What a difference a year makes.

Atos recently held its second North America business event in Dallas, just under a year since completing its acquisition of Syntel. Last year’s event focused on the newly formed Atos-Syntel organization in North America, and also on how, with a new CEO in place, North America was starting to address some legacy problems and to manage a situation where a chunk of business had gone away with some contract non-renewals: we felt that Atos North America was on a more positive trajectory than it had been in 2017, also that the integration with Syntel was being done less hastily than some of its previous large-scale IT services acquisitions (see our blog on the 2018 event here). This year, some major strides appear to have been made in North America in GTM, account management, portfolio and positioning – and there are some areas of good practice that Atos North America could export to other regions in time.

One priority has been to improve service delivery; if a very considerable improvement in NPS is anything to go by, this has been addressed. And issues in one problematic contract (going back to the acquisition of the IT services business of Xerox) have now been resolved.

In terms of portfolio, there has been a significant hiring of new talent, including a North America Digital Transformation Officer and a new head for its SAP practice, both with a mandate for offering development and innovation.

The new Digital Transformation Office is working on simplifying and packaging offerings from across the portfolio so that these resonate more closely with clients’ digitalization priorities, which it categorizes as:

• Being cloud ready
• Enhancing CX
• Improving innovation and agility
• Securing the business
• Using all their data
• Scaling their business
• Automating business processes.

That these are typically major priorities for enterprises today is undeniable. Overall, the messaging has come a long way from the product centricity of the Digital Transformation Factory; it is becoming more centered around use cases and on potential client benefits, though in some areas it remains a work in progress. Overall, there is an increasing emphasis on more flexible modular solutions from across the portfolio, and on flexible consumption models (the latter very different from some legacy infrastructure deals).

With SAP, Atos’ capabilities in North America have not historically been anywhere near as extensive as they are in geographies such as Germany and even the U.K., and they have focused on SAP BASIS ops. Initiatives in the last six months include setting up a small SAP consulting team as part of an ambition to target SAP transformation opportunities such as S/4HANA implementation/migration services; also, offering SAP HEC as a managed service on GCP. There are clearly strong ambitions here.

The fact that the global head of B&PS, Sean Narayanan, is based in New York indicates the importance being attached to Syntel. Benefits from the offshore delivery capabilities, the intelligent automation tools (the Syntbots platform) and agile delivery capabilities that Syntel has brought in should become apparent fairly quickly. Atos has completed the reverse integration of its larger B&PS contracts in other English-speaking geographies in a timely manner. Taking certain Syntel portfolio capabilities and exporting and expanding these across the group will take longer, as will developing more industry-specific offers for sectors such as healthcare payer and financial services.

While the Business & Platforms Solutions (B&PS) division in North America has been transformed with the addition of Syntel, the region’s legacy Atos Information & Data Management (IDM) division has also been busy, including working on adapting its GTM strategy. There has been a shift from the former pursuit of large managed services deals: the focus now is getting in front of clients earlier in their cloud journey and targeting smaller deal sizes such as cloud assessment engagements through which it can develop the relationship with the client to become a partner of choice for cloud design, migration and operations services.

Atos has said all year that North America would be back to organic growth by the end of 2019: in fact, it has achieved this in Q3. Something that perhaps would not have been expected a year ago is that the growth has come from IDM, which has done well to catch up the lost business from last year so quickly, rather than B&PS, which saw negative growth in its two priority sectors of healthcare and financial services

So, what next for North America? Of course, the ambition is to cross-sell the portfolio: this is likely to take time for a number of reasons, including little sector overlap in the region between legacy Atos and Syntel and lack of brand awareness. As we noted last year, in the short to mid-term, Atos North America is more likely to win broad-scope (infrastructure plus applications services) deals with mid-sized enterprises.

We expect to see an increasing focus in 2020 on vertical-specific offerings, most obviously healthcare, financial services and insurance.

And Atos North America might be exporting messaging about certain areas of the portfolio to the broader group; for example, the concept of ‘Singular IT’ mentioned a few times at the event – watch this space.

NelsonHall recently published an updated Key Vendor Assessment on Atos that includes its Q3 2019 results: for details, please contact [email protected]

It is a decade since Thierry Breton assumed the mantle of CEO and Chairman at Atos, his arrival marking the end of a troubled period for the company. In that time, the company has improved its profitability (when he arrived, its operating margin was just 4.8% and all service lines were experiencing a deterioration in profitability, so his ambition of a double-digit margin seemed ambitious). Also in that time, the company has grown in scale and geographic presence through a series of fairly significant acquisitions in both the Atos and Worldline businesses. These acquisitions have also led to some dramatic changes to its portfolio.

Atos recently posted its Q4 and full year 2018 results. These have been discussed in NelsonHall’s Quarterly Update on Atos, and a more comprehensive Key Vendor Assessment on the company will be published in the next few days.

But the real news had already happened two weeks before, at its Investor Day: this featured several major announcements, including the intended deconsolidation of Worldline, the next three-year plan for Atos, and also succession planning in place for Breton.

So why has Atos embarked on its next three-year plan one year before the current three-year plan is due to complete? In short, the time is right: two acquisitions, both completed in the last quarter, have provided heft and scale to both Atos and Worldline. With the additions of Syntel and SIX Payment Services, each business is now in a stronger position to pursue its own ambitions.

Five years after its carve out, Worldline becomes a standalone company

The first major announcement at the Investor Day was Atos’ intention to reduce its stake in Worldline from 50.8% to 27.4% through a proposed distribution of 23.4% of Worldline shares to Atos shareholders (who will receive 2 Worldline shares for every 5 Atos shares held), thereby deconsolidating Worldline from the Atos Group from early May 2019 (assuming approval at the AGM on April 30). Atos will remain the largest shareholder, followed by SIX Group with 26.9%.

We were not surprised to hear of this development, coming as it does five years after the 2014 IPO of Worldline and at a time of newly expanded scale: there are clear benefits to Atos shareholders, and to both companies, in becoming standalone. Both Atos and Worldlines’ board of directors have unanimously supported the proposal.

If we include a full year’s contribution from SIX Payment Services, which has expanded Worldline’s revenues from merchant services by 65%, and its geographic presence in the DACH region (primarily Switzerland), Worldline generated €2.2bn pro forma revenues in 2018. It is now a major player in Europe.

Worldline has been very clear about its ambition to become the dominant consolidator in the European payment processing market. And here it is succeeding, despite the disappointment of its failed attempt to acquire Gemalto: since its IPO, revenues have doubled, through a combination of inorganic and organic growth, and adjusted operating margin has expanded from 18.7% to 21.2% (again, pro forma, including SIX PS).

As a standalone company, Worldline will have an enlarged free float (45.7% post transaction, which we think might increase) with increased stock market visibility and be in a stronger position to use stock for acquiring: its ambitions as a payment processing consolidator are if anything even stronger, with the focus moving next to potential opportunities in some of the larger European economies. Separation from Atos might also be helpful in discussions with some banking consortia over potential new outsourcing opportunities; Worldline CEO Gilles Grapinet alluded to some large deals on the horizon.

Worldline shared its 3-year financial targets ambitions for 2019 to 2021. We believe the topline targets to be modest in ambition, given the M&A and large outsourcing deal aspirations.

Atos and Worldline will maintain commercial, industrial and GTM relationships via arm’s length contracts between the entities. This will include joint R&D programs and purchasing agreements.

ADVANCE 2021: the road ahead for Atos

So, what about Atos on a standalone basis?

Firstly, scale: including a 12-month contribution from Syntel, Atos generated €11.3bn pro forma revenue in 2018, with an adjusted operating margin of 10.0%. It remains a double-digit margin business without Worldline.

Secondly, profile: as we have discussed before, Syntel has changed the profile of Atos in terms of both geography and portfolio. With Syntel, Atos becomes less dependent on IT infrastructure services and becomes more balanced both at a global level and in its North America business. The reverse integration of much of Atos’ global B&PS business into Syntel continues in 2019. In its next three-year plan, entitled ‘ADVANCE 2021’, B&PS becomes a more important pillar of Atos’ growth plans for the next three years.

As part of ADVANCE 2021, Atos has introduced a new initiative, RACE (Road to Agile Competitiveness & Excellence), essentially the successor to various TOP plans, with a stronger focus on reducing direct costs, rather than optimizing G&A, to achieve further margin expansion. RACE has 12 pillars. We feel that some of these, such as the Global Optimization through Automation & Lean (GOAL) initiative (which started in H2 2018 and includes leveraging Syntel IP, increasing near/offshore delivery, and setting up shared service centers for indirect functions), indicate Atos is in catch-up compared to some of its peers. In terms of divisional margin targets, the division targeting the greatest expansion is B&PS, primarily from leveraging Syntel to achieve a 60% off/nearshore rate by 2021.

The three-year plan includes just 1-2% targeted organic growth in 2019, while North America and Germany (its two largest regions) recover.

IDM will remain a flat business for the next three years

With its Information & Data Management (IDM) division, a key priority is to get back to growth following declines in 2018 in Germany and North America (primarily the U.S.), where, under its new management, the outlook for 2019 appears much better than it was a year ago.

At a global level, IDM is now back under the leadership of Eric Grall, who is also Atos’ COO. The focus over the next three years will be on hybrid cloud orchestration, and IoT/edge computing, these areas balancing revenue stagnation in other units and the ramp-down of its traditional data center service business.

IDM has more growth ambitions for its U.K. BPO unit and wants to expand its financial services BPO business into Europe. Again, we feel the targeted growth over the next three years, which we estimate at around 8% CAGR, is a modest ambition given the healthy growth in many areas of BPO.

Overall, IDM is set to remain stable at around €6.3bn.

B&PS to benefit from market momentum in digital

The Business & Platform Solutions (B&PS) division enjoyed an improved performance in 2018, benefiting from repositioning around Digital Factory offerings. Syntel brings a business growing at ~10% (NelsonHall estimate), provides vertical expertise in the U.S. banking and healthcare industry, and will help capture project and digital transformation services growth in the U.S. There is (at last, we feel), an increasing focus on developing industry-specific propositions in each of its seven targeted verticals, potentially also pulling through IDM in some opportunities. This will be an important element in the next stage of Atos’ evolution. We will be looking with interest at how Atos will harness the industry-specific capabilities it has gained in different regions and develop a stronger cross-regional industry play. Strengthening the GTM approach is a key part of this, but on its own will not suffice.

Overall, B&PS is targeting a 5% CAGR for 2019 to 2021, which, assuming no major changes in the macro-economic conditions, is in line with our predictions for overall market growth in these services.

Atos looking to replicate the growth model of Worldline at BDS

Perhaps one surprise at the Investor Day came from Breton’s comments as to possible intentions regarding the BDS unit. BDS comprises a range of businesses, e.g. security products and services, HPC and high-end servers, mission-critical systems for the defense industry, and secure communication devices and software. The positioned commonality across these different activities is security, AI, and big data/analytics. The division continues to enjoy double-digit organic growth (12.0% organic in 2018) and is nicely profitable (divisional operating margin was 15.4% in 2018). But Atos is unusual as an IT services company in having businesses like these.

It appears that Atos may look to replicate what it has done with Worldline at BDS. Breton alluded to the need for BDS to be listed if it is to be a consolidator in the cybersecurity market and afford the high valuation multiples currently used in security M&As. He did not indicate a time line; however, we would not be surprised to see a listing before end 2020. Again, this would make obvious sense.

Atos has been an active acquirer in the last decade; significant M&A activity appears to be over for a while at least, with Atos focusing primarily on organic growth. Atos in 2021 may not be a significantly larger business, but we think it will have evolved in its profile and positioning.

By Dominique Raviart and Rachael Stormonth

Details of Atos Q4 and full-year results and financial targets in the new ‘ADVANCE 2021’ three-year program are provided in NelsonHall’s Tracking Service, Quarterly Update and Key Vendor Assessment programs. To find out more, contact Guy Saunders.

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

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

Key elements of strategy

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

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

Forward-looking priorities

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

• Markets
• Portfolio
• People
• Culture.

Markets

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

Portfolio

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

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

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

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

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

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

People

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

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

Culture

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

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

Summary

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

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

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

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

L to R: NelsonHall's David McIntire, Rachael Stormonth, Andy Efstathiou, and Dave Mayer 

NelsonHall recently attended an Atos North America event in Dallas which focused on the newly formed Atos-Syntel organization in North America. Earlier this year we noted that Atos in the U.S. was still a work in progress (see here). The event was held just days after its acquisition of Syntel had closed and we were keen to learn about the integration plans and the strategy for future growth in North America.

We came away assured that, with a new CEO in place, several problem contracts no longer an issue, and an enlarged set of capabilities, Atos North America is in a very different position from what it was at the beginning of the year. And looking more widely, Atos can now position as offering scale end-to-end services across infrastructure and applications in all its key geographies. We also note that this is an integration that is being done with perhaps less speed than some of its previous large-scale IT services acquisitions.

The significance of the Syntel acquisition

The event was held in Atos' regional U.S. HQ in Irving. Opened last year, the facility is also its first Business & Technology Innovation Center (BTIC) in North America. A clear emphasis throughout was that Atos in North America is now in a stronger position in terms of resourcing for a broad range of application services, including developing cloud-ready applications, as well as being able to support enterprises with reducing their infrastructure spend to invest in digital. It was also apparent that, in the short term at least, the growth opportunities are in mining Syntel’s client base rather than with acquiring new logos.

In July we wrote a short piece on the significance of the Syntel acquisition both to Atos North America and to its Business & Platforms Solutions (B&PS) business globally (see here). As a reminder, among other things, Syntel brings to Atos:

• Increased presence in North America (adding 4.5k employees and ~$825m in regional revenue, expanding it by around a third, and means that Atos North America has a broader set of capabilities it can offer to clients in the region
• A business that will be margin accretive to Atos
• Three large accounts: Amex, State Street and Fedex (which were ~45% of Syntel total revenues)
• A boost to its BFS and Insurance sector businesses (approaching $420m and $140m in revenue in 2017 respectively), also a significant U.S. application services practice in the Healthcare/Life Sciences vertical
• A large Indian delivery capability, augmented by its SyntBots Intelligent Automation platform
• Capabilities in apps development, testing and application modernization services (‘digital’ areas of application services)
• Its 'Customer for Life' ethos, which has been a significant factor in client loyalty.

We also noted that, given the level of reverse integration that is happening in B&PS, and the fact that Syntel had a larger presence than Atos in the U.S., the role of Syntel senior management is critical to the success of the integration. And the transition so far has been seamless: former Syntel CEO Rakesh Khanna, for example, remains as CEO of Atos-Syntel, which now operates as a unit within the B&PS division, and is on Atos’ Executive Committee. He presented alongside Sean Narayan, who heads B&PS globally, and Simon Walsh, the new head of Atos North America (an external appointment) about the capabilities of the combined entities.

Portfolio: with applications plus infrastructure services capabilities in North America, Atos can now position in the region around digital transformation

Atos freely acknowledges that until now, the only examples it could provide where its services were evidently supporting clients in their digital transformation were from Europe. It was not by accident that the event opened with Rakesh Khanna providing some case study examples of recent Atos-Syntel projects with clients outside its top 3 (AmEx, State Street, FedEx) where its services have helped the client play catch up with large digital disruptors in their respective industries. Other examples included a blockchain initiative and supporting an online insurer impacted by a high level of significant technical debt by migrating ~880k lines of code from COBOL to Java.

Three insurance sector clients presented: all are mid-sized organizations and have been clients of Syntel for many years. Common strands were consistency of (quality) delivery and proactivity, e.g. in one case approaching the client with a proposition around the transformation of its underwriting process. One of the three is also a new Atos IT infrastructure services client from earlier this year, having switched from an incumbent provider after 15 years: this client referred to the relative ease and speed of sourcing, appreciating having fresh eyes looking for new opportunities, and an outcome-based pricing model (based on net new premiums) that had been agreed.

Delivery: integration of B&PS into Syntel delivery model already in progress

While little was said about the reverse integration of Atos’ large B&PS accounts into the Syntel delivery model, or of Atos’ India delivery centers into Syntel’s, work on this has already started. The integration includes:

• Transfer of Atos’ North America and large global India-delivered B&PS contracts to Syntel, representing around $1.25bn, roughly one third of Atos’ overall B&PS business, of which $160m is from legacy Atos
• Alignment of Atos’ B&PS India-based delivery with Syntel
• Folding of some Atos delivery operations in Pune, Chennai and Mumbai into the larger Syntel facilities.

Any new B&PS deals incorporating global delivery will be pursued under the Syntel model.

The use of the Syntbots platform is expected to play a significant part in the ongoing delivery transformation in the RISE 2.0 program of the B&PS unit (which in our opinion had been in catch-up mode in the application of automation and AI). Atos is also assessing how and where Syntbots can play a part in its Infrastructure services business, e.g. in applying ML to incident management.

Improving sales execution & delivery performance in I&DM in North America

Three former problem contracts were terminated or expired earlier this year. The remaining few have been or are being addressed; one large problem contract has been reset and the new North America CEO holds a major incident review call every morning: there is evidently close attention being paid to improving delivery execution, also in staying close to other I&DM clients.

Following a period of disappointing sales performance, Atos is refreshing its I&DM pre-sales and sales personnel and architects in North America. There have been some new wins recently and the net new business is apparently strong.

Syntel clients happy with the larger scale of Atos

In the two weeks following the acquisition, Atos CXOs (Thierry Breton, Sean Narayanan, Eric Grall) managed to visit all Syntel’s key clients, representing ~70% of its total revenues; most were positive in that, as part of Atos, they can potentially look to Atos-Syntel for support in other geographical operations or in other services.

Future growth: farming rather than hunting; mid-market the primary focus

Among the attributes of Syntel emphasized by clients at the event were its effectiveness in forging deep relationships with them over the years and its consistency of delivery. Nearly all of Syntel’s revenue was through its existing client base and it brings to Atos strong account management and significant presales and solution architecture capabilities in North America, albeit for relatively (for Atos) small engagements.

Atos North America intends to leverage Syntel’s model and look primarily for smaller deals to grow wallet share in existing accounts. This is a significant change in emphasis in the GTM: both cross-selling and targeting smaller engagements are new areas of emphasis for Atos. An integrated approach into the Syntel client base has already commenced. Syntel’s 'Customer for Life' ethos brings in a new and improved approach to managing customer relationships; at the event there was a clear emphasis on client-centricity and on selling to specific client needs with a strong awareness that their appetite for the pace of change may differ significantly.

We note that in North America there is little sector overlap between Atos and Syntel: for example, Atos will have few local client references in financial services that it can draw on, though for smaller opportunities this will not be as critical a factor in vendor selection as it is in large deals.

Expect to see more vertical-specific offerings mid-term

Before Syntel, Atos’ portfolio in North America was primarily horizontal IT infrastructure services, though its earlier acquisitions of Anthelio Healthcare and three small healthcare consulting firms (two from Conduent) had indicated an intention to expand its presence in the U.S. healthcare sector. Syntel now brings in some application services business in the payer sector. Developing an integrated end-to-end portfolio for targeted segments of the healthcare sector remains an ambition.

We also expect to see a stronger play in the longer term in specific sectors within FS&I, also in manufacturing & retail.

Outside its top three clients, Syntel’s client base is typically drawn from mid-sized organizations, which is not where Atos has typically played.

Summary

The integration of Syntel immediately improves Atos North America’s ability to speedily resource B&PS deals without having to use resources from other regions, something which has at times been a competitive impediment. A large deal team remains in place and the legacy Atos North America focus on larger-sized enterprises for I&DM services remains. The ambition is also to cross-sell legacy Atos services into Syntel clients and to make a broader move overall into the mid-size market, and it is here that Atos is more likely to win broad-scope (infrastructure plus applications services) deals in the short to mid-term.

The increased emphasis on client intimacy in North America is also becoming more evident in the larger I&DM business in the region, where, with a new CEO in place, we also note a stronger focus on improving delivery reliability.

As well as having an immediate impact on Atos North America's offerings portfolio, Syntel is also a powerful boost to the B&PS RISE 2.0 initiative.

A year ago, following a TCS analyst event in Boston, the theme of which was Business 4.0: Intelligent, Agile, Automated, and on the Cloud, we wrote about how TCS’ new service line structure has been designed to support the company’s emphasis and positioning around Business 4.0 (see the blog here)

Underpinning its positioning around Business 4.0, over the past year TCS has been emphasizing two key capabilities:

• Location-independent agile
• Machine first delivery model (MFDM).

These two provided the core themes at the company’s recent analyst event in London. In our discussions with TCS execs, we were impressed by the speed and determination with which the company is moving to achieve the bold ambition it shared in 2017 to become 100% “enterprise agile” by 2020, also by its consciousness of how the nature of software engineering services will transform in the longer term.

Location-independent agile

With its stated target to be “enterprise agile” by 2020, TCS firmly placed a stake in the ground: to the best of our knowledge, no other IT services vendor has made a similar claim. TCS seems to be well on the way to achieving this objective with an estimated 250k of its 410k+ strong workforce already ‘agile ready’.

So, what is TCS doing to make this happen?

Unsurprisingly, there has been a massive retraining drive, accompanied by various efforts to nurture a culture where employees expect to continually learn (“making learning addictive”), something that becomes increasingly important as more roles become inter-disciplinary. A key asset underpinning its micro-learning platforms is its Karma gamification framework which has analytics and event-driven digital ‘nudging’ capability, used when an employee has been inactive.

Another core belief is that an employee’s contextual knowledge is more important than any specific technology skills – the aim is to train employees to become generalists rather specialists, particularly from roles that are next to be automated, by broadening the bar in their T-shaped skills profile to a V-shaped profile, e.g. training database managers on Hadoop, machine learning, and/or cloud systems administration. TCS estimates that its associates have on average four skills.

In line with this, performance management has moved from yearly assessments to micro targets.

Enabling tools that TCS has developed include:

• Jile, a cloud-based agile DevOps framework-agnostic product designed to help scale agile at the enterprise level. TCS launched Jile as a commercial product back in January (priced at $9 PU/PM)
• An Agile maturity model, an ‘agility debt’ framework with 27 characteristics codified from its experience with 300 clients, which it is now using to assess an organization’s agile readiness levels across the dimensions of structure, workforce, technology, and culture.

But enterprise agile also demands a transformation of the workplace: Krishnan Ramanujam told us that TCS is indeed transforming some of its larger delivery centers in India, including consolidating six campuses in Mumbai; removing cubicles in existing centers and installing large screens for interacting with team members based in other locations. We were assured that there is a “significant” investment in thus workspace transformation, but that there is no pressure on margins.

TCS’ emphasis on its capabilities in location independent agile is unsurprising: distributed agile is obviously important for large enterprises, and for many, their agile teams remain pockets of excellence. But getting distributed agile to work effectively is absolutely critical for those application services providers (by far the majority) that have an off/nearshore-centric global delivery model. Offshore delivery is not going away.

Machine first delivery model (MFDM)

As we have noted before in our Quarterly Updates on TCS, MFDM is not (just) using automation and AI for operations optimization. It is about giving technology the “first right of refusal” to sense, understand, decide, and act within a networked environment equipped with analytics and AI. The human interface is used for exception handling, training the machine to reduce exceptions, and for the application of contextual (often industry) knowledge.

The emphasis in the ‘Machine-first’ philosophy in the interplay between people and technology is how augmenting human capability can help unlock exponential value. The positioning is that MFDM can enable transformation in the client’s businesses (and, thereby, growth) for example through STP, new business models, increased speed to market, transformed CX, etc.

MFDM is thus a key element in TCS’ efforts to gain mindshare with stakeholders outside the CIO. We think there is more to be done in the articulation of the philosophy, as some clients (and, we noted, analysts) are honing on the automation aspect rather than the more disruptive business transformation play.

Ignio: in or out of TCS?

TCS describes its intelligent automation platform ignio as “the intelligent machine” behind MFDM. As with last year, most activity to date has been around IT operations (we estimate around 75%) though there is beginning to be increasing use of ignio to support applications development activities. The application of ignio in TCS’ Cognitive Business Operations business is in its infancy: obvious use cases include working on increasing the level of STP in activities such as finance, and accounting, supply chain, claims or mortgage processing. So, there are still considerable opportunities to leverage ignio across the portfolio.

At the same time, there is increasing traction for ignio as a commercial product, sold at times by other systems integrators. TCS highlighted that in FY18, its third year of operation as a commercial product, ignio achieved revenues of $31m, substantially more than many other SaaS enterprise products and also commented that it is looking to achieve >$100m in annual revenues in the next two years.

There is some tension between these priorities, and in discussions with execs, we noted some uncertainty as to the optimum model for ignio: as one of several product units within TCS, a separate subsidiary, or a standalone ISV which can sell more easily to other IT services providers.

The service portfolio revamp is helping drive digital; work to be done on full stakeholder play

In the last 12 months, TCS’ revenues from ‘digital’ services and solutions have increased by 49% to nearly $5bn. And the rate of growth has been accelerating: in Q2 FY19 revenue from digital services and solutions was up nearly 60% and accounted for >28% of the quarter’s total revenues (see TCS Quarterly Updates for more information). Moreover, this is organic growth. There is, of course, the caveat that there is neither commonality nor clarity as to different vendors’ determinations as to what classifies as digital, and in TCS case it has won some very large platform-based outsourcing wins that it would classify as digital. Notwithstanding, we are not aware of any other IT services vendor enjoying this level of organic growth at this scale, in what is primarily a services, rather than solutions, business. All IT services providers are undergoing a process of reinvention. Among the larger players, TCS is unusual in succeeding so far in achieving this through internal transformation.

Among the new standalone practices within the Digital Transformation Services (DTS) group, IoT and the larger Analytics & Insights unit are enjoying very strong growth. Taking longer to take off is Blockchain, with most activity still at PoC stage, a reflection of where the market is currently, but the pipeline is building up.

Among other things, the new service delivery structure has worked in helping advance TCS’ full services play and support its ambitions for its offerings to be more business outcome focused, and “to address issues of board-level significance”. However, this is not quite the same as having direct access to CxOs. While we appreciate that TCS does have direct access in some service areas and in some clients to stakeholders such as the CFO, we think there is more work to be done around the full stakeholder play and in elevating the TCS brand from technology to business partner, both in increasing thought leadership and also in the portfolio.

What next at TCS?

We have been aware that TCS’ messaging around Business 4.0 is resonating well with clients, but, as noted above, feel that the business transformation potential of the MFDM philosophy is less well understood. Expect to see more messaging in 2019 which provides specific client examples demonstrating the benefits realized from MFDM, and how the value proposition coming from the MFDM approach supports the delivery of specific services.

While TCS has focused on organic growth in recent years, we were keen to know whether there might be any tuck-in acquisitions to augment, for example, the design capabilities of TCS Interactive (and increase TCS’ access to client’s marketing budget stakeholders), or perhaps its managed security services capabilities. In short, we think that there is a possibility of both, that the recent acquisition of a design studio in the U.K. will be followed by other tuck-ins in other geographies, also that a cyber specialist asset, perhaps in the U.S. is attractive.

In terms of target markets, also expect to see an increasing focus on the U.S. public sector, for example, that builds on its experience in state Unemployment Insurance platform modernization.

Summary

A major focus of the event was to show why and how TCS has been redesigning and adapting organizational structures, facilities, processes and policies, and also its workforce culture to align with location-independent agile and with the MFDM. In our discussions with execs, we also picked up that the thinking is looking further ahead, to a time when there is virtually no coding and computer science skills become less relevant, and a primary key skill is data science.

One presentation referred to the great Wayne Gretzky's (dad Walter’s) advice to “skate to where the puck is going” (rather than where it is). This may have become an over-used aphorism in the corporate world, but, like all good aphorisms, is effective in neatly capturing a concept or principle. In our discussions with execs, we were convinced that TCS has a clear vision of the future of information technology, and it is investing to make sure that it will remain relevant even when the nature of IT services has changed dramatically from what it is today.

This week started with the announcement by Atos of its intended acquisition of Syntel for $41 a share, a total consideration of around $3.57bn including Syntel’s net debt of $201m, in an all-cash deal.

Syntel being acquired is not a total surprise: the company has faced some challenges recently, and in the previous four weeks its share price had been going up strongly (from $31.61 a share on June 27 to $39.13 at the end of last Friday, a jump of 24%). And Atos making a significant acquisition in the U.S. was very much on the cards. In fact, the companies said that they have had discussions about a possible tie-up going back to 2014, predating Atos’ previous major acquisition expanding its North American presence, that of Xerox ITO in 2015.

At nearly 3.7x revenue and 14.5x EBITDA, the purchase price at first glance looks high, but it’s a premium of just 5% on Friday’s close and of 14% on the last 30-day share price average. Assuming regulatory clearance, the acquisition will transact (unlike Worldline’s hostile bid for Gemalto): Syntel’s founders and affiliated entities (who own 51.1% of the company’s shares) have committed to vote their shares in favor, both companies’ boards have unanimously approved the transaction, and we do not expect to see a counter bid. Barring any regulatory challenges, the companies expect the acquisition to close by the end of the calendar year.

So why is Syntel attractive to Atos? In short, Syntel will provide:

• A boost to Atos' North America business ($823m revenues in 2017, representing 89% of its total revenue), in particular for application services – filling in the Business & Platform Solutions (B&PS) gap in Atos’ North American business we have commented on previously (see here for example)
• Three large clients: Amex, State Street and FedEx, which together accounted for just under 45% of Syntel’s revenues in 2017 (~$415m)
• A boost to its BFS and Insurance sector businesses (approaching $420m and $140m in revenue in 2017 respectively), also a significant U.S. application services practice in the Healthcare/Life Sciences vertical to complement Atos’ recent healthcare sector acquisitions
• A large Indian delivery capability: Syntel has ~18k (mostly delivery) personnel based in India with some large campuses in Mumbai, Pune, Chennai and Gurugram (previously known as Gurgaon) and has developed an effective resource planning model enabling fast deployment in new projects
• And, unlike some recent Atos’ acquisitions, it will be immediately margin accretive.

Syntel’s challenges have included its heavy dependence on H-IB visas with little substantive onshore capability, and a lack of discretionary budgets in many of its major accounts, particularly in BFS: the company’s revenues have been declining for some time (2017 revenues were down 4.4%, with BFS sector revenues down over 11%, the primary factor being a 30% decline in revenues from AmEx, following the completion of a large project).

Atos refers to 40% of Syntel’s revenues coming from digital (cloud, social media, mobile, analytics, IoT and ‘automation’). Syntel currently reports that revenue from digital projects accounted for 20.5% of total Q1 2018 revenue (Q4 2017: 19.7%), growing at 21.6% y/y with the other ~19.5% of revenues related to the automation and modernization activities that build the foundation for implementing digital capabilities.

Major initiatives have included:

• A focus on growing some of the top 4 to 50 clients, and here there has been some success: in Q1 2018, this group represented 52.5% of total revenue, growing at around 17% y/y
• Ongoing enhancements to its Syntbots intelligent automation platform, underpinning all its service lines, including additions in machine vision, NLP, ML and virtual assistants
• The Syntel X.0 workforce transformation model launched in 2017, aligning competency building with career planning and performance management to develop a future-ready workforce.

The simple addition of Syntel to Atos will:

• Increase its global revenues from €11.9bn to around €12.7bn
• Boost its operating margin from 10.6% to 11.5%
• Extend its Business & Platforms (B&PS) business from 26% to 31% of its global revenues
• Extend its North American business from 16% to 21% of its global revenues
• More than double its India-based headcount, to 32.5k.

But, of course, Atos is looking for more than a simple addition. In its rationale for the acquisition, Atos declares it is looking for additional revenue synergies, reaching ~$250m by 2021, with half achieved by 2020, from cross-selling opportunities in both the European and U.S. client bases. We think there are significant opportunities from:

• Cross-selling Syntel digital offerings, offshore-delivered apps development, testing and application modernization services into some of Atos’ European clients, particularly in BFSI and retail
• Cross-selling Atos’ infrastructure services into some of Syntel’s larger U.S. accounts
• Developing an integrated end-to-end portfolio for targeted segments of the U.S. healthcare sector.

Atos also expects the increased offshore delivery and revenue synergies will add $50m to the operating margin. To facilitate this, Atos is moving ~$1.2bn of its current B&PS work (~33% of 2017 global B&PS revenues) to operate under the Syntel model upon completion of the acquisition. This includes the entirety of the North American B&PS footprint (~$160m, <5% of global B&PS 2017 revenues), plus select contracts from other regions. Key aspects of Syntel’s delivery model that Atos is looking to utilize include increasing offshore leverage also the use of automation and agile delivery.

Atos is also targeting ~$120m from G&A optimization by end 2021 from the combined scale, including consolidation of facilities in India (Atos expects to move its employees based in Chennai and Pune into available space in Syntel’s larger campuses in these cities), plus the alignment of KPIs in B&PS

Will there be challenges in the integration? Of course. Some of the immediate ones that come to mind include:

• Aligning Syntel’s 'Customer for Life' ethos, with its implied customized approach, with Atos’ more standardized “Digital Transformation Factory” framework
• Managing attrition in India, though we imagine this will be easier now that employees will be working for a larger, more global organization
• Managing the reverse integration of some of Atos’ B&PS larger contracts into the Syntel delivery model
• Up and/or cross-selling larger transformational engagements into Syntel’s top 4-50 client base, which includes a long tail of small accounts; this will require substantive awareness raising.

Given the level of reverse engineering in B&PS, the role played by Syntel senior management will be fundamental. Syntel CEO Rakesh Khanna will join Atos’ Executive Committee and will be key to driving this.

And of course, Atos has a well-honed integration methodology and has successfully integrated some large and some more problematic acquisitions over the last decade.

The addition of Syntel will certainly fill in the B&PS hole in North America, add substantive offshore delivery, bring in IP such as its SyntBots and MIII (manage, migrate, & modernize) framework, and improve B&PS margins.

The acquisition should accelerate the B&PS transformation globally including in the application of intelligent automation to service delivery. It also means Atos globally has a more balanced portfolio in its IT services offerings. We think there are further potential benefits, for example in leveraging some of the IP that Syntel will bring in to develop more industry-specific offers for sectors such as healthcare payer and financial services.

Readers of the NelsonHall Quarterly Updates on Tech Mahindra over the last two years will be aware of initiatives that have taken place to turn around the LCC business it acquired, and also of recent investments such as a minority stake in Altiostar. This blog looks at some of the other sectors in which Tech Mahindra operates, and at some broad developments around service delivery.

Two recurring themes in the presentations at Tech Mahindra’s recent global analyst event in Hyderabad were ‘Future’ (a refreshing change from ‘Digital’) and ‘3-4-3’ – indicating the overarching intent to demonstrate how Tech Mahindra is developing its offerings portfolio to be relevant to clients in each of its target markets.  Also evident was a strong focus on upskilling of personnel and innovating service delivery. Tech Mahindra is well known for its heritage as a specialist IT and engineering R&D services provider in the communications vertical, for engineering services in the auto and aerospace sectors, also for its work in supporting other Mahindra Group companies. To what extent is the company able to leverage these capabilities today to support other types of enterprises in their digital initiatives?

3-4-3 approach informing vertical initiatives

In his keynote, CEO CP Gurnani introduced the ‘3-4-3’ theme informing the portfolio strategy. For each target vertical, the company has picked 3 major trends, which have informed the selection of 4 focus areas in portfolio development (the ‘big bets’), and also the sector positioning in helping clients address 3 core CEO objectives: 'Run Better, Change Faster, Grow Greater'.

To briefly illustrate the application of the ‘3-4-3’ approach to two sectors: Communications, its largest and most mature (while Tech Mahindra’s dependence on this sector group has been reducing, it still represents nearly 43% of revenues) and BFSI, one of its smallest vertical units (13% of revenues).

Communications industry

BFSI sectors

Articulating what 3-4-3 means at sector level appears to be a work-in-progress (the links across the 3 dimensions are not always clear), but it is a neat approach for clarifying investment priorities and for developing a narrative around business outcomes for each target vertical: ‘Run, Change, and Grow’ workshops are likely to have been an important instrument in the very evident recent improvement in client mining (see recent NelsonHall Quarterly Update for details).

Tech Mahindra would be expected to have a strong narrative around the future of the Communications sector, so how does the 3-4-3 strategy translate into its investment priorities in the financial services sectors? Well, the acquisitions since 2015 of:

• BIO Agency brought in capabilities around digital CX (~£12.5m rev)
• Target Group (~£51m rev) brought in a platform BPaaS capability for processing lending and investment products. Target subsequently acquired the mortgage processing platform of Commercial First
• Sofgen in 2015 brought in Temenos and Avaloq core banking capabilities, focusing on German-speaking Switzerland.

BIO and Target Group both operate in the U.K. However, we have not seen cross-fertilization between them to develop more of a transformational story. Tech Mahindra continues to target relevant smaller scale opportunities in the mid-sized banking sector in the U.K. and EMEA.

Manufacturing industry

Let’s look at another broad vertical, one where Tech Mahindra has been enjoying double digit growth recently: Manufacturing. Here, it is benefiting from:

• Existing domain experience around connective devices, its strong heritage in product engineering services, also from supporting other Mahindra Group divisions, and from this, a close understanding of how AI and IoT technologies can be applied to enable new digital business models
• Some recent investments, such as its ‘Factory of the Future’ Lab in Hyderabad, which focuses on the use of technologies such as IoT, cloud, analytics, robotics, and AI in the manufacturing sector
• Its acquisition of Italian automotive product design house Pininfarina
• Partnerships, such as with Toshiba Digital Solutions.

In short, in discrete manufacturing, Tech Mahindra is well positioned for newer types of IT services around IT/IoT convergence and is investing in developing a range of new offerings.  We might possibly see further tuck-in acquisitions, perhaps to help it better leverage Pininfarina for offerings around connected device.

More likely, we think, are additional digital agency tuck-in acquisitions, perhaps folding these into the BIO umbrella, with the U.S. the most obvious geography, to scale its digital agency capabilities and align these more closely to Tech Mahindra’s principal target sectors.

‘New Age Delivery’ for software of the future

As well as the vertical stories, we also got a brief introduction to this initiative to transform how software development is done, essentially to increase the speed (and quality) of code production. Tech Mahindra’s ‘New Age Delivery’ platform (it might be branded differently, but for this blog I’ll refer to it as NAD) combines various approaches and tools the company has been developing in the last few years. Key attributes and related assets (both proprietary IP and third-party) include:

• Automation and AI across the SDLC, leveraging its AQT (Automation, Quality, Time) suite of automation and AI tools, including TACTIx (IT and network ops), FixStream Meridian (IT ops) LitmusT (testing), Entelio (chatbots) and UNO (RPA), and Acumos, an open source platform for building and sharing AI applications
• Enabling the adoption of Agile and DevOps at scale, leveraging the ADOPT framework that it launched back in 2014, based on the CollabNet TeamForge ALM platform. Includes an Agile training kit
• Reusability, leveraging its ‘Blue Marble’ cloud-based business service integration platform for microservices
• Collaboration, using the Xtra Mile crowdsourcing platform
• Upskilling/reskilling capabilities including through gamification
• Co-creation with clients.

Some of these assets have been used by Tech Mahindra for some years; others such as Acumos, launched a few months ago, are much newer. Acumos, co-developed with AT&T and hosted by The Linux Foundation, is a marketplace where users can access AI and ML models packaged into microservices and connect them to data sources to build new AI applications. Self-organized peer groups, e.g. within a company, can share, test and review AI solutions. The initial target sectors (unsurprisingly given it is an AT&T and Tech Mahindra collaboration) are Telecoms, Media & Technology: use cases suggested include development of AI applications for use in video analytics, content curation and AR/VR. Acumos thus supports the key principles of reusability and co-creation noted above. Development of AI models will primarily be on open source; this is a timely move.

Tech Mahindra’s NAD platform also includes ‘Design Thinking as a Service’ (DTaS), 'Capability as a Service' (CaaS) and 'Upskilling as a Service’ (UaaS) which includes online training (takes in a developer’s rankings from the crowdsourcing platform).

The platform is helping Tech Mahindra position as a services aggregator, managing projects in which onboarded ‘capability partners’ can bid for pockets of work (code packages) in projects. The next stage of the initiative appears to be onboarding partners with the requisite skillsets (e.g. mobile) into the platform.

As well as extending Tech Mahindra’s reach in areas where there are skills shortages, the UaaS elements are of critical importance in re- and up-skilling its internal talent for newer technologies and methods of working (it includes a predictive tool for identifying appropriate candidates).

The NAD platform thus aims to address a number of critical success factors in software delivery today. It is clearly particularly useful for complex digital transformation projects. Presumably, Tech Mahinda can also extend its use to managed services engagements.

Tech Mahindra is currently using the platform with four clients in the telecoms and retail sectors.

All tier 1 IT services providers are busily accelerating their use of automation and AI in service delivery, with the focus still primarily in infrastructure operations. Tech Mahindra’s approach with its NAD platform (which focuses on software development) has a broader vision, one that includes harnessing crowdsourcing in a systematic manner, bringing in specialist partners, UaaS, and the Acumos marketplace, all of which are likely to be very attractive to clients.

The NAD initiative will be a key asset in evolving its delivery capability to help it achieve its target of having 50% of revenue from digital services by 2020.

TechMNxt: positioning statement and ecosystem program

‘TechMNxt’ is a term being used by Tech Mahindra as a positioning statement, as it works on becoming a ‘next gen’ IT services company in terms of technologies, business model, and employee capabilities. The company is also using TechMNxt to refer to a global program to engage with tech start-ups, alliance partners and academia to develop offerings in the areas of AI, ML, cybersecurity, next-gen networks, big data, IoT, etc., and also to open CoEs. A recent example of an initiative under this banner is opening a Maker’s Lab in a BT Research Campus in the U.K. Expect to see the brand being used increasingly.

Apart from its acquisition of HCI, the company does not appear to be planning to significantly increase its onshore presence in the U.S. to reduce its (relatively high) dependence on H-1B visas and also improve client proximity for (early stage) digital projects. Its strategy appears to continue to focus on the kind of activity that can be offshored.

Summary

CP Gurnani has been vociferous for some years about the need for the Indian IT industry to reinvent itself and to be capable of innovation, and this ambition is very clear at Tech Mahindra. The company’s heritage and domain expertise in Communications and its strong capabilities in engineering services will continue to be an important facet of its specialization. In addition, in separate conversations with the company, NelsonHall has been impressed by how Tech Mahindra is applying AI in its engineering services business.

The NAD platform is also a well thought-through stitching together of a number of approaches to software development.

While Tech Mahindra is convincing in how it is developing its offerings for the Communications and selected discrete manufacturing sectors, there is more work to be done in developing a coherent narrative about its ability in some of its other target sectors to support companies in major digital transformation initiatives.  The fact that it still refers to its non-Communications units as its ‘Enterprise’ business is telling. We note that although BIO Agency and Pininfarina (both acquired in 2016) got star billing, there was no mention at all of HCI, its large recent acquisition in the U.S. healthcare sector.

A final note… unlike some Indian-oriented service providers (by which I mean those firms with primarily Indian leadership as well as Indian delivery capabilities, not just those headquartered in India), Tech Mahindra remains very proud of its Indian culture and centricity. Most of the client examples provided over the two days were Indian organizations (though 47% of its revenues are from U.S. headquartered organizations), which gave a slightly local feel to this global analyst event.

NelsonHall recently attended NIIT Technologies’ analyst and adviser event in London, and we were keen to get an update on developments at the company since the arrival of Sudhir Singh as CEO. We were aware that the last two quarters have seen a significant increase in the number of large deal signings (five, compared with two in H1 FY18), also that there have been a significant number of new appointments - but generally NIIT Technologies has been rather quiet. It is now apparent that the company has been embarking on a major transformation.

From Geographic to Industry Focus

This transformation is most evident in a radical organizational restructure from the former geography-based P&L to one that is vertical-led. In sales pursuits, there has been a sharper vertical-specific narration and a stronger emphasis on capabilities in digital, data, cloud and automation – and this is likely to have helped in at least some of the recent large deal signings.

NIIT Technologies is now structured primarily around three key industries, in each of which there is a focus on a specific sub-segment where the company would like to have a dominant position:

• Travel & Transportation (26% of total revenue), specifically airlines & airports
• Insurance (we estimate ~24% of total revenue), specifically commercial and reinsurance (primarily London market)
• Banking & Financial Services, (~19%), specifically wealth & asset management.

The importance of this is not to be underestimated: in both IT and business process services, deep industry domain expertise, and ideally IP, is a key factor in vendor selection. Having recognized the need to operate at the intersection of selected verticals and emerging technologies, NIIT Technologies has made a wholesale rejigging that goes from go-to-market right through to delivery.

The former ADM organization (which generated two thirds of the company’s total revenue) has now been folded into these three verticals; each now has a Global Head (who may also have a regional responsibility) and a head of delivery.  The former head of ADM is now wearing a different hat: as NIIT Technologies’ first ever CTO, his responsibilities include accelerating the use by the company of blockchain, IoT and AI.

The other much smaller service lines of Infrastructure Management Services and BPS stay as standalone units, and there are also separate units for Data/Automation and Cloud.

Singh has also introduced:

• A large deals pursuits team, in parallel tweaking salesforce incentivization plans to increase the focus on large deal ($20m+) wins
• A new partnerships and alliances organization.

External Leadership Hires, Center of Gravity Moved from India to the Markets

Since Singh’s arrival, the company has been on a hiring spree: all the three vertical global heads are new recruits, as are the global heads for Data & Automation (a new service line), RPA, and Cloud.

Several things are evident in these recent leadership appointments:

• They are all external hires, and from much larger firms
• They are all based onshore, close to clients: three of the eight are based in Princeton, NJ (where the CEO is also based) and two in London (near the London market client base)
• There is a clear focus to accelerate the use of intelligent automation (IA) in service delivery, also to expand capabilities in data & analytics.

This influx of new senior execs is not part of a turnaround program: NIIT Technologies’ topline growth in recent years has been steady, if not stellar, and EBIT margin has not been under any unusual pressure. What is happening should be seen rather as an evolution, one that builds on assets and capabilities that the company has acquired or been developing over the last few years, including:

• Proprietary IP such as Mona Lisa for the airlines sector and the suite of products (Navigator, Exact and Acumen) for the commercial insurance sector. As we indicated in our blog last year (see here), the recent focus in product development has been adding microservices (10 were launched last week) and cloud-based tools to improve the UX: next month will see the launch of a smart assistant, Aniita, and an analytics tool, Score 
• Capabilities in Pega and Appian, through its acquisitions of Hyderabad-based Incessant Technologies in 2015 and Ruletek in 2017, which expanded Incessant’s delivery presence and client base in the U.S. BPM is a building block in digital process transformation
• Its ‘TRON’ intelligent automation platform. Our perception is that while NIIT Technologies is slightly in catch up mode in the use of IA in its delivery of both application and infrastructure services (e.g., it currently has 4 PoCs in progress using arago’s HIRO), there is a strong push to change this.

“Engage with the Emerging: Innovate, Incubate, Industrialize”

This phrase neatly captures the journey on which NIIT Technologies has embarked: to build on its existing industry knowledge by expanding its capabilities in emerging technologies and by industrializing service delivery through IA. The ambition is clear: for clients in its target sub-verticals to see NIIT Technologies as a partner of choice for large scale digital initiatives, not just as an offshore ADM provider with experience of operating in their vertical.

So, what will we see at NIIT Technologies over the next year? In brief:

• More industry-specific use-case in the use of cognitive, IoT and blockchain (which has obvious relevance in all its target sectors), with concomitant marketing
• Much greater use of IA across service delivery, particularly in infrastructure services,
• Expansion of the existing partnership ecosystem, e.g. around cognitive tools, analytics, fintech
• Expansion of cloud-based offerings and of API capabilities in each of the three key sectors
• NITL (the insurance software unit) growing its client base outside the U.K., with a particular focus on the U.S.
• Double digit CC growth (EBIT margin expansion coming after: the current priority is topline growth)

And what might we see?

• Stronger interaction between Incessant Technologies and the vertical units in building out vertical-specific digital transformation narratives
• Niche acquisition activity, e.g. around data and analytics
• More onshore hiring, e.g. of solution architects, data scientists, vertical domain SMEs, etc.
• The creation (though unlikely in 2018) of a fourth vertical unit, perhaps manufacturing, or possibly media (though the acquisition of key account Morris by Gatehouse is causing a major dent in this business).

Summary

Sudhir Singh was appointed last May as CEO designate, taking over this January from Arvind Thakur, NIIT Technologies’ first-ever CEO, and now Board Vice Chair. In that seven-month period he was able to put in place some of the building blocks for the next phase of the company’s development, one where it can position on possessing capabilities across vertical domain, emerging technologies, and IA: three absolutely critical attributes for staying relevant to clients.

I was subsequently assured by HP ES leadership that its federal sector business would be an important part of the newco. I should, of course, be mindful of the fact that a business can switch from being deemed “core” to “non-core” at the moment it is divested.

Anyway, six months after the creation of DXC Technology, we have an answer: DXC Technology is to spin off its U.S. federal business and merge it with two Veritas Capital-owned businesses, Vencore (formerly the SI Organization, spun off from Lockheed Martin in 2010) and KeyPoint Government Solutions (provides background investigation services for federal government agencies formerly Kroll Government Services, acquired by Veritas in 2012), creating an independent, publicly traded U.S. government IT services contractor. As with the CSC/HP ES tie up, this is a tax-free RMT transaction, and Mike Lawrie will be Chairman. Is this a total surprise? Perhaps not.

Some Details of the Transaction

• The newco ownership will be 86% DXC shareholders/14% Veritas Capital
• Newco will pay $400m in cash to Veritas and $1.05bn to DXC. It will also assume $700-800m of Vencore debt
• DXC will use the proceeds to reduce debt, repurchase shares, and “for other general corporate purposes” (possibly M&A?)
• Veritas Capital’s Ramzi Musallam will join the newco board
• Newco CEO will be Mac Curtis of Vencore, COO will be Marilyn Crouther of DXC
• The transaction is expected to close by March 31, 2018.

DXC Rationale for the Transaction

DXC highlights that splitting its USPS and commercial businesses will enable each to focus on their respective market dynamics, optimize capital allocation, and “drive customer value through highly tailored offerings and services”.

The press release also states that combining USPS with Vencore and KeyPoint “will significantly strengthen USPS’ competitive position”. This is perhaps the more pressing factor. If we look at the performance of USPS in its Q1 FY18 (the one quarter that DXC has reported since its creation), it had a very low 0.3x B2B. This, obviously, is partly a reflection of lumpiness in large deal awards in the sector, partly a contraction in federal spend, and partly a timing issue (slippage in signing of a large award in the National Security sector), but it does also indicate a lack of competitiveness. 

The Newco: a Top 5 U.S. Federal IT Services Contractor

The table below summarizes approximate revenue and headcount for each of the three businesses.

Joining forces with Vencore and KeyPoint will add scale: as a $4.3bn firm the new company will be a top five (by revenue) U.S. federal IT services contractor, similar in size to SAIC and CACI, and not much smaller than (mostly former CSC business) CSRA.

We don’t know the margin profiles of Vencore and Keypoint but suspect that Vencore is at least on a par with USPS (11.4% segment margin in Q1 FY18); its portfolio includes some high margin offerings, also Veritas was looking for a buyer for Ventura in 2015, and is likely to have stripped out costs since. Certainly, in its investor presentation, DXC refers to “industry-leading profit margins”.

While neither USPS nor Vencore has been enjoying topline growth recently, the opportunities for the newco are likely to center more on revenue than on cost synergies, though there will be obvious ones, e.g. around HQ rationalization, also in applying automation to the KeyPoint business.

Vencore, for example, brings to the table capabilities in cyber (enhanced with its 2014 acquisition of Qinetiq North America), and analytics, as well as system engineering.

There is little client overlap: Vencore’s client base includes Intelligence and Defense agencies, whereas, outside its DoN NGEN contract (where the addition of Vencore may be an important factor in the recompete), the USPS federal client base includes the likes of VA, HHS and CMS. The newco will have both a broader portfolio and also access to a broader range of contract vehicles - as Lawrie highlighted, significantly strengthening USPS’ competitive position.

There is shareholder value in this transaction, but what does this mean for DXC?

The transaction will not mean that DXC becomes a commercial sector pureplay: it retains a large public sector business, both internationally and also in the U.S. state and local segments. Looking ahead we suspect further smaller-scale divestment activity may be on the cards.

Meanwhile, DXC continues to invest in expanding certain parts of its portfolio, this week announcing the tuck-in acquisition of Logicalis SMC, further strengthening the already extensive ServiceNow capabilities that CSC then DXC have been ramping up through a series of acquisitions.

We look to see whether there will be also be an increasing emphasis by DXC on certain sector plays, for example Insurance (for example Xchanging brought in insurance software IP and there is the big win a MetLife)): a heavily verticalized (commercial sector) focus has not been a feature of CSC nor HP ES in recent years, but within its GBS business, its Industry IP and BPS businesses could do with a shot in the arm.

Postscript

The initial title of this blog was: "DXC Spins Off U.S. Federal Business: State and Local Next?" However, I overlooked its acqusition of Microsoft Dynamics 365 specialist Tribridge, for which, its Q2 FY18 SEC filings reveal, it has paid $152m. Tribridge, now part of GBS, enhances its offerings and presence in the healthcare, justice, and public safety markets. And of course DXC has a significant presence in the Medicaid sector, with a practice currently included in the health unit of its Commercial segment. Mike Lawrie has sold off a U.S. public sector business twice now; acquiring Tribridge and then doing this for a third time (of units serving various state and local markets) is extremely unlikely. Once USPS is spun off, will we see more clarity about the various non private sector industry practices that currently tucked within Commercial?

NelsonHall recently attended the Infosys Confluence customer event. Last year the theme was covered in the interlinked motifs of Automation, Innovation, and Education (see here). This year, the theme evolved to ‘Unlimit’, which on the surface is more outward facing. We were not looking so much for an update on developments at Infosys over the last year (we cover these in our Quarterly Updates and Key Vendor Assessments on Infosys) as for updates on, among other things:

• Talent development in the services business/onshore U.S. hiring
• Developments in the products business, including with Nia
• New approaches to delivering innovation on behalf of clients.

This blog looks briefly at each.

The talent model

Onshore U.S. hiring: April’s NelsonHall QU on Infosys, covering its Q4 FY17 (see here), mentioned plans to increase onshore U.S. hiring: Infosys intends to hire 10k local employees over the next two years, and is setting up four development centers, the first in Indianapolis.

The intention is to co-locate innovation hubs in each of these delivery centers. While this makes sense from an internal perspective, we are surprised that there are no plans to set up small innovation showcase studies in key locations such as NYC that are closer to key clients.

Out of the 2,000 hiring plans for the Indianapolis center in FY18, Infosys has already hired around 800, of whom ~300 are campus hires. Infosys intends to leverage the local university system to do much of the initial training - last year its U.S. new hires had to travel to Mysore for training, and that is clearly not a realistic option as the U.S. delivery capability scales. Infosys will benefit from a major incentive package from the Indiana Economic Development Board, which will offset the investment required (around $8.7m) to set up a new facility.

Is this solely a defensive move in response to increased protectionism? Well, not quite: we noted in a former blog over a year ago that Infosys was intending to increase onshore recruitment at graduate level. It is of course also about being seen to be closer to the client in engagements that center on helping them in their digital transformation.

As well as grad recruitment, Infosys is also interested in personnel transfers from clients as part of outsourcing deals - what it somewhat clumsily calls “talent refactoring” - the type of transaction that other vendors have been doing for many years but one that has now gone out of favor with many. While this is one way of scaling up a local talent pool quickly, it also means an older, more expensive workforce (often with pension obligations) that will also need retraining in new technologies. Furthermore, Infosys has little experience in this.

There appears to have been solid progress in cultural transformation at the grass roots level through initiatives such as Zero Distance and Zero Bench. The latter has been a particularly innovative way to speed up development and experience for people on the bench and has also led to some useful s/w development activity. There has also been some level of delayering, with the focus for career development being on content leadership rather than on management advancement through span of control.

Putting all the software units under one head to drive Products business strategy and accelerate development

In our latest QU on Infosys, we noted two recent hires to its Products units:

• New CEO of the EdgeVerve subsidiary, Pervinder Johar (formerly CEO of Steelwedge Software. He is tasked with developing a channel route-to-market to be able to sell the software to a larger client base
• New leadership at Panaya, Jake Klein, whose key remit is to go after higher value opportunities.

These appointments follow that last year of Sudhir Jha (ex Google) as Head of Product Management and Strategy, and now also overseeing Nia. Like Johar, he is based in Silicon Valley.

Although his title at Confluence remains Head of EdgeVerve, it now appears that Pervinder Johar’s responsibility spans all of Infosys’ software units:

• EdgeVerve, which itself comprises two units:
  ​- Edge: when first set up as a subsidiary three years ago, the purpose was to collect software from Infosys projects which had repeatable uses and productize those assets. These assets form the core of the Edge suite of software assets, now overseen by Andy Dey (ex SAP)
  ​- Finacle: last year, its software and development assets were transferred to the EdgeVerve subsidiary, increasing its headcount from 650 to 6,500 at a stroke
• Nia (formerly MANA), we will discuss below
• Skava, the customer loyalty management s/w acquired two years ago
• Panaya, acquired last year

All in all, there has been a series of external hires for Infosys’ products businesses in the last two years, as Sikka looks to accelerate growth: last quarter these units contributed 5.5% of total revenues, a level that has not changed significantly, in spite of acquisitions such as Panaya and Skava.

The Products business is currently undertaking a product strategy, and development coordination & creation exercise, which started last month. The main goals include to:

• Create a software business strategy and development roadmap
• Rationalize development to eliminate duplication of effort, facilitate asset reuse, and coordinate interoperability of broad functionality
• Rationalize its organizational structure, while retaining independence of units where appropriate
• Identify cross-sell opportunities.

Development centers for (also leadership of) these units are located across three continents:

• Edge and Finacle products: Bangalore and Pune
• Nia: San Francisco Bay area and Bangalore
• Skava: Bay area and Coimbatore
• Panaya: Israel

Co-ordination is thus not going to be straightforward, although the unit leaders are meeting weekly until the end of June. The exercise is consuming a lot of exec time, including their entire seven days prior to Confluence, so this is evidently a very high priority.

There is a clear ambition to drive third-party commercialization of Infosys software assets. This will require building a channel network, including other SIs, something which would be much easier if it had more of an arm’s length relationship from Infosys. We think there will be other developments in Infosys Products business in the near future, and not just an ongoing acceleration in product development that we have noted recently.

Recent product development announcements have included those of:

• A blockchain-based solution from Finacle
• OECloud (Open Enterprise Cloud) an open source framework for rapid development of cloud-native enterprise applications, originally developed for EdgeVerve
• From Panaya, a SAP testing tool launched earlier this month, then, announced at Confluence, a new cloud-based ALM platform Panaya Release Dynamix (RDx), expanding the Panaya suite beyond tools that support work on ERP environments to ones that enable agile development environments

Looking under the hood of Nia

In a session with Vishal Sikka called “Under the Hood of AI”, he revealed that there were now 160 use cases for elements in the Nia platform: an impressive number, in our opinion. While the early use cases were for IT, the more recent growth has been in the number of business use cases.

How Infosys could potentially use Nia:

1. To improve internal service delivery within its IT infrastructure and applications businesses, what Infosys has for some time referred to as “renew the core”
2. Within its consulting and SI units to help clients improve their business processes
3. By combining the consulting capability with its BPS domain expertise to pre-build new digital-first business process models and then go to market with a managed services wrapper around these.

The first of these currently appears to be the primary focus. It is essentially a journey of automation being pursued by all services providers, and as such we question to what extent it will be a major differentiator in the long term.

The second of these requires strong consulting and industry domain capabilities in the GTM: and this does not appear to be a major focus for Infosys. In this respect, Infosys appears to be plowing a different furrow from many peers who are focusing on enhancing these capabilities.

However, there was a AI workshop on both Day 2 and Day 3 which were extremely well attended by clients. In these workshops, people identified, for their own organization, key areas for the application of AI, also the potential obstacles to implementing these (e.g. feasibility and change management). These workshops could, potentially, create significant new opportunities for Infosys downstream, providing their Products business links with the C&SI business.

So, let’s look at the third potential type of opportunity in leveraging Nia. We think this is the area where Infosys has the potential to come up with completely new software-led managed services offerings that could support clients in the kind of paradigm-shift innovation (business model and operational) that many organizations are now starting to ask for. But it would also make the BPS business more central to Infosys – and here we feel the current drive from the top is to focus on elimination of manual effort in existing business processes rather than on innovative process models that involve platforms (cloud-based) as well as analytics and AI and RPA. As such, we think this is an opportunity that Infosys is missing/choosing to ignore. There is a current drive to develop propositions to clients to help them progress from Walk to Crawl to Run to Fly (with the emphasis, of course, being on Fly proposals), but the thinking again does appear to be Technology first, Business Outcome second.

In this video blog, Rachael Stormonth, NelsonHall's EVP Research, discusses the birth of DXC Technology.

Financial information on the combined company can be found here.

NelsonHall's reaction to the news of the acquisition at its announcement can be found here.

Atos’ recent analyst and advisor day in Boston provided further details around the company’s three-year (2017-2019) growth ambitions that the company unveiled in November 2016. In a nutshell, Atos is targeting:

• CC/CS revenue growth of 2%-3% per annum (2016: +1.8%)
• An adjusted operating margin in the range of 10.5%-11.0% by 2019 (up from in 9.4% 2016).

More here about Atos’ 2017-2019 financial plans. NelsonHall covers Atos extensively in both its Quarterly Vendor Update program and also in its Key Vendor Assessment program.

Atos described several levers that it is pulling to achieve these financial objectives. These include SG&A spending rigor, M&A financial discipline, delivery automation and delivery industrialization (including a recent initiative on application management industrialization).

In addition, Atos unveiled several initiatives in support of its financial objectives including those focusing on:

• Service portfolio management, with a focus on its Digital Transformation Factory (DTF) portfolio, and cyber security, focusing on back office services (as opposed to front office work such as UX, and digital marketing agencies)
• Continued growth in North America (4.5% CC/CS growth in 2016)
• HR and retraining people to digital skills.

Service Portfolio Management

Atos has transformed over the years from a federation of geography-centric (GBUs) operations into a more global organization with global service lines. This is the case of Worldline, of Big Data and Security (mostly hardware and software products), of Infrastructure & Data Management (which groups IT infrastructure services and BPS). Increasing, Business & Platform Solutions (its C&SI businesses) is becoming global, starting with application management services.

With the adoption of a global structure, Atos has launched new global service offerings. Those global service offering also reflect the nature of the portfolio of Atos, which now includes software products (Evidian security), hardware (bullion enterprise servers and HPC), and for now Unify (communication software).

Atos is targeting hyper-growth in its four Digital Transformation Factory pillars (Canopy cloud computing, SAP HANA, Atos Codex, and Digital Workplace), aiming to grow from ~€1.5bn revenues in 2016 to €3.8bn in 2019, with SAP HANA and Digital Workplace expected to achieve a 2016-2019 CAGR of around 90%.

While these objectives are ambitious, they do include the market evolution of IT services e.g. from SAP ERP to the SAP HANA ecosystem and S/4 HANA.

The event provided more insights on various initiatives across the global services lines in support of the targeted growth.

Service portfolio innovation is critical to this: we are starting to see evidence of this with Atos offerings putting increasing emphasis on IP and accelerators. With Atos Codex, for example, the company is developing IP-based use cases.

Cross-selling is also on the agenda with Bull-branded hardware (bullion) optimized for SAP HANA. In the longer-term, Atos is has also positioned its HPC hardware processing high volume of data as the hardware that powers big data, working on expanding its HPC client base from its traditional research and weather company usages towards enterprises, with one French automotive OEM as the early example of this transition.

Innovation through partnerships with start-ups is also one of the routes Atos is experiencing to drive growth. Partners presenting at the event included Apprenda (cloud orchestration), Inventy (SAP processes performance benchmarking and optimization), and Cognicor (AI) (having transitioned from IPSoft’s Amelia).

With end-user computing, Atos is also using its Unify UCC subsidiary to cross sell the recently-developed Circuit into its end-user computing client base. Siemens, the largest client of Atos, and the former parent of Unify, is the largest client of Circuit with almost 400k seats deployed. Atos wants to transition clients from a voice and service desk centric approach to and end-user experience. Transformation in the form of professional services is very much a priority.

Across DTF, Atos is investing into automation, whether through partnerships or through its own IP. This is a work in progress, and Atos is likely to further invest over the coming years. Also, expect Atos to expand its DTF offerings to a wider range of use cases.

Continued Growth in North America

Continuing the positive momentum in North America is a priority. North America is now Atos largest region (€2.1bn revenues in 2016) and it has integrated and stabilized Xerox ITO, turning around several challenging contracts, and improving NPS significantly.

With the recent acquisition of Anthelio, expect to see further inorganic growth, with expansion of capabilities in its Business & Platform Solutions business a priority.

North America will rely on the DTF of the overall Atos, relying also on cyber-security, expanding organically and complemented by tuck-in acquisition (e.g. the recent acquisition of Pivotal services specialist zData, which brought ~30 personnel).

Offering verticalization is another priority: with Anthelio, Atos doubled its presence in healthcare, expanding into the healthcare provider sector. Anthelio was relatively large ($250m in revenues) and Atos in North America would like to replicate this vertical approach to other sectors. Priority sectors include retail and manufacturing.

Looking ahead, North America aspires to serve as the first mover for Atos, bringing new partnerships with the intense start-up ecosystem in the U.S. and with large partners. This is aspirational at this point, we think.

HR Management

Atos also provided some light on its HR policy and its effort at aligning its workforce to digital skills, still in the context of constant pyramid reshaping. The company is combining hiring from tier-one universities (1.5k personnel each year), identifying internally though analytics personnel with high potential, retention programs (with an objective to reach 95%) through career paths (5k) and its well-being at work programs, reskilling through digital certification (4k to 6k personnel each year).

Atos, which hold its event on the International Women’s Day 2017 is also targeting a big uptick in its women labor force. In the past four years, women have represented 26-28% of its headcount and the company wants to accelerate to reach ~40% by 2020. The company will achieve this objective by increasing its women hiring mix to 50%. This is a bold ambition.

Atos Has More Financial Freedom that in the Past

With an adjusted operating margin of 9.4%, and a net cash position of €481m at end of 2016, Atos has significant financial flexibility, while maintaining an annual spend of €300m on R&D. All rosy then? Of course not - Atos’ journey to a 10.5%-11.0% operating margin relies heavily on SG&A reduction through procurement rationalization and other TOP actions. Atos is a firm that impresses with its execution on cost management.

Evolution from European Services Player; Vision Centers on being Digital Leader

With the Digital Transformation Factory play and its gradual adoption of global units, service lines, and offerings, Atos is no longer a federation of European-centric firms and is becoming a more integrated firm. It is also no longer a services pure-play but a vendor that has a unique mixture of services, software and hardware assets that it has worked hard to shape into a coherent portfolio with a central positioning of supporting clients on their digital journey. Finally, we are seeing a much stronger focus by Atos on innovation - including through partnering with start ups - than we have noted in the past.

Dominique Raviart and Rachael Stormonth

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

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

Firstly, the enlarged business

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

In terms of:

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

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

Immediate priorities

These include:

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

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

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

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

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

So what about digital and innovation capabilities?

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

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

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

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

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

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

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

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

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

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

There is a clear drive to identify within the organization:

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

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

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

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

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

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

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

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

Regarding developments in Customer Management Services:

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

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

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

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

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

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

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

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

Staying with IT Services, David McIntire:

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

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

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

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

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

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

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

The importance of the U.S. to Capgemini’s reinvention was reflected by the decision to locate its annual global analyst event in San Francisco, where it showcased its latest Applied Innovation Exchange (AIE), opened four months ago. It is evident that the recently integrated iGate, also the much smaller recent acquisition (~60 employees) of Fahrenheit 212 are central to the future evolution of Capgemini on a global basis.

Top Priority: Integrating iGate

The fact that post IGATE, North America has become Capgemini’s largest geography and its headcount in India has reached 90k has been well publicized by the group.

When Hermelin shared the new strategic priorities for the group, as determined in the latest rencontre, integrating iGate was at the top. Hermelin was referring not so much to the types of cost synergies that are to be expected in a post-merger integration scenario of this scale, but to revenue synergies, in particular from having Capgemini gain from the IGATE approach to account development. Hermelin has publicly commented for some years that client intimacy was an area that needed strengthening, and leveraging the IGATE account management model, starting in iGate’s core U.S. market will be a major development in this respect.

As part of this focus on strengthening client intimacy, Capgemini intends to move to a vertical-led go-to-market structure, spanning all its service lines. The natural starting point is Financial Services, leveraging both iGate and the former APP.S 1 super-regional applications service unit (based on the former Kanbay, which had itself brought in offshore delivery capabilities and strong account management), and expanding the APP.S 1 go-to-market to cover all service lines, including IT infrastructure services (which has new leadership). This vertical-led go to market is also starting in Retail/Consumer Products with a cluster of around 10 global accounts. The intention is to develop and leverage best practice across the accounts and use the cluster as a platform for innovation and collaboration. This will be a major evolution for a group which has for years sought to move beyond its background of country-based fiefdoms with a series of global initiatives.

Another capability brought in by IGATE is its ITOPS platforms, in particular its IBAS TPA administration platform. Expect to see further investment in the next few years by Capgemini’s Business Services unit on BPaaS, in particular in selected BFSI sectors. It is also looking to leverage the Odigo multi-channel contact center platform, brought in with the Prosodie acquisition, in some of its BPO delivery.

Portfolio Development Priorities: Cloud, Digital, Business Services

The second on the list of strategic priorities for Capgemini Group as laid out by Hermelin relates to the portfolio, and he mentioned three areas: Cloud, Digital, and Business Services, all to be expected Capgemini estimates that cloud and digital services accounted for ~22% of its total revenues in 2016, and grew at over 23%.

This blog does not have the space to look at the offerings and developments in Capgemini’s cloud services portfolio, which enjoys the umbrella brand of “cloud choices” (we will be looking at this in our next Key Vendor Assessment on Capgemini).

Looking instead at Capgemini’s positioning today around Digital (to which more attention was paid at the event) it is evident that some progress has been made recently and that there will be continuing investment, again with the U.S. being at the heart of this.

Capgemini describes its offerings around digital transformation in four areas:

• Digital Customer Experience (DCX), launched in 2014, recently enhanced with the acquisition of German Salesforce specialist Oinio
• Insights and Data, launched 2015 (data collection; data conversion; also creation of platforms to manage insights and data)
• Digital Manufacturing: a new set of global offerings being launched around IT/OT, e.g. for preventative and proactive maintenance, for shorter, more agile product development. GE Digital presented at the event, and Capgemini is one of the early SI partners for GE Predix – expect to hear more about Digital Manufacturing in 2016
• Digital Innovation (Fahrenheit 212, see below).

It is developing and scaling capabilities in each of these four areas, and also intends to develop industry-specific focuses to each, starting with insurance and consumer products/retail. Capgemini is establishing digital leaders in each major geography, appearing to be starting with the U.S., and building teams in specific sectors

Innovation: AIE and Fahrenheit 212

Also key to building its market positioning around Digital and innovation is the concept of the AIE, first introduced last year. Capgemini currently has a network of nine AIEs, some of which have an industry focus (e.g. Lille and retail). San Francisco, which forms Capgemini’s basis for joint innovation with Silicon Valley start-ups, is the flagship. Most, if not all, of the larger IT services providers are building their own versions of innovation centers, and these can fulfil a variety of purposes. So what is distinct about Capgemini’s approach? The clues are in the first and third words of the AIE name: Applied and Exchange. Capgemini highlights, that the AIE approach comprises five elements, including the following three:

• A framework providing discipline to the design principles of “Applied Innovation” (speed, scale, safety, certainty)
• The AIEs being networked (rather than acting as individual labs), thus able to harness group capabilities, again breaking down any historic geo silos
• A global ecosystem (including 3rd party R&D, academia, tech start-ups via venture funds and PE partners, alliance partners, client co-creation)

Capgemini is placing considerable emphasis on building its AIE network. In general, innovation centers being opened by IT services providers are primarily intended to act as door openers, usually for new opportunities within existing accounts, and provide a format for partnering with tech start-ups. As well as the concept of “applied innovation as a service”, Capgemini is also looking for its AIEs to both extract innovation from and push innovation back into the group. This is part of the wider push to be more integrated in leveraging Capgemini’s assets globally, across both geographic and service line structures.

We also learned more at the event about the capabilities brought in to Capgemini by Fahrenheit212, acquired this February, an innovation strategy and consumer-centric design firm headquartered in NYC, with a smaller office in London, with ~60 employees. Fahrenheit 212 brings in a model it has developed for the development of innovative products and services for a client base that has included Coca Cola, Samsung and Marriott; also an entrepreneurial approach, often agreeing with clients a performance-based compensation model for projects. Now part of Capgemini Consulting, the expectation is that it will help strengthen Capgemini’s ability to position on innovation when assisting clients in their digital transformation. Capgemini claims that, rather than embark on a series of local acquisitions, it is looking to replicate Fahrenheit capabilities in other geos.

“Attract and develop the best talent”

This was third on the list of strategic priorities shared by Hermelin. Capgemini has shared for some years now various initiatives to flatten its pyramid structure and increase the way it uses India capabilities. Among the focus areas for 2016 that were shared were increased recruitments of digital technology specialists, and a reskilling plan in Europe, targeting ~1.5k employees.

Capgemini also anticipates that AIEs and other new types of workplace environment will add to its attractiveness as an employer of digital talent

Competitiveness: Push on automation at Group level

Every IT and BP services provider is on some form of automation journey; some are articulating more clearly than others what vendors and tools they have applied, are applying or considering applying for monitoring, to automate, to orchestrate, and also for cognitive automation.

At the event, Capgemini highlighted that

• Automation is a strategic priority for the group, led by the group Competitiveness function, and covering all its service lines, in particular operations
• Its approach to automation is disciplined and integrated, with a framework for “Intelligent Business Automation” that spans its operations services

We were shown some client examples and the benefits achieved, e.g.:

• In faster release cycle times through DevOps
• Incident reduction through application portfolio management
• In reducing cycle time and cost of quality and improving first pass rate through test automation
• In efficiency improvements through applying RPA to order processing

And using itself as a reference point for HR departments, Capgemini is also using IBM Watson internally for resource planning and fulfilment.

The reality is that at the moment, Capgemini (and this is true of every other IT service vendor that we have spoken to) cannot predict when that all important inflexion point at which the efficiency savings (ignoring the other benefits) from automation in its delivery of a managed service outweigh any committed price reductions.

Some 19th century literature (e.g. Henry James) looks at the push and pull tensions between the old world of Europe and the “new world” of the U.S. What is happening at Capgemini is reminiscent of this: Europe is where large skill reskilling is taking place and where the vestige of some old fiefdoms are still being removed; the U.S. is spear-heading developments that will lead to a rejuvenated and the new revitalized Capgemini Group that, aged 60, will look and feel less French, and at a time that, symbolically follows the passing of its founder Serge Kampf.

NelsonHall will be publishing an updated Key Vendor Assessment on Capgemini shortly, which will look in more detail at the group's priorities. For details, contact [email protected].

Twenty one months after his appointment, Infosys is on an upwards trajectory:

• The company finished FY16 with a strong Q4 (ended March 31), 15% y/y constant currency revenue growth, higher than TCS for the first time in many years. Full FY16 revenues were up 13.3% in CC, ahead of initial guidance; and the number of large deal signings continues to grow
• In terms of shareholder value, the introduction to Dr Sikka’s keynote address in this year’s Confluence user event in San Francisco reminded us that the market cap of Infosys has increased by over 40% (to $44bn) during this period
• Behind these headline figures, there is a palpable improvement in employee morale, and our perception is that client confidence is restored.

As such, the tone at Infosys Confluence this year was celebratory as well as visionary.

Using the interlinked motifs of Automation, Innovation, and Education, Dr. Sikka discussed some of the key initiatives started since his arrival, distinguishing between:

• Breakthrough innovation, e.g. the Aikido services launched last summer (which, at the time, we felt to be style over substance), and...
• Grass roots innovation, e.g. Zero Distance projects (where the aspiration in every project is to innovate from the bottom up) launched March 2015, and Design Thinking (DT) training. Both of these have scaled, with a rate of adoption that Sikka describes as ‘astounding’. Around 90k employees have now gone through a one-day DT workshop, and 8.5k Zero Distance (ZD) master projects are currently under way, with 500 client testimonials for ZD projects already gathered. Clients we spoke to who have experience of ZD projects were appreciative of what was described by some as a ‘free service’, while those with no ZD experience yet were keen.

The big new announcement at Confluence 2016 was the launch of a ‘breakthrough innovation’ like Aikdo: the Infosys MANA AI portfolio. MANA (which includes the Infosys Automation Platform), is not a platform, more a toolset of technologies and techniques such as ontologies, probabilistic networks & inference, NLP, machine learning & neural networks, rule-based automation, process mining & forecasting, discrete event simulation, and so on. MANA, we heard, is a Polynesian word meaning a pervasive supernatural power that flows through all things. As with the branding of ‘Aikido’, the spiritual interests of Infosys’ CEO are evident.

A key differentiator in Infosys’ approach to AI with MANA is that it starts by targeting L3 activities and identifying bugs in code (with some level of self-healing), rather than the conventional approach of starting by automating L1 and working up to identifying eligible areas in L2. Infosys proclaims MANA as ‘reinventing the reinvention of IT landscapes’.

MANA is already live with five organizations (including Infosys internally) and Infosys is aiming to have 25 use cases within a year. At Confluence, we heard about two use cases.

The first use case is in order management processing at an Australian telco client. Multiple systems are involved in order processing. MANA:

• Predicts when orders are at risk of being delayed/not fulfilled, identifying where a particular order is stuck within the  systems, and does some automatic code fixing (so preventing tickets). It also analyzes order pathways  to expose process inefficiencies
• Where it is not able to do self-healing, MANA consolidates sources of information (source code, system logs, run-time logs, defect logs, user interactions, etc.) and uses probabilistic models to localize the bug and indicate where a code fix is needed, showing the source code components and providing associated test plans.

Beyond the cost benefits, the client noted the benefits could include improved customer experience and increased speed to cash from faster order activations (self-healing orders getting a special mention), also the near real-time information on customer order status.

The second use case is Johnson Controls Inc. (JCI) facilities equipment (chillers, generators, etc.) on Infosys campuses. MANA is being used for predictive maintenance. Again, JCI noted that MANA offers advantages beyond cost, such as sustainability and reliability, etc.

Infosys is also applying Mana internally for travel & expense management.

With automation, Infosys clearly wants to be an early adopter, not a fast follower. It is still early days: Infosys’ revenue per capita declined in FY16, with committed pricing reductions still outstripping any cost benefits from automation. We asked COO Pravin Rao when Infosys expects its investments in automation and AI will begin to have an impact on productivity. Apparently, this may start in H2 FY17, and become more evident in FY18, as Infosys makes progress against its targeted $80k revenue per capita by 2020.

Another theme at Confluence was a focus on nurturing a mind set of ‘being improving’, a nice reflection of the fact that continuous improvement is critical to success in IT services and BPS. This was certainly apparent in our conversations with BPS execs.

Among our conversations with execs, we also discussed:

• Workforce plans: The move to automation and increased productivity is having a major impact on Infosys’ hiring strategy. While other BPS vendors are continuing to enhance their price-competitiveness via shifts in personnel to tier-2 locations in India, Infosys intends to largely retain its current delivery footprint in India and is not looking to add lower cost delivery locations there. Indeed, the company is also reducing the number of H-IB visa applications, intending to increase onshore recruitment at graduate level. The company is increasingly seeking benefits from client proximity and problem-solving backed up by automation rather than competing on people costs
• Infosys’ acquisition strategy: This appears to be fundamentally different from most other IT service providers currently. While nearly all say their acquisition strategy is IP-led, they are typically targeting IP at the enterprise application level within a target vertical. Infosys’ focus is on ‘horizontal’ enabling software and capabilities that can be applied to augment delivery across service lines and domains, much as it is doing with Panaya, now being used for testing services as well as ERP upgrades.

Infosys’ Zero Distance approach (and the detailed focus on the client’s business by delivery personnel that it demands) and MANA are both potentially significant differentiators for a company that two years ago appeared to have been in danger of losing its mojo. MANA could also potentially be a major differentiator in BPS services where Infosys is also managing the associated applications, though client acceptance of full-stack IT and BPO services remains limited outside of new initiatives such as BPaaS. This is the sort of initiative that Dr Sikka envisioned when he talked about making Infosys a ‘a next generation services company’. Infosys is in a hurry: there will be more.

With over half of its revenues coming from Managed Services (mostly IT infrastructure management), and Bull and Unify (the former Siemens Enterprise Communications) adding hardware, security, and middleware to its portfolio, it is particularly important for Atos to have a clear and distinct positioning within the global IT infrastructure managed services vendor landscape. This has not been the case recently.

Financially it has proven credentials. But in an environment where enterprises are contending with the huge disruption of digital, they are looking for more from service providers than delivery reliability, and management and financial stability.

In response, as summarized by its tagline “Trusted Partner for your Digital Journey”, Atos is now looking to position as a digital leader, in being one of the few IT services companies with the end-to-end IT services capabilities to support clients on their entire “digital journey”.

This positioning and breadth of capability is a particularly strong focus in the Managed Services (MS) business. The relish of MS head Eric Grall in having achieved organic (CP/CC) growth in 2015 was apparent (not many onshore-headquartered IT services providers are enjoying organic growth in MS at the moment).

MS has been busy, firstly with investments in automation and robotics in 2015:

• Having decided several years ago to standardize on ServiceNow for service orchestration for hybrid cloud management and ITSM, the investment kicked off in earnest in 2015
• Atos also embarked on initiatives to leverage autonomics solutions from Arago and IPsoft. It is currently doing three POCs putting Amelia in shadow of L1 operators for three months, aiming to use Amelia as a virtual agent for all L1 support and then to reinforce L2 support. The ambition is to achieve efficiency gains of up 50% in incident management and of 25-30% in service requests within two years.

Secondly, MS launched what it calls a hybrid “digital data center” with virtualized compute, network and storage, leveraging VMware. Atos is now offering clients a SDDC option for private cloud, with Siemens one of several early adopters. The SDDC approach shifts the emphasis from the infrastructure to the application workloads, which has several clear benefits to clients.

Thirdly, we heard for the first time about a newly coined acronym “EDGE” (Engineer, Design, Gather Enhance), Atos’ articulation of its approach to helping clients in their digital transformation.

So what does the EDGE approach mean as it applies to Atos MS?

• Engineer: having a common framework for the orchestration and management of the complexity of clients’ landscapes of legacy infrastructure, private and public clouds.
• Design (delivering a consumer-like experience to IT):  Atos’ ‘OneSource’ CIO cockpit, accessible on laptop and mobile devices, apparently includes project status and satisfaction metrics. Also the OneContact mobile app
• Gather: applying analytics for insights into automation of IT infrastructure management; we heard about a new three-year apparently exclusive arrangement with U.S. firm ClickFox around applying its CEA customer journey analytics platform to identify process areas for automation in end user help desk. This should both reduce costs and improve the user experience. While some of its competitors are showing less interest in EUC services, Atos sees  it as an opportunity for growth, with the addition of Unify adding to its offerings in UCC 
• Enhance: improving productivity/speed and delivering a consistent user experience across channels while reducing costs, e.g. shift left in helpdesk, the use of Amelia,

Atos has emphasized its capabilities in cloud orchestration across legacy and new environments for several years. EDGE goes beyond this; it should be helpful for Atos in going to market in providing a coherent overview of the breadth of its capabilities in MS.

In conclusion, deciding to standardize on ServiceNow is not in itself a differentiator, nor is leveraging IPSoft - using tools such as these will soon become “must-have” capabilities for any vendor to remain price competitive. The ClickFox platform (which to date has been used for customer journey analytics in sectors such as retail banking) is an interesting choice to apply to IT helpdesk processes. One Atos client I spoke to was particularly interested in it.

Furthermore, having an easy to navigate CIO cockpit providing real-time, drillable-down information is becoming a “must-have” for IT infrastructure management services providers; these are likely to have more bells and whistles added. Atos current version sounds relatively advanced, although we have not seen it. And there are some other MS providers able to offer an enterprise private cloud service (in addition to a virtual private cloud).

So the components are not unique in themselves, but applying all of them is distinct. When you tally up all these capabilities, plus the increasing global scale of Atos, it becomes increasingly apparent that Atos is one of a very small cohort of IT infrastructure services providers able to offer a full-service management across legacy and cloud environments, while assisting organizations in moving to cloud environments. Most of Atos’ client base was not “born in the cloud”; the EDGE approach appears to take a realistic approach to helping bricks and mortar enterprises in the digital transformation of their IT infrastructure.

Atos will formally unveil its “2020 Ambition” in Q4 of this year, but we were provided with a snapshot of its ambitions for MS. These included

• The introduction of new MS services, particularly around IoT
• Achieving 50% of its revenue from hybrid cloud and platform transformation by 2020 (currently <20%)
• Achieving a $1bn book of transformation services business.

A number of factors will make achieving organic growth in IT infrastructure management services ever more difficult over the coming years. Only the larger Indian oriented services providers are currently enjoying (very) healthy growth, but their capabilities do not generally include end-to-end management of hybrid environments with a private cloud offering. Atos’ MS business has been on a journey of transformation for several years; it is now articulating a clear roadmap for being at the forefront of next gen IT infrastructure management services in the years ahead.

While EDGE appears to have been coined by its MS business, expect to hear more about EDGE across other Atos global service lines.

************************************************

We also heard at the event, inter alia, about:

• Some workforce transformation initiatives (both recruitment and reskilling)
• New developments in other parts of Atos, such as the Atos Codex analytics platform
• The massive transformation program currently underway at Siemens AG (being done at speed: it started May 2015 and should be completed in December 2016). As well as the sheer scale of the transformation, there are new features such as Atos Resource Islands (ARI), a security offering for highly confidential systems
• Atos C&SI business. Expect to see the EDGE appear more prominently here too
• Developments in Worldline.

These all merit separate articles and will be discussed in the next NelsonHall Key Vendor Assessment on Atos.

If we look at Q4 2015 revenue performance in Cognizant’s two largest vertical groups:

• Financial Services, was up 16.6% to $1,308m, with the strongest growth in insurance
• Healthcare (includes payer, pharma, biotech and medical devices) was up 23.2% y/y  to $952m, with the strongest growth in life sciences

These two vertical groups accounted for 70% of Cognizant’s total revenues in Q4, and for 74.5% ($366m) of the company’s overall y/y topline growth.

So why did Cognizant’s share price take a bit of a dive following these results, and furthermore drag down some other stocks with it, before showing some recovery on Friday?

The fact that sequential growth, at 1.4%, was below that reported by Accenture and Infosys may have had something to do with it. At NelsonHall we largely ignore sequential growth, as it ignores seasonality impacts, which may vary slightly from vendor to vendor, depending on their client base.

But the main concern was over Cognizant’s soft guidance for Q1 and full year 2016. Revenue guidance for:

• Q1 2016 is in the range of $3.18bn - $3.24bn, y/y growth in the range of 9.2% to 11.3%
• Full year 2016 is in the range of $13.65bn - $14.20bn, or growth in the range of 9.9% to 14.3%: the expectation is for back-ended growth.

In providing some color on guidance, management highlighted softness in both major vertical groups:

• Financial services, in banking more than insurance, where some of its banking clients are “taking a cautious approach”, putting some projects on hold
• Healthcare, where the major consolidation that is playing out in the payer industry means that some of its larger payer clients are delaying IT plans until their merger plans are clear.

In financial services Cognizant expects to see some level of growth, but given some current project delays in banking, says it is adopting a “wait and see” approach, and until then being conservative in its forecast

In contrast, in healthcare CEO Francisco D’Souza claims to be feeling “very, very good” about the pipeline of large deals Cognizant has for 2016, many of these leveraging TriZetto. The expectation is that healthcare will have a slow start in 2016, with strong growth from H2 and into 2017.

Indian financial and business media was more alarmed by Cognizant’s references to softness in the financial services industry. At one point D’Souza commented “our expectation is that we continue to grow faster than (the) industry… certainly others in the industry I think will probably have some of the same outcomes in financial services that we do”.

In a pointed response to this, TCS issued an investor alert on the Tuesday referring to its own performance in financial services in 2015, pointing out that revenues from the Banking and Financial Services industry vertical in CY 2015 grew by 15% in CC terms, compared with 13.5% CC growth for the company overall, and that, on an organic basis, TCS' CC revenue addition of $1.85bn in CY 15 was “the highest in the industry”. In an interview with India’s Economic Times, TCS CEO N Chandrasekaran claimed “we have not seen anything negative with any client” and that “for financial services as a whole, it is going to be an excellent year for us.”

So why does one major vendor call out softness in BFSI and another major vendor make such positive comments? Has one of them got it badly wrong? Well, clearly not: they are obviously talking to their clients! But a vendor can refer only to its own client base, and to the services they themselves are delivering to that client base. As an indicator of the differences this can mean, where TCS has been suffering headwinds in recent quarters in its insurance business because of its Diligenta BPO unit, for Cognizant, insurance has been the growth engine in its BFSI business recently.

Every vendor today is emphasizing its capabilities in various areas of digital - but it is in the discretionary spend of their clients’ budgets that some vendors are now feeling the pinch. Having a strong outsourcing business delivering recurring revenues is clearly advantageous – and we note that Cognizant’s outsourcing services businesses have been lagging its consulting and technology services businesses, delivering just 7.6% y/y growth this quarter.

This leads us to the other area of softness called out by Cognizant: its healthcare business, which includes payer, pharma, biotech and medical devices. Recent growth has been driven primarily by continued strength in life sciences (which we estimate accounts for about a third of its healthcare revenues) but it is the payer sector that Cognizant has placed its bets, looking to leverage TriZetto to build a BpaaS utility. Cognizant continues to highlight that it is in advanced stages of discussions for some very large deals, that current issues are related specifically to M&A activity, and that it expects some of these deals to close from the second half of this year. To an extent, the consolidation happening in the sector makes a platform-based BPO offering more attractive to buyers. But will Cognizant build a true utility with TriZetto? NelsonHall research shows that while healthcare payers may be amenable to a BpaaS model for some industry-specific activities, as in other sectors, appetite for a true utility service (i.e. a multi-tenant platform model) tends to be low.

Finally, the company continues to generate lots of cash, nearly $700m in Q4, and now has over $4.5bn in cash and equivalents. As well as share repurchase, we may well see further acquisition activity this year, which is, of course, one way of returning to “above industry average” topline growth. It is in the public domain that Cognizant has walked away from negotiations for Dell Services (essentially the former Perot Systems, which has a sizeable healthcare business) because of price. A few weeks ago, Cognizant announced its acquisition of KBACE Technologies; will we see another acquisition announcement in the next few months?

NelsonHall will be updating its Key Vendor Assessment of Cognizant in the next few weeks. This is the most comprehensive profile of Cognizant available on the market. For details, contact [email protected]

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.

We are now approaching the end of the pool stages of the Rugby World Cup, which has 20 teams from across the world competing in this glorious sport. Teams from nations such as the U.S., Canada, Argentina, Japan, as well as established Tier 1 rugby nations such as Australia, New Zealand, South Africa, France, Ireland and Wales (poor England; for the first time in the history of the Rugby World Cup, the host nation will not survive the pool stage).

Rugby provides a great exemplar of what is needed for agile-enabled DevOps to succeed. I have outlined the analogy to a number of CIOs: all have been in agreement, if initially somewhat bemused.

So what can rugby teach the IT services market about an agile, continuous delivery approach to product development?

Let me count the ways….

1. A great coach: in rugby, the driving force behind the team’s motivation and behaviors, as well as identifying and making sure that all necessary training and skills development is provided to team members. A great coach and scrum master will always have a short, mid and long term strategy in mind and a specific game plan for each match. They also take the heat off the players when there is pressure
2. Multi-function, multi-skilled team: take a look at the height and weight of some of the players in the World Cup teams and you will see huge variations: some teams have players ranging from 1.75m to 2.08m in height, and from under 80kg up to 126kgs in weight. This diversity reflects the very different skill sets possessed: for example, by a flanker and the fly half, or a wing and the hooker (just to be clear, the hooker is the guy who “hooks” the ball when it enters a scrum!)
3. A great captain, who demonstrates leadership on and off the field, combined with a self-organized team that has been empowered through training and cultural affiliation
4. Collaboration, communication and sharing: essential for a team to succeed in rugby. Rugby tries are usually scored after a number of brilliantly executed (and oft-practiced) moves involving multiple players. The World Cup has featured some memorable tries where one player, having made a huge effort and nearly on the try line, passes the ball to a team-mate to ensure that the try is secured. There is no room in rugby for players looking for personal glory - success is very much a team effort. In the same way, collaboration, communication and sharing is also the bedrock of Agile development, in the analysis, design, development, and QA functions, and in DevOps, between development, QA, and IT operations.
5. Passion/common mindset/alignment to the game plan, with a clear view of the match (business) requirements: also essential for a team to succeed
6. Discipline and professionalism in approach: as well as passion, rigor and discipline are as key in agile development and in DevOps environments as they are in rugby
7. Scrums (which is where my analogy was born). Rugby law requires players in the scrum to drive straight-forward and square, a focused, disciplined approach that is also best practice for Agile. A successful scrum in rugby makes progress; an unsuccessful scrum collapses
8. Short sprints: often in rugby (not always) coming after a set piece such as a scrum 
9. Incremental progress/move fast: most of the time, a rugby player will advance just a few meters before they must pass or offload the ball. The team’s progress to the opposing try-line tends to be incremental and iterative in nature (the intercept and glorious long run to the try-line is a rare thing)
10. Fail fast/learn fast/recover fast: events during a match may require a slight adjustment to the planned game tactics. The best teams learn quickly, recover and adapt when planned tactics are not working. Teams that stick rigidly in these circumstances to planned tactics fail. Communication between team members (which may include new suggestions from the coach, relayed by a replacement coming onto the field) is critical for this level of adaptability
11. Post-mortems/continuous improvement: key to ongoing improvement, by identifying areas in need of improvement. Some teams have turned up at this World Cup clearly better in specific areas than they were even six months ago. And some teams have made progress from match to match
12. Automation: obviously key in DevOps environments, which heavily use tools, e.g. for release management, provisioning, configuration management, monitoring, and testing, But what about rugby? Well, each of the players is monitored closely during matches (each carries a sensor on their back). And the coach depends heavily on analytics (from training, of matches, of individual player performance, of competitors, etc.) when developing a game plan. Any other ideas for automation in rugby?

So there we are: the Rugby World Cup provides us with a template for agile and for thinking about moving to a DevOps environment. What do you think? Any more we can squeeze out of this analogy (perhaps on Transparency, or minimizing hand-offs, or the concept of the minimum viable product?)

I am, sadly, not too familiar with American Football, but there are some obvious similarities, and I imagine this might also be an exemplar. And with distributed agile often involving delivery from India, perhaps India should consider taking up rugby as a national sport!

P.S. In case you're interested, the team I am supporting is through to the quarter finals, but who will win the World Cup this time? Well, just to hedge my bets, I’ve got some Kiwi accessories and can claim family there.

Founded in 2006, VC-backed Fixnetix provides and operates specialist trading infrastructure for ultra-low latency trading. It claims its iX-eCute microchip is one of the world’s fastest pre-trade risk systems, capable of completing 20 pre-trade risk assessments in single digit microseconds. Fixnetix has ~85 clients - investment banks, proprietary trading houses, hedge funds, start ups and exchanges - and supports global interconnectivity to ~40 co-location and proximity data centers and trading access to 90 global markets.  Fixnetix is a Vendor of Record (VOR) and Network Service Provider (NSP) for the majority of low-latency exchanges across the world. 

Four years ago, Fixnetix, which was in fast growth mode, was considering whether to go it alone or to opt for a full or partial sale, in which case it would look for partners with whom it could sell its trading solutions around the world (in particular outside the U.K.)  Then in February 2012, NYSE Technologies bought a 25% in FixNetix for £17.5m ($17.6m) in an agreement which included the option to buy the remaining 75% stake by the end of 2015. However, after NYSE Euronext was itself acquired in November 2013, IntercontinentalExchange (ICE) began to sell off NYSE Technologies businesses and in May 2014 sold its 25% stake back to Fixnetix for a token £200. Fixnetix was thus again likely to be looking for a suitor.

But this is not a banker-brokered acquisiton: the two organizations already know each other. CSC has worked with Fixnetix for the past year, providing support in a $100m, six-year deal Fixnetix won last year with a U.S. investment bank. The investment bank, an existing CSC client for its central IT, outsourced its derivatives market-making desk to Fixnetix and selected CSC to provide support and scale. The client intends to extend Fixnetix’s coverage to all its trading desks over time. The key drivers of the deal were operational cost efficiency (the bank was looking for cost savings of ~30%), increased compliance, and multiple exchange coverage. 

In 2014, Fixnetix achieved revenues of £38.2m, and for the first time in its history it achieved a positive EBITDA (margin of 1.3%), with pre-tax losses down to £2.5m. While financial details have not disclosed, Fixnetix’s valuation is not going to be too dissimilar to what it was in February 2012. The largest shareholder in Fixnetix is Delta Partners.

So what does CSC plan to do with Fixnetix?

This acquisition is part of a broader drive by CSC to develop specialist as-a-service offerings in selected commercial sectors, with capital markets a priority - although CSC does not currently have a significant presence in the capital markets sector. As part of CSC, Fixnetix will gain the scale to be able to service a larger client base, and increased ability to target market participants around the globe. CSC will gain a presence in the capital markets industry and relationships with line of business execs, including in 85 firms who are existing Fixnetix clients.

CSC intends to develop a set of IT services and managed services offerings for the capital markets industry over the next few years; possible areas of expansion include services around cyber security, and big data & analytics. Other areas of likely development include partnering with consultancies and ISVs. At this point in time, the thinking does not extend to BPS offerings.

Declining product margins and increased compliance costs are making it necessary for the capital markets industry to consider outsourcing of front-office operations, for the first time in history. CSC has the operational scale for IT infrastructure services; Fixnetix brings a client base and a specialist capability that will make a real difference in CSC's efforts to penetrate the sector. 

Rachael Stormonth and Andy Efstathiou

NelsonHall recently published a detailed profile on CSC's capabilities on Managed Security Services, available to clients of our IT Services research program. 

• Revenues were $3,085.1m, up 22.6% y/y, and up 25.5% in CC
• EBIT margin was 17.7%, down 171 bps y/y but up 50 bps sequentially
• Adjusted EBIT margin was 19.8%, down 122 bps y/y, but the same as in Q1
• Non-GAAP operating margin, which excludes stock-based compensation expense and acquisition related expenses, was 20.2%, slightly above the target range of 19% to 20%.

For full details, see here.

CEO Francisco D’Souza describs Q2 as a “tremendous quarter”, delivering the strongest sequential revenue growth in dollar terms in the company’s history, and ahead of guidance.  This comes on the heels of strong performance in Q1.

And guidance for Q3 and full year 2015 is upbeat, in spite of the anticipated loss of $100m in incremental revenue in H2 from Health Net. Confidence, despite the impact of the restructuring of its contract with Health Net in the light of its imminent acquisition by Centene, is strong.

Cognizant expects that its 7-year $2.7bn MSA with Health Net for BPS, whch was due to commence in H2, will not now be implemented. The relationship with Health Net for other services will, however, continue; its existing AO and BPO contracts with Health Net, valued at $520m, have been extended through 2020. Significantly, one important aspect of the agreement with HealthNet has been retained, with Cognizant licensing some IP from Health Net which it intends to leverage with TriZetto software and Cognizant hosting and BPO capabilities in the development of platform-based offerings.

Consolidation on the healthcare payer market (Centene-Health Net; Aetna-Humana; Anthem-Cigna) means (after an initial pause in decision making) there will ultimately be winners and loser among the SITS and BPS suppliers to this market. Cognizant is more likely to be a winner. With deep domain knowledge, platform-based offerings based on the Cognizant-TriZetto platform, enhanced by Health Net IP, and offshore delivery capabilities, it is well positioned for a range of both C&I and also BPaaS opportunities.

Elsewhere, Cognizant saw 18.1% y/y growth in US$ from the financial services sector, now a $5bn annual revenue run-rate business. Cognizant claims to be seeing broad-based growth both banking and insurance, with strong demand, unsurprisingly, for digital-related services. The growth is strongest for project-based services.

Cognizant does not provide segment reporting by service lines, but in its commentary stated that each of its “Horizon 2” service lines – Cognizant Business Consulting (CBC),  Infrastructure Services, and BPS, delivered higher topline growth than the company average (the slowest area is likely to be legacy applications maintenance). Management highlights that CBC is competing against Tier 1 global consulting firms in many deals. Growth in BPS is led by the insurance, healthcare and financial services sectors.

Geographically, Cognizant saw growth across all regions, including Continental Europe, which remains spotty, in particular for non-European players. Its “Rest of World” segment is primarily India and Australia. Will we see further tuck-in acquisitions similar to Cadient (digital marketing services in U.S. healthcare) or Odecee (digital services in Australia)?

An immediate challenge for Cognizant operationally is improving attrition, which is trending upwards, now at 19% annualized. This follows a hiring spate throughout 2014 and Q1 2015 (~46,000 net additions). Cognizant has been expanding its graduate recruitment in the U.S. and Europe, and one of its challenges might be improving employee engagement and retention in this cohort. Utilization is down y/y (73% offshore, 78% excluding trainees) but up sequentially. The y/y decline is attributed to workforce re-skilling initiatives; the expectation is that utilization will continue to increase, which will, of course, help drive margin.

• Revenues were $2,256m, up 5.8% year-over-year (y/y) as reported, up 10.9% in constant currency and up 4.5% sequentially
• Operating income (EBIT) was $541m, a margin of 24.0%, a y/y decrease of 115 bps, and a sequential decrease of 173 bps.

See here for the full results

"I’m very pleased with our overall performance for the quarter” said CEO Vishal Sikka at the start of his prepared comments on Infosys Q1 FY 16 results. “This was the best (sequential) quarterly growth in revenue in the last 15 quarters and in volume growth in the last 19 quarters, excluding the effect of acquisitions”.

Our interest at NelsonHall, unlike India-based financial analysts, is on y/y growth rather than sequential growth (which is always going to be impacted by seasonality). In many respects this was a promising quarter, for example:

• Constant currency y/y growth of 10.9% is the highest for six quarters. Acquisition-related revenues (from Panaya and Skava) were around $7m so most of this growth was organic
• Annualized attrition was vastly improved from Q1 FY15, when it peaked at 26.4% for Infosys consolidated and 23.4% for Infosys standalone.
• All service lines, apart from (surprisingly, testing services) delivered y/y growth in US$ terms, and both application management and consulting/packaged implementation had their strongest quarter’s growth for several years. Infrastructure services, a growth engine for all the larges five IOSPs, continues to deliver double digit growth
• Revenues from the top 10 clients are up, in particular at the largest client, a high-tech giant
• During the quarter, Infosys signed six large deals (including some renewals/expansions) of which three had a LTV of >$100m each.

The push to strengthen Infosys’ sales engine and key account management appears to be bearing fruit already. Sales and support headcount at the end of the quarter was up a massive 16% y/y. The company has also been working on improving its approach to the RFP process, including through the application of design thinking. And the top 15 accounts now each have an exec sponsor.

Aspects that might seem less positive include:

• Annualized attrition (both for Infosys standalone and for Infosys consolidated), is slightly higher than it was last quarter. Some of this can be attributed to a seasonal effect for the June quarter (when some employees leave to pursue higher studies), but reducing attrition appears to be still a work in progress
• In spite of a benefit of around 60 bps from rupee depreciation, operating margin of 24.0% was down 115 pts y/y. This is attributed to wage hikes (7.5% to 8% for offshore employees, 2.5% for onshore) and increased visa costs. Sub-contractor costs have also been rising and are now 5% of revenues. The increase is due to needing to ramp up quickly for projects, either in skills that Infosys does not have internally or because of visa issues. As we are hearing with other vendors, training and re-skilling staff is a high priority. And while utilization is improving, it is still below the 83-84% that Infosys would like
• Revenue per capita is down, from $52.6k in Q1 FY15 to $51.7k this quarter. But the decline is much less than the 7.3% y/y decline in pricing for “traditional” services.

During the earnings call Sikka highlighted progress in various initiatives that will improve revenue per capita, including:

• Leveraging Panaya to increase automation in ERP upgrade projects and packaged implementation services: sold into 15 engagements this quarter, with a pipeline of 137
• Rolling out the Infosys Automation Platform to 10 infrastructure services clients, with people savings of 17% achieved in early pilots
• The Infosys “zero distance” to innovation initiative launched last quarter, where for every project the project manager is given a “five point innovation agenda”
• Acceleration in deploying automation solutions for application maintenance BPO services
• Traction in the Finacle and Edge units (software had its best quarter since Q3 FY14)
• Application of design thinking in 100 engagements
• Grass roots initiatives to improve employee productivity.

Infosys’ target for 2020 includes $20bn in revenues, 30% in operating margin, and $80k revenue per capita. Q1 FY16 performance is in line with the guidance for FY 16 of constant currency growth of 10-12% and an operating margin of 24-26%. What should we expect to see over the next few quarters? It is still very early days in the company's drive to achieve non-linear growth - to put things into persective, approaches like IIP, Panaya and Design Thinking are between them impacting less than 5% of all Infosys' projects. But as each of these begins to scale, their impact on overall margin performance may start to become more evident, perhaps by the end of this fiscal. Finally, with the increased investment in sales and key account management, expect to see more big deal signings.

• Revenue was $1,794m, up 3.1% y/y, and up 8.1% in CC (up 0.2% sequentially  in CC)
• Operating margin was 21.0%, down 1.8 pts y/y, and down 1.0 pts sequentially. Much of the decline is attributed to wage increases (7% for offshore employees).

(For full results, see here).

The 8.1% CC year-on-year growth achieved by Wipro this quarter is exactly what the company achieved in Q1 FY15, but lower than any of the intervening quarters. It continues to trail Infosys (10.9% y/y CC growth) and TCS (15.5%). And the 21.0% operating margin is the lowest since Q3 FY14 – so not an outstanding quarter.

Looking at the service lines, global infrastructure services continues to be the growth engine, contributing an estimated $502m in revenues, or around $59m more than Q1 FY15 – more than the $53m achieved across the group, indicating a net revenue decline in aggregate across the remaining service lines. But this growth engine has also seen a slowdown (we estimate incremental y/y revenues for infrastructure services were around $76m, $89m and $94m in the last three quarters). The only service line to see accelerating growth is product engineering services (we estimate around $17m incremental revenues), but it still contributes under 8% of global revenues.

In my years as an industry analyst, it has seemed to me that when a vendor keeps changing reporting segments for a service line or a vertical group, bad news is being buried (i.e. a service line or industry is underperforming). A year ago Wipro changed its service line reporting, and a new segment called “Advanced Technologies and Solutions” appeared, representing around 11.4% of total revenues. My expectation was that “Advanced Technologies and Solutions” would be one of the faster growing service lines. It was not. Wipro’s segment reporting for service lines has changed again this FY, and “Advanced Technologies and Solutions” has disappeared. All application services are now reported as a single segment “Application Services”, with revenue reporting for the “Business Application Services” business (which was delivering topline growth above overall company growth) now combined with ADM activities (which saw declining revenues throughout FY 15). The “Application services” unit accounts for nearly half total Wipro’s company revenue - and saw negative y/y growth of 3.4% this quarter. Much of Wipro’s activity here is legacy business, where pricing pressure generally continues to be a factor, as it has been for several years. Wipro, as a top five Indian oriented services provider (IOSP) should be in a relatively strong position to cope with pricing pressure. And, like other vendors, it is introducing automation. The recent expansion of the relationship at AIB to include application services is promising, but there need to be more clients like this… Wipro is not seeing revenue growth in its top 10 accounts, and although the number of $75m+ accounts grew by two this quarter to 17, there has been no substantial growth in the number of $10m+ or $20m+ accounts for some time.

What has happened with the BPO business? Three quarters of double digit growth, then two weak quarters (+1.4% reported growth last quarter, -1.1% this quarter). This deceleration appears to be due to ramp downs in a couple of contracts, but management highlights that ramp ups are about to start in some recent deal wins, also that investment in automation continues. With a new COO in place who has a strong background in BPS (Abid Neemuchwala), will we see investment in inorganic growth to expand the BPS portfolio and possibly global delivery capability? There have been rumors of interest in U.K.’s Equiniti (which itself has been on an acquisition spree under its new CEO), though there now appears to be stronger interest in Equiniti from Onnex Corp.(who recently sold its stake in Sitel).

Looking at sectors, retail and transportation had a relatively strong quarter, but revenues from healthcare sharply decelerated (has been achieving around 20% growth in CC, was 10.3% this quarter) as some projects ended: apparently some recent contracts will begin to ramp up in Q2. The energy sector has been Wipro's main growth sector for several years, and the slump in oil prices has had a major impact in the last two quarters. Management indicated that a return to positive growth is anticipated, coming from increased adoption of cost-driven outsourcing by clients.

In terms of geographies, Wipro has enjoyed two quarters of double digit CC growth in India and APAC/other emerging markets, which between them account for 22% of its global revenues. And the Americas (mostly U.S. business) continues to deliver CC growth of around 10%. But Europe continues to be problematic for Wipro. Like other vendors, Wipro has expressed an interest in strengthening its ability to serve the German market. Will we see M&A or client acquisition activity to support scale expansion in Europe, or will the focus be on growing specialist capabilities like Danish headquartered digital design agency Designit?

Although utilization has been improving, Wipro is still a long way from achieving non-linear growth. In spite of TK Kurien’s comments earlier this year about aspiring to improve employee productivity, it will be some time before automation initiatives have a noticeable impact.

Significantly - and promisingly - some of the 9.7% y/y headcount growth this quarter is in sales and support activities (up nearly 10% sin,e last quarter and up 12% y/y), indicating an increasing focus on sales and marketing (Wipro recently appointed a new Chief Marketing Officer). Will we begin to see progress in other accounts like AIB where Wipro has succeeded in growing its relationship very quickly? To service AIB, Wipro is settting up a center in Dublin and is taking on personnel; willingness for asset and/or personnel transfer would resonate in other large IT outsourcing opportunities in EMEA.

Generally, management tone was positive about the outlook for stronger topline growth in H2 FY16. Will this be acquisition driven, or will we also see stronger organic growth, perhaps driven by large outsourcing wins in the energy or financial services sectors? 

• Provide application development and management, and transformation and innovation services
• Set up a 200-seat facility in Dublin to house staff who will be transferring from AIB plus other local staff serving other contracts that Infosys has signed in the region.

State-owned AIB has been executing a restructuring program, which includes initiatives to improve organizational efficiency. Cost discipline remains an ongoing component of its strategy and it is pursuing a medium term target of a cost-to-income ratio of less than 50% (progress so far has been good: from a 76% ratio in 2013 to 55% in 2014).

Back in January, AIB stated that, as part of its restructuring plan to reduce costs and increase efficiencies, it was planning to outsource IT activities, with about 450 roles potentially affected as suppliers take over services. 

• Announced contracts to date have been for IT infrastructure services, with awards to Wipro ($150m mainframe services deal announced January, ~130 personnel transfer, with Wipro also setting up a center in Dublin), Eircom (~30 personnel transfer) and Integreon (security services, handful transfer). And in 2014, HCL took over some EUC services at the bank (~73 personnel transfer)
• Around 300 staff will be affected by the bank's outsourcing of applications services; most of these employees will transfer to Infosys and also to Wipro (the other ADM service provider selected by AIB).

Notable features of these awards include:

• The bank has selected Indian oriented services providers (IOSPs) for all its major IT outsources, and it had no previous significant experience of working with any of them. In contrast, the Bank of Ireland (BoI) last year chose a more familiar partner, Accenture, when it outsourced its group technology and change division (200 people)
• Infosys and Wipro are both setting up sizeable centers in Ireland to service AIB. This will have been one of the factors that will have helped in AIB's selection. And of course, Infosys and Wipro expect to use their centers to service other local clients
• In this contract, Infosys is to provide support to AIB for its digital transformation journey - as well as the operational efficiency focus, AIB (like other retail banks) is also increasingly investing in its omni-channel customer strategy. The bank has also had Accenture providing consulting services around digital transformation.

With reference to its $10m innovation fund being set side, Ireland has a significant Fintech market, which will be attractive to Infosys.

AIB also signed some BPO contracts in 2014: payments clearing to BancTec and learning services to Accenture. Are more BPO awards on the cards?

BoI's IT infrastructure management contract with IBM is up for renewal this year: Wipro and HCL will clearly be interested.

And for Infosys, it gains another banking organization as a major client for ADM services in Europe. Just a week later, Infosys also announced a major application services contract with longstanding client Deutsche Bank, who has selected Infosys as one of its strategic technology services partners. See here

(Details of all these outsourcing contracts are available to subscribers of NelsonHall's contract database).

(see our initial comments on the news of the HP break up here:)

At the HP Discover event in Las Vegas earlier this month, the last before the break up of goliath HP into two organizations - HP Enterprise (HPE) and HP Inc. (HPI) - CEO Meg Whitman (the future CEO of HPE) took pains to highlight the progress that has been made in preparing for and organizing the separation, including:

• The leadership structure and workforce advancement are completed
• HP currently has 12 board member (6 to each company); is in the process of appointing a further 12 to complete the two new company boards
• New partner-driven GTM approach in some markets
• HPE has a new brand (see below)
• A new PartnerOne alliance (like an airline alliance), with a partner playbook of FAQs
• Supply chain: 100% of direct suppliers and logistics suppliers have been contacted
• Automatic cross-license of patents across the two new HP companies (neat analogy of HP now having a “two car garage”)
• Separation of IT systems “the long pole of the tent”, Around 5,000 of HP’s internal IT department is involved in this program, one of the largest separations ever involving 570 projects, 2,800 apps, 75k apps interfaces, 50k servers, 6 DCs, one of the largest SAP estates globally, 172k SI tests for connectivity, etc. HP is documenting what it is doing
• The experience being gained in such a massive project is of interest to some clients…HP also has external client references for this: Del Monte, who executed its own split into two separate entities for its food and pet food businesses. Achieved in 8 months, HP ES helped separate the infrastructure using HP Helion Cloud; Del Monte now has a cloud first strategy HP ES also helped in the Kraft/Mondelize breakup.

HP expects to file Form 10 later this summer with an internal operational deadline of August 1, three months in advance of the Nov 1 deadline (new FY).

New Hewlett Packard Enterprise Logo and Brand: Green is the Color

The new logo has the outline of a green rectangle placed over the name of the company. Green stands out as being an unusual color for a logo in the IT industry, and it also has positive connotations of sustainability, growth, and profitability.  

In a rare blog post in April, Whitman wrote “We needed a design that would express our renewed commitment to focus and simplicity. And we needed a logo that would be as transformative, flexible and agile as we are becoming… Finally, the logo needed to work across all the ways we would use it.”

As well as the new color, the new logo goes back to the full Hewlett Packard moniker. At HPDiscover, Whitman declared that the logo brings out “the right legacy of HP and the exciting future ahead.”

Hewlett Packard Enterprise​ Positions on Four Transformation Themes

With HP Enterprise Services (HP ES) head Mike Nefkens acting as MC, execs from across HPE explained how the entire company is now going to position in GTM along four new “transformation areas” which between them cover HP’s view of where the market is headed

• Transform to hybrid infrastructure – servers, storage, cloud, DevOp, apps, even BPS, both traditional and cloud enabled. Helping clients manage their existing IT estate at lower cost while managing the migration to cloud
• Protect your digital enterprise (cybersecurity, also risk management, backup and recovery)
• Empower the data driven organization - big data and analytics; Haven architecture. Autonomy on Hadoop, moving to S4Hana. Also apps and business processes
• Enable workplace (why not workforce?) productivity - digital, mobile, SaaS, HP Networking importance of Aruba, implementing across HP for wireless infra

The intention is to pivot all of Hewlett Packard Enterprise around these four areas. Certainly, this was the most integrated presentation spanning HPE companies that we have yet seen, and is a clear development on the “services attach” approach that HP has referred to in previous years.  The 240 or so largest accounts in HPE are led by AGMs and the client approach appears to be more service-led (TS, PS as well as HP ES) than it has sometimes been previously.

The “cloud” word and the “new style of IT” phrase that have dominated HP ES presentations in recent years have evolved to “new style of business” (requiring, of course, the “new style of IT”). There appears to be a greater focus on understanding the client industry, while positioning as the “friend of the CIO”, for example bringing them lessons learned in managing the split.

The Idea Economy and Time to Value

In another theme in Day One, Whitman highlighted how in “the idea economy there are few barriers to let ideas to become realities (new capability, product, service, or even industry) in a world where IT … can be acquired as services”. Time to value is thus both the big challenge, and the big opportunity.

Two examples of HPE capabilities that underpin this time to market value proposition are in

• DevOps, for composing apps very quickly, using micro services
• Testing: a LeanFT automated testing tool. HP claims that LeanFT will identify defects in application code at the early stages of development when tweaking code is an easier process

Indicating Hewlett Packard Enterprise's commitment to open source (and HPE reaching out to the developer community) , HP announced Grommet, a OS UX framework for enterprise applications, which CTO Martin Fink claimed HP developed to address disparities in UX across HP products (it includes source technology for HP OneView). Fink highlighted that, in the spirit of open source, it is not being called HP Grommet

“Composable Infrastructure”: next gen “Converged Infrastructure” for the hybrid world

Fink also introduced the concept of “composability” (using the analogy of composing music) as applied to managing converged IT infrastructures, the focus of a multi-year initiative called Project Synergy. A “unified API” lets applications automatically access, deploy and then release compute, storage and networking resources - it treats infrastructure like code. Currently, applications running on converged infrastructure solutions like HP's ConvergedSystem can do so via an administrator or some other tool.

The HP Composable Infrastructure API works with configuration management and orchestration tools to abstract the compute, storage and fabric resource and provide these resources dependent on an application's performance, cost and security requirements. This gives a cloud-like flexibility to deploying and redeploying resources for both cloud apps and traditional applications. Part of the emphasis on “Transform to hybrid infrastructure “, HP presents Composable Infrastructure as enabling clients to bridge the gap between traditional and modern business applications, which need faster, more frequent upgrades.

HP ENTERPRISE SERVICES

Developments in Positioning and Go To Market

HP Discover also provided the opportunity for HP ES to give an update to analysts.

Mike Nefkens highlighted:

• The value proposition across the portfolio revolves around the four new transformation areas, noted above. This is a clear development on the “Advise, Transform, Manage” positioning of last year (see our comment here:)
• Work continues to improve profitability using the usual operational efficiency levers
• While selling costs are also down (18% y/y last FY, and under budget by 13%), HP ES is revitalizing its sales operation under Larry Stack
  • Sales force efficiency has improved
  • “Strategic Enterprise Services” (SES) signings in cloud, migration to cloud, security services, Apps SI, analytics and data management, industry solutions, have all seen double digit growth in signings. An entry point into a new client now is often security (where, for example, it used to be workplace services)
  • Win rates are improving (win loss rate is up 19 pts y/y, some of this from qualifying out early, with new business signings up 10 pts)
• Revenue continues to be impacted by contract run-off, EMEA and declines in traditional ITO, but performance is expected to improve in H2 FY 15. FY 2015 revenues are likely to be down 4-6%, and FY 2016 should be flat  (which is good compared to immediate peers)
• CSAT and client loyalty metrics are improving,  with Voice of Customer up 8%, NPS up 9 pts
• An ongoing reduction in the number of incidents (down 36% since Q4 FY12)
• The setup of the seven global practices as part of the drive to improve cross-selling.

Revitalizing Sales at HP ES

Areas of focus include:

• Getting sales execs to understand the client’s buying criteria
• Developing GTM collateral, use cases, references client presentations, brochures etc.
• Making it easily available, via a sales portal that provides access to a searchable database
• Training and certifying client facing teams by using Spartan belts (up to black belts) and leadership support and coaching. There has evidently been a huge focus on sales development at HP ES.

Other developments at HP ES include

• Co innovation with clients in “Lighthouse deals” (e.g. Workforce 360 with UK’s MOD, Virtual Private Cloud with DB) which H ES will seek to replicate.
• In a significant change, all practices have to have a client attach for a new offering
• A “Pathfinder program” with tech startups
• Investment in automation, including data center automation and RPA in BPS
• More noise about partnerships for solutions, e.g., security diagnostic assessments with FireEye.

Some areas that are still work-in-progress:

• The total cost of workforce as percentage of revenue is its lowest since FY 2010, but still several points above many competitors.  A large proportion of the $2bn cost take out over the next three years will be deployed on reducing labor costs through offshoring and pyramid management (see here )
• The seven practice areas remain under invested; reducing delivery costs has to come first. Will we see a closer alignment between the seven practices and the four transformation themes over the next few years?
• Partnerships, both with technology partners - expect to see news of an expanded partnership with Microsoft – and with consultants/SIs, to augment business consulting capabilities
• HP ES still has some ‘old school’ infrastructure management contracts that need attention.

All in all, while the next few years will continue to be a challenging journey, HP ES has achieved a huge amount in the last 18 months and is much better positioned to compete for the “new style of business”. And Hewlett Packard Enterprise as a whole is clearly working on going to market in a more integrated fashion.

What a difference in 18 months!

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

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

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

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

20:20:60 Targeted Change in Business Mix

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

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

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

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

What about the U.K.?

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

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

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

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

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

• While 2014 was a “transformational year” for Atos MS and Worldline businesses, Atos’ C&SI business has also been reinventing itself. 2014 saw good progress against nearly all of the unit’s three year financial targets
• Atos C&SI has been making substantial investments to strengthen its capabilities to support clients in their digital transformation agendas, with a revamped portfolio that increasingly has vertical flavors
• The articulation of four Customer Transformation Challenges (CTCS), the creation of the new Atos Digital unit, and “innovation workshops” are key developments in Atos’ work to position as a “partner of choice and trusted advisor” to support clients in their digital transformation.

…………………….

In April, NelsonHall attended an Atos analyst day which focused primarily on its Consulting and Systems unit, a €3.4bn business, accounting for 39% of Atos global revenues

• A year ago, we wrote about how Atos was making a “bold move” in the reorganizing of its Consulting and Systems units into a single organization and was preparing for the next stage of its evolution (see here).
• In a separate note, we also suggested that in its MS unit, acquisition to bring in infrastructure management capabilities in the U.S. was likely (see here).

2014 was what its management calls a “transformational year” for Atos, with three transactions started or finalized during the year:

1. The announcement at the end of the year of its agreed acquisition of Xerox ITO, which will expand its MS foothold in the important U.S. market (see our blog here)
2. The acquisition of Bull, also expanding its capabilities in MS and in cloud
3. The spin-off of Worldline, providing it with necessary strategic flexibility (see here).

Atos’ C&SI business was also busy, quietly reinventing itself while it pursues its three year (2014-2016) targets. C&SI head Francis Meston highlighted the progress that was made in 2014 against a number of these targets, including in:

• Revenue growth (+8.5%, but down 1.5% organic)
• Operating margin improvement (up from 6.5% in 2013 to 7.4%)
• CSAT and NPS scores:  achieving in particular a huge improvement in the NPS scores in H2 2014
• Global delivery (steady progress, but still some way to go in order to reach the 50%+ offshore ratio target for 2016.

Atos C&SI has also been making substantial investments to strengthen its capabilities to support clients in their digital transformation agendas, with a revamped portfolio that increasingly has vertical flavors. It also continues to work on enhancing customer intimacy and its ability to cross-sell.

These initiatives are causing some major shifts, both in portfolio and in go-to-market.

Increased Emphasis on Digital Across Atos

As part of a much stronger corporate focus on digital, Atos C&SI has redesigned its portfolio with offerings to support clients address their digital agendas. Atos C&SI now includes:

• Atos Consulting, whose offerings now include digital transformation consulting
• Atos Digital, a new unit set up in January this year with about 100 consultants; offers services in areas such as digital commerce and mobility, embedded software, CX solutions, big data & analytics, connected universe solutions
• Enterprise application services
• Application development and support services: Atos has been beefing up its DevOps capabilities, and claims it has 5,000 engineers trained on agile/DevOps.

With a stronger articulation on engaging with clients on their business priorities, Atos’ go to market approach to digital transformation centers on helping clients across four strands of what it calls ‘Customer Transformation Challenges’ (CTCs):

1. ‘Customer Experience’ (CX): personalized omni-channel interaction and integration; analysis and customer insight
2. ‘Trust & Compliance’: ensuring infrastructure, personnel and customers are secure and compliant
3. ‘Operational Excellence’
4. ‘Business Reinvention’: enhanced or new business models that take advantage of new digital networks.

There has been progress in matching the four CTC themes to industry challenges and priorities in each of Atos’ target verticals (Public & Health; Financial Services; Manufacturing, Retail & Transport (MRT); Telecoms, Media & Utilities; Energy & Utilities) - with CX, for example, connected living, connected health, connected citizen, connected car, omni-channel retail, etc.

Atos has been producing case studies of digital transformation achieved for clients across each of the four themes, all its target verticals, and spanning its portfolio. This work continues: expect to see more industry POCs and also further strengthening of vertical capabilities.

Reinforced capabilities in ‘Business Reinvention’ CTC theme

Recent investments that have strengthened existing or brought in new capabilities that support Atos’ offerings around the “Business Reinvention” CTC theme include:

• Cambridge Technology Partners, acquired last June brought in some personnel who have capabilities in digital marketing
• Business Technology Innovation Centers (BTICs), onshore in Paris, London, Madrid, Munich, Vienna, Utrecht and offshore in Pune
• Recruitment of onshore data scientists.

The “Business reinvention” theme refers to enhancing existing business models or introducing new ones that take advantage of digital technologies, data analytics and new digital networks to provide value in new ways and find new sources of revenue. The digital transformation consulting offerings from Atos Consulting vary from 20-day ‘digital discovery’ projects through to Proof of Concept projects (6-24 week duration) that are delivered by multi-function teams from across Atos.

Innovation Workshops

Another key strand in Atos’ approach to being able to support clients in their digital transformation is the “innovation workshop”, a high-level event at a BTIC attended by C-level execs from both the client and Atos with an agenda that looks at the client’s specific future challenges. With this approach, there is a clear drive by Atos to:

• Demonstrate to the client a deep understanding of their company specifically and of the challenges/ opportunities for their industry
• Convince the client of its capabilities around innovation
• Identify business opportunities with the client
• Subsequently deliver results fast through POCs or pilots.

Atos conducted 123 innovation workshops in total in 2014, including multiple workshops with strategic accounts such as Siemens, Airbus and ING. The top five innovation topics, reflecting the high proportion of workshops with MRT sector clients, were

• Economy of data
• Connected customer
• Smart mobility
• Industry 4.0
• Augmented reality.

These workshops are serving to strengthen Atos’ relationships in the account with key decision makers beyond its normal CIO relationship: this is particularly useful for MS accounts, and position Atos as an innovative partner. And of course, they also help build the pipeline.

Client Intimacy

Across its largest 150 accounts (which together account for 50% of total revenue), 70% engage with Atos for one service line only. While this might be regarded as surprising for an IT services provider with business consulting capabilities, it perhaps reflects that Atos has been a siloed organization. Bringing together consulting and SI into the one unit should assist in cross-selling, at least across C&SI.  Adding Bull and Xerox this year should also help in the ability to cross-sell.

Initiatives to improve client intimacy and increase the level of cross-selling include expanding the client executive role for major accounts. The client exec is responsible for a three-year plan for the account involving all of Atos and is now incentivized on cross-selling.

Co-innovation through digital POCs is also a key aspect of Atos’ focus on strengthening client intimacy.

Atos is certainly doing something to improve CSAT: there has been a huge improvement in NPS scores since 2013, which H2 2014 reached a level both ahead and above the 2016 target.

Talent Management

Atos C&SI also shared some aspects of how it is aligning its HR management to the digital agenda, in terms of:

• Workforce management
• Talent development, including a program of external certifications in areas such as agile/SCRUM, DevOps, S4HANA, SFDC, etc.
• Global delivery resourcing.

To date, few onshore-centric vendors have been as open about their approach to the critical aspect of skills development and workforce management.

All IT services vendors (that have application services in their portfolio) today are emphasizing ‘digital’ in their offerings. Some have been acquiring to gain new capabilities, for example around digital marketing; others appear to be doing little more than applying a touch of lipstick to their current portfolio. Atos may have been a little late in highlighting its capabilities around digital, but it is doing so wholeheartedly across all its SBUs. The creation of an integrated C&SI unit has been an enabler in portfolio development. So far, development has been organic - any acquisition activity is likely to be small and bolt-on. Expect to see production of more industry use cases around the four CTCs.

Finally, its partnership with Siemens, with whom Atos has been jointly developing an Industrial Data Analytics (IDA) platform, has the potential to position Atos very strongly for future managed services opportunities around clients’ IoT initiatives.

• 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”.

HP Enterprise Services (HP ES) will deploy HP Helion, providing data center services on-demand including storage, platform and hosting – activities formerly essentially done in-house. Deutsche Bank retains control of the IT architecture, application development and IT security.

The decision to outsource was driven by the client’s need to modernize its IT infrastructure and re-engineer its underlying technology platform globally to be able to support the introduction of digital services. A small number of the client’s IT staff will transfer to HP ES as part of the outsource.

HP ES’ Howard Hughes and Martin Southgate took the time to tell us a little more about this big win, also about other client news in the IaaS space.

HP’s previous relationship with the corporate banking division of DB was mainly around hardware and middleware. DB’s relationship was with HP,OHP not with HP ES.

The deal is global in scope, covering 10 countries including Germany, U.K., the U.S. and five major centers in APAC. The solution is essentially HP Helion for Managed Cloud, in due course featuring OpenStack. The fundamental cloud solution and the overall transformation methodology and approach are all HP standard, with some customization at the local level to meet local regulatory requirements around how DB uses the service.

HP ES highlights the sophistication of its approach to migrating to the new platform, in taking workloads from the current estate, which is essentially Wintel and Linux, plus some AIX and SPARC-based platforms, and moving some of the work into HP datacenters. One feature of this will be in how it will deal with the client’s current virtualized environment (about 20% of its estate is currently virtualized). HP will be “adopting” those environments, i.e. wrapping the existing set up with its automate tools to move them towards fully autonomous self-service.  So wrapping and adapting the existing environment before rolling out HP Helion will be a feature of the migration.  There will be annual upgrades to the solution during the 10- year contract with the first release going out some time this year, and the expectation that OpenStack will feature by 2016 or 2017.

HP ES spent “a significant amount of time” with the client doing upfront data discovery, getting to know the client’s applications estate, how different applications fit together, the various infrastructure components etc., to be able to automate more of the work around the migration onto the new cloud capability. The team then started to work through standard patterns for groups and applications.

The ultimate transformation to a fully cloud-based infrastructure (migrating workloads, building the cloud, rationalizing data centers, simplifying things) is expected to take around three to four years. When the procurement started around 18 months ago, the client’s focus was on software and product capability but over a period it became evident that outsourcing incorporating consumption-based pricing was needed if it were to generate both the savings and the speed of transformation it was looking for.

In the HP Q1 FY15 earnings call, CEO Meg Whitman referred to the “One HP” approach, led by ES and with EG enterprise group, software business heavily involved and to the pursuit having been “hard fought” (the final contender against HP was IBM, who is a strategic partner o DB’s retail division),

With a “heavy lifting” deal like this that involves multi-country data center consolidation and migrating very large mission-critical workloads, using automation for a lot of the apps discovery, onto hybrid clouds at a global scale, with enterprise class services across the cloud-enabled data centers, and supported by multi-lingual, multi-region service desks - - - there are very few vendors globally who can really take on this type and scale of transformational outsource. Being a safe pair of hands is absolutely critical in these deals, as is having the necessary toolset to facilitate the transformation in architecture.

IBM and HP have been investing heavily on building global cloud data center capabilities (and, indeed continue to do so) and are now starting to reap the benefits.

IBM recently announced large IaaS deals with the likes of Anthem ($500m), WPP ($1.2bn) and ABN MRO (multi-billion).

And HP is signing several other deals in the hundreds of millions, some of which will be announced shortly. It claims to have a very strong pipeline of large IT infrastructure management opportunities involving a migration to a hybrid cloud environment –- and also to be able to compete much better than it used to for smaller-scale end user outsourcing opportunities.

So where recent years have been marked by the rise of the competition from IOSPs (notably HCL, Wipro, TCS, and Infosys) in infrastructure management recompetes, we are now seeing a return of Big Infrastructure Outsourcing with large multi-nationals migrating to the cloud, often in order to be able to drive a digital agenda across their core production applications. And here the Big Boys with the requisite global cloud data center estate, the cloud automation tools, and the network management capability will once again be the victors.

This is perhaps why, with less than stellar quarterly results recently, IBM Global Services and HP Enterprise Services can be fairly bullish about the future. While cloud may have started in relatively safe areas such as in support of the end-user workplace and IT development environments, multinationals in sectors such as banking and telecoms are now increasingly looking at moving to hybrid cloud environments to support their digital agendas across their major business portfolios.

(Coincidentally, both HP ES and IBM GS have been focusing on realigning their BPO portfolios recently, but both appear to continue to struggle with their enterprise applications outsourcing businesses…)

(see also here)

• Topline growth: guided on 2-4% organic, delivered 3.4%, accelerating to 5.5% in Q4
• Net margin, guided on 0.3 to 0.5 pts improvement, delivered 0.7 pts to 9.2%. Capgemini should read 10% margin by early 2016
• Organic FCF: guided at above €550m, delivered €668m.

Also:

• Bookings were up 13% with a large number of large deals (over €50m).
• The number of offshore employees continued to increase, growing nearly 20% in India, and represented 47% of the Group headcount at the end of December.

Capgemini thus goes into 2015 with a sense of momentum.

With a lot of attention in recent years on driving the industrialization agenda and India delivery, Capgemini is now looking to position more strongly on its ‘innovation’ capabilities, e.g. the recent launch of a new global service line for Cybersecurity. Management highlights that in 2014, SMAC related revenues were up 25% to account for 14% of total revenues, so ~€1.48bn.

In Europe, Capgemini is seeing activity in Germany and the Nordics. It describes the general market situation in France as “still unclear”. In the U.K. the redesign of the Aspire contract will have a clear impact on topline in 2015. Previously pass-through revenues will now billed by the client directly to Fujitsu and Accenture. NelsonHall expects the impact in contract governance could be as much as 2.5% of revenue of Capgemini's revenues in 2015. The contract with HRMC is expiring in 2017 and in all likelihood, the client will move to a multi-tower contract governance. The Aspire contract will remain a revenue growth inhibitor for several years.

North America saw a good year in 2014, with 8.5% like-for-like growth and the highest profitability in the Group (12.6%). In North America, Capgemini is currently ranked #20 in terms of revenue. Emulating Atos, whose acquisition of Xerox ITO services business will increase its competitiveness in the country, Capgemini is openly looking to acquire in the U.S. this year, being interested in both domain and also volume expansion.

Capgemini has achieved a huge amount in recent years: it has completed its offshore transformation and has made substantial progress in its portfolio management initiatives: Strategic Global Offers are now a major contribution to both topline and margin. But, as we have written before, question marks remain about two of its service lines: Sogeti and Capgemini Consulting (CC), which also are its most cyclical activities:

• Sogeti is looking to accelerate its transitioning from a staff augmentation business to a specialized business, with testing, and to a lesser extent security, as key drivers. It is working on a new business plan to accelerate its focus on several key offerings
• Resuming growth at Capgemini Consulting will probably take some time: CC has been aligning around digital transformation and SMAC, mirroring similar activities in its Apps businesses. But so far this has not helped CC resume growth. Maybe acquisition in the U.S. could boost CC (with Capgemini very much wiser than it was back in 2000 when it acquired Ernst & Young).

Capgemini remains the only large Europe-headquarterd IT services vendor (and one of the few in the world, along with Accenture and IBM), which has achieved the transition to an India-centric model. Capgemini's execution on its execution demands acknowledgement - and financial markets are doing so: Capgemini's market cap is ~€11.3bn, representing a 2014 PER of 19.5.

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.

Atos is ending 2014 with a bang. Having completed the integration of Siemens IT Solutions & Services pretty darned quickly (certainly far faster and more effectively than naysayers would have predicted), it has proceeded this year to the carve-out of Worldline, a distinctly different business, the acquisition of Bull, which brings in HPC systems capabilities, and now today’s announcement of the Xerox ITO unit.

The price Atos is paying for the business appears reasonable in terms of multiples.

It appears that Atos and Xerox have been in discussions all year, initially around some kind of partnership. They have experience of working together: Xerox provides managed print services, HR and F&A BPO services to Atos, while Atos supports Xerox for some of its ITO work in Europe.

What does this mean for Atos?

• Its three-year “Ambition 2016” strategic plan is “to become a Tier 1 Global IT brand”. For this to happen, expansion in the U.S. is clearly critical. With this acquisition, Atos’ revenues in the U.S. will nearly triple, from an estimated to €1.7bn (>$2.1bn), and North America will move from 7% to 17% of its global revenue. The U.S. is important both because of the size and maturity of the market, and also because it tends to lead in the adoption of new technologies. NelsonHall estimates that Atos will become the sixth largest IT services player globally, and lessen its dependence (somewhat) on the comparatively soft European market 
• Since acquiring SIS, Managed Services has clearly been the primary focus for Atos: with Xerox ITO, MS will represent over €6bn (~$7.8bn) in annual revenue
• The acquired business brings in some offshore delivery capability – an area where Atos is still lagging:  it will gain ~3,850 resources in low cost countries, mainly in India, the Philippines and Mexico
• As well as bringing in new U.S. clients such as McDonald’s, Atos gains a sizeable new client with Xerox: two separate contracts with Xerox will together bring in $240m in annual revenue
  • In the first, which is to serve Xerox as a client, Atos will also benefit from Right of First Offer/first Negotiation on any new opportunities with Xerox – what is not yet clear is what this might mean for HCL Technologies whose 2009 data center outsourcing contract with Xerox is about to expire
  • In the second contract with Xerox, Atos will be picking up some business servicing some of Xerox’s BPO and Document Outsourcing clients.

While history has not been favourable to European-centric IT services vendors needing to penetrate the U.S., Atos has gained considerable experience in managing the integration of large companies – and it already has some local capabilities in the U.S.

What does this mean for Xerox?

• The assets being divested are formerly from ACS, and not its core BPO business. This should be seen as a portfolio management effort by Xerox, who is getting rid of a business that is now being described by Ursula Burns as sub-scale and that has been dilutive to margins (although it will be accretive to Atos margins). Arguably Xerox could have moved a little faster in managing the integration of this business: Atos will doubtless show more rigor. This year, Xerox has been more selective in the types of ITO deals it is pursuing, and while the business has continued to deliver topline growth, renewals and new signings have been down.  Xerox Services can now focus on a pure BPO and document outsourcing (which NelsonHall also classifies as BPO) portfolio, which will help with go-to-market and sales. And we should expect to see margin improvement as soon as the transaction is complete
• It potentially means new BPO opportunities in Europe, by targeting Atos’ client base
• Xerox will continue to partner with other systems integrators in its MPS business
• Xerox will use at least $400m of the proceeds from the sale of the ITO business to boost its M&A allocation for 2015 to $900m. This could support expansion in Europe and/or further industry-specific BPO development.  Certainly, we should expect to see significant acquisition activity by Xerox next year.

What does this mean for Atos and Xerox clients?

• Atos European HQ'd MNC clients will potentially be able to also be serviced by Atos in their U.S. operations
• Xerox ITO clients will potentially benefit from a large vendor with a global MS service line that has been able to invest, for example in automation technology, cloud, the Atos Technology Framework (ATF) and its zero incident program (ZIP).

Joint Innovation from Atos/Xerox?

One phrase in the presentation deck hinted at joint innovation: “a strategic collaboration geared to leverage both parties’ technologies and capabilities”. In theory, there is the opportunity for Atos and Xerox to jointly go to market for integrated ITO and BPO opportunities for new kinds of services in Europe and North America – next generation services that involve BPS and leverage big data/analytics/cloud/perhaps IoT technologies.  But Ursula Burns’ response to our question in an analyst call today indicated that the thinking at the moment is on cross-selling into each other’s client base rather on developing next-generation integrated ITO/BPO services.

In conclusion, our immediate responses are:

• A: Atos, a great move, over three years after acquiring SIS, less than a year after Bull. Atos has shown itself highly capable in acquiring, integrating and sorting out troubled, unprofitable assets (and Xerox ITO is neither of these): integrating Xerox ITO should be relatively easy, though separating some of the offshore assets that reside within Xerox campuses may take some time. In 2015, Atos in the U.S. will be of a similar size to Atos in Germany, Atos in France and Atos in the U.K. The acquisition will probably leave Atos with zero net debt: there are few onshore-centric vendors around who can make a $1bn+ acquistion without getting into net debt
• B: BPO pureplay. Xerox deals decisively with a lower-margin business and streamlines its Services business to become a pureplay (other initiatives for ITO would have required substantial investment)
• C: Clients of both parties benefit
• X: X for unknown. The jury’s out as regards future collaboration and joint go-to-market for innovative offerings. This could possibly have legs... but there is...

Earlier this month we attended Infosys’ U.S. analyst event and its Confluence customer meet in Orlando. Dr. Sikka was about 100 days into his role, and we were looking to see what developments there have been since September (and the Q2 FY15 financials call in early October) in the messaging about the company’s strategic priorities, also which new initiatives are already being implemented. Given the short time lapse, we were quite prepared for the possibility that we would pick up very little more beyond what has already been said by Sikka in various public addresses. But this did not happen.

In his keynote address, the messaging around “Renew the core business, innovate into new businesses” was consistent with what he said in September, perhaps more refined. But some priorities are now more evidently moving into execution.

Design Thinking: could this be a future big differentiator for Infosys?

Infosys recently conducted half day workshops on Design Thinking (DT, in which Sikka’s alma mater Stanford did pioneering research) for 5,238 of its employees, and aims to have provided for training for around 30k within the year. The implications of having a DT-trained workforce are potentially huge.

Sikka consistently emphasizes his belief in training, and refers to Mysore as one of Infosys’ ‘crown jewels’. He would evidently like to increase the level of ongoing training and development. This culture of training resonated well with clients to whom we spoke at Confluence.

There is shrewd business sense in this:

• As the more mundane rules-based activities are increasingly automated, it will be increasingly important to have a “bottom of the pyramid” workforce that is operating at a higher skills level. We believe that upskilling the entry-level workforce is potentially  a major future problem for some offshore-centric IT services and business process services organizations
• DT training could help in developing a workforce that is more confident  and more proactive in the way it approaches its work, for example in challenging clients and managers and suggesting better alternatives, rather than simply “doing as told”. This would represent a major change of culture (in India, the boss is always right). There will likely be early hiccups, particularly at supervisory and junior management levels. But longer term, it could help resolve an issue that has been a challenge generally for Indian-oriented service providers. And of course it has the potential to lead to the development of innovative services.

Role of Infosys Labs: Becomes More Immediately Central

Arguably, another of its ‘crown jewels’ Infosys Labs has recently had to trim the size of its workforce. Its head left at the end of 2013, and another head has not yet, as far as we know, been announced. – though two former VP execs at SAP Labs India have recently joined Infosys as VPs. We expect to see the level of investment in Infosys Labs increase, to enable it to pursue a clear remit to focus on automation, machine learning and AI, and develop IP that can be deployed in services lines to impact the way Infosys delivers its services.

Stitching together different offerings from across Infosys

In our last blog, we mentioned how the EdgeVerve subsidiary is operating in a startup-like environment. This should help in attracting talent (Infosys will be competing against the likes of Google), also in nurturing product development.  And of course it means that EdgeVerve can approach other SIs.

We wondered how Infosys was working to foster links between EdgeVerve and service lines such as PES and BPO to develop and then go to market with innovative offerings that are IP-based but services led – offerings around IOT, around big data and analytics, around the customer experience, and so on. Monthly meetings have already been established… though, of course, it is early days.

But we believe that the effectiveness of its approach to stitching together new offerings that leverage its technology and service capabilities, and services that might span current service lines will be a critical factor in Infosys’ longer term success. On its own, EdgeVerve will not be a major revenue engine for Infosys (unless Infosys decides to change its spots entirely and switch fundamentally from services to software) - but it does have the potential to be provide the IP that underpins a lot of future growth.

And of course, the focus on RPA and AI will help in delivering the kind of non-linear growth that IOSPs have been targeting for years. Since 'Confluence', Dr. Sikka has said he expects the company's annual revenue per capita to increase significantly above its current level of ~$50k within two years.

On a final note, during his keynote, Dr Sikka referred briefly to the “Infosys Information platform” for data processing, whch has open source components and Hadoop-based components, and to the concept of transforming the way that applications development activity is executed. We expect to hear much more about these in the next few years.

Let’s look at a few data points.

COMPARISON OF EXPENDITURE ON SALES & MARKETING AS A PROPORTION OF REVENUE: TCS, COGNIZANT, INFOSYS, WIPRO

N.B. TCS, Wipro and Infosys fiscal years (FYs) end March 31; FY 2014 ended March 31, 2014. Cognizant reports in calendar years, so we have used CYs 2010 to 2013 as nearest comparison years.

As TCS and Cognizant do not break down SG&A expenditure into S&M and G&A outlays, I have done some guestimates based on rough comparisons. If we take Infosys’ expenditure on G&A in FYs 2011-2012 (7.16% and 7.11%) as an indicator of what TCS and Cognizant might have spent, then estimate their G&A spend at a steady 7% in FYs 2013 and 2014,  then we get something like our estimates above.

Taking these estimates and looking at the actual topline increase in the last four years, the picture becomes very clear.

COMPARISON OF EXPENDITURE ON SALES & MARKETING AND REVENUE GROWTH: TCS, COGNIZANT, INFOSYS, WIPRO

Now there are some simplifications and estimates in what is essentially a back of the envelope job and it ignores any contribution from acquisitive growth. But the least acquisitive of these four companies during this period has been TCS.

Infosys and Wipro have now begun to loosen their S&M purse strings – and are perhaps encouraged by a better year in FY14. But they are both still a long way behind in their expenditure on S&M. Another back of the envelope guestimate says that TCS spent three and a half times as much on S&M as Infosys in FY 2014; Cognizant spent two and a half times as much.

Where have we seen the sales investments being most effective in recent years by the larger IOSPs? 

A lot of growth in FYs 11 to 13 came from the vendors account mining their very largest accounts (a reflection of where the wider market opportunities lay). And here Wipro, with just three $100m+ clients in FY 2011, was very much in catch up mode. In FY 2012, Cognizant overtook Wipro to the number three spot of the IOSPs, and generated $200m more in revenue. Looking at just their top 10 clients, we estimate that from them in that year, Cognizant generated an additional $306m; Wipro generated an additional $140m. Moreover, the difference in revenue contribution from their top 10 clients was $536m, whereas the global revenue difference between the two firms was just $200m. So it was all about the Top Ten.

Since FY 2011 Wipro has grown from three to ten $100m+ clients, so there has been tremendous progress in the last three years with its very largest accounts. But account mining in Wipro’s next tranche of its client base has not been as strong. Both Infosys and Wipro continue with initiatives to strengthen their client engagement model.

We are now seeing, as well as stronger client engagement, more evidence today of very effective sales hunting by some large IOSPs, with their scalps including some impressive large new logo wins. HCL has been particularly aggressive, ousting incumbents in some major IT infrastructure management renewals. Buoyed by some recent wins, Wipro is also gaining confidence in going after new accounts.

In summary, cutting back on S&M is an understandable, albeit kneejerk, reaction by some vendors when they have had a disappointing quarter. And I am still seeing this as a reaction in places, including at some of the smaller IOSPs. But, particularly when a vendor is looking to expand in a geography where it is relatively immature, or when it is trying to go to market with an enhanced portfolio, this is a reaction that smacks of lack of confidence and of boldness.

HCL’s growth in the last few years has been dominated by its IT infrastructure services business, which in two years has gone from contributing under a quarter to over a third of global revenues. In Q4 FY14, for example, IT infrastructure services accounted for (a NelsonHall estimated) 55% of the $179m in incremental y/y revenue. For FY 2014 as a whole, that contribution is over 67% of the additional $673m in revenue.

If we look at other service lines, HCL’s applications services businesses are delivering low to mid single digit growth; HCL does not appear to be responding as well as some of its Indian peers to changing market requirements in ADM and SAP services.Will we see actions in FY 2015 to revitalize its applications businesses, both for discretionary spend digital projects and also for larger milti-year legacy modernization engagements? Its engineering services business is doing a little better, but only at high single digit growth.

HCL’s only other service line which delivered double digit growth this year is BPO, culminating in a (NelsonHall estimated) growth of over 35% this quarter – but to put this into perspective, BPO represents just 4.6% of HCL’s global revenues. Nevertheless, BPO is punching above its weight, contributing over 10% of the y/y growth this quarter.

Growth this quarter was once again led by EMEA (where HCL has been winning IT infrastructure management deals in recompetes). HCL does not provide y/y revenue growth by region in constant currency terms, but sequentially, EMEA delivered an impressive 6.7% CC growth (for the company overall, it was 2.8%)

Changing our focus to verticals, growth this quarter has been absolutely dominated by the financial services sector, which we estimate contributed nearly 50% of the y/y growth (although it represents just 28.4% of global revenues). It is too early for the $400m IT outsourcing contract with Norway’s DNB Bank announced in May (where HCL ousts Evry) to kick in – but we believe the growth has come from other IT infrastructure management wins in the Nordics. We expect that financial services will continue to be a growth engine for HCL in FY 2015, and not just from the DNB win: HCL is targeting application modernization opportunities in retail banking, also in wealth management, SI opportunities around Avaloq’s range of wealth management products.

HCL is also seeing strong growth on its E&U and public sector vertical group, which accounts for just 10.1 % of global revenues but generated over 24% of the y/y growth this quarter.

In contrast, its healthcare and life sciences vertical group has had another very quiet quarter (we estimate 3.7% y/y growth); the strong growth achieved in FY 2013 has not been maintained this year, indicating that a lot of activity was project based (e.g. around ICD 10 transition).

Also, HCL’s high tech/manufacturing vertical group has had its weakest quarter of topline growth for some time. Growth has decelerated throughout FY 2014 (from an estimated 37.6% in Q1 to – a still healthy - 10.6% in Q4), as some large IT infrastructure management deals have bedded down.

So what can we expect to see in FY 2015: with three very large outsourcing wins this fiscal, the IT infrastructure services business will continue to be the major growth engine. We should also expect to see partnership announcements made this year (e.g. with CSC, Avaloq) translate into some application-services led engagements in the retail banking sector. Finally, expect to see a resumption of strong growth in the manufacturing sector.

NTT DATA Inc. recently held its first ever analyst day in Boston.

For those readers who may not be fully up to date of where NTT DATA Inc. fits into the NTT DATA organization: NTT DATA Inc. is the North American subsidiary of Japanese-headquartered NTT DATA, the largest IT services firm in Japan, which itself is a 54.2% subsidiary of NTT Group, which also owns NTT Communications and Dimension Data.

NTT Group has been pursuing an international expansion strategy for some time, to reduce its dependence in Japan and benefit from opportunities in other regions, in particular in North America and EMEA. As part of this corporate ambition, a series of acquisitions within the NTT Data organization have included:

• In North America, Keane (2011, 12.5k personnel of which 7K in India), Intelligroup (2010, ERP services, 2,500 employees, of which 2,000 in India) and last year Optimal Solutions Integration, a SAP services specialist headquartered in Irving, TX, revenues ~$170m, headcount of 1k, including 200 in India)
• In Europe, itelligence (Germany, 2008, €164m revenues, SAP services), Cirquent (Germany, former BMW captive) and more recently value Team (Italy, 2011, €308m in revenues and headcount of 3k), EBS Romania (2013, ~600 personnel servicing mostly Germany) and everis (Spain, 2014, €591m, 10.6k).  Everis, a major player in Iberia has also brought in delivery capabilities in LATAM which could potentially be leveraged by NTT Data Inc.

NTT DATA globally is today perhaps larger than many industry watchers are aware: revenues for FY14 are around $13bn, of which 21.8% outside Japan.  NTT DATA International revenues have grown from just $150m in FY07 to around ~$2.7bn in FY14.  The ambition is to reach ~$3.4bn by FY16 (or 25% of global revenues).  The long-term perspective in NTT DATA’s international strategy reflects a Japanese culture: the focus is on expansion rather than, at least in the short term, on margin: Q1-Q3 FY14 EBIT margin in NTT DATA’s international operations was negative, partly due to goodwill amortization.

A priority is clearly to absorb and integrate all its acquisitions to a federated region-centric structure that has several areas of coordination, evolving NTT DATA’s operating model from a holding company scenario. As part of its integration effort, NTT DATA has focused initially on North America, its largest market, where it has integrated Keane with Optimal and other smaller acquisitions into regional business with a single management structure and now goes to market under the NTT DATA brand. Elsewhere, brands such as Itelligence and everis remain – at least for the time being, although the EMEA region is also spearheading a “One NTT DATA” initiative across the region. Other initiatives that should help in both integration and ultimately margin improvement include setting up of shared services for some back-office activities.

NTT Data Inc: at the Forefront of the "One NTT Data" Inititative; Looking for Further Expansion

NTT DATA Inc. today is now a significant player in North America: revenues have reached ~$1.5bn. The company retains the application services centricity of Keane (65% of revenues): offerings include ADM, legacy modernization and testing (40% of revenues) and ERP services (25%). It has some proprietary software IP, in particular in the healthcare industry, for example a revenue cycle management (TCM) platform. Other offerings include cloud services (10% of revenues) with a professional service offering; BPO: 7%; and staffing: 7%.

Major longstanding clients include Honeywell, Morgan Stanley, Unisys; more recent big wins include Yum! Brands and Daimler.

Its sweet spot, in terms of deal size, for ERP and ADM services is around $5m, rather than larger deals. Having said that, last year NTT DATA Inc. secured one of its largest ever deals in the government sector, winning a sizeable $200m+) ITO deal at Texas Dept of Transportation (TXDot) over Xerox (see http://research.nelson-hall.com/search/?avpage-views=article&searchid=21640&id=200003&fv=2). A factor that helped it secure the deal was its ability to bring Dimension Data capabilities to the table for the network management services as part of the NTT family.  It has brought DiData into clients such as Honeywell. We would expect to see over the next few years an increasing focus on integrating various parts of the NTT Group (other regions of NTT DATA, or DiData, or NTT Comms) into selected target accounts. But the bread and butter business in the U.S. will continue to be on mid-single digit opportunities, including growing accounts brought in by Optimal

One thing that management highlighted was that NTT DATA Inc. has very few red accounts.

So what should we expect to see happening at NTT DATA Americas over the next year or so?

• Further inorganic growth, for any of the following
  - Increasing its domain capabilities in target sub-verticals, which include P&C insurance (a Guidewire SI capability would be highly desirable: but would also be highly attractive to other vendors; among the larger IT services vendors,  only Capgemini has so far built up a sizeable Guidwire practice) or healthcare payer
  - Expanding its geographical reach in North America, in particular the west coast or Canada
• Continuing to build its rural/near/onshore delivery capabilities. A BPO and apps support contract with Yum! Brands last year brought a 200-personnel presence in Louisville, KY which NTT DATA intends to leverage to serve multiple client and at least double in size (see our comment at the time of the contract announcement at http://research.nelson-hall.com/search/?avpage-views=article&searchid=21639&id=201928&fv=2)
• Increasing its focus on mid-sized, high-growth organizations such as Palo Alto Networks, where NTT DATA can be a strategic IT services partner and support the client in its expansion
• Replicating what it has done in Texas (where it spent several years developing relationships before winnng the TxDoT deal) to develop a presence in other states
• Acting as a central point for cross selling opportunities for NTT Comms and Dimension Data. This NTT Group approach is determined on a bid by bid basis and is not systematic
• Setting up and building R&D and customer experience centers in North America to showcase the IP of NTT DATA in Japan. The first, a new center in Palo Alto, CA, is opening this summer. This R&D initiative is in the context of the wider NTT Group

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Clearly, NTT DATA as a whole is taking a very systematic approach to its international expansion, with a long-term view. It has also been very pragmatic about its international expansion: the U.S. is the largest IT services market worldwide and has rebounded. Europe is a work in progress: NTT DATA now has a significant presence in Germany and Spain and will want to expand in other major geographies: the U.K. comes to mind as a key priority.

The core of the NTT brand is using IT innovations: did we see much evidence of that at the NTT DATA Inc. analyst event? Perhaps not – but for most, if not all, analysts there, the event was about getting to understand where NTT DATA Inc. is today. And we were convinced that this is an operation that has attracted many seasoned execs in its leadership and has the wallet and appetite for further growth, combined with a realistic sense of the types of opportunities for which it is well positioned in the short term. Looking ahead, opening up R&D and customer experience centers in the U.S. will provide the opportunity to bring capabilities from other parts of the other NTT Group to clients’ attention and to underpin portfolio development. And any acquisition activity will provide clear indicators of where and how NTT DATA Americas will continue its growth. 

Dominique Raviart and Rachael Stormonth

LMT continues to boost its civilian aviation capabilities to diversify from core defense and government sector business where revenues have been declining. IS&GS revenues were down 5% in 2013 to $8,367m.  Beontra is its second acquisition in this sector in six months, following that of Amor Group, a supplier of airport products and services last September. Amor had an impressive year in 2012, with 27% organic growth. It brought to IS&GS products in civil airport operations which complement IS&GS’ civilian pilot training capabilities that it acquired in 2011 with Sim Industries.

Around £110m of Capita's revenues will come from four clients that have already signed up to the framework for seven years. These four initial clients, which together represent 30 public bodies are:

• NHS Scotland
• Education Scotland
• Pathfinder North (5 local authorities)
• Pathfinder South (2 local authorities)

A further 11 organizations are planning to join in 2014, following final discussions.

This important win for Capita builds its presence in the Scottish public sector, currently restricted to its one-stop travel booking contract for the Scottish Government that came through the acquisition of Expotel in 2012.

Over the years, Capita has made a number of acquisitions to enhance its IT services arms. The acquisition that is most relevant to this deal is that of Carillion IT Services Ltd (CITS) for £36m in 2009. CITS brought Capita capabilities in Scotland and added scale to its operations. At the time, CITS had ~440 personnel, including 190 in Scotland. Capita can also tap into capabilities that came with  Synetrix, acquired for £75m in cash, also in 2009. These include the design and deployment of converged networks, hosted application solutions, managed security solutions and software platforms.

Capita and Updata beat competition from a joint Cable & Wireless and Virgin Media Business bid, and another by BT to win this contract. BT, which already supplies networking via N3 national communications network to NHS in Scotland, is less than happy about the outcome. It recently took NHS National Services Scotland (NHS NSS), which led the procurement on behalf of a consortium, to court for an allegedly flawed tender process. Media reports also suggest that BT may be suing NSS for £20m in damages.

SWAN has come out of the recommendations of the Scottish Government's McClelland Report and Scotland's national digital public services strategy Scotland's Digital Future: Delivery of Public Services. It should help the Scottish public sector achieve digital services, collaborate more and share data where necessary.

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]

In particular, we were keen to find out about developments to the portfolio, business mix, and target market. The Brazilian economy has slowed down (growth fell to just 0.9% in 2012), and other multi-national IT services vendors operating in the country, such as Accenture, have been taken by surprise by their lack of growth. For Capgemini Brazil, a highlight in 2012 was being selected by Caixa (the fourth-largest bank in Brazil) as its strategic partner for modernizing its IT systems, in a ten-year deal which involved Caixa's investment arm CaixaPar taking a 22% stake in CPM Braxis for BRL121m (~€48.4m), reducing Capgemini’s stake to 56.8%. Winning the Caixa deal was possibly a short-term distraction locally (in H1 2012, Capgemini saw no growth in Brazil), but strategically it means Capgemini can position as a major IT services provider in the Brazilian retail banking sector. We believe that Capgemini’s approach, offering Caixa a stake in CPM Braxis, was a more attractive proposition to Caixa, than one which involved setting up a JV.

The integration of CPM Braxis is complete. Could Capgemini have been more aggressive in developing its IT services business in Brazil (portfolio development, industrialization, GTM, etc.) after acquiring CPM Braxis? Possibly. Certainly, Capgemini instigated a strategic review of its LatAm business earlier this year. It was put under the leadership of Patrick Nicolet, with a view to defining a regional strategy. A new regional head for Apps and Infrastructure has been appointed, Walter Cappilati, who is relocating from Capgemini France to Brazil (Capgemini’s head of BPO in LatAm is well established: see here for our blog on our visit to Capgemini’s BPO center in Campinas http://research.nelson-hall.com/blog/?avpage-views=blog&type=post&post_id=98).

Capgemini is keen to increase the proportion of revenue coming from outside Europe, with North America (a good margin business for Capgemini) a major target geo. Its operations in Mexico (Apps, BPO); Colombia (Apps); Argentina (Apps, consulting); Guatemala and Chile (both BPO) are currently primarily nearshore delivery locations.

In LatAm, the primary focus unsurprisingly remains the large market in Brazil, where Capgemini has nearly 6,800 IT services personnel working out of seven sites (Alphaville, Brasilia, Curtibia, Porto Alegre, Rio de Janeiro, Salvador, Belo Horizonte), plus over 1,000 BPO personnel in two centers in Blumena, and Campinas), giving it a country presence in six key states. Brazil accounts for over 85% of the overall headcount in Latin America.

Within Brazil, the financial services sector, ~52% of total country revenue, is the key strength and focus. With Bradesco and Caixa as its two key clients, Capgemini is positioning on its ability to act as a strategic IT partner for applications projects such as core banking and insurance platforms (with the latter, using partnerships with Pega and Guidewire), and multi-channel initiatives, also in IT infrastructure consolidation and ongoing management. Capgemini is planning to draw on support from the group’s global financial services BU. As well as increasing wallet share in the current account base, Capgemini will also be targeting new large accounts, drawing upon its global account strategy.
In the manufacturing sector (MRD is ~16% of total country revenue, no significant change since 2010), the primary focus is on SAP AM opportunities and on the multilatinas in its client base such as Embraer and Grupo Bimbo.

Capgemini’s public sector business in Brazil has grown from an estimated 8% of county revenues in 2010 to ~13% in 2012. Client references include application development engagements for Military Police of São Paulo (the largest police force in Brazil and the third largest in Latin America). Capgemini’s focus is on opportunities around tax and welfare and public security (in Mexico as well as Brazil), and to draw on experience from other countries such as the Aspire program in the U.K. But in the short term, the presidential elections in 2014 will impact any new contract signings.

By service line, the priority is application services, and bringing in new Capgemini offerings such as Next Generation Application Management (NGAM, about which NelsonHall has written in a standalone vendor profile available to ITO program subscribers), SAP OnePath, and managed testing services. Capgemini has client references in Brazil for SAP OnePath (a regional toiletries distributor) and for testing services (mining company Vale). A number of recent hires in sales and pre-sales indicate a drive to accelerate growth in application services. Capgemini is also looking to improve margins, both from improving productivity (target is by 20%+ by 2016), also from relocating some activity from Alphaville (a suburb of Sao Paulo) to a lower cost location with a 20%+ fully loaded cost differential, probably to the south east of the country (a similar relocation initiative has been made by the BPO operation in Brazil).

With its IT infrastructure offerings, Capgemini needs to shift the mix of its business from product reseller activities to higher margin engagements that include deployment and management services, including as-a-service offerings (from IaaS and PaaS through to SaaS). IT infrastructure management client references include NET Serviços, the largest multi-service cable company in Latin America, for whom Capgemini is providing L1 and L2 service desk and field support for users across 70 cities. Capgemini has started work on leveraging global alliances: in February 2013 it announced an extension of its strategic alliance with EMC, with the launch of a joint go-to-market agreement in Brazil, primarily targeting the banking and agribusiness sectors.

With BPO, Capgemini is looking to develop go-to-market synergies with applications services: one area in the retail banking sector could be mortgage services. Accenture has already made a move in this market with the acquisition of Vivere (in October this year, see separate article): was Capgemini caught napping?

Overall, Capgemini is very well positioned in Brazil, with a portfolio that spans applications, infrastructure and BPO services and the ability to support multi-national clients operating in the region with their globalization agenda. There is no intention to build a consulting capability in the short term (this is not currently where the main opportunities lie).

There is clearly a renewed focus on Latin America by Capgemini. We expect to see accelerating topline growth in in the applications business from 2014, with margin improvement coming initially from relocating a significant proportion (we estimate 50%) of applications services personnel from one major center to a lower cost location. Another potential opportunity is blended global delivery: elsewhere in LatAm, Capgemini’s BPO business in Guatemala City has done this successfully in one area of F&A for one client, using India in some non-voice sub-processes. Capgemini may look at some blended global delivery in its applications services business in Brazil, a country which has the increasing challenge of labor constraints.  Short term growth is likely to come from activities such as SAP SI projects. Extending the application services business in the insurance sector is likely to take a little longer.

Transforming the legacy IT infrastructure business into a higher margin solutions-led business is likely to be a multi-year journey, one that will be helped by initiatives such as the joint GTM partnership in Brazil with EMC, also by strengthening local account management to target major MNC clients that have operations in Brazil.

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A year into the ‘Fix the Foundation’ stage of CSC’s multi-year turnaround program, GIS has been aggressively pursuing the corporate drive to rationalize the offerings portfolio (shifting from a historical tendency for services to be client-customized). Budzinski claims the GIS portfolio has been reduced from ~500 (mostly customized) to just 38 next gen standard core offerings across four offering areas:

• Workplace
• Datacenter and networks
• Platform, includes compute, mainframe and cloud. CSC has a storage-aaS offering based on EMC
• Enterprise service management.

For CSC’s total portfolio, the offerings have been reduced from over 1,200 to less than 300 in number, with more to come.

Other pillars of the turnaround program focus on driving demand and moving up the value chain, including through strategic alliances to develop scale in ‘next-gen’ infrastructure service offerings. These offerings are to be based on tight relationships with a few partners, with whom CSC is creating reference architectures based on pre-integrating software and hardware elements.

The big news from CSC last month was the announcement of a global partnership with AT&T which will involve:

• AT&T running CSC's communications network, also potentially CSC’s commercial managed network services clients. The contract is significant (NelsonHall estimates $1.5bn)
• CSC merging its cloud hardware infrastructure with AT&T's, providing global scale to its cloud offerings.  The aim is to minimize the level of capital investment in next gen datacenters by leveraging AT&T’s existing footprint. CSC is to deploy its BizCloud VPE service offering in several AT&T datacenters immediately. AT&T is to adapt its cloud IT infrastructure to CSC's own cloud offerings within 18 months
• CSC assisting AT&T (and AT&T's clients) in modernizing their application portfolio and moving those applications to the cloud. In a bold claim, CSC says it will achieve this for AT&T within approximately 18 months.

(See also http://research.nelson-hall.com/search/?avpage-views=article&searchid=393&id=200595&fv=2)

CSC highlights this is more than a loose joint go-to-market alliance; any new integrated services will be baked into the offering. This is a very early stage of the partnership in terms of joint R&D: CSC intends to launch internal pilots within the next few months and will then industrialize any new offering before going to market (a reflection of the stronger corporate focus on offering lifecycle management). But generally, the partnership will enable CSC to scale faster for cloud services. There is a clear emphasis across much of the portfolio on helping clients migrate legacy applications to the cloud.

A major focus is expanding the workplace services business: CSC currently runs 1.5 million end user devices (including mobile devices); its three-year target is eight million. Budzinski highlights the speed of provisioning and scalability of CSC’s virtual desktop offering – the aim is to provide a service that can “change the customer experience” at an attractive price to clients that can make money for CSC. This is a bold claim for a service that is generally price sensitive/low margin. The offering is on a stack that enables mobile/PC OS convergence) - something that is likely to be attractive to enterprises with large professional services mobile workforces. CSC is one of a diminishing number of global vendors actively interested in standalone end user outsourcing services.

So where is CSC’s GIS business looking to win the new deals that will return it to topline growth? CSC is doubling its sales force (see also our comments in Q1 FY 2014 results last month) and has implemented salesforce.com. For GIS, the sales force is both

• Cross-selling into the existing client base: currently only 10% of accounts are buying services from more than one service line, so the opportunity is immense
• Targeting large multi-tower IT infrastructure management contract renewals - and there are some obvious ones where AT&T is involved

Early signs are encouraging: in its Q1 FY 2013, GIS did $180m signings in TCV. Last quarter it secured $800m in signings, of which 10 were large deals - and at the other end of the sale, 785 deals had a combined value of £225m, showing CSC chasing and winning small deals. Overall with new signings, CSC claims to be seeing a strong shift to utility-based pricing.

CSC is bullish about recent successes in its cloud strategy. In its Q1 FY 2014, management highlighted 27% revenue growth in cloud services in the commercial sector, also that cloud deals accounted for ~30% of its IT infrastructure services signings in the quarter.

CSC has clearly been working very hard to rationalize and transform its GIS portfolio and is moving to a more asset-lite approach (leveraging EMC and AT&T partnerships) both internally in its datacenters and to clients. While CSC is not the only service provider attempting to be rigorous in portfolio transformation, it is moving fast. And the objectives are bold: with its 8m target, CSC wants to become possibly the largest vendor in the end user outsourcing space.

In some areas CSC has a job to change some negative perceptions formed from historic behaviors (reactive; not innovative; nickel and diming in large outsourcing engagements; execution that was patchy, particularly for mid-market clients). But it is clearly gearing up for changing patterns in buying behaviors.

Last month, our takeaway on the fiscal Q1 results was “...progress on cost take-out; too early to tell for future growth” (http://research.nelson-hall.com/blogs-webcasts/nelsonhall-blog/?avpage-views=blog&type=post&post_id=35).

At the end of our chat, Budzinski affirmed his confidence that GIS - and indeed CSC overall - will hit the next milestones in the turnaround program (details of the program laid out by Lawrie last year are provided in the NelsonHall Key Vendor Assessment on CSC).

Over the next year, expect to see:

• New cloud offerings coming from the AT&T/CSC alliance
• An increasing focus on industry-specific IP-based offerings coming out of the apps business, particularly in healthcare and insurance, the latter including BPO services.

Is CSC transforming its portfolio and its go-to-market?  Yes.

Will it pick up some of the major second and third generation ITO recompete opportunities coming up in the next few years? The AT&T/CSC alliance could potentially be a very useful weapon in some of these.

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

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

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

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