.

Infosys McCamish Focuses on Client Interaction

Indeed, while life companies need to launch new products at speed, insurance product functionality is now increasingly taken as table stakes. Life & annuities producers are now much more focused on client interaction functionality. This includes the omni-channel experience and the ability to deliver a zero-touch digital engagement, incorporating, for example, machine learning to deliver straight-through processing and next-best actions.

In line with these requirements, Infosys McCamish has taken a 3-tiered approach:

• For policy owners & agents: aiming for zero-touch, omnichannel, and responsive design via portals, e-delivery, e-sign, smart video, SMS notify, and chatbots
• For operations: aiming for ‘one & done’ via the use of workflow, dashboards, content management, and document management
• Core administration functionality: aiming for seamless integration via APIs together with an extensive product library.

Infosys McCamish’s preference is to convert policies from client legacy platforms to its own VPAS platform. Its conversion accelerator identifies data cleanliness and produces balance and control reports before moving the policy data to VPAS. Not all data is moved to VPAS, with data beyond the reinstatement period being moved to a separate source data repository. Infosys McCamish will aim to have 13-24 months of re-processable data on its platform, converting all the history as it was processed on the original platform so that in the future, it is possible to view exactly what happened on the prior platform.

VPAS supports a wide range of life & annuity products, including term life, traditional life, universal life, deferred annuities, immediate annuities, and flexible spending accounts, and Infosys McCamish estimates that on mapping a carrier’s current products with the current configurations in VPAS, there is typically around 97% full compatibility. VPAS currently supports ~40m policies across 22 distinct product families.

However, where necessary or where conversion for some policy types is impossible, it can also wrap its customer experience tools around legacy insurance platforms to provide a common and digital customer experience. Infosys McCamish platforms make extensive use of an API library that supports synchronous and asynchronous communication between Infosys McCamish systems and customer systems.

Incorporating “Smart Video” into the Customer Experience

Infosys McCamish has enhanced its customer experience to enable policy/contract owners to go beyond viewing policies online and transact in real-time, further introducing:

• Mobile App and chatbot functionality
• Smart video, which uses APIs to extract data and present it to the customer in video form
• Wearables to support wellness products.

Customers can view their billing and premium information and obtain policy quotes online, with personalized smart video used to enhance the customer experience. They can also initiate policy surrenders online. Depending on carrier policy, surrenders to a certain value are handled automatically, with higher value surrenders being passed to a senior person for verification. Similarly, if a customer is seeking to extend their coverage online, the request is routed by the workflow to an underwriter or senior manager. DocuSign is used to facilitate the use of e-signatures rather than paper documents. All correspondence can be viewed online by customers, with AI-enabled web chat used to support customer queries.

Digital adoption depends on carrier policy and is running at ~25%, with customers being prompted to use digital in all correspondence. Single-touch and no-touch processing account for ~75% of transactions.

Workflow & Dashboards Guiding Agents to Reduce Time to Onboard

Infosys McCamish has integrated BPM and workflow and low-code development to support the back-office and call center service layers to provide operations with inbuilt automation to achieve increased levels of straight-through processing and fewer opportunities for manual errors. It incorporates business rules so that data is only keyed once with, for example, relevant customer updates applied to one policy type being applied across all of their policies.

The VPAS customer service work desk is built on Pega, with the workflow configured for contact center and back-office services and supporting the customer and agent self-service portals.

The agent dashboard is dynamic with the view shown based on the agent role, and the call center dashboard provides drill-downs on service requests by type, SLA performance details such as average handling times, and the full audit trails of each transaction.

The workflow also guides the call center agent through the steps in a transaction, provides scripting, and uses AI to recommend additional actions when communicating with a customer. This improves the quality of each interaction and significantly reduces the time taken to train new agents.

The above is supported by experience enablers underpinned by the data warehouse, which is updated in real-time as changes are made in the policy administration system. The data warehouse is accessed via APIs by Infosys Nia analytics or third-party tools such as PowerBI or Tableau.

Product Configuration Based on Cloning Existing Products

New products are typically created within the product management module by cloning an existing product or template and business rules; for example, customizing to add or remove certain features or coverages, rather than by creating new product features and functionality.

VPAS new business supports digital new business, including E-App and underwriting case management, and integrations with other new business platforms such as iPipeline and FireLight.

Agent Management & Compensation Increasingly Bundled with Product Administration

In addition to the VPAS life and annuity product administration system, Infosys McCamish’s life & annuity platforms also include PMACS, a producer management & compensation system, supporting agent onboarding, licensing, and commission management.

Infosys McCamish is experiencing a greater requirement for end-to-end capability, with PMACS increasingly being bundled with VPAS. The emphasis within PMACS has moved beyond commission management, where the system shows the agent how each commission was calculated, to agent onboarding, licensing, and appointments, allowing agents to view their pipelines and their client policy portfolios.

PMACS has also moved beyond supporting life & annuities and group & critical illness to support property & casualty.

Summary

Infosys McCamish is increasingly looking to assist life & annuities carriers in the adoption of modern digital platforms, and their VPAS ecosystem emphasizes:

• Digitalization, with a high emphasis on separation of systems of engagement from systems of record
• Componentization, to facilitate low impact enhancements and speed to market
• Self-service for both customers and agents, in support of zero-touch processing and multi-channel access
• Integrated BPM and workflow and low-code development in support of the back-office and call center service layers
• Use of CI/CD to identify the impact that changes in one component will have on other software components.

John Willmott and Rachael Stormonth

In 2016, Atos was awarded a 13-year life & pensions BPO contract by Aegon, taking over from the incumbent Serco and involving the transfer of ~300 people in a center in Lytham St Annes.

The services provided by Atos within this contract include managing end-to-end operations, from initial underwriting through to claims processing, for Aegon's individual protection offering, which comprises life assurance, critical illness, disability, and income protection products (and for which Aegon has 500k customers).

Alongside this deal, Aegon was separately evaluating the options for its closed book life & pensions activity and subsequently went to market to outsource its U.K. closed book business covering 1.4m customers across a range of group and individual policy types. The result was an additional 15-year deal with Atos, signed recently.

Three elements were important factors in the award of this new contract to Atos:

• Transfer of the existing Aegon personnel
• Ability to replatform the policies
• Implementation of customer-centric operational excellence.

Leveraging Edinburgh-Based Delivery to Offer Onshore L&P BPS Service

The transfer of the existing Aegon personnel and maintaining their presence in Edinburgh was of high importance to Aegon, the union, and the Scottish government. The circa 800 transferred personnel will continue to be housed at the existing site when transfer takes place in summer 2019, with Atos sub-leasing part of Aegon’s premises. This is possible for Atos since it is the company’s first life closed block contract and the company is looking to win additional deals in this space over the next few years (and will be going to market with an onshore rather than offshore-based proposition).

Partnering with Sapiens to Offer Platform-Based Service

While (unlike some other providers of L&P BPS services) Atos does not own its own life platform, the company does recognize that platform-based services are the future of closed book L&P BPS. Accordingly, the company has partnered with Sapiens, and the Sapiens insurance platform will be used as a common platform and integrated with Pega BPM across both Aegon’s protection and closed book policies.

Atos has undertaken to transfer all of the closed block policies from Aegon’s two existing insurance platforms to Sapiens, and these will be transferred over the 24-month period following service transfer. The new Sapiens-based system will be hosted and maintained by Atos.

Aiming for Customer-Centric Operational Excellence

The third consideration is a commitment by Atos to implement customer-centric operational excellence. While Aegon had already begun to measure customer NPS and assess ways of improving the service, Atos has now begun to employ further the customer journey mapping techniques deployed in its Lytham center to identify customer effort and pain points. Use of the Sapiens platform will enable customer self-service and omni-channel service, while this and further automation will be used to facilitate the role of the agent and enhance the number of policies handled per FTE.

The contract is priced using the fairly traditional pricing mechanisms of a transition and conversion charge (£130m over a 3-year period) followed by a price per policy, with Atos aiming for efficiency savings of up to £30m per annum across the policy book.

Atos perceives that this service will become the foundation for a growing closed block L&P BPS business, with Atos challenging the incumbents such as TCS Diligenta, Capita, and HCL. Edinburgh will become Atos’ center of excellence for closed book L&P BPS, with Atos looking to differentiate from existing service providers by offering an onshore-based alternative with the digital platform and infrastructure developed as part of the Aegon relationship, offered on a multi-client basis. Accordingly, Atos will be increasingly targeting life & pensions companies, both first-time outsourcers and those with contracts coming up for renewal, as it seeks to build its U.K. closed book L&P BPS business.

NelsonHall recently attended the SE2 Partnership Forum, entitled ‘Future-proof: From Here to Digital’, in Washington D.C., where the main focal point of discussion was the challenge of digital transformation in the life insurance and annuity sector.

Here I look at a number of developments in SE2’s offerings that are helping clients to address the challenge of digital transformation.

Digital consumer experience

SE2 offers multi-channel consumer engagement, deploying chatbots (or ‘roboadvisors’) to optimize the customer experience, including an interactive messenger with cognitive capability. It also uses machine learning and analytics.

SE2 uses Alexa to provide self-service capabilities, whereby customers can use voice activation to request policy details, change premium schedules, and receive dedicated virtual assistance and offers on new products and plans. As well as increasing personalization and improving the customer experience, this also increases cross-sell and upsell opportunities.

For digital content delivery, SE2 uses Broadridge, which encompasses three areas:

• Experience management: replacing static documents and emails with dynamic, personalized and relevant digital communications
• Omni-channel communications: delivered to traditional electronic channels (email/SMS) and to personalized cloud solutions and online banking interfaces
• Data and analytics: offering improved digital adoption, enabling customers to set digital preferences.

SE2’s digital content delivery improves the customer experience, helps reinforce value propositions and promote new products, and goes beyond email with new digital channels. It allows clients to select preferred communication channels, offers a network of insurance brands that help drive digital adoption, and enables continuous improvement via robust analytics.

Digital Direct Life platform

The Digital Direct Life platform provides an enhanced, responsive UX and includes configurable eApp, Questions for D2C, and Agent Assisted Apps. Its Open Integration Architecture with OOB connectivity to major third-party providers includes vendors used for gathering evidence in life underwriting (MIB, MVR, Rx, etc.) and medical vendors (Lab, APS, etc.). It has a notification center with continuous multi-channel updates that enables self-service and integration with UW platforms using industry standards (ACORD) for automated and manual UW connected to a multi-channel payment gateway.

The platform uses Automated Underwriting (AU) with Electronic Health Records (EHR), with advanced techniques like Application Triage Algorithms, to achieve automated application decisions without any manual review in 75% of cases. This reduces underwriting time from the current 30-45 days to near immediate delivery, with the cost reduced from $400 to less than $50.

AU with EHR provides a single point for collection, consolidation, text mining, and reporting of EHR data, helps distribution channels close leads faster, helps insurers improve customer experience, increases revenues, and reduces cost. It also makes health and wealth management seamless, bypassing invasive underwriting procedures involving lab work (e.g. blood testing).

Improving speed to market

SE2 has applied the following technology enhancements to enable clients to improve their speed to market:

• A template-driven responsive website offers optimized web experience. Self-service administration toolsets are presented on a responsive web design pattern that is device agnostic and comes with a notification center
• Digital integration platform, which provides client-centric business services delivered with a scalable business integration architecture. The open architecture leverages industry standards across internal and external partner ecosystems, leveraging Mulesoft, ActiveMQ, and Informatica
• Enterprise output framework, a real-time framework enabled for scheduled transactions, with consistent template management utilizing the carrier’s branding. Its Output Manager manages on-premise and offsite print and mail capability, and also provides enhanced audit and compliance across the print and delivery lifecycle, along with integration with partner channels like Broadridge for e-delivery
• An actuary engine (from Accenture) provides a configuration-driven product rule engine that allows granular configuration of transactions and scheduled events. A modern UI controlled by a security layer and seamless integration with the SE2 annuity Policy Administration System (PAS) reduces the effort to implement product rule changes.

Future proofing initiatives

SE2 is also involved in a number of initiatives with the aim of providing ‘future-proof’ life & annuities capabilities for its clients, including:

• Blockchain. SE2 is on the LIMRA Blockchain Advisory Board, and indicates that there is a consensus among carriers on the positive impact of Blockchain, evaluating technologies and conducting POCs that require industry-wide collaboration. Leveraging learnings from other industries, including P&C insurance, and identifying potential use cases for industry-wide solutions helps improve peer-to-peer settlement in Blockchains. Benefits are derived in the form of increased transparency, accurate tracking, permanent ledger, and cost reduction
• Virtual and augmented reality that enhances the user experience with richer content, provides real-time information enmeshing of real and virtual worlds, training and advocacy to increase effectiveness and efficiency, and design visualization for heightened experience and insights
• Insight-driven analytics (from DataRobot). Along with its partners, SE2 is helping its clients achieve state-of-the-art in life underwriting by combining the power of predictive analytics with the SE2 platform. Insights derived from the SE2 platform are augmented with third-party data (e.g. from MIB, MVR, Rx, and APS) to create an analytics partner ecosystem operating as a one-stop shop, with annuity and life analytics driving decisioning, and advanced technology using a data lake and machine learning.

Summary

The global life insurance market is being transformed rapidly due to the increased adoption of digital solutions, providing opportunities for life companies to gain competitive advantage by responding quickly to changing market forces, consumer needs and preferences.

SE2’s deep domain experience and commitment to digital transformation are key strengths in this market. The company backs its own investments by partnering with startups to reduce speed to market and provide greater efficiencies. SE2’s strategy to develop world-class digital life insurance solutions recognizes the power of both innovation and collaboration in realizing this goal.

The insurance outsourcing industry is moving at a fast pace in response to the need for rapid deployment of digital platforms and offerings, as well as advancements in new distribution models that are emerging via ‘insurtech’ start-ups. Here I take a look at some of the key trends driving the insurance BPS market in 2017, both in terms of delivery and transformation, and by individual service line.

New distribution models, analytics & automation

Health insurance start-ups (Oscar Health, Clover Health, Bright Health, etc.) have been flourishing, followed by property & casualty insurance (Lemonade, Verifly, Metromile, Wrisk, etc.) and life & annuities insurance (Ladder, League, InforcePro, etc.), who are also seeing an increasing amount of investment. Outsourcing vendors will be actively looking to partner with, or potentially acquire, such companies in order to leverage their capabilities on an add-on basis, or using a completely transformative approach. And the insurance start-ups that will be most targeted by vendors are those investing in new distribution models.

Insurtech developments will bring more regulations at federal level in the U.S., as the application of new operational models will overtake the current state-level regulation framework of insurance companies. It is also possible that the new regulations will allow for the fostering of further innovation compared to current state regulatory frameworks.

Big data and analytics in insurance will see further growth, stemming from the vast amounts of data stored by insurance carriers. Vendors will either develop offerings to leverage such information, or will acquire companies in order to do so. It is still commonplace to find old-school insurers who are unable to analyze and leverage their clients’ and prospective clients’ data.

In terms of operating systems, vendors will continue to optimize legacy platforms with add-on proprietary or third party software, as well as retire dysfunctional and costly systems for newer ones that have modern distribution model capabilities. Digital transformation will increase among insurers, with larger numbers of insurance carriers shifting their operational model towards emerging market segments (millennials, middle-market consumers, etc.).

In the area of automation, the insurance sector has been at the forefront of RPA adoption to date, and this will continue in 2017. Meanwhile, AI technology is taking small steps towards greater adoption within insurance offerings, mostly in policyholder-facing applications. Policyholders will continue to request better, more personalized, engagement by their carriers through omni-channels, with a digital approach, with the policyholder engagement market segment seeing growth of more than 10% per annum.

Elsewhere, wider application of telematics offerings among passenger vehicles and industrial devices will allow for more accurate and individualized calculation of premiums.

Trends for 2017 by insurance service line

Property & Casualty BPS trends include:

• Launching new digital products and services in untapped markets for traditional insurers
• Emergence of fully digitally-operating carriers with a Bermuda-style regulatory framework, backed by PE/VC firms
• Emergence of new products for traditional insurers (drone insurance, on demand insurance, etc.)
• Wider application of analytics for process improvement and trend identification among policyholders.

Life & Annuity BPS trends include:

• Insurers outsourcing more responsibility to vendors that are able to provide specialized actuarial and predictive analytics services targeting customer retention
• Insurers requiring guidance on regulatory product adjustment from Solvency II implementations
• The middle-income and millennials market in the U.S. will see increased growth, as investments in digital channel communications expand
• Vendors will continue to improve customer service levels, CSAT scores and customer retention rates.

Healthcare Payer BPS trends include:

• The future of Obamacare and health insurance exchanges in the U.S. is uncertain after the Trump election. There will definitely be changes in the ACA care models and payers will most probably bear some of this cost of change in healthcare policy
• Consolidation among lower-tier healthcare payers will continue its momentum in 2017, creating opportunities for legacy platform retirements and updates from outsourcing vendors, eliminating disparate assets in newly-formed organizations
• Population health management and wellness programs through innovative delivery and distribution models will see significant growth, as well as engaging with patients through omni-channels, improving retention and satisfaction
• Applying analytics that identify opportunities for process improvement, as well as reducing fraud, waste, and abuse will be a top priority for payers
• Distant monitoring of patients and telemedicine will also see increased growth
• Preventive care and wellness offerings, in conjunction with traditional healthcare insurance, will see a rise in demand.

HCL provides closed book life insurance outsourcing services, and is currently engaged in RPA initiatives with three insurance clients.

In order to capture customer data in a smarter, more concise way, HCL is using ‘enhancers’ at the front end, providing users with intuitive screens based on the selected administrative task. These input forms aim to request only the minimum, necessary data required with RPA now being used to transfer the data to the insurance system, ALPS, via a set of business rules.

For example, one RPA implementation undertaken can recognize the product type, policy ownership, values, and payment methods, and it can prepare and produce correspondence for the customer. If all rules are met, it is then able to move onto payment on the due date. This has been done with a view to reducing the number of touchpoints and engaging with the customer only when required. Indeed, HCL is working with its clients to devise a more exhaustive set of risk-based rules to further reduce the extent to which information needs to be gathered from customers.

Seeking a 25% cost take-out in high volume activities

On average, 11k customer enquiries are received by one HCL insurance contact center every month, and these were traditionally handed off to the back office to be resolved. However, HCL is now using RPA and business rules to enable more efficient handling of enquires/claims with limited user input, with the aim of creating capacity for an additional 4.4k customer queries per month to be handled within the contact center.

Overall, within its insurance operations, HCL is applying RPA-based business rules to ~10 core process areas that together amount to around 60% of typical day-to-day activity. These process areas include:

• Payments out, including maturities, surrenders, and transfers

• Client information, including change of address or, account information

• Illustrations.

These processes are typically carried out by an offshore team and the aspiration is to reduce the effort taken to complete each of them by ~25%. In addition, HCL expects that capturing customer data in this new way will shorten the end-to-end journey by between 5% and 10%.

One lesson learned has been the need for robust and compatible infrastructure, both internally (ensuring that all systems and platforms are operating on the same network), and with respect to client infrastructure; e.g. ensuring that HCL is using the same version of Microsoft or Internet Explorer as the client environment.

We now turn our attention to Dell Services, which has adopted an automation focus across its life and healthcare insurance BPS processes.

Focusing on healthcare payer & provider and life insurance process automation

In 2016, life insurance accounts for around 30% of Dell Services’ overall BPS revenues and healthcare payer accounts for approximately 35%, with healthcare provider making up the balance. Dell Services takes a platform-led approach to its BPS:

1. It has its own LifeSys platform for life insurance, on to which it migrates a client’s book of business and provides administration services in its own environment; or

2. It partners with a third party supplier for platform capability and tailors it to fit the needs of the book of business, from which it can then provide services, e.g. Dell Services uses partner ikaSystems for its healthcare payer platform needs, on top of which it layers its Dell Business Process Management Suite (DBPMS) tools. The tools include:

3. An enterprise dashboard: including KPI tracking and trend analysis for SLA metrics

4. Client extranet: including an issues log

5. Queue management: including skill-set based routing and priority allocation.

Automation Ideation led by BPS delivery teams

Unlike other providers, who tend to be led by their clients with respect to automation, the process at Dell  Services starts with an internal ‘ideas generation’ stage, achieved either through Dell’s ‘LEAP’ (Listen, Engage, Act, Progress) portal where agents are able to log ideas, together with perceived benefits (and are rewarded if their ideas are selected) or via the Business Process Improvement (BPI) team who carry out a ‘click study’ to identify ways in which the process could be re-engineered or automated. In line with its peers, an internal concern about increasing automation was the inevitable change in job composition; for this reason, the LEAP portal is considered particularly important to ensure employees are involved and engaged in driving the initiative forward. In addition, supervisors are targeted with an annual 5%-15% AFTE target. Once an idea has been selected, a feasibility study takes place before the idea is tested and bots are deployed by the central AFTE automation team. Bot management is then passed to the operations team while the bots are monitored through the central bot command center.

Balancing AFTEs with FTEs

In line with the market, Dell Services has concentrated its efforts on applying automation to high volume processes, which account for ~30% to 35% of its overall book of business. To achieve this, it is targeting the introduction of ~300-400 AFTEs year on year, though this is not a static number since clients are on-boarded throughout the year. The overall aim is to achieve around 6% productivity improvement per annum.

Although Dell Services does use third-party RPA platforms, it has developed its own “AFTE” platform incorporated within the Dell Business Process Management Platform. AFTE bots rather than third-party bots are typically deployed where the Dell BPMS platform is already being used or is to be used.

High volume processes (in which AFTEs are being used to varying extents) within each of Dell Services’ insurance services include:

• Life insurance:
  • Data entry and indexing: freeing up FTEs to carry out other activities such as policy holder services where less work is typically carried out by AFTEs – though this is something that Dell is looking to change and where Dell is investing in automation initiatives
  • Policy issuing: currently, the work is handled 50% by FTEs and 50% by AFTEs, with Dell seeking greater tool maturity before it is able to drive greater automation here
  • Premium accounting
• Healthcare payer:
  • In-bound calls: FTE-led
  • Adjustments: FTE-led
  • Adjudication: 50% AFTE, 50% FTE
  • Claim processing: FTE-led
  • Member enrolment: FTE-led
  • Provider maintenance: 50% AFTE, 50% FTE
• Healthcare provider:
  • File download: exclusively AFTE
  • Medical coding: 50% AFTE, 50% FTE
  • Change entry: FTE-led
  • Payment posting: AFTE-led
  • Credit balancing: 50% AFTE, 50% FTE
  • Accounts receivables: FTE-led

A simple example to illustrate some of the quantifiable benefits that have been achieved through automation can be seen through the work that took place to automate call center operations at one of Dell’s life insurance clients. Prior to the introduction of automation, call center agents were required to use a number of screens to capture customer information, which often resulted in comparatively low accuracy, and a high handling time. The system was not user-friendly and baseline training typically took around 10 weeks. Ultimately SLAs were being missed. To address this, Dell condensed the numerous screens into one screen and introduced rule-based processes to ensure no manual calculations were required to complete the form, unlike previously, where up to six manual calculations were required. As a result, AHT fell from 471 seconds to 374 and training took ~7 weeks, as opposed to 10. The quality of data capture increased from 88% to 95% and the average time taken to update notes fell from 110 seconds to 15 seconds¸ because the system was largely able to perform updates itself.

Plans to Implement Machine Learning within Dell BPM Platform

Over the last four years, Dell has extended its capabilities from simple script based-processing, to the development of AFTEs, including an associated AFTE command center. Going forward, the intention is to incorporate a self-learning capability, implement technologies such as NLP and machine learning within the Dell BPMS platform, and to secure end-to-end automation in the processes that are already largely being carried out by AFTEs, e.g. indexing.

At SE2’s Partnership Forum in Boston last week, the main theme was ‘FutureProof’, and specifically how to prepare and guard your company from regulatory and operational uncertainties. In effect, the life and annuities insurance BPS vendor is future proofing itself by investing heavily in its infrastructure, middleware, and platform capabilities to address its own future needs, as explained by CEO Gautam Thakkar and CIO Vinod Kachroo.

Industry drivers

SE2 identified some of the key trends in the insurance industry that will drive the development of applicable offerings, including:

• The need for insurers to provide a continuous income source through annuities, given an aging population; this is particularly challenging in the current low interest rate environment
• The need to approach customers via social media, using effective data manipulation, to enable better decision-making
• Department of Labor (DOL) regulatory changes that will impact clients.

Strategy for growth

In order to achieve future growth, SE2 will focus on greater innovation in its offerings, and enhancing the customer experience to drive better results. Specifically, SE2 is planning to:

• Further invest in data analytics to help identify growth opportunities and operational improvements
• Build RPA and AI capabilities for greater process automation
• Adopt algorithmic underwriting, whereby data aggregation and manipulation will enable automated contract creation for simple policies
• Develop technology and service offerings that address DOL regulatory changes
• Exploit IoT to the extent possible
• Target the millennial and middle-age markets, which have greatest growth potential (as identified in NelsonHall’s Targeting Life, Annuities & Pensions BPS market analysts study earlier this year)
• Increase its use of digitization
• Adopt a ‘direct to consumer’ market approach through omni-channels that simplify the process of insurance buying and administration.

SE2’s roadmap for the coming years also includes a new distributor dashboard, further web enhancements through personalized UIs, efficiency improvements in its call centres, fund automation, and increased use of business rules engines.

To assist it in achieving its goals, SE2 has partnered with:

• NTT Data for infrastructure management and application testing
• Automation Anywhere for RPA  
• InRule Technology for business rules management capability
• Informatica for data management and technology transformation.

SE2 is focusing on expanding in the U.S. life market by aggressively increasing its headcount in its New Jersey and Topeka facilities in the U.S., as well as in Waterford in Ireland. It is also looking at potential acquisitions to strengthen its life offerings.

Helping clients meet operational goals

At the forum, SE2 clients Security Benefit Corporation and Global Atlantic described how SE2 is positively impacting their companies’ operational goals. Security Benefit’s CEO, Mike Kiley, stated that his company has continuously increased its policies count and assets under management with the administrative help of SE2, while Global Atlantic’s President and CEO, Nick von Moltke, emphasized the benefit of having a partner that is continually investing in its infrastructure, a key contributor to future success and the ability to adapt to changing market conditions.

A big advantage for SE2 is its sole focus on the insurance vertical. Also, as a private company, it is under less pressure to deliver strong results every quarter. The fact that it operates using its own proprietary platform also distinguishes it from insurance BPS vendors that rely upon third party software to deliver their offerings. These advantages, along with its high employee retention rate, are good indicators that SE2 is well positioned for future growth.

Wipro started its automation journey in the late noughties and has since gone on to set up a dedicated RPA practice, and also developed its own AI platform, Wipro Holmes. Currently, Wipro is principally partnering with Automation Anywhere for RPA software.

Clients showing early interest had questions around which insurance processes bots could most easily be deployed in, and where should they be applying RPA. The processes Wipro found to be most suitable for application of RPA in the insurance sector are claims processing and new business, and hence these are the key focus areas for Wipro.

Efficiency improvements of ~40% in target insurance sub-processes

Today, over 50% of Wipro’s RPA clients are in the BFSI sector, with ~40% using bots for data entry processes and 60% for rules-based services. Wipro currently has four clients for RPA services in the insurance sector split across life, annuities & pensions (LA&P), property & casualty (P&C), and healthcare insurance. Two of these companies are focused on a single geography and two are multi-geography, including U.S., Europe, LATAM and the Middle East.  

One of the insurance clients is a Swiss provider of life and P&C services for whom Wipro provides RPA in support of new business data entry. Pre-bots, the filling in of a new business form required the use of multiple unsynchronized screens to collect the necessary information. To address this issue, Wipro developed an interface (a replica of the application form) to enable 100% automated data entry using bots, a typical ‘swivel chair’ use of RPA. This yielded a 30% - 40% efficiency improvement.

In the healthcare payer sector, Wipro has implemented RPA in support of provider contract data management, specifically in the area of contract validation. Here, Wipro designed four bots in 90 days, automating ~75% of the contract validation process and improving productivity by ~40%.

In 2016, Wipro has noticed a shift in customer attitude, with organizations now appreciating the enhanced accuracy and level of auditability that RPA brings.

Of course, the implementation of RPA is not without its objections. One frequent question from organizations just starting the RPA journey is ‘how do I stop bots going berserk if the process changes?’, since once programmed, the bots are unable to do anything other than what they have been programmed to do. Accordingly, Wipro ensures that any changes that occur in a given process are flagged up in the command centre before an attempt is made for them to be carried out by a bot, and a signal is given that the bot needs ‘re-training’ in order to carry out that process.

Secondly, IT departments sometimes ask how long the bots are required to stay in the work environment and how do they fit into an overall IT transformation strategy. Wipro’s response is to treat the bot like an FTE and to keep it for as long as it is achieving benefit, ‘re-training’ it as required. Wipro suggests that bots wouldn’t conflict with the aims of an IT transformation, and ought to be considered as complementary to an IT transformation.

Complementing RPA with Cognitive using Holmes

So far, so good for Wipro regarding its application of RPA in the insurance sector. RPA is being used to address data entry processes (40% of activity) and rules-based transaction processing areas such as claims (60% of current activity). However, this still leaves the question of complementing the rigid process execution of RPA with machine learning and self-learning processes, and also the question of addressing knowledge-based processing requiring human judgment.

This is where Wipro Holmes comes into the picture – a proprietary AI platform with applications for cognitive process automation, knowledge visualization, and predictive services. The platform is not currently being used with insurance clients, but conversations are expected to start within the next 9 months. It is expected that, in contrast to the RPA conversations which were led by Wipro in more than 95% of cases, the AI discussion will be led by existing RPA clients and across a wider pool of services, including finance & accounting (F&A).

Accordingly, the focus now is on developing Wipro Holmes, to ensure it is ready for use with clients in 2017. Insurance activities that will benefit first from this platform could include the area of Know Your Customer (KYC) compliance, to enable more rapid client on-boarding. 

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.

• 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.

First CEO TK Kurien opened by describing Wipro’s view of the market:

• Enterprises were created prior to the current digital era. As a result, customers cannot engage easily or effectively with legacy enterprises operating with old style operating models and operations systems
• Operations vendors (IT services and BPO) will be disrupted. “Slow and certain”, Wipro’s previous model, where offerings were developed and tested to assure quality outcomes, is no longer a successful strategy. Wipro describes its current model as “Fast and Uncertain”, where ideas are tried, then adapted over time, as a flexible strategy more appropriate for rapidly changing times
• The journey with clients to a digital operational development cannot be undertaken at full maturity. It requires Wipro, partners, and clients to slowly adapt while also continuing to provide current services. To accomplish that Wipro needs to maintain and aggressively grow existing operational relationships. Wipro will aggressively pursue new business to establish larger market share, because existing clients provide a base from which transformation can be launched (i.e., upsell). Kurien did not discuss how he intends to pursue new business before transformation. Presumably aggressive pricing and terms would underpin such a grab for marketshare
• Traditional BPO will be disrupted, with value levers extending beyond labor arbitrage and simple process re-engineering. While this has been a theme for several years in the industry, Kurien indicated community sourcing (open source software, cloud computing, and shared services) as opposed to vendor specific offerings will drive enterprise operations much more so in the years ahead than has been the case to date.

To address these trends, Wipro is changing its own approach. Key initiatives include:

• Digital POD, Wipro’s methodology for clients designing new operations environments (both platforms and processes).The process draws on strategy, design, and technology. Wipro is building technology and design capabilities in concert with partners to support clients’ evolving business strategies. Specifically Wipro is currently building three digital POD centers in London, Bangalore, and the Bay area of California. These centers will work on client engagements designing new operations environments for clients. As examples of how this might work, Wipro referred to several tier one banking clients, hit hard by the financial crisis and culling businesses and operations, who are redefining their business models to adapt to changing regulations and competitive conditions. Automating manual processes, modernizing legacy platforms, and maintaining ongoing delivery requires third party help from a combined IT/BPO vendor. An early example of what Wipro wants to do, according to Kurien, is a top 4 bank in the U.K. that Wipro has helped over the past three years improve its retail customer support using platform and operations change and support. During that time the client moved up from fourth to first in customer satisfaction ratings.
• Alliances and partnerships:
  • Open source: Wipro has committed to invest over the next two years to further develop its open source capabilities. Open source development has become a key area of investment for banks and other global 100 companies. Open source is used by enterprises for its low cost and ability to deliver custom functionality.
  • Wipro is building on its existing experience and joining open source communities to better identify best resources, also to help formulate community priorities
  • Corporate VC fund to invest in tech start-ups. Wipro has made three investments so far
• Move its own business model from labor arbitrage to process arbitrage (global standardization and greater automation of processing). Wipro has seen their clients’ focus for operational change shift from cost of resource to total cost of ownership (TCO), over the past few years and believes this trend will continue and accelerate.

Wipro articulated that, as a company, it is responding to the fact that businesses in its target sectors (banking, healthcare and retail, to name just three) are having to change their entire operational delivery methodology to adapt to the changing environment. Wipro also highlighted that this requires to talent - both technology and operations talent.

And, like many other IT services providers, Wipro is looking with increased interest at alliances and partnerships. Partnering however requires a wide net to succeed. Most partnerships are weak, some are strong, and a few drive strong value creation.

The challenge with partnering is how to drive partners forward to execution when they have competing demands/opportunities. Successful partnerships require the alignment of goals and culture, which in turn requires due diligence on potential partners and clear signalling of intentions and values.

Participation in communities, such as open source, is table stakes to access and due diligence, but not the trigger to execution. Wipro has indicated it will support partners by identifying sub-domains where it will be active. Wipro has a large client base, something developers typically do not. Wipro can create a market for open source developers’ services, while providing its clients with quality assurance and scale.  IT and operational support. In the long run, we believe Wipro will need to selectively partner with relatively few organizations and people for open source capabilities. Ultimately, Wipro will need large scale in-house complementary resources to capitalize on engagements. Leveraging the independent resources of alliance partners to deliver operational change to clients will demand that Wipro bring its own operational scale to the table, not merely IT skills. 

HCL’s original contract with Chesnara dates back to 2005. However, HCL also had a separate L&P BPO contract with Save & Prosper, who Chesnara purchased from JPMorgan Asset Management in December 2010. More recently, Chesnara also purchased Direct Line Life, whose L&P operations are currently in process of being transitioned to HCL. This latest acquisition by Chesnara adds a further 150,000 policy holders to the portfolio currently administered by HCL.

Accordingly, these three historically separate contracts are now being consolidated by Chesnara and HCL into a single contract to provide a consistent suite of services and SLAs across policy administration services, fund accounting, investment administration, and certain actuarial valuation and reporting services.

At the service delivery level, this involves handling all policies within a similar operating model with workflow for all policies handled through HCL’s OpEX (Operational Excellence) work management and quality assurance tools. In addition, policies are being migrated, where feasible, on HCL’s ALPS insurance platform. For example, the policies transitioned from Direct Line Life are currently being migrated onto ALPS. However, as usual, it is not feasible to handle all policies on a single platform and a small number of legacy systems will remain in place across the various books, handling approx. 50,000 policies.

In addition, within the new contract, HCL is working to ensure that service levels and service metrics are consistent across all Chesnara books of business, and HCL will be enhancing the SLAs and service metrics in place to ensure consistency with regulatory conduct risk expectations over next 18-months. This involves developing an increased focus on customer experience e.g. introducing proactive calling where there may have been a customer service issue before this issue turns into a formal complaint. The benefits of this type of approach include operations cost reduction, by reducing the level of formal complaints handling, as well as delivering improved customer experience.

The pricing mechanisms used across the various books are also being standardized and moved from pure per policy charging to a combination of per policy and activity-based pricing. For example, the pricing of core policy administration services will still tend to be per policy driven but will be rationalized by policy type across books. However, the costs of many accounting-based activities are not sensitive to the number of policies managed and so will be priced differently to achieve better alignment between service pricing and the underlying cost drivers.

Elsewhere in the industry, changes in the fiscal treatment of retirement income is forcing companies to re-evaluate their retirement product strategies and their approaches to administration of annuity and retirement books. The new legislation coming into place in the U.K. means that companies with small annuity books may no longer be adding significantly to these and so may need to treat these differently in future. This potentially creates opportunities both for consolidators and companies such as HCL who support their operations.

Quite simply because of the revised revenue guidance for 2014 from growth of at least 16.5% to at least 14%. This is a huge cut of ~$220m (from ~$10.3bn to ~$10.08bn), all of which coming in H2. This forecasts:

• Q3 as having the lowest y/y topline growth since we started tracking Cognizant’s financials over a decade ago (at around 10.6% to 11.9%)
• H2 overall as coming in at around 10.3% growth, a big drop from the 18.1% achieved in H1.

CEO D’Souza highlights two main factors contributing to the reduced guidance:

• A small number of U.S. and U.K. clients experiencing difficulties, leading to lower discretionary spending
• Longer than anticipated sales cycles for certain large integrated deals.

Of these, the largest relates to client-specific issues at a handful of clients. The implications in the earnings call were that these were temporary issues but in at least one case (including a U.K. retail sector client), we believe Cognizant has lost business to an Indian competitor.

On a positive note, Cognizant has been selected for three major outsourcing contracts with a TCV of $3.5bn that it expects will bring in incremental revenue of $200m in 2015. And the new business is all long-term outsourcing ... whereas, if we are correct in our understanding, the business that Cognizant is losing is primarily ADM type activity. These new contracts will help accelerate Cognizant’s revenue mix from being still very dependent on traditional custom applications development projects and application maintenance engagements (activities which we believe have been growing for Cognizant at lower than the company average for some time) to having a greater mix of what the company terms “Horizon Two” (BPO, IT infrastructure management) services, where it was arguably somewhat late in building scale. Similarly, Cognizant was relatively late in investing in Continental Europe, but is now reaping some benefits from its CI Group business unit acquisitions. One of the three new large signings is Vorwerk, a European consumer goods firm.

By far the most important signing in Q3 will be that with Health Net, not just because of its size (at $2.7bn over seven years, the largest in Cognizant’s history), nor because of the breadth of services being provided (BPO plus applications outsourcing and IT infrastructure management), but because it appears that the intention is for Cognizant to leverage the software IP and the delivery capabilities it will acquire with the deal to set up a BPO utility for other U.S. health payors.  This would indeed be transformational for Cognizant - and for the sector.

The third large deal, with an unnamed financial services client, illustrates Cognizant expanding an existing relationship to include both BPO and ITO. Again, now that it has scale in some areas of BPO some areas if industry-specific financial services BPO, F&A) and in IT infrastructure management services, Cognizant is much better positioned to secure complex multi-service outsourcing deals than it was a few years ago.

Cognizant claims its revenues from SMAC services are around $500m per annum: if so, then its Horizon 3 businesses are also gaining traction.

So, the short term loss of revenue is obviously a major setback that will continue to be a headwind in 2015, but recent investments and new wins position Cognizant well to resume stronger topline growth in the mid-term. It certainly claims its pipeline is healthy. We may also see further inorganic growth in Continental Europe.

Finally, Cognizant is contending with offshore attrition by offering a wage hike (10%) that is at the higher end of the industry, a tactic that works well in India.

Bit of a mixed bag from Wipro this quarter, generally positive, but with a few areas where we would hope to see improve over the next few quarters.

Looking at overall topline performance, revenues were towards the higher end of prior guidance of $1,715m-$1,755m, and the 9.6% reported y/y growth was the best quarter’s growth since Q4 FY 12. However, the constant currency growth of 8.1% was lower than that achieved in the previous two quarters.

Operating margin continues to see y/y improvement (2.8 pts to 22.8%), reflecting, inter alia, continuing improvement in utilization (now at 77.9% excluding trainees).

Wipro has introduced a new service line reporting segment, called the somewhat splendid “Advanced Technologies and Solutions” (seems to be comprised of the former Analytics and Information Management segment plus around $70m of business from other service lines such as Global Infrastructure Services, and Business Applications Services). Whatever the segment may include, it is not yet a growth engine for Wipro, having contributed between 11.5% and now 11.3% in the restated segment breakdowns for the last five quarters.

This segment restatement makes assessment of any new developments in y/y growth patterns difficult. Three service lines delivered double digit growth this quarter: infrastructure services (16.7% growth, ~$63m in incremental y/y revenue, over 40% of the total incremental revenue, Business Application Services the other major revenue engine, with $50m in incremental y/y revenue, and ), BPO, which had a very strong quarter of nearly 21% growth.

Looking at the verticals, media and telecoms had its best quarter for years, continuing to accelerate from the 10.5% CC growth achieved last quarter. This sector group has more than just stabilized; it is now delivering growth above overall company levels. A recent outsourcing win at Sanoma (see here: http://research.nelson-hall.com/sourcing-expertise/search-all-content/?avpage-views=article&searchid=29555&id=203303&fv=2) illustrates Wipro winning cost-take out IT outsourcing deals in the challenged media sector. The Energy & utilities sector slipped below double digit constant currency growth for the first time in years - but the Atco win (the largest in Wipro's history, see here http://research.nelson-hall.com/sourcing-expertise/search-all-content/?avpage-views=article&searchid=29555&id=203338&fv=2) will return its E&Ubusiness to being its fastest growing vertical. 

The Americas region (which for Wipro has predominantly been the U.S., though the Atco deal will soon increase its footprint in Canada) delivered its best topline growth, both as reported and in constant currency, for several years, reflecting improving commercial sector market demand. Topline growth in Europe slowed down slightly (in constant currency) – but for Wipro, Europe is not a new growth market: it is already generating around 30% of its revenues from the region. The India and Middle East business performed better than expected (up 13.4% y/y), as the elections did not have the negative impact that had been anticipated.

This is the first quarter in a year that Wipro has increased its headcount, with nearly 1,400 new net hires (the year-on-year increase is just 234). Does this indicate renewed confidence? Or are the new campus hires partly being done to contend with increasing attrition? Wipro reports its attrition in parts: excluding its India/Middle East business and BPO, voluntary TTM attrition is now up to 16.1% (Wipro doesn’t report involuntary attrition). BPO quarterly attrition was 11.8% (slightly down, but still an annual attrition of over 28%). A rough estimate puts Wipro’s voluntary TTM attrition, excluding the India and Middle East businesses, where attrition will be higher, at around 17.5%.

We also note Wipro has been making steady progress recently in increasing its share of wallet in some of its largest accounts but this quarter, the revenue contribution from clients 2 to 5 is down, from 13.2% to 12.7%.  

Revenue guidance for next quarter is in the range of $1,770m to $1,810m, a y/y growth of 8.5% to 11.0%. With a number of large outsourcing deals coming online over the course of this year, we would hope to see Wipro return to double digit growth within the next two quarters.

GP Strategies is also supporting some of its U.S. headquartered clients in their global expansion. One example is Cigna Healthcare, which has been a Learning BPO client for six years. Cigna began its contract in the U.S. and expanded to countries including Korea, China and the Philippines. As for future global expansion, prospects include an existing $10m p.a. revenue U.S. client that is considering expansion into Canada and Europe.

In the past six months GP Strategies has established 14 new legal entities in countries in EMEA, Asia and Latin America. Its latest legal entity was established in April in the Philippines. In particular, GP Strategies is seeking to grow in Asia Pacific. Upon GP Strategies acquisition of Blessing White in October 2012, in 2013 the company began selling leadership training into its client-base, delivered via Blessing White.

It appears that GP Strategies is now moving on from the phase of driving international expansion by inorganic growth. CEO Scott Greenberg recently stated further acquisition activity has been put on the back burner for a while while it focuses on deployment of new clients.

Consistent with NelsonHall’s research findings, clients are looking for vendors with global learning capability for reasons that include cost reduction, compliance, increased efficiency and consistency.

Expect GP Strategies to achieve organic revenue growth in Q2 2014 between 12% and the low teens.

• Revenue £4,288.1m up +5.6%, up +6.7% at constant currency (CC)
• Operating profit was £143.8m, a margin of 3.4%, down 330 bps

The decline in profits was anticipated with a warning given by the company to this effect only a few weeks ago. In this period, Serco reported a net exceptional charge of £90.5m, reflecting principally the Electronic Monitoring settlement and one-off costs, together with an estimated £21.0m of other indirect costs in relation to the UK Government reviews.

As forecast by the company in its H1 announcements, growth slowed down, in H2 2013. In fact it halved.

Contract wins in H2 2013 included an ITO contract extension for the EU and an FM contract with the Canadian defense. But BPO contract wins completely dried up in H2 2013. This perhaps reflects the problems of Serco’s Global Services division which was most impacted by the electronic monitoring debacle, reporting -350bps decline in operating margin.

Serco admits that clients did not want to talk to it until the issues had been resolved. New contracts have started to come in once again (such as the Lincolnshire Council contract) since Serco settled the matter with the U.K. government.

Apart from the MoJ expenses, divisional margin came under pressure from upfront expenditure on existing contracts. These included:

• A ~£15m working capital investment in transformation for Shop Direct in 2013 and further anticipated but smaller outflow in 2014. Returns are expected to begin from the contract in year 3 (FY15).
• Suffolk Community Healthcare redundancy cash costs of c£5m; no effect expected in 2014.  

It has not been an easy year for Serco in some of its international businesses either. In Australia, a change of government and policy has resulted in revenue attrition in its contract with the Department of Immigration and Citizenship for which Serco runs a number of detention centers.

In America, the outlook remains uncertain due to Federal funding challenges around programmes and contracts, but Serco has won a number of new contracts in the region, including the $1.25bn 5-year federal Eligibility Support (ES) contract by the United States Department of Health and Human Services' Centers for Medicare and Medicaid Services (CMS) but this is likely to be at relatively low margin.

Serco has done well to achieve topline growth despite its annus horribilis. 2014 will be a year of repair and rebuild for Serco. The new CEO, Rupert Soames, and a number of new non-executive board appointees, are likely to go to start with a major review of the business. Serco's strategy of diversification should help with this activity, providing it with a broad set of options for rebuilding the business.

Serco has updated its guidance for 2013 and 2014 following its clearance by the U.K. government to bid for new contracts.  Serco expects a mid-single digit percentage organic decline on 2013 revenue due to:

• Lower levels of incremental work won across the group to date
• Attrition from contracts lost such as electronic monitoring
• Volume reductions in its Australian immigration detention services contract
• Assumptions as to the extent to which it will be successful in securing further rebids and extensions as well as new bid opportunities during the year
• Adverse currency movements in 2013.  The impact of this has reduced revenues in 2013 by ~£50m and profits by £8m.

Adjusted operating margin is anticipated to decline by ~50 to 100 basis points on 2013 due to greater than previously envisaged margin reduction resulting from the revenue impacts described above, and the incremental costs of the agreed corporate renewal programme.

Serco's ongoing portfolio management resulted in further non-core disposals in 2013. These businesses contributed £43m of revenue and £7m of profit up to the point of disposal last year and will not contribute to revenue and profits in 2014.

In 2014, Serco expects:

• Continuing additional costs of £10m a year related to the corporate renewal programme within its adjusted operating profit
• One-off costs incurred in 2014 of ~ £15m for external advisers and other directly-related costs of programme implementation, including initial training and systems set-up
• A further restructuring charge estimated at £10-£15m will be incurred in 2014 to implement reductions in headcount and related costs.

Market consensus for 2014 Adjusted operating profit is currently £277m but Serco anticipates a result that could be 10-20% lower than this for ongoing activities, on a constant currency basis.

The profit warning came on the same day that Serco announced clearance by the U.K. government to bid for new contracts. Serco announced that it expects a mid-single digit percentage organic decline on 2013 revenue due to a number of factros including:

•     Lower levels of incremental work won across the group to date
•     Attrition from contracts lost such as electronic monitoring
•     Volume reductions in its Australian immigration detention services contract.

Adjusted operating margin is anticipated to decline by ~50 to 100 basis points on 2012 due to greater than previously envisaged margin reduction resulting from the revenue impacts described above, and the incremental costs of the agreed corporate renewal program.

In 2014, Serco expects continuing additional costs of  up to £40m related to the corporate renewal programme, external advisers and further restructuring.

Market consensus for 2014 adjusted operating profit is currently £277m but Serco anticipates a result that could be 10-20% lower than this for ongoing activities, on a constant currency basis.

Serco's financial woes have been compounded by a change of Government in Australia, its second largest market. Tony Abbott, the new prime minister, has pledged to stop the flow of boat people into the country by shifting the work to overseas centers. This has resulted in a decline in volumes in the detention centers that Serco manages under contract for the Department of Immigration and Citizenship.

On another front, in January, Serco's health provision in Suffolk was criticized after a four-month NHS review found services were being provided safely but improvements were needed. The areas for improvement were reported to include staff morale, recruitment and retention, communication with GPs and commissioners, equipment stores and procedures at the Ipswich care co-ordination centre.

Serco has been implementing a major corporate renewal plan as part of its negotiations with the Cabinet Office. As well as extensive management changes, and a renewed and refreshed code of conduct and governance, Serco has committed to creating a  separate division for its U.K. Central Government work to increase focus and openness for Government as a collective customer.

Other key measures include:

• Enhancing transparency and access, with reporting of operational and financial contract KPIs, and greater engagement of customers at contract and departmental level.
• Establishing formal Ethics Committees and Ethics Officers in each division, accompanied by the redesign of its whistle-blowing process to the highest international standards
• Measuring the progress of attitudinal change throughout the organization with ongoing independent culture and ethics reviews.

Looking at signings:

• Full year 2013 signings were up 20%, with BPO and ITO renewal rate at 92%, above the target range of 85% to 90% and 7 points higher than 2012. And new business signings was up 9% in BPO and up and up 23% in Document Outsourcing (DO)
• In Q4 2013, overall signings TCV was flat y/y with fewer renewal opportunities in the quarter, though renewal rate was a strong 92% and new business signings were up 5%. For BPO, TCV of signings in the quarter was up 20% y/y, with strong growth in healthcare payor, healthcare provider, F&A, and Europe (the latter presumably driven by recent M&A activity in Europe). However, TCV of DO and ITO signings were down. In its ITO business, Xerox is focusing on executing on some large deals and improving margin.

Revenue growth in Services (DO up 4%, ITO up 2%, BPO down 3% in Q4) has decelerated, as expected. BPO revenues had a 1.5% impact from the student loan contract run-off. And Xerox has not had the benefit of acquisitive growth, which has traditionally contributed 2%-3% of Services revenue growth (under the former ACS model).

But Xerox continues to be challenged in its attempts to improve Services operating margin, once again lower than planned. As late as November 2013 (half way through Q4), in its investor conference, Xerox was guiding on achieving full year 2013 segment margin of 9.8% to 10% for Services … in fact, it achieved 9.76%, just getting into the bottom end of this. And it missed guidance for Q4: segment margin was 9.6%, below the targeted 10%.

Management acknowledges “although (margin decline was) driven by known issues, this is an area where we need to make more structural progress”.  So what were the contributory factors for the 160 bps y/y decline? The following factors have been given as major factors contributing to the y/y decline in Q4:

• The student loan run-off, which had a 60 bps impact on segment margin – but this was not an unforeseen event!
• Unforeseen extra expenses on healthcare platform contracts (MMIS, also healthcare exchanges), where Xerox allocated additional resources to projects. Given the newness and complexity of building a Healthcare exchange, and the challenge of doing so within a tight time constraint, one cannot fault Xerox for taking action to avoid the type of debacle seen in the federal exchange project. Having to do so also on MMIS projects indicates longer standing execution issues
• Slower than expected ramp ups in wireless customer care, leading to volume pressures. It is not clear whether this is delayed or lost work.

This is the third quarter of sequential margin decline, and in a year when Xerox said it was increasing its focus on improving profitability of Services. Services segment margin has now declined every year since 2010. Xerox is now guiding on a margin improvement of 50 basis points in 2014, with this improvement becoming evident in H2 “as near-term margin pressure dissipates and the impact of our margin improvement actions accelerate” Q1 2014 margin is expected to be flat y/y, at around 9.3%.

In the November investor conference, Xerox outlined a five plank strategy for Xerox Services. Some of the initiatives to improve margin – for example further offshoring – are initiatives that the former ACS was talking about even before its acquisition by Xerox.

Xerox needs to demonstrate in 2014 that it is getting a firmer grip on improving profitability of Services, ideally with no more unexpected expenses.

Acquisition spend in 2013 was substantially below the plan of $300m to $500m for the year. The $60m Invoco acquisition closed in January. In 2014, Xerox expects to spend up to $500m in acquisitions (including Invoco). A focus of recent acquisitions has been expanding its customer management services BPO capabilities in Europe: will we see in 2014 acquisition activity that brings in IP in other areas of its portfolio?

Effective-People and Effective-Learning offer HCM technology for:

• Recruiting
• Onboarding
• Compensation
• Succession planning
• HR analytics.

The acquisition includes capabilities around sales and support of the SuccessFactors BizX platform. The companies are partners with SuccessFactors and SumTotal.

GP Strategies continues to make acquisitions to strengthen its service offerings and global capability. This is GP Strategies fourteenth acquisition in the last four and a half years, and its 23rd since 2006. Combined with organic growth, including its large multi-year global learning BPO (LBPO) services contract with HSBC, NelsonHall estimates that since 2009, GP Strategies has more than doubled its LBPO revenues. Once fully implemented and deployed across HSBC affiliates globally, GP Strategies anticipates that HSBC will be its largest client.

Learning is an integrated and integral component of talent management. According to NelsonHall's Q4 2013 LBPO market analysis, vendors continue to strengthen and integrate their talent management service and technology offerings. SaaS talent management continues to accelerate across all HRO service lines, including combined with LBPO. Client learning spend will continue to accelerate for job skill training and professional development for purposes of attraction, development and retention of talent.

The acquisition is expected to close by the end of March 2014.

Expect GP Strategies to continue acquisitions to expand its global capability and its HCM services.

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]

• Revenues were $5,759m, down 9.3% y/y, and down 1% sequentially
• EBIT was $255m, a margin of 4.4% down 223 bps y/y.

Fiscal Q4 2013 revenue (and y/y and sequential revenue growth) by service type was:

• Infrastructure technology outsourcing $3,563m (-9%, -3%)
• Application and business services $2,196m (-10%, +1%).

IT outsourcing contributed 62% of HP ES business, application and business services ~38%.

Q4 bookings were up over 30% y/y, driven by strong renewals

FY 2013 results for HP ES were:

• Revenue of  $23.5bn, down 8.2%, down 7% in CC
• EBIT of $679m, a margin of 2.9%, down 119 bps.

FY 2013 revenue (and revenue growth) by service type was

• Infrastructure technology outsourcing $14,682m (-7.0%)
• Application and business services $8,838 (-10.0%), primarily due to softness in the applications business.

12-month trailing book-to-bill at end FY 2013 was approximately one in line with prior guidance.

For HP Group overall, fiscal Q4 2013 revenue was $29,131m. Revenue (and y/y revenue growth as stated and in CC) by region was

• The Americas $13,400m (-2%, -1%)
• EMEA $10,195m (-4%, -5%)
• Asia Pacific $5,535m (-1%, +4%).

For HP Group overall, fiscal 2013 revenue was $112,298m (-7% y/y, -5% CC y/y).

- See more at: http://research.nelson-hall.com/sourcing-expertise/view-all-vendors/?avpage-views=article&id=201480&fv=2#sthash.O34tiq29.dpuf

HP Enterprise Services (ES) today announced its fiscal Q4 2013 results, for the period ending October 31, 2013:

• Revenues were $5,759m, down 9.3% y/y, and down 1% sequentially
• EBIT was $255m, a margin of 4.4% down 223 bps y/y.

Fiscal Q4 2013 revenue (and y/y and sequential revenue growth) by service type was:

• Infrastructure technology outsourcing $3,563m (-9%, -3%)
• Application and business services $2,196m (-10%, +1%).

FY 2013 results for HP ES were:

• Revenue of  $23.5bn, down 8.2%, down 7% in CC
• EBIT of $679m, a margin of 2.9%, down 119 bps.

FY 2013 revenue (and revenue growth) by service type was

• Infrastructure technology outsourcing $14,682m (-7.0%)
• Application and business services $8,838 (-10.0%), primarily due to softness in the applications business.

On the face of it, the decline in revenue across the board does not look very impressive, but in fact, the data shows that the "fix and rebuild"  is broadly heading the right way.

Firstly, the revenue performance at HP ES throughout FY 2013, the "Fix and Rebuild" year, has been better than the guidance a year back of revenue decline of 11% to 13%. This is partly due to slower than expected ramp downs. However, the delayed revenue run-off will put further pressure on services revenue in FY 2014, negatively impacting Q1 growth and putting pressure on H1 results overall. Management highlighted that signings for "strategic" enterprise services, which include cloud, big data, application modernization and security, were up double digits. In FY 2014, HP ES is focusing in a sales force retooling program.

Secondly, FY 2013 operating margin of 2.9%, boosted by the 4.4% margin achieved in fiscal Q4, is at the high end of prior guidance of between 0% and 3%,

HP ES continues to focus on changing the mix of its portfolio towards services using the "new style of IT". This is being boosted by the added emphasis on innovation and an increase in engineering headcount announced today.

The group-wide focus on innovation has seen HP bring out new capabilities that HP ES could potentially leverage in its pursuit of "new style of IT" deals. Examples of recently announced technologies include HP OneView, unveiled in September, a new integrated software-defined management capability for converged infrastructure, extensively in virtualized BladeSystems and Rack server environments. Also new is Salesforce Superpod which was announced at Dreamforce 13. It is a dedicated instance in the Salesforce multi-tenant cloud, to run on HP's Converged Infrastructure for enterprise data centers. The Superpod is targeted at very large clients and will be offered to existing Salesforce clients at an additional fee.

HP ES continues to work on its turnaround strategy. Measures currently underway include:

• Flattening the labor pyramid, in terms of both skill sets and locations
• Focus on getting better at taking contracts away from competitors
• Building up HP ES’ advisory offerings
• Building client road maps in every area to help clients go from the traditional to the “new style of IT”.

These measures were covered in a recent NelsonHall blog "HP ES Turnaround Strategy Update - New Style of IT, New Style of HP ES" - See more at: http://research.nelson-hall.com/blogs-webcasts/nelsonhall-blog/?avpage-views=blog&type=post&post_id=73#sthash.b0nY9tIP.dpuf .

HP Group as a whole delivered >$9bn of FCF, well above its most recent outlook of ~$8bn. Net debt was reduced by >$1bn for the seventh consecutive quarter and HP has now achieved its net debt goal ahead of plan.

NelsonHall will be shortly updating its Key Vendor Assessment in HP ES to include these results.

• 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.
• - See more at: http://research.nelson-hall.com/blogs-webcasts/nelsonhall-blog/?avpage-views=blog&type=post&post_id=73#sthash.b0nY9tIP.dpuf

Pindar has become the third CEO of a major U.K. outsourcing company to resign this year. The other two, Nick Buckles of G4S and Chris Hyman of Serco, both left behind companies that are being investigated for fraud by the British Government. No such allegations have been directed at Capita.

The company has done extremely well under the leadership of Pindar. In the past ten years alone:

• Its revenue has more than doubled (from £1,081m full year in 2003 to £1,891m in H1 2013 alone)
• The share price has increased by > +316% over the last 10 years, compared with the FTSE (>+52%).

Pindar leaves the company in good shape, with:

• £2.9bn of major new contract wins so far this year
• An anticipated organic topline growth of 8%
• An operating margin that is expected to stay steady at 12.5% to 13.5% for the foreseeable future.

Today's announcement coincides with the news that Capita has resolved the problem of its under-performing personal insurance BPO businesses. It is selling Lancaster Insurance Services, Sureterm Direct, BDML Connect and Delta Underwriting to Markerstudy Group for an undisclosed price. The four businesses (685 personnel based across three locations) are expected to generate ~£47m in revenue and make a combined operating loss of £15m in 2013. Capita is also closing its SIP administration business based in Salisbury.

Business rationalization and expansion will be a tougher nut to crack. Organic growth cannot deliver the overall growth required to grow revenues and margin at acceptable rates. Xerox will need to acquire, but any large acquisition program will incur failed acquisitions. Xerox intends to keep the damage down by acquiring businesses at low prices, which is likely to cause it to miss big wins, but avoid big losses.

Finally, culling businesses (such as the student loan processing business, which is shrinking fast and reducing margins because overhead has not shrunk as fast as revenue) will be necessary for Xerox services to focus on its winning businesses. It is not clear anyone would want to buy the student loan processing business, making a cull impossible, and downsizing the only option. Xerox will need to focus on segments of its financial services BPO business that can be grown rapidly to offset the shrink in the student loan part of the financial services business. Other sunset businesses will have to be handled the same way if there are no bidders.

Xerox will succeed at bring its services operational performance up to its operational expectations, but it will take 3 years to accomplish.

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)

PCO Innovation offers PLM strategy and process consultancy, application architecture, system implementation, data migration and application management. It specializes in PLM platforms including Dssault Systèmes, PTC and Siemens PLM.

Today’s announcement follows Accenture’s acquired of PRION Group earlier this year.

So why is Accenture focusing on PLM and developing PLM “business services”, a term Accenture is using to describe offerings that span management consulting, technology and operate services. There is a well-established market for services that leverage PLM, with the proposition including enabling faster time to market for product launches and reducing operational and product development costs. And Accenture is not interested in being a late entrant. The answer is possibly around its overall investments in what Accenture calls “digital”. Over the last four years, Accenture has made a series of acquisitions around digital marketing to build Accenture Interactive, aiming for this to be a $1bn business within a few years. PRION and now PCO Innovation indicate a newer interest in manufacturing operations and the new business opportunities to be derived from “the internet of things”. Another recent initiative is a JV with GE called Taleris focused on the aerospace sector with a predictive maintenance offering using analytics from sensors on aircrafts. Expect to see more emphasis by Accenture on its capabilities around digital transformation in manufacturing sectors.

NelsonHall has just published an updated comprehensive (97 page) Key Vendor Assessment on Accenture, available to subscribers of the KVA program.