Yesterday morning, DXC announced its intended acquisition of Luxoft in an all cash transaction of $59 per share, around $2bn. This represents a 48% premium over Luxoft’s average closing share price over the previous ninety days (and ~86% premium on Friday’s closing price). The deal is expected to close by end June 2019.

In recent years DXC (including as CSC) has made a number of acquisitions that have expanded its ServiceNow, Microsoft Dynamics, and recently Salesforce capabilities and formed the bedrock of its Enterprise & Cloud Apps (ECA) practices. This is different: the Luxoft transaction is closer in feel to its 2016 acquisition of Xchanging, which brought in Insurance sector capabilities, or the more recent acquisition in the U.S. of Molina Medicaid Solutions. In all three cases, DXC is acquiring a company that has specific issues and challenges but that also expands DXC’s own industry capabilities; Luxoft will in addition expand DXC’s capabilities around Agile/DevOps.

Luxoft is a company in transformation

With revenues of $907m in FY18 (the year ended March 31, 2018) and nearly 13k personnel, Luxoft is a mid-sized firm. DXC is presenting Luxoft as a “digital innovator”, but it is a company that is grappling with significant client-specific and market challenges. Until FY17, it was highly successful, enjoying revenue growth in the range of 20% to 30%. FY18 saw a slowdown, still to a very solid level of 15.4% (of which we estimate ~7% organic), but FY19 has seen flat growth.

In particular, Luxoft has been hit hard by its dependency on the investment banking/capital markets sector, in particular on two clients: UBS and Deutsche Bank. Back in FY15 they accounted for over 56% of Luxoft’s total revenues (~$294m). Since then, Luxoft has been growing its share of wallet in other key accounts, and the combined revenues from clients 3 to 10 have increased from $123m in FT15 to ~$208m in FY18, a CAGR of ~19%, with clients 5 to 10 growing at nearly 30%. In FY19 Luxoft is expecting around 13% revenue growth from these accounts (to, we estimate, ~$235m).

But while it has been very strong growth in its other top 10 accounts, Luxoft has since FY18 been impacted by declining revenues at both UBS and Deutsche Bank (the later by 13.4%). H1 FY19 saw a 11% y/y decline and these two accounts now account for just over 30% of total revenues. Both have been insourcing some talent. While Luxoft believes that the UBS account is now stabilizing, Deutsche Bank is more challenged, and the account remains an issue: revenues are likely to decline by ~44% in FY19 to ~$90m, or <10% of total revenue, with a further contraction in FY20.

Outside these two, Credit Suisse is also a major client and Luxoft is clearly exposed to the slowdown in the European capital markets/investment banking sector. But elsewhere in financial services, there are much stronger opportunities in the near-term in the wealth and asset management sector, particularly in the U.S. and there is the potential for DXC to help Luxoft expand its presence in the Australian banking sector.

Luxoft has been looking to diversify its sector capabilities in recent years, in particular beefing up its offerings to the automotive sector, developing relationships, mostly in Europe, with tier-one OEMs and suppliers such as Daimler, Continental, and Valeo. Automotive & Transport is a hyper growth business for Luxoft, delivering nearly 43% growth in FY18, but for a company the size of DXC, this is a small business it is picking up: FY18 revenues were $158m. (FY19 revenues are likely be ~$220m, boosted by Luxoft’s acquisition of embedded software specialist Objective Software, which has brought in some U.S. client relationships. Some of these are large accounts (four of the top 10 accounts are in the automotive sector.  And one is a common account to both DXC and Luxoft.

In its Digital Enterprise unit, which is servicing all other verticals, Luxoft has been driving its offerings to more digital offerings, at the same time looking to reduce its exposure to low-margin work. Revenue performance in the Digital Enterprise Unit has been erratic with a strong performance in FY18 followed by a 13% decline in H1 FY19 though Luxoft claims to be confident that it has completed the transformation of the unit.

In brief, among the capabilities that Luxoft will bring to DXC we see:

• Significant agile development capabilities, enhancing DXC’s application services business.
• Some analytics capabilities
• Some product engineering services capabilities in the automotive sector, plus some experience in IoT-centric projects
• Offerings around UX design (in June 2018, Luxoft acquired Seattle-based design agency Smashing Ideas from Penguin Random House).

Luxoft has also been developing its capabilities in blockchain, an area where we suspect DXC has little experience, with pilots in the healthcare, government (evolving in Switzerland) and automotive sectors.

And, of course, Luxoft has a sizeable nearshore delivery capability in Eastern Europe. Luxoft’s delivery network has its roots in Ukraine and Russia. In reaction to the 2014 Ukraine-Russia crisis, the company initiated its Global Upgrade program with the intent of de-risking its profile and increasing its presence in other nearshore locations, in particular in Romania and Poland. Since FY14, Luxoft has decreased its headcount in Ukraine from 3.6k to 3.1k and in Russia headcount from 2.3k to 1.9k.  In parallel, Luxoft has significantly increased its presence onshore with now 1k personnel in North America and made its delivery network far less risky for clients. DXC highlights that it will be able to help Luxoft scale its delivery footprint in The Americas and India.

DXC is betting Luxoft will help accelerate its topline growth

While Luxoft has been grappling with declining margins – partly, but not solely due to the declines at Deutsche Bank and pricing pressures in other accounts – DXC is emphasizing the topline opportunities, rather than cost synergies. Given DXC’s track record in stripping out costs, we imagine Luxoft employees will be glad to hear this.

DXC is targeting revenue growth from:

• Luxoft achieving 15% revenue growth over the next three years
• Revenue synergies of $300 to $400m over this period, representing 1% to 2% of additional revenue growth for DXC

To achieve this, DXC is looking to cross-sell, for example, the:

• Product engineering capabilities of Luxoft to North American and Asian automotive clients and other sectors, e.g., high-tech, manufacturing and healthcare in priority
• Digital capabilities of Luxoft into DXC’s client base. DXC claims that all of Luxoft’s business is, by its definition, digital, thus adding nearly $1bn in revenues to DXC's own $4bn digital business, and expects to grow this $5bn business by another 20% annually
• Managed cloud and digital workplace capabilities of DXC into the Luxoft base (where, however, there are typically well entrenched incumbents).

DXC is also looking to broaden the use of Luxoft assets, taking FS and automotive capabilities and applying these to industries where Luxoft has not historically had a large presence. As an example, Luxoft has developed data visualization assets for FS clients, capabilities it believes that could be applied to other sectors.

How will DXC and Luxoft Integrate?

One key question is how DXC will manage the integration. In the short term at least, Luxoft will remain an independent company, retaining its brand and senior leadership (DXC intends to have retention plans in place for key Luxoft execs). For DXC to ultimately position as an end-to-end and global IT services organization, able to offer clients a full spectrum of services ranging from digital transformation advisory and concept testing through to IT modernization in all its key geographies and target markets, there will need to at least appear to be an integrated go-to-market and also a standardized global delivery operation that leverage this newly acquired assets.

David McIntire, Dominique Raviart, Rachael Stormonth

Unsurprisingly, given its investment in, and focus on, Watson, IBM declared at a recent Alliances Analyst Day that 2016 is 'the year of cognitive'.

The intent of the meeting was to look broadly at how IBM is working with its key alliance partners, including SAP, Oracle, and Microsoft, and it is clear that IBM’s focus is on incorporating cognitive capabilities and broadening the suite of industry-targeted offerings with each of its alliance partners. Here I take a look at how this is taking shape.

SAP

SAP is IBM’s largest and most mature alliance, with ~36k IBM resources focused on SAP. IBM perceived that its SAP offerings, and in particular SAP HANA S/4, were behind the market a year ago and has invested in improving its capabilities. In pursuit of this, IBM is working with SAP to expand and mature its offerings, particularly in digital transformation. Investments include:

• 40 resources from IBM and SAP collaborating on building out offerings
• $1m in marketing
• Two digital transformation centers (Palo Alto and Waldorf).

To demonstrate commitment, the boards of both companies have been receiving regular updates on the progress of these offerings. With a target for CY 2016 set at 50 new S/4 HANA engagements, as of June, the companies had already signed 52 new engagements.

IBM is positioning against its end-to-end capabilities, in particular its capabilities in digital and enterprise application services, and especially large, complex engagements spanning multiple offerings requiring flexibility of financial approach. One of the case studies presented was an engagement in which IBM was brought in to complete an SAP migration that had hit problems.

But its biggest focus area and differentiator is its ability to integrate cognitive capabilities on top of SAP functionality tailored to specific industry requirements. Given IBM’s focus on cognitive solutions and the relative maturity of Watson capabilities, layering cognitive directly on EA solutions can act as a differentiator versus other IT service vendors, focusing their machine learning capabilities internally to improve processes such as application development and incident management. An example is the integration of its MetroPulse product with S/4 HANA Retail, to leverage cognitive capabilities (including data from the Weather Company) that enable retail companies to identify hyper-local demand and adjust inventories appropriately.

Oracle

IBM’s Oracle practice represents its second largest EA alliance. It has certified ~1500 resources in Oracle Cloud applications, with a target of 2k certified resources by end of the year. Over 5k resources have received training virtually from the Oracle University.

IBM is working with Oracle to develop horizontal Cloud Enablement offerings and has so far developed the following:

• Budgeting and Planning Cloud
• CX Sales Cloud
• CX Service Cloud
• ERP Financials Cloud
• HCM Cloud
• Innovation Management Cloud
• Procure to Pay Cloud
• Procurement Cloud
• Source to Contract Cloud
• Transportation Management Cloud.

This investment in resource skills and offerings has begun achieving results, with IBM realizing a 275% increase in Oracle cloud services YoY. It has 50+ Oracle Cloud engagements across 30 clients currently active, and cloud engagements represent 20% of its total Oracle EA revenues in H1 2016.

As with its SAP offerings, IBM is focusing on embedding cognitive capabilities and developing industry-specific digital transformation offerings with Oracle. It is building out 30+ offerings across ten industries such as Oracle Banking Digital Experience, Cognitive Electronics, Digital Retail, and Insurance on the Cloud. Additionally, it is looking at integrating Watson and Oracle to create new offerings to be formally launched in the coming weeks, including:

• Watson Procurement Intelligence
• Field Tech Services
• Talent Advisor
• Financial Smarter Advisor.

IBM is targeting 7% revenue growth across Oracle EA offerings through the end of the year, as well as growing to a total of 45 Oracle cloud clients.

Microsoft

IBM’s newest EA alliance is with Microsoft, a partnership that is ~2 years old. IBM views its Microsoft offerings as providing, unlike Oracle and SAP, a means to target smaller and mid-sized companies. IBM’s Microsoft practice has ~4,400 resources, and 75% have received Microsoft certification.

An example of IBM’s commitment to growing its Microsoft practice is its recently announced acquisition of Optevia, a small U.K.-based consultancy (~40 FTEs) focused on helping public sector clients implement Microsoft capabilities. While Optevia’s footprint is primarily U.K. and Europe today, it is expanding with an engagement in the healthcare space in the Middle East as well as pursuing work in North America, Spain, and Southeast Asia.

IBM’s Microsoft group spans Microsoft offerings across big data and analytics (Power BI), enterprise applications (Dynamics, AX, CRM), mobile enterprise and collaboration (Office 365, Lync Server, Skype for Business) and application development and cloud (SQL Server, .Net, Visual Studio, Azure).

IBM’s Microsoft offerings leverage cognitive capabilities across a number of industry verticals, including:

• Banking CRM
• Insurance CRM
• Constituent Engagement (Local government essentials)
• Auto Retailer
• Next Generation Field Services.

One particular area of focus beyond the expanded integration of cognitive capabilities is Surface Business Transformation, an initiative to leverage Surfaces and develop enterprise applications for them based on Windows 10. An example of this is what IBM refers to as a ‘Meet and Greet’ app. For example, rather than a bank waiting to interact with customers once they reach the teller window of a bank, an associate armed with an enabled Surface can meet them at the door, pull up their information (as the Surface connects to a CRM server in the back) and provide immediate guidance and support. IBM is the exclusive Microsoft partner for the banking, retail, and consumer packaged goods industries.

IBM is also looking at building out its cloud and application management capabilities in support of these offerings.

Cloud

With cloud hosting and management a strategic priority for IBM in addition to cognitive, IBM is looking to integrate its cloud services with its alliance partners. One facet of this is IBM’s introduction of Cloud Management Services for SAP and Cloud Management Services for Oracle. These services integrate IBM’s cloud managed services, including support and uptime service levels, with SAP and Oracle software.

IBM is trying to move cloud discussions beyond the IT department. It is slowly seeing business executives engage on cloud projects and it sees the presence of a change agent as a key driver for realizing the value of cloud investments. Case studies discussed included new senior leadership coming in and divestitures as examples of drivers that resulted in the transfer of workloads to cloud environments.

Application Management

While IBM’s traditional application management business may not be trumpeted as frequently as its strategic imperatives, application management still accounted for ~19% of revenues in Q2 2016 and those services are evolving to take advantage of the new capabilities offered by cognitive.

IBM introduced its Agent Assist around a year ago to its support teams or us in to diagnosing and resolving incidents. EA is a key target area for Agent Assist, and IBM has built a standard knowledge base across SAP that can be implemented at the onset of an engagement and then expanded over time with client-specific information. Agent Assist is being deployed across 500 application management services accounts with over 5k resources are being trained on it. The next step will be a fully cognitive automation platform that not only identifies the resolution to an incident but is also capable of resolving incidents without human intervention.

For application development work, IBM is introducing Coding Assist, to facilitate developing common code blocks for ABAP, BI, and HANA.

These technologies are not intended for IBM consumption alone, though; as their maturity increases, IBM is looking to turn these into client-facing as a service products.

In line with these requirements, Capgemini has introduced Digital Fabric, an application development delivery solution supported by my3D, a virtual visual management toolset.

The core of Digital Fabric is design thinking, agile development, smart testing and DevOps and is intended to address the inherent friction that arises in each phase of the delivery lifecycle by weaving a common thread across disparate groups, including:

• Requirements & Design: between IT and business groups in understanding the business value while defining requirements and creating designs
• Build & Test: across a distributed development team, as well as test and operations, including around ensuring test coverage of all critical functionality.

Requirements & Design with RDV

Rapid Design and Visualization (RDV) is a methodology to accelerate the discovery, definition, and validation of requirements through applying design thinking principles, scenario and persona development and rapid prototyping. The methodology includes:

• Defining scenarios: based on analysis of existing personas and usage requirements, critical scenarios define the core requirements for the new or modified system
• Creating and validating screen layouts: using market leading tools such as iRise to quickly develop wireframes and screen layouts as well as define user interactions
• Functional simulations: conduct simulations to test that prototypes meet requirements
• Generating documentation: used as inputs to both the development team as well as the test team, reducing the effort to kick off each subsequent lifecycle stage.

The core of RDV is quickly defining and prototyping products through the building of wireframes and screen layouts. Tools such as iRise enable requirements to be documented directly in the tool, to maintain traceability and form the basis for test scenarios. These tools also enable the exporting of the defined specifications of the prototypes to provide documentation.

In addition to feeding into developing test cases, RDV will develop a sprint plan, mapping user stories to sprint cycles. These maps are then used during development to measure and report progress against the plan.

Development with ADC

To support the development phase, Capgemini uses its Accelerated Delivery Centers (ADC), based in the U.S., U.K., France, Poland and in Pune, India.  In these centers, Sprint teams (or pods) that range from 5 to 7 resources are stood up and work in Java and .Net, with scrum masters providing guidance across a number of teams.

The ADC’s pods of cross-functional resources work in agile 2-3 week sprints, employing test-driven design and behavior-driven design principles. Technical environments can be rapidly provisioned leveraging Docker for workload containerization. Additionally, the ADC leverages a number of tools and accelerators, including:

• BDD Swift, which automatically enables requirements to be translated into executable test specifications based on behavior driven design principles
• Jira, for issue and bug tracking
• App Swift, which generates application code based on the UX requirements outputs developed in RDV
• App Builder, to create user interfaces automatically
• Git, for version control
• RoboQ, for inspecting code quality in Java and reducing technical debt
• Cloud Swift, for deploying code into cloud environments such as AWS or Azure.

As depicted below, Capgemini uses its Continuous Delivery Orchestration Engine (CDOE) to manage these tools and other development and DevOps tools across the development and test process. Built on Jenkins, CDOE interfaces to a variety of tools via APIs. CDOE provides a single interface for managing the workflow across the development lifecycle, leveraging Docker technologies to migrate developed code from initial compilation to production readiness.

Testing with SmartQA

Capgemini uses its SmartQA platform to support testing work, encompassing the management of test data, test automation, and test environments. SmartQA manages the test process through its Command Center, taking inputs from a variety of tools including Jira, ServiceNow and Clarity as well as embedding analytics to both predict and measure the breadth of coverage, and the effectiveness and efficiency of the test process.

SmartQA automates governance and handshakes across the test process as well as providing support for each of:

• Planning
• Data creation, obfuscation
• Environment spin-ups
• Workflow, build train and job train
• UAT execution
• SIT execution
• System test execution.

Dominique Raviart will be looking at the SmartAQ product suite in more detail in an upcoming blog.

Distributed Delivery with my3D

To improve cohesion among globally distributed teams, Capgemini has developed the my3D (distributed digital delivery) toolset. My3D covers the following functionality:

• Skills management: a repository of skills across the team to enable the quick assignment of work to the most appropriate team member as well as the identification of skill gaps to meet client demand
• Virtual visual management: a set of virtual white boards to manage tasks across a globally distributed team. My3D can connect to ticketing tools and visualizes data in 80 different ways. Individual project teams can customize the information connected and shared, becoming the fabric across teams and a common dashboard for use in daily standup meetings
• Innovation and crowdsourcing platform: started initially to gather feedback and requirements for the My3D toolset itself, this component of my3D allows for collaboration and crowdsourcing across project teams to drive innovations, creating a virtual continuous improvement list
• MyKPI Dashboard: to provide visibility across the project team of current project metrics and status. myKPI leverages integration to ITSM tools such as ServiceNow and Capgemini is in the process of developing integrations with Jira for project tracking, enabling my3D to act as a single project status dashboard once completed later this year
• Maturity matrix assessment: measures and visualizes the maturity of individual agile teams within the project.

In addition to these core capabilities, my3D also offers an app store that enables self-service procurement of DevOps tools by teams. Rather than tying in all development teams to a preferred set of tools, my3D enables Capgemini to offer flexibility in toolsets while also minimizing the time to initiate the use of those tools.

Capgemini has trained over 45,000 employees and client team members on the use of my3D and rolled it out to centers around the globe. Capgemini is also using it for internal staffing and metrics tracking in addition to the client engagements it supports.

One example of a client engagement where my3D is being leveraged to deliver application development is a global bank. Capgemini worked with the bank to roll out my3D to address the bank’s objectives of reducing IT spend through improved quality as well as eliminating gaps in metrics reporting and providing a single global view of project status.

To meet the bank’s objectives, my3D deployed 56 digital workspaces, live incident and defect tracking from ticketing systems, and enabled daily stand-up meetings across 1500 FTEs. The my3D skills management functionality was used to identify skill gaps within the incident management team to target training and reduce incident resolution times. My3D has become the central console for managing, monitoring, and reporting to a globally diverse team.

Capgemini is encouraging the development of new functionality within my3D through the use of its embedded innovation and crowdsourcing platform. One area being targeted is the expansion of integration across the toolset, enabling further automation and ‘zero-touch’ processes. An example targeted for roll-out this year is the automation of integrating sprint plans into my3D to auto-populate the activities assigned to each team member.

In general, these toolsets and processes also lay the foundation for Capgemini to incorporate next generation capabilities that will further accelerate service delivery. Integrating cognitive capabilities that link identified defect and technical debt issues with training plans for resources, or using available resource skills to inform the building of sprint plans, are simple examples of how these toolsets can provide even greater value when further integrated and analyzed.

Achieving results with financial services clients

Financial services is currently the largest industry population in the Accelerated Delivery Centers, accounting for approximately one-third of the total ADC client base. One example of Capgemini’s application of Frictionless AD is with a large European bank, where the bank’s traditional waterfall development cycle could not keep up with accelerating regulatory changes.

To define requirements and develop designs for the bank, Capgemini had the product owner travel to India and work on-site with the Capgemini development team. The joint team defined six personas as the basis for defining requirements and then leveraged iRise to build out wireframes. Capgemini estimates that this joint effort supported by iRise reduced the workload from weeks to days and that ‘feature waste’ (time spent on developing features that aren’t required) was reduced by 20-30%.

To complete the development activities for the bank, Capgemini stood up 22 pods, each comprised of five resources. App Builder was leveraged to translate the requirements from iRise into usable, pre-defined Java code blocks, reducing development effort.

To accelerate the testing effort for the bank, the requirements gathered in the RDV were loaded into Selenium to develop automated test cases using BDD Swift, with orchestration by Jenkins. This increased test code coverage and reduced defects in production.

Elsewhere, a global financial services firm has seen a 50% reduction in its technical debt. While still in progress, the bank projects a total of 50k savings in project hours which has enabled it to engage with Capgemini for more projects, growing Capgemini’s footprint at the client by 50%. In another project, Capgemini reduced defects found in SIT and UAT by 60% and improved time to market by 30%.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In 2014, Serco expects:

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

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

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

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

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

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

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

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

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

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

Other key measures include:

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

This is the second signifcant contract win for Capita driven by the Cedar HR acquisition. The other was in May 2012, an award by Leicestershire, Nottinghamshire and Derbyshire police forces to share back office services under a collaborative agreement. The deal involved Capita deploying Origin to manage all three forces’ data for HR, training, duty management, and health and safety under a contract worth £2.3m over 5 years.

More opportunities are to be expected in the U.K. polic sector, as forces deal with further budget cuts.

Axelos was incorporated in July 2013, 51% owned by Capita, 49% by the Cabinet Office but governed by a separate board from the parent organizations. The company will be fully operational from January 1, 2014. Axelos is the owner and accreditor of the best practice methodologies.

Its aims are:

• Quality: to raise the quality bar for products and services delivered to clients for the full Best Management Practice portfolio
• Relevance: to improve the relevance of the portfolio to the business, e.g. demonstrable value to managers, CIO and CEO
• Growth: to grow internationally in both public and private sectors
• Innovation: to adopt new ideas and standards in communication, learning and management
• Collaboration: to be a social business with open and transparent communications and to integrate with other frameworks.

Axelos is looking to achieve these objectives by:

• Extensive use of digital channels including enhancing the existing Best Management Practice web site for multiple channels built on top of an enhanced document management core. Use of digital channels will include gamifying the learning tools and provision of information and material for practice tests on-line and as apps for smart devices
• Growing the online communities of practice that contribute to enhancements and development of the portfolio. It has already run product workshops in London, for attendees from the wider international ITSM and PPM communities to discuss subjects such as international tailoring and ITIL improvements
• Develop multi-national offerings for major organizations and industries.

The company is based at Capita’s offices in London. Capita provides Axelos with back office services such as HR and payroll, F&A and IT. Currently, there are 10 employees but Axelos is recruiting.

Axelos is in effect the new custodian of the best practice portfolio. The jewels in its crown include the widely adopted ITIL and PRINC2 methodologies. The JV is the vehicle to free the custodian from public sector constraints on commercialization to grow the revenues from this valuable portfolio. There is potential to grow the best practice products into international standards.

As a new company, Axelos is very privileged to have a strong portfolio of products which also lends itself well to client interactions in communities of practice and social networking, where ideas for enhancements can take shape faster, and be of value immediately after they are formally released. There is much value in collaborative and crowd-sourced innovation that Axelos can potentially tap into. There are already communities of practice based around the existing products, and Axelos will be looking to take them along its journey of evolution.

The challenge for the JV is to develop a new lasting operating model that successfully combines collaborative innovation, and crowdsourcing - benefiting from the wisdom of its communities of practice, while growing the business commercially. There are some good practice examples in the open source software community. Axelos should be looking at all options assessed against the requirement of protecting its IP.

The restructuring of NPS division last year, to focus more on services, combined with a number of contracts starting in 2012 helped improve NPS revenue. Contracts that started in 2012 include:

• The Blue Badge Improvement Scheme
• Athena - the managed service for data sharing by Essex Police and six other forces

NPS is also more agressively marketing its housing software internationally, reporting expansion in New Zealand, Australia and Canada, though no growth data was provided.

NPS' £170m contract with C2k to provide an Education Cloud for all schools in Northern Ireland was a major win for the company. Other contributors to the division's revenue improvements include managed services contracts with mid-market customers in the UK, including Christian Aid, Almac, Doosan, Wolseley, AAH Pharmaceuticals and the Driver and Vehicle Agency in Northern Ireland.