We recently talked with TCS’ Salesforce practice about its verticalization initiatives.

Product verticalization has been one of Salesforce’s key strategies (along with Customer 360/cross-selling and geographic expansion) since 2014, when it launched its Industries business unit. Like SAP, Salesforce acknowledges that organizations spend time and effort customizing their enterprise applications, and so it has broadened and deepened its vertical cloud offering, strengthened by its acquisition of Vlocity in 2020.

Despite its vertical push, Salesforce continues to rely on IT services partners to complement its vertical capabilities, acknowledging the role of its systems integration partners. Yet, the role of the service partner raises many questions about the nature of their vertical offering. Should a partner’s vertical offering be a product (sold with a subscription) or a solution (provided with the service)? Should it have functionality and an enhancement roadmap or be project-led? Should the partner offer point functionality, integrate with Salesforce applications, or provide a more comprehensive sub-vertical solution? Should the solution be available on AppExchange and go through Salesforce certification?

Our discussion with TCS’ Salesforce practice helped clarify what clients should expect and its verticalization effort with TCS Crystallus™ on Salesforce.

With Clay Maps, TCS combines a transformation methodology with systematic sub-process mapping

In the past two years, TCS has articulated its Salesforce verticalization strategy through its Clay Maps, which have two components:

• A systematic mapping of key sub-processes, targeting sub-verticals under disruption. The company has mapped these sub-processes with Salesforce functionalities across Clouds, going beyond erstwhile Vlocity to the full range of sectors (Salesforce Customer 360)
• A transformation methodology based on identifying the client’s goal and how this goal impacts the client’s business and, eventually, processes. TCS calls this their ‘go-to-market plays’. Examples include fraud prevention and detection for claims management in insurance and wellness insurance for healthcare payers.

TCS Crystallus: Adapting to Client Demand

Based on Clay Maps, and as part of its TCS Crystallus on Salesforce initiative, TCS created 90 artifacts ranging from PoVs to demos and solutions. Crystallus includes:

• For each sub-industry: a problem statement, impacted processes and code remediating the problem statement. TCS has ~30 of these go-to-market plays
• Approximately 30 pre-configured applications (based on TCS’ best practices) and 10 PoVs that eventually will become pre-configured applications
• 20 functionality white spaces for which TCS has developed reusable code components.

TCS Crystallus goes across telecom, media, technology, manufacturing, life science, healthcare, retail & CPG, public sector, E&U, BFS, travel & hospitality, and professional services.

TCS takes a pragmatic approach to its Crystallus artifacts: it will initially design PoVs, invest in a demo, and then a reference architecture and a solution, depending on client demand.

An example of a Crystallus sub-vertical solution is for healthcare providers. TCS has developed several roles such as the clinical educator journey, where the educator looks at patient records, enrolls the patient in care programs, and shares knowledge articles with patients. The Crystallus solution also provides dashboards and drill-down capabilities.

The company has designed a roadmap for its most successful solutions and will enhance them, primarily based on upfront investments rather than project-led developments. Overall, TCS provides the solutions as part of the service, although it does not rule out selling them for a subscription or a license if the client asks for the standalone solution.

TCS asserts it has also anticipated the future. Should Salesforce develop its own sub-vertical process or point solution, TCS will work with the client transitioning to the off-the-shelf functionality and remove dead custom code. TCS highlights that it has designed its TCS Crystallus solution as modular and will integrate with the client’s applications. The practice asserts that, as a top five Salesforce partner (based on certifications), it has access to Salesforce’s product roadmap, which it reviews.

TCS asserts that Crystallus is for the long term, and that further sub-vertical expansion is part of the journey. The company launches assets in the verticals brought by Vlocity/Salesforce Industry Cloud, e.g., in media, energy & utilities, and healthcare providers, with recent solutions for gas and energy transition and new Salesforce Cloud (e.g., CPG). TCS increasingly wants to design solutions across Salesforce products (‘multi-cloud’). Salesforce finds that the more Cloud products its clients have, the more loyal they are. This makes sense and correlates with Salesforce’s claims that its clients use it for creating a front-office platform. We think that clients will be even more loyal if they find sub-vertical Salesforce solutions that reduce customization work and maintenance costs.

We recently talked to Cognizant about its Salesforce Marketing Cloud capabilities.

Within the Salesforce portfolio, Marketing Cloud, along with Commerce Cloud, is a high-potential product that will eventually outgrow the more mature Sales and Service Clouds. More than any other Salesforce product, Marketing Cloud has grown through M&A, notably ExactTarget (that came with B2B marketing ISV Pardot) and Datorama (analytics for marketers).

Cognizant primarily built its Marketing Cloud capabilities with its 2020 acquisition of Lev, with Cognizant transferring its Marketing Cloud practitioners to Lev. As Cognizant’s Marketing Cloud practice, Lev has now reached around 600 consultants globally and is one of Salesforce Marketing Cloud’s largest service partners.

Lev’s preferred entry point with Marketing Cloud projects is consulting, with a maturity assessment of the client’s Marketing Cloud instance, followed by creating roadmaps for the transformation program to help the client exploit more Marketing Cloud features and functionality. Lev also offers organizational audits, process improvement, and license/subscription expense rationalization.

Addressing Marketing Cloud’s Large Portfolio

Lev’s capabilities span the full range of Marketing Cloud sub-products, ranging from the core Engagement sub-product (initially based on ExactTarget) to the emerging Customer Data Platform, Personalization (the former Interaction Studio), Intelligence (Datorama acquisition), and Account Engagement (Pardot acquisition).

Most of Lev’s work is around the Engagement sub-product, primarily Email Studio, Journey Builder, Mobile Studio, and Ad Studio. Lev works with clients to transform their email initiatives, automating email campaign management triggered across the customer journey. It uses Contact Builder to clean data and remove redundant accounts to improve data consistency.

Lev supports client scenarios such as organizations expanding multi-channel communications (e.g., expanding from email ISV to SMS and WhatsApp) and migration from legacy email service providers. In both scenarios, Lev will focus on migrating/transforming assets such as email templates, content areas, images, and documents to the Engagement sub-product.

Expansion in BPS

Lev has gone beyond IT services with Engagement and expanded to:

• Digital advertising agency activities such as campaign management BPS
• Creative services such as email visual design, copywriting, and content strategy and creation
• Paid ad management, helping clients define their campaign’s objectives, segment their audience, purchase the right advertising online, and monitor their effectiveness
• Translation and localization services for clients with multi-country campaign needs.

Lev sees campaign management and creative services as one of the entry points into an account.

Lev has developed two products that complement Salesforce’s Marketing Cloud:

• Campaign Studio, which helps organizations migrate marketing assets to Engagement and monitor campaigns at the enterprise level, and shorten time to create complex emails, audiences, and send schedules
• Abandoned Cart, which monitors abandoned carts on Commerce Cloud and can trigger email reminders.

Increased Joint Initiatives with Cognizant in Sales and Delivery

So, what next for Lev?

Lev continues to invest in emerging Marketing Cloud products:

• Personalization, formerly known as Interaction Studio, for tracking customer behavior, identifying customers to connect unknown and known customer profiles, and connecting with Sales Cloud to enrich customer profiles
• Intelligence, formerly known as Datorama, to offer a marketing reporting tool that can be used by marketing professionals and provide specific KPIs such as cost per lead or cost per click
• Salesforce Genie, formerly Customer Data Platform, for unifying the customer data profile, and enabling declarative segmentation and activation.

The emphasis is on helping organizations adopt enterprise-wide Marketing Cloud programs, focusing on marketing asset and data model standardization and application integration with Salesforce Sales Cloud and third-party applications. Lev believes that Cognizant’s capabilities around API and MuleSoft and overall data expertise will help while it specializes further in the marketing domain.

Lev is also looking to benefit from Cognizant’s scale and recruitment engine. It has now coordinated its sales and marketing activities with the larger Cognizant. Look to see some offerings verticalized, in conjunction with Cognizant’s sector units, other Salesforce practice units such as ATG, and of course, Salesforce’s vertical Clouds. Any such verticalization journey will require close internal and external coordination.

We recently talked to NTT DATA about its pending acquisition of Apisero, announced last month.

NTT DATA has been through significant changes recently with its merger with NTT Ltd. NTT Ltd. grouped a wide range of network and connectivity services, hardware and related services, data center hosting, IT infrastructure services, and resales. The resulting NTT DATA is now a giant with revenues of ¥3.5tn (~$26.2bn) and 180k personnel, larger than Fujitsu’s Services unit. NTT DATA has largely unified its brands over the years while maintaining the NTT DATA Services brand for its North American operations.

The company continues its M&A activity, with Apisero bringing scale in digital and cloud. Apisero is a MuleSoft and Salesforce consulting partner headquartered in Chandler, AZ, with additional offices in Vancouver, Strathfield, Barcelona, Dubai, and India. The company services U.S. mid-sized firms and has approximately 2,000 specialists, including around 1,500 MuleSoft practitioners and around 500 Salesforce consultants. Apisero has an India-centric delivery model, with 90% of its employees based in India (in Pune, Mumbai, Delhi, Kolkata, Ranchi, Bangalore, Hyderabad, Guwahati, or Chennai). NTT DATA highlights that Apisero is enjoying very strong growth (NelsonHall estimates around 30% topline growth), outgrowing even Salesforce, which continues to benefit from robust market demand. In its latest quarter, Salesforce reached the same revenues as SAP.

Apisero is a strategic acquisition for NTT DATA as it will almost double its size in the key Salesforce service market. We estimate that the combined Apisero NTT DATA will have around 5,000 Salesforce practitioners (including MuleSoft) globally: Apisero will definitively place NTT DATA among Salesforce’s largest partners.

Apisero will also significantly strengthen NTT DATA’s capabilities in MuleSoft’s API-based integration niche. Salesforce has positioned MuleSoft as the glue for integrating its Cloud products, especially around Customer 360, aggregating customer data from Salesforce and external applications. And, of course, MuleSoft continues to expand outside the Salesforce ecosystem. While Apisero will bring mostly professional services to NTT DATA, it also has several MuleSoft-certified connectors for ISVs, whether significant SAP Hybris and Splunk or niche, Redox (EHR) and Metrc (marijuana industry).

A Game-Changer for NTT DATA in North America and India

More broadly, Apisero will be a game changer for NTT DATA in North America. It will quadruple its headcount in North America/India to around 2,700 and rebalance NTT DATA’s delivery network to India, primarily around MuleSoft.

Finally, Apisero will bring to NTT DATA North America around 500 Salesforce consultants, primarily around Sales Cloud. Even though Sales Cloud is one of the more mature Salesforce products, it has continued to enjoy 15-20% organic growth. Its potential remains important, including in the SME sector.

A Recruitment Engine

NTT DATA’s short-term priority is to let Apisero continue with its high growth and disseminate Apisero’s best practices across the group. In one example, Apisero will bring in an automated and structured recruitment and upskilling engine primarily in India, which will help NTT DATA to scale up faster.

NTT DATA shows the offshoring potential for MuleSoft’s technical activities; the company is looking to expand from the U.S. and sell MuleSoft offshore services to its client base globally.

Meanwhile, NTT DATA continues to be busy with its existing Salesforce capabilities. It recently benefited from integrating NTT Ltd.’s operations, which brought a Salesforce service business in South Africa through the legacy Dimension Data.

NTT DATA will now need to digest its recent acquisitions: expect to see a pause in M&A activity while it focuses on sharing best practices, offerings, and its delivery organization across the Salesforce practice in its various geographies.

IBM recently announced its acquisition of Salesforce Platinum Consulting partner, Waeg. The company, whose name means “wave” in old English, expands IBM’s Salesforce service presence in Europe and is IBM GBS’ second Salesforce services acquisition in 2021, following 7Summits in the U.S. It is also GBS’ fifth acquisition since IBM announced the intended spin-off of its managed infrastructure services business last October, highlighting how IBM Services is shifting its portfolio to digital offerings.

Waeg has, we estimate, around 160 employees. It has two primary strengths: specialized skills and its delivery network.

The company has a background in strategy consulting, business process re-engineering, and B2B Commerce Cloud (the former CloudCraze products, acquired by  Salesforce in 2018). Over time, Waeg expanded its B2B Commerce niche to B2B marketing automation (the Pardot products), Service Cloud, and ERP/back-office integration. The company has been investing in its MuleSoft capabilities, following the API-based product integration strategy of Salesforce. Waeg highlights that it has developed connectors for B2B Commerce with product management systems, such as handling promotions and coupons and logistics firms’ systems, to shipment tracking.

A particularly distinctive aspect of Waeg is its delivery network, which comprises a small local consulting presence combined with nearshore delivery centers within the EU. While the U.S. and the U.K. have adopted global delivery for traditional IT services and digital services, Continental European firms have preferred a more onshore approach, especially for digital projects such as Salesforce.

Waeg brings in a delivery organization that is primarily based in Warsaw, Lisbon, and Dublin. Meanwhile, Waeg continues to deploy its sales office network onshore in Amsterdam, Brussels, Copenhagen, Lyon, and Paris. Waeg is also building some onshore project management and business analyst presence to interface with clients with the same culture and language.

Waeg highlights that the pandemic and the adoption of WfH have deeply influenced European firms. Client demand for B2B Commerce Cloud has accelerated, while at the same time, the appetite for Service Cloud has remained very solid. Indeed, Salesforce’s earnings over the last year have shown high client traction for Commerce and Marketing Cloud along with a more traditional product such as Service Cloud (used in contact centers).

And, with WfH adoption, Waeg sees that nearshore delivery for digital projects, still in the EU, is now more acceptable to Continental European organizations for data privacy reasons. As such, Waeg provides IBM GBS with a foundation for scaling its Salesforce delivery presence rapidly.

We believe that Waeg will help IBM target new Salesforce opportunities in the manufacturing and life sciences sectors in Europe. The company brings a client base in manufacturing and CPG, OTC distribution, and animal health products. Significant clients include Novartis, Baxter, MSD, Biomérieux, Moet Hennessy, Friesland Campina, Barry Callebaut, and Dawn Foods.

Waeg is also expanding its Salesforce capabilities to supplier relationship management, where it sees significant client interest in the wake of COVID-19 and interest in sourcing locally and identifying new suppliers.

With Waeg, IBM GBS is expanding from its  Salesforce strength in the U.S. and now has a decent presence in growth markets in Europe. APAC will be IBM GBS’ next priority, though there may be further inorganic growth in key European markets.

As well as geographic expansion, IBM will further expand its portfolio specializations: field services, quote-to-cash, and Vlocity/Salesforce Industries are likely candidates. Given Salesforce’s growth and aggressive acquisition strategy, IBM GBS has plenty of options for further development.

Coforge, the former NIIT Technologies, recently briefed NelsonHall about its Salesforce capabilities. In 2019, the company acquired Whishworks, which became the foundation of its Salesforce activities. Whishworks, one of MuleSoft’s top five strategic partners globally, services clients across sectors, with BFSI being its most significant target market.

London-headquartered Whishworks also has an office in the U.S., in Princeton, NJ. Its delivery model is India-centric, its primary delivery centers being in Hyderabad and Noida. It is currently experiencing high growth, enjoying revenue growth of 30% in its FY21.

Specializing its MuleSoft Portfolio

Since 2019, Coforge has grouped all its MuleSoft and Salesforce capabilities under Whishworks, which now has 430 Salesforce practitioners, including 300 MuleSoft ones. Whishworks offers a wide range of services, from technology consulting to managed services, and is also a MuleSoft VAR in the U.K. and India.

Whishworks is working on developing a specialized portfolio of services. Two examples of this are:

• Anypoint Platform 3.8 to 4.4 migration. MuleSoft is ending its support for Anypoint 3.9 by the end of 2021, leaving many of its clients with a mandatory migration. Whishworks has developed a fixed price offering for the migration, with pricing based on the number of APIs: it estimates the cost for a client with 50 APIs is around $100k. Whishworks highlights that some of its large clients have up to 1k APIs on different MuleSoft versions
• The use of accelerators. Whishworks has four connectors that are available on Anypoint Exchange, the equivalent of Salesforce’s AppExchange. Whishworks’ connectors provide access to the APIs of the applications. An example of this is extracting data from a web application to a mobile device: the connector reduces the amount of custom code required to connect the two applications. Whishworks’ most popular connector is its Microsoft Azure Storage connector, which the company offers free of charge to clients.

Delivery quality remains a key focus, and Whishworks is relying on several approaches. Whishworks uses a centralized technical design authority team, ensuring that delivery teams apply best practices and get their sign-off. Whishworks want to avoid an API development team bringing in their development personal style by using standardized approaches.

MuleSoft is now the Foundation for Salesforce’s Customer 360

Further growth is on the agenda for Whishworks, initially with MuleSoft. The company highlights that MuleSoft aligns with Salesforce’s professional services approach, i.e., focusing on software products and leaving services opportunities to its SI partners. Whishworks is, in Europe, one of the two preferred SI partners for MuleSoft’s Commercial Business Unit clients. It is looking to expand its MuleSoft expertise to the U.S., where the service opportunity is immense.

Whishworks is also looking to expand to the entire Salesforce product ecosystem, from its technical MuleSoft niche to functional products. The Salesforce strategy will help here. Salesforce has made MuleSoft’s Anypoint Platform the official software tool for integrating its vast and quickly expanding acquisition-led product portfolio. Anypoint Platform is more than the technical glue of Salesforce’s applications. It has become a topic relevant to business, with MuleSoft’s API-based integration technology at the core of Salesforce’s Customer 360 value proposition. With Customer 360, Salesforce promotes a comprehensive customer profile through consumer data centralization and analytics.

Along with Customer 360, Whishworks also adds skills around the various Salesforce products, initially focusing on Sales Cloud, Service Cloud, Health Cloud, and Financial Services Cloud. The company highlights that these clouds rely heavily on MulSeoft for interacting with third-party applications. Also, Whishworks has already developed several vertical solutions, such as claims management for insurance firms and a financial services sector cloud migration tool and service.

Whishworks will be adding other vertical solutions to its portfolio: we expect the firm will ultimately address the whole client base of the larger Coforge.

And we also anticipate Coforge will bring business consulting capabilities to help drive discussions with clients around their digital transformation initiatives. More than ever, this consulting-led approach is required to make a Salesforce project more than a traditional enterprise application project.

In November 2020, Atos unveiled its strategy for OneCloud, which focuses on key partnerships with the hyperscalers, and also includes three ISVs: SAP, ServiceNow, and Salesforce. We recently talked to Atos' Salesforce practice to discuss its growth plans and recent acquisitions.

Atos has been a long-standing SAP partner and recently reignited its Salesforce practice, making two acquisitions in Q4 2020 with Eagle Creek Software Services and Edifixio, both Salesforce specialists. Together, they bring around 600 Salesforce consultants, mostly based in the U.S. and France.

Eagle Creek brings specialization in the U.S. around Commerce Cloud, Field Services & Vlocity

Eagle Creek has its headquarters in Minneapolis, MN. The company has around 250 employees and serves clients in the telecoms, manufacturing, financial services, health & life science, and public sectors.

Eagle Creek initially provided Siebel Systems services, turning to Salesforce in 2016 when Salesforce acquired Demandware (now Commerce Cloud). The company has maintained its Commerce Cloud specialization, expanding its capabilities to .NET and Java development capabilities to enhance the UI of Commerce Cloud.

In parallel, the company developed capabilities around Field Services Lightning. Eagle Creek believes that the potential for field services automation is untapped. With Salesforce further investing in its field service product portfolio with the 2019 acquisitions of Click Software (labor scheduling), and MapAnything (driving directions on a mobile), Eagle Creek sees a preference by clients for Salesforce products over those of GE/ServiceMax or Oracle. In 2017, Eagle Creek became a Vlocity partner in addressing utilities and CSPs, becoming one of the top three service partners in North America.

Eagle Creek has an onshore-only delivery approach, with its technology centers located in North and South Dakota, close to its Minneapolis headquarters. These centers are used for training as well as delivery. Eagle Creek also benefits from the loyalty of its employees in the Dakotas, with attrition at ~5%.

Edifixio: Sales, Marketing, Community & SAP integration

French company Edifixio brings a different set of capabilities to Atos. Edifixio has a background in application migration to the cloud. The company also built B2B portals and marketplaces, integrating them with back-end systems (e.g., SAP). Ten years ago, the company expanded to Salesforce services, initially focusing on CRM/Sales Cloud.

Currently, Edifixio has ~80 Salesforce consultants in Paris and Grenoble and ~300 certifications. It has mostly capabilities around Sales and Marketing, along with Community Cloud and Heroku (for mobile enablement). The company is active on the application and data integration side and has developed several related accelerators and IP.

Edifxio provides an AWS-hosted SAP integration product as a managed service. Another IP is an AppExchange data quality tool that Edifixio developed for detecting data duplicates and improving its clients' data quality. Finally, Edifixio brings a DevOps IP, complementing Salesforce DX.

Atos: bold growth ambitions & portfolio verticalization

An immediate priority for Atos is consolidating its portfolio of services and accelerators and making these consistent across geographies. The company wants to push its application and data integration capabilities and make Salesforce's products interoperable, targeting Commerce and Field Services integration. Synergies with the rest of Atos in integration and strategy and business process consulting will help here.

In the mid-term, Atos has bold growth ambitions. With Edifixio and Eagle Creek, the company has 600 consultants in its Salesforce practice, and is targeting 1,500 consultants within two years. To fuel this growth, Atos is retraining internally as much as possible. M&A activity is also highly likely. The company just finalized, in February 2021, the acquisition of Profit4SF. The Utrecht, Netherlands-based Profit4SF is small firm, with 30 employees. More importantly, it brings precious Marketing Cloud capabilities.

Atos also intends to verticalize its service portfolio. An immediate priority is Vlocity (now Salesforce Industries) around telecoms, media, and utilities. Unsurprisingly, given its client base, Atos is also targeting the manufacturing sector, mostly in the U.S., Germany, and France.

We think that Atos' portfolio verticalization is an effective approach, helping Salesforce in its effort. While Salesforce has launched several industry clouds in the past years, it still needs to rely on its service partners to complement its horizontal capabilities. Two numbers indicate the priorities of Salesforce: it will spend $27.7bn on acquiring Slack, while it spent $1.33bn for Vlocity!

We recently talked to IBM GBS regarding its acquisition of 7Summits. After years of limited GBS M&A activity, IBM has been increasing its investment level in this business. With the planned divestment of most of its GTS business, GBS is core to IBM Services. Since October 2020, GBS has made five transactions across cloud, payments, SAP, and Salesforce.

The 7Summits acquisition, which fits into IBM iX, is the first Salesforce services acquisition since its Bluewolf transaction in 2016. With Bluewolf, IBM acquired a tier-one Salesforce partner and gained further scale. Bluewolf had 500 employees and strengthened IBM's Salesforce practice in the U.S. 7Summits also enhances the Salesforce practice’s presence in the U.S.: it is headquartered in Milwaukee, WI, and brings an onshore delivery presence in 30 states, mostly in Chicago, Indianapolis, Atlanta, Austin, NYC, Minneapolis, and San Francisco. We estimate its headcount to be ~240.

7Summits Brings A Specialization in Experience Cloud and Lightning Experience

Unlike Bluewolf, 7Summits is not about acquiring for scale (IBM already has scale, with a NelsonHall estimated 4,000 employees, excluding MuleSoft and Tableau personnel). What 7Summits brings to IBM is a portfolio specialization.

7Summits has a background in Experience Cloud (formerly Community Cloud), Salesforce's portal product. To date, the company remains heavily involved in Experience Cloud and has developed ~70 accelerators, the majority of which are based on Experience Cloud. The company has ~10 Lightning Bolts (i.e., industry templates) on AppExchange, focused on partners, clients, employees, and, in the case of Higher Education, students.

Also, within its IP portfolio, 7Summits has an important IP called Migration Factory, which enables Community Migrations. Community Migration is a set of tools and services for transitioning from SharePoint, Connections, or Jive. With Community Migration, 7Summmits systematically inventories existing content, maps to Salesforce UX constructs, and focuses on contextual data migration.

Its IP also includes around thirteen enterprise applications (point solutions, such as News, Events, and Job Board) and about 30 Salesforce Lightning components (e.g., Image Gallery and Leader Board).

7Summits also created a prototyping IP. The IP relies on Salesforce's Envision for creating UX/UI designs that are compatible with Salesforce's design requirements.  

Five years after its launch in 2015, Lightning Experience continues to drive activity at 7Summmits. 7Summits has developed a Classic-to-Lightning UI migration IP and looks at providing a roadmap for the migration, focusing on the UI and custom code and libraries. 

Beyond Experience Cloud: Integration, Consulting, and UX

Experience-led business solutions require capabilities beyond Experience Cloud. 7Summits uses Experience Cloud to bring together objects from across multiple Salesforce clouds and data and content from other systems to enable digital transformation. 7Summits estimates that each Experience-led implementation requires business consulting (25% of the services provided), UX/UI design services (~10%), technology and implementation services (~50%), with integration as an essential, and project management (~15%). Thus, the company has developed its capabilities around business consulting, experience design, and technology services. Looking ahead, IBM's capabilities in application and data integration, workflows, and the UX capabilities of iX will help scale 7Summits' capabilities.

7Summits recently verticalized its capabilities, starting with the software and high-tech sector, addressing client's needs like iterative product development, customer-led product roadmaps, and field-centric code sharing. 7Summits focuses on activities such as partner onboarding, connecting clients, and maintaining products.

7Summits has found similar partnership management needs in the manufacturing sector. The company also has experience in the higher education sector, with Harvard University, around student onboarding. The company is now expanding to the healthcare payer and provider sector.

The Road Ahead: Multi-Clouds, Agile, and Industry Solutions

7Summits is gradually expanding from its Experience Cloud specialty to become a Service Cloud and helping clients in their multi-cloud journey. Again, the more diverse Salesforce portfolio of IBM will help here. Meanwhile, IBM is expanding its Salesforce portfolio beyond the core Sales and Service Clouds. IBM hints it will conduct additional M&As to strengthen its portfolio. Also, NelsonHall expects a geographical delivery expansion to UKI, the EU, LA, and APAC.

IBM's Salesforce ambitions go beyond multi-cloud and strengthening its capabilities around the different Salesforce products. A priority is accompanying the client across the program lifecycle, from consulting through to application management, through cross-selling GBS' strengths around AI and analytics, automation, DevOps, and application management services. With many enterprise clients selecting Salesforce's products as a front office foundation, IBM highlights its agile development capabilities, using its Garage delivery model and its integration expertise.

Salesforce continues its rapid acquisition strategy, which brings additional products to integration. IBM is accordingly creating templates and reference architectures to pre-integrate different Salesforce products. Salesforce is accelerating its verticalization efforts, identifying white spaces in its vertical solutions, notably through last year's acquisition of major ISV partner Vlocity. Given Salesforce's fast-moving product portfolio, major SI partners such as IBM will be relying on the strength of their partnership with Salesforce to know where to invest next in its industry solutions.

We recently talked with Wipro regarding its 4C acquisition. Wipro accelerated the development of its Salesforce practice with the Appirio acquisition in November 2016. Indianapolis-headquartered Appirio was an essential move for Wipro, paying $500m for the firm, its second-largest acquisition ever. As well as a Salesforce business, Appirio brought in a Google practice, crowdsourcing vendor Topcoder, and a Workday practice. At the time of its acquisition, Appirio had ~1,250 employees, mostly based in the U.S., with some based in offices in London, Dublin, and Tokyo.

Wipro integrated Appirio with its Salesforce practice (~600 personnel at the time of the merger) and set up development centers in Porto, Manilla, and Guadalajara. In parallel, Wipro rolled out its commercial deployment in Sao Paulo, Munich, Paris, and Melbourne.

Wipro's subsequent divestment in 2019 of its Workday and Cornerstone practices (350 employees) to major client Alight Solutions meant that Appirio became a purely Salesforce-focused practice.

Wipro has ambitious revenue plans for its Salesforce business, aiming to grow the practice through a combination of organic investment and acquisitions to become a $1bn practice within five years. Salesforce, which is growing by 25%-30% every year, drives the service ecosystem and Wipro, with its dual onshore/offshore background, is well-positioned to benefit from this growth.

4C Brings Presence in Europe and Specialized Capabilities

4C is headquartered in Brussels and generated revenues of €32m in 2019. Founded in 1997, the company initially provided consulting and analytics services, expanding quickly to CRM.

In 2012, 4C made the decision to focus its CRM services activities solely around Salesforce, sacrificing half of its revenues at the time. This bold move was successful, and Salesforce Ventures-backed 4C became a Platinum partner. Industry consulting, Salesforce, and analytics remain the foundation capabilities of 4C, which has its own AI (TellMi) for unstructured data ingestion and analysis.

In recent years, 4C has made several small-scale acquisitions, expanding its presence in Europe to include the U.K. (CloudSocius, 2016), France (Neoxia JV, 2016), and Denmark & Norway (3C Consult, 2019). As well as Benelux, 4C significantly expands Appirio’s onshore presence in these countries, U.K, France, Denmark, Norway, also Dubai, UAE.

In terms of offerings, 4C has pivoted its capabilities from its former core Multi-Cloud capabilities to Quote To Cash, contract lifecycle management (CLM), and Field Service Lightning (FSL). In total, we estimate that nearly 20% of 4C's employees are working in QTC/CLM and FSL across verticals. A client reference for CPQ is a large U.K. technology firm. 4C has also been scaling up its Marketing Cloud capabilities, including Datorama. The pandemic helps drive increased activity in Marketing Cloud as Salesforce clients look to intensify their communications with their customers.

The CPQ, FSL, and Marketing Cloud capabilities brought in by 4C are a significant boost to Wipro's global Salesforce capabilities; historically, these have been less of a focus for Appirio. 4C also has Einstein analytics capabilities.

4C is keen for its Salesforce specialists to work across clouds and encourage them to have multiple certifications, with Sales, Service, and Community Clouds as core certifications. To date, its 365 or so employees have gained over 1k certifications.

With Appirio and now 4C, Wipro has around 2,500 Salesforce specialists globally across the Americas, EMEA, Asia, and Australia, with approximately 7,400 certifications between them, and has gained experience from working on over 5,000 projects. And Wipro also has access to the 200,000 or so personnel with Salesforce capabilities in the Topcoder community.

Introducing Appirio Purvue to 4C

Wipro's short-term priorities, unsurprisingly, are focused on integrating 4C with Appirio and driving commercial synergies.

One area of potential synergies center on Appirio Purvue, a significant current development at Appirio. Appirio has built Purvue as a tool to support its Close the Experience Gap offering. Purvue is a dashboard and toolset for measuring and benchmarking the capability maturity and pain points within a client's business processes (e.g. within marketing, lead management, opportunity management, etc.) and the NPV/IRR of Salesforce projects. Appirio has developed a version of Purvue, which uses Salesforce Health Cloud to help organizations track their readiness for reopening offices in an ongoing COVID-19 environment.

We believe that Appirio will be introducing 4C to Purvue so that 4C consultants can use the tool to drive more data-oriented consulting engagements.

And expect to hear more about Purvue from Appirio over the next year; it has the potential to be a useful sales aid for Salesforce projects.

We recently talked to Cognizant about two planned Salesforce-related acquisitions: Code Zero and EI Technologies, which the company announced in Q1 2020.

Cognizant Strengthens Specialized Billing Capabilities with Code Zero

Code Zero is a U.S. Salesforce CPQ and billing specialist with experience in providing services to manufacturing firms expanding their business from selling products to commercializing subscriptions. It has developed several accelerators in the form of SAP and Oracle Ebusiness Suite connectors. Code Zero brings in an estimated 60 personnel, most of whom are based in one of two primary locations: Atlanta, GA and Charlotte, NC.

For Cognizant, Code Zero expands capabilities it acquired in 2018 with ATG, a larger CPQ and billing specialist. Created in 2000, ATG initially serviced the communication service provider industry, providing complex services involving integration with multiple applications. In 2010, ATG expanded its target sectors to the manufacturing and high-tech sectors, helping clients transition to subscription-based and recurring revenues. ATG had developed connectors with ERP applications, a recent addition being a Netsuite integration tool for high-tech clients. The company also offers services around migrating data to CPQ and billing and post-implementation managed services such as application enhancements, training, and new Salesforce feature adoption.

The addition of Code Zero brings to ATG a complementary geographical presence with offices in Kansas City and Saint-Louis, MI, St. Louis and Missoula, MT, and Cincinnati, OH. NelsonHall estimates the combined headcount at around 375.

Looking ahead, ATG wants to deploy at Code Zero its methodology and dashboard for monitoring the health of engagements with clients, and also align with its project discipline. ATG is Cognizant’s CPQ and billing CoE, and Cognizant intends to leverage ATG to expand its capabilities organically in India and also in Barcelona, Spain.

With EI Tech, Cognizant Increases its Salesforce European Onshore Presence by 50%

Cognizant also announced earlier this year its intended acquisition of the domestic operations of French Salesforce service vendor EI Technologies. Where Code Zero has brought in specialized skills, EI Technologies will very significantly strengthen the European Salesforce services presence of Cognizant, particularly in France. NelsonHall estimates the pending acquisition will increase Cognizant’s onshore Salesforce services presence by over 50%, adding around 350 personnel based across France’s three largest cities: Paris, Lyon, and Marseille.

EI Technologies has capabilities in Sales, Services, and Community Clouds, taking an agile and iterative approach to projects. Its client base is primarily drawn from the manufacturing/CPG, retail, and insurance sectors. The company has developed several IPs, including accelerators for deploying Sales and Community Clouds, and templates for the insurance and retail industries. Cognizant highlights also the AppExchange understanding that EI Technologies has developed, navigating across Salesforce’s ISV partners and selecting the right solutions for clients.

EI Technologies has two other assets:

• A Paris-based training institute where the company conducts 2,000 training sessions per year
• Digital consulting capabilities. Cognizant highlights that gaining digital consulting expertise is in line with its strategy in Europe to be involved early in the project lifecycle and bring verticalized skills.

Cognizant Continues to Acquire With Lev

Cognizant continues to acquire Salesforce capabilities, announcing last month its acquisition of Lev, an Indianapolis-headquartered firm that brings in specializations in Marketing Cloud. Lev is a significant firm with 200 employees.

In total, Cognizant has acquired ~650 Salesforce services employees, showing confidence in the resiliency of the Salesforce ecosystem, despite the pending global economic recession.

NelsonHall is seeing, as one of the impacts of the COVID-19 pandemic, a short-term delay in Salesforce projects. Nevertheless, Salesforce is at the center of digital retail and marketing programs and our global survey of over 1,000 organizations indicates that in the mid-term these will be less impacted than other types of program; and the pandemic is clearly accelerating the move to cloud. Cognizant’s strategic rationale for scaling up and specializing its Salesforce expertise remains valid.

We recently had an update from NTT DATA regarding its Salesforce services activities across the different countries it operates in. At a global level, the company’s priority is to scale up its Salesforce services capabilities, with recruitment as a priority.

Salesforce keeps making horizontal M&As at a fast pace while verticalizing its software products. NTT DATA is mirroring this approach by strengthening its portfolio around Commerce and Marketing Clouds along with MuleSoft, while creating verticalized offerings. Finally, NTT DATA is working on better coordinating its various units and driving synergies between its Salesforce units and its other digital consulting divisions.

Scaling up Salesforce capabilities

NTT DATA has 1,000 Salesforce certified professionals currently, and is planning further expansion, prioritizing organic growth. Accordingly, the company is retraining some employees, for example Siebel and Microsoft Dynamics CRM consultants and J2EE developers, with Salesforce skills. And NTT DATA is also recruiting, targeting both developers with five years of experience and new graduates.

While NTT DATA has been one of the most acquisitive firms in IT services, in the field of Salesforce services it is taking a cautious approach. The company is no longer targeting Salesforce pure-plays, now considering these to be often expensive as well as niche. Instead, NTT DATA favors buying larger firms that bring a wider range of capabilities, such as Sierra Systems in 2018 in Canada which brought in around 700 employees offering IT consulting, systems integration, and application management services, including Salesforce capabilities.

Expanding horizontal capabilities, including around MuleSoft

Just as Salesforce is expanding its capabilities both horizontally and vertically, so is NTT DATA. Horizontally, NTT DATA is investigating broadening its expertise around Marketing and Commerce Clouds along with MuleSoft. Application integration and MuleSoft are a priority; NTT DATA acknowledges that enterprises now often use Salesforce’s Cloud as a platform for building larger systems and integrating with other applications. NTT DATA has set up Integration CoEs in the U.S. and India that group integration software capabilities from MuleSoft, Boomi and Informatica. Japan and Europe are next: each will have their own Integration CoEs in 2020.

Verticalizing the Salesforce portfolio

NTT DATA continues verticalizing its Salesforce portfolio. It has developed several industry-specific accelerators such as Telecom Lab, Field Service Lightning and CPQ for Manufacturing, Manufacturing in a Box, and Logistics in a Box, and the automotive industry.

One verticalization example is NTT DATA’s Digital Insurance Platform (DIP), which it deployed for a U.S. insurance client that wanted to launch a new life and annuity insurance product in just 45 days. DIP combines a reference architecture that integrates the Service and Sales Cloud, along with Vlocity, and relies on MuleSoft for integration with the client’s claims management and policy administration systems. Along with its reference architecture, NTT DATA brought its repository of business processes, and its investments in RPA, chatbots and AI.

NTT DATA highlights that DIP has high potential, and the company is targeting its 60 insurance and healthcare clients in the U.S. As part of its expansion plans for DIP, NTT DATA has so far created DIP versions for the life insurance, annuity/retirement and healthcare payer/insurance and P&C segments. Looking ahead, the roadmap includes public unemployment insurance, and automotive insurance.

With its verticalized Salesforce services, NTT DATA is targeting multi-year contracts: the one noted above with the U.S. insurance client is a five-year BPS deal where NTT DATA also operates the contact center and back-office services. The company is also looking at potential SaaS deals.

Internal coordination is a priority

With NTT DATA having a federal structure with geographies as key business units, the company’s challenge is to coordinate further its different activities across geographies and across service lines. An example is the 2019 investment in Star Global Consulting, a U.S. firm with 750 personnel that has brought in onshore strategy consulting, design consulting, mobile development, and marketing skills. NTT DATA highlights that Star Global brings skills such as digital consulting and digital marketing that are adjacent to the capabilities of Salesforce services. The challenge will be to drive coordination between its Salesforce and digital units across geographies. This is a priority for NTT DATA.

We recently talked with Cognizant’s Salesforce Consulting & Solutions Group (CSG) unit, recently set up in Europe. The unit reflects ongoing investment by Cognizant in its Salesforce capabilities, with a more vertical focus, accommodating Salesforce’s growing product portfolio.  

CSG complements the capabilities of Cognizant Interactive and Cognizant Consulting by bringing vertical knowledge and consulting capabilities relevant to Salesforce. CSG has been in hiring mode, recruiting business consultants with experience in banking, insurance, pharma, retail and CPG.

Pushing towards verticalized offerings

Along with this vertical recruitment, CSG is formalizing its vertical knowledge with the creation of Salesforce-related vertical-specific blueprints. The unit is systematically identifying areas within each vertical that are prime for digital disruption, e.g. in retail and CPG, processes that used to be customer high-touch (providing in-store cross-selling opportunities) and that are now occurring over the internet (aiming to help retailers to find new ways of maximizing cross-selling). In total, CSG now has around 25 blueprints that can help it rapidly engage in discussions with clients.

CSG is helping Cognizant’s Salesforce practice to further sharpen its vertical focus through the creation of solutions that cover functional gaps currently not covered by Salesforce’s Cloud products, building on four existing solutions in retail banking, wealth management, insurance and life science. One example is a solution for collections, aligning Service Cloud with different geo-based regulations. The creation of additional solutions is currently a work in progress.

CSG is expecting to provide these solutions as part of its service portfolio and is confident this investment will help it differentiate its offerings and align with clients’ expectations in bringing a vertical-ready capability. In due course, CSG will consider if it needs to turn several of the solutions into software products with license and maintenance subscriptions.

Making the most of current implementations

Along with its vertical and consulting push, CSG is also helping Cognizant’s Salesforce practice around aftermarket services. CSG recently launched its Good-to-Great assessment service. During a two-week engagement, Cognizant assesses how Salesforce Clouds have been implemented from a process, technical and functional point of view, looking to maximize usage of the client’s investment in Salesforce’s Clouds. Good-to-Great relies on the traditional approach of checklists, its outcome being a report deliverable that includes suggestions for improvement.

Matching Salesforce in its investments

The company continues to focus on Salesforce Sales (with CPQ), Service and Community Cloud, and B2B (CloudCraze) and is targeting two growth markets: Marketing Cloud and Commerce Cloud among its large corporate clients, focusing on a 360-degree customer view. Looking ahead, Cognizant wants to invest in its capabilities around Salesforce’s September 2019-launched CPG Cloud and Manufacturing Cloud.

Several acquisitions have helped Cognizant growth its Salesforce portfolio and footprint. In late 2018, the company acquired two Salesforce service partners: ATG, a U.S. vendor specialized in CPQ and quote-to-cash processes, and SaaSfocus, an Australian vendor of significant size (~350 personnel at the time of the purchase), with a significant footprint in India.

In parallel, Cognizant has also adapted the structure of its Salesforce practice to include its MuleSoft practice (Salesforce acquired MuleSoft in 2018), adding 1.7k consultants.

With Tableau Software now part of Salesforce, Cognizant will have to consider if it should merge the two practices or keep its Tableau capabilities separate. Like other vendors, Cognizant is likely to face more similar challenges: Salesforce has given guidance that it will be a $16.9bn firm by the end of FY20 (ending January 31, 2020) and it continues to have appetite for M&A, even after its recent $15.7bn Tableau acquisition. This signals that Cognizant will have to further adapt its capabilities in the year to come.

While Sopra Steria may be known for its execution excellence and its investment in delivery industrialization, it had not really invested in creating accelerators and IP. Then, early last year it launched its Digital Enablers program with accelerators in mind.

The company followed a slightly different approach to some of its peers in India, and initially focused on providing its developers and employees with the tools for creating accelerators. This blog looks at the progress made by the company in the past year, the level of adoption, and how usage is expanding.

Providing the tools for creating accelerators

The first step for Sopra Steria was to provide tools for creating accelerators. The company has used the Inner Source collaboration approach, used by the open source communities (e.g. Apache Foundation, Linux Foundation) and several large organizations to drive software development. Using Inner Source, Sopra Steria is providing software tools such as defect management; wikis; repositories (Gitlab); its development workbench, Continuous Development Kit (CDK); and a container-based deployment software (Red Hat’s OpenShift).

The Digital Enablers program wants to provide further cloud-hosted accelerators. It has, in the past year, developed a SSON-based authentication service, and a RedHat OpenShift-based Kubernetes (“container as a service”) offering. Looking ahead, Sopra Steria is working on providing a micro-service creation workbench based on open source tools including Kafka and Istio.

Inner Source adoption is accelerating

Sopra Steria highlights that adoption is accelerating. It currently has 6k registered users working on 4.2k projects, up from 2.1k registered users and 1k projects in progress at end March 2017. The company estimates that a third of its application services personnel are now registered. Adoption is expanding in particular across France, U.K., Norway, Germany, Spain, and India.

Use cases are also changing. With Digital Enablers, Sopra Steria initially targeted its developers, on an individual basis. Adoption is now spreading to the project level. And several clients are asking Sopra Steria to accompany them in similar projects, e.g. around jumpstarting portals for collecting ideas (“Digibox” IP), and bringing the right tools to their developers. Digital Enablers is also driving some level of revenue, with several clients buying virtual agents/bots that were created using Digital Enablers’ accelerators. Accordingly, Sopra Steria is getting organized and is systematically driving the creation of sales guidelines, along with technical documentation, for each IP created on its tools.

AI next on the horizon

Sopra Steria continues to expand its range of supporting tools for its developers, and has created a methodology and a technology framework for training on ML technology, focusing initially on image recognition and virtual agents.

The company’s immediate priority is to keep up the adoption of Digital Enablers, further accelerating its bottom-up approach. The company has found that Digital Enablers is attractive to millennials that are eager to develop accelerators in new fields and gain more experience. The cost of this approach is relatively limited, and Digital Enablers is finding that it is awarded budgets for creating new accelerators relatively easily.

At the corporate level, Sopra Steria is keen to invest in the Digital Enablers initiative. It is finding the business case worth it, and that Digital Enablers is helping the company to shift its portfolio to AI and micro-services, while promoting reuse and quality, both internally and with clients.

NelsonHall recently caught up with managed cloud and hosting vendor Rackspace. We discussed Rackspace’s May 2018 acquisition of a Salesforce consulting and systems integration partner, RelationEdge, and how the acquisition fits into its plans.

Who is RelationEdge?

RelationEdge (RE) was founded in 2013, in San Diego, CA. The company is positioned as a business process reengineering and Salesforce systems integration services vendor. RE has a background in Service Cloud, and in the migration from Desk to Service Cloud. RE also provides services around Salesforce’s main Clouds, including Community, Marketing, and Sales Clouds.

Alongside Salesforce services, the company also provides digital marketing agency services such as email campaign management, content management, social media PR, conversion rate optimization, and SEO.

RE is profitable and has been on a growth path: the company is present in 12 locations in the U.S., and has expanded through an entrepreneurship approach, with each regional office having its own go-to-market and delivery capabilities. Currently, RE has 125 personnel, onshore.

How do Salesforce capabilities fit into Rackspace?

Rackspace wants to rapidly expand its application services capabilities to complement its cloud-centric IT infrastructure service capabilities. The company has an Application Services unit, which has developed application operations, application maintenance and support services.

Rackspace is also driving this service expansion through acquisitions. The backing of its owner since 2016, PE firm Apollo Global Management, is helping. Rackspace has made two application service-centric M&As since it was taken over.

In June 2017, the company acquired TriCore Solutions, a systems integration firm specializing in ERP, BI, analytics, and data warehousing, with core capabilities around SAP and Oracle. TriCore jumpstarted the C&SI capabilities of Rackspace and brought ~500 personnel. TriCore also brought a presence in India with 355 employees in Hyderabad and Gurgaon.

The RE acquisition brings further benefits to Application Services by positioning the unit more firmly in the digital space. Now, Application Services has not only Salesforce capabilities, but also commerce and UX experience around Oracle Commerce and SAP Hybris, Sitecore Experience Management and Experience Commerce, and Adobe Experience Manager. In addition, Rackspace also provides Java and .NET development services.

What is the application services future for Rackspace?

Rackspace continues to be a cloud-centric IT infrastructure service vendor. And to that purpose, it made its largest ever acquisition with Datapipe in November 2017. Datapipe had a similar business to Rackspace, and brought managed hosting and cloud service expertise. It had 825 employees and a 29-datacenter presence in nine countries.

Nevertheless, in spite of its IT infrastructure centricity, Rackspace has ambitions in the application services space with a focus on digital. In the short- to mid-term, the Application Services unit will be focusing on cross-fertilization, with the expansion of the RE delivery model to India (relying on TriCore’s Indian presence), and will also be deploying the business process reengineering expertise of RE.

Application Services will also be expanding and focusing its service portfolio, with several priorities in professional services:

• SaaS applications (e.g. Salesforce, Workday, ServiceNow, SAP HANA, and Oracle Cloud)
• Growing professional services
• Business intelligence and analytics
• Application migration to the cloud
• On-premise applications and software, with a focus on ERPs and collaboration applications
• Databases (e.g. RDBMS, NoSQL, and MangoDB).

Finally, IP creation is also on the agenda, to shorten implementation times, with Application Services looking to create technology accelerators.

In the context of Salesforce services, NelsonHall believes that RelationEdge represents a first step for Rackspace’s Salesforce portfolio. With the Salesforce ecosystem rapidly expanding, notably through acquisitions, and Salesforce’s Cloud expanding from specific applications (e.g. CRM) to becoming platforms for development of further functionality, RE’s move into IP creation and the expansion of its delivery model to India are a mid-term necessity. Hence, we believe that Rackspace is going in the right direction.

NelsonHall will be publishing a major global market analysis report on Salesforce Services in October 2018.

We recently met with Sopra Steria to discuss the broad topic of intellectual capital and accelerators. We came away impressed with Sopra Steria’s approach that is both very new (launched early 2017) and also broader in focus than technical accelerators.

Earlier this year Sopra Steria launched its Digital Enablers initiative. Digital Enablers has several aspects: creating API-based/-like micro-services for external clients, for internal needs, and for creating a sense of a community internally focusing on digital, based on Inner Source principles.

Micro-services/web services

Sopra Steria’s micro-services approach has two main elements: one is based on the historic focus of Sopra to create software products (“solutions”, with core banking, real estate, and HR software products, and through its ISV subsidiary Axway); the other on the understanding that new ways of programming based on open source software, APIs, and web services require new software services. Those new software service will co-exist with software product.

The company is investing in creating new services focusing initially on horizontal activities. Those new services will become the IP of Sopra Steria, with an intent to create reusable products or services. As an example: Sopra Steria is currently finalizing a SSON service that targets custom applications development activities, with the intent of providing an authentication service off-the-shelf, maintained by Sopra Steria over the life of the application, and public cloud-hosted.

Sopra Steria is working on application container security, expecting Docker-like application container technology usage to expand. As part of this adoption of Docker, Sopra Steria will commit on the security of container layers, as part of its security SLAs.  

Another initiative in progress is in the use of AI-based chat bots for service desk activities.

Sopra Steria plans to release one new service per quarter, relying on volunteers that share their time between client projects and those new services. The team size for each new service ranges from five to ten personnel, as part of a virtual API development factory.

Adoption of Inner Source Principles

Sopra Steria’s intellectual capital initiative goes beyond its micro-service approach. The company is promoting internally the principles of Inner Source. Inner Source is a collaboration approach used by the open source software communities (e.g. Apache Software Foundation, Linux Foundation) and several large organizations, to drive open communication, collaboration, and software quality.

Sopra Steria’s initial step was to make internally available tools for open communication (code, documentation, defect management, and more importantly reliance on all volunteering contributors), and for software quality (code reviews). The company is using open source defect management, wiki, and repository manager GitLab, Red Hat’s OpenShift, for container based software deployment, as well as an internal Sopra Steria agile/DevOps software development workbench named, continuous development kit (CDK).

The intent of the Inner Source approach is to bring together volunteers on the topics they are interested in. Topics range from mainstream technical accelerators (e.g. around Java, SAP, and .NET technologies) and new areas (blockchain demos or data science algorithms). Sopra Steria is keeping a loose handle on topic selection, and allows developers to work on what their topics of interest.

The company launched its Inner Source initiative on March 30, and already had ~1k projects in progress, with 2.1k registered users. Given Sopra Steria’s size, this is rapid early take up of the Inner Source program.

So, where does Digital Enablers fit within Sopra Steria’s overall corporate strategy? Digital Enablers is considered to be of strategic importance, not just because of its potential to create a source of revenue in the long-term, but also in driving career interest and making the company attractive to millennial talent. We will be monitoring the progress of Digital Enablers in the coming quarters.

In the last few years Accenture has executed a wholescale reshaping of its portfolio towards what it terms ‘The New’ (digital-, cloud-, security-related services) and has managed to keep ahead of the pack in staying relevant. NelsonHall recently attended an event hosted by Accenture Technology on the theme of innovation-led applications services.

Accenture Has Repivoted

CEO Pierre Nanterme opened the one-day session describing how Accenture started preparing for a major transformation of the company’s service portfolio toward ‘The New’ back in 2011.

In FY15, ‘The New’ accounted for 30% of Accenture’s total revenues; in FY16 this proportion moved up to 40%, or ~$13.5bn, progressing in H1 FY17 to ~45%. Nanterme shared his ambition that Accenture will exit this fiscal with activities in “The New” representing over 50% of the company’s total revenues—a milestone Accenture achieved in 3Q FY17. Given the accelerating rate of both acquisition activity and organic investments – and the accelerating pace with which organizations are embracing digital - this looks probable. If so, Accenture will have achieved something of a coup – and the right to make the bold statement on its website “New Isn’t On its Way: We’re Applying It Right Now.”

 While an increasing number of services providers are sharing what proportion of their revenues are coming from “digital”, there is no clarity of what this can encompass, and as such comparisons are not possible (is Vendor A, calculating Digital accounts for 16.7% of its revenues, lagging Vendor B, who claims 22.1%, or are they simply classifying differently?) Nevertheless, Accenture’s bold claim of over 50%, and its ability to point to the size and scale of its Accenture Interactive, Accenture Analytics and Accenture Mobility units (which together are now over $10bn in revenues) put it in a position that no other IT services vendor is currently anywhere near. As for Accenture Technology, which remains the company’s largest SBU, accounting for an estimated 50% of total revenues, it estimates that over 45% of its revenues related to SAP, Oracle, and Microsoft are now around The New. This is a very significant achievement.

Accenture Technology and Innovation

Creating Accenture Digital as a greenfield organization was, arguably, easier than realigning an existing massive organization such as Accenture Technology around digital. So how did Accenture Technology shift towards The New?

There are several elements to this transformation: adoption of new technologies: agile, DevOps and automation, application migration to the cloud; partnerships with the likes of salesforce.com and Workday; and realignment of major partnerships with SAP, Oracle, and Microsoft toward the cloud.

As with the other Accenture divisions, Accenture Technology has been very active in recent years in acquiring to expand or build capabilities in ‘the New’. To give just one example, expanding the Salesforce capabilities of Accenture Technology, since 2014 Accenture has acquired seven specialists: Media Hive, New Energy Group, CRMWaypoint, Cloud Sherpas, tquila and ClientHouse, and most recently federal sector specialist Phase One.

Accenture is redeploying the client base of acquisitions such as Cloud Sherpa towards large enterprises, bringing more interfacing/integration work with other enterprise applications. The size of some of their deal wins is increasing.

Another element is the expansion of what Accenture now calls the ‘Accenture Innovation Architecture’, which comprises Accenture Research, Accenture Ventures, Accenture Labs, Accenture Studios, Accenture Innovation Centers, backed up by Accenture Delivery Centers in its Global Delivery Network.

Liquid Studios…

Accenture Technology has been investing in opening client-facing Innovation Labs and Liquid Studios. Liquid Studios use rapid application development principles, microservice-based architectures, and technologies such as IoT and wearables. The focus is on ideation using Design Thinking, “pre-totyping”, prototyping, and solutioning, delivering a MVP. The first Liquid Studio opened in Silicon Valley just over a year ago: 2017 has seen a spate of openings of Liquid Studios in European cities such as London, Paris, Kronberg, Milan, Stockholm, and Helsinki, not to mention a Digital Hub in Madrid, with more to come.

Another key element of Accenture Technology’s investment in pivoting to the new is the Accenture myWizardcloud-based (hosted on Azure) intelligent automation platform to support the delivery of application services, first announced last April. MyWizard comprises Accenture proprietary industry assets, machine learning, and analytics tools and methods, plus tools from its alliance partner ecosystem. It currently comprises 6 virtual agents that analyze data (and mine Accenture’s cumulative knowledge base) and identify patterns to support the following roles: architect, scrum master, testing advisor, data scientist, project manager and modernization analyst. Clearly, MyWizard has the potential to turbo charge Agile projects; just a year after its launch, it is apparently gaining traction: Accenture claims MyWizard has been used in over 2,300 engagements and currently has over 12,000 active users.

At the corporate level, Accenture has a venture arm targeting tech start-ups. The $100m funding is relatively limited given Accenture’s size we think, but the ambitions are bold. The company has a partnership with Partech Ventures, which itself has €850m of investment. Partech screens ~7k start-ups every year, expanding the reach of Accenture, from 1.5k a year.

… and Liquid Talent

The naming of Liquid Studios also included a reference to talent. In its ambitions to increase the level of millennials in its workforce, Accenture is envisaging different sourcing (“liquid”) models: by 2020, Accenture believes 43% of its personnel in the U.S., including traditional sub-contractors, will be a liquid workforce. Accenture is using crowdsourcing and has made a minority investment in Applause; it is also integrating its HR systems with those of other crowd-testing vendors.

Accenture is also becoming more social. An example of this is its partnership with a start-up, Simplon.co, to develop application development skills among non-IT workers. Is this a communication tool or a true corporate citizen involvement? Time will tell, but numbers are at scale: globally, Accenture wants to bring back to work 3 million people by 2020.

In a nutshell: Execution of strategy

So, what does Accenture’s reinvention of recent years reveal?

Firstly, there is no magic but a systematic redeployment of efforts, in a disciplined manner. Such a transition requires strong vision, systematic and significant investments and purposeful, sustained drive. Having said that, Accenture plans to invest in the range of $1.8bn in acquisitions this fiscal year, which is accessible to many of the top fifteen global IT service vendors, and its vision of the future of IT services is one held by all vendors. This story is all about execution of strategy.

A final comment: one side heading above that “Accenture has repivoted” is just the start of a journey, as Accenture acknowledges in one of its current slogans: “We are continuously evolving”. As more disruptive technologies gain traction over the next few years, and as cognitive technologies generally become more sophisticated, the ability to continue to harness new developments in technology within the frameworks it has developed and the business and industry expertise it has amassed over the years, will continue to be a key differentiator.    

Dominique Raviart and Rachael Stormonth

Yesterday, NTT DATA Inc. closed its acquisition of Dell Services, seven months after its initial announcement.

The acquired entity, now called NTT DATA Services on an interim basis, has some obvious benefits. For example, it:

• More than doubles NTT DATA Inc.’s revenues from $1.7bn to over $4bn
• Significantly strengthens the infrastructure/cloud business of NTT DATA Inc., which traditionally is supplied by sister companies NTT Com (telecom services, datacenter, and hosting), security (NTT Security) and IT infrastructure services (Dimension Data). Dell Services generated $1.68bn in IT infrastructure and cloud revenue in its FY 2016 (to January 29, 2016).
• Brings in sizeable applications and BPO businesses (~$1.16bn revenue in FY16), with specific strengths in healthcare (~50% of revenues of the former Perot Systems). The BPO capability, in particular, will significantly boost NTT Data Inc.’s own capabilities
• Brings in industry-specific capabilities in sectors such as healthcare
• More than doubles NTT DATA Inc.’s India delivery capabilities, from ~12k to ~26k personnel.

So, Dell Services is a strategic acquisition - but at $3.06bn, it is expensive.

Perot Systems did not thrive as part of Dell. After Perot Systems became Dell Services, its financial performance was mixed. FY 2016 revenues were down 5% to $2,84bn (similar size to Perot Systems in 2008, and in May 2010, Dell said its Services business with the addition of Perot) was generating quarterly revenues of $1,891m). And its operating margin was just 5.3%.  The acquisition is also margin dilutive. NTT Data Inc. is generating an EBIT margin of over 10%.

Our perception is that some of the distinctive capabilities of the former Perot Systems became almost invisible when it became part of Dell. As part of NTT DATA, it is back to being a services pureplay, and the application and BPO businesses, in particular, are likely to receive more investment.

Japanese Owners take long-term view

NTT DATA continues to execute on its active M&A strategy. Thanks to its Japanese ownership and financial backing of its majority shareholder NTT Group, NTT DATA tends to take a long-term view, focusing on revenue synergies rather than margin expansion in the near-to mid-term. For NTT DATA Inc., for example, the ambition was to achieve revenues of $3.4bn by FY16. With the addition of Dell Services, this target will be surpassed.

‘One NTT DATA’ integration ambitions

An NTT DATA priority in recent years has been to absorb and integrate all its acquisitions to a federated region-centric structure that has several areas of coordination, evolving its operating model from a holding company scenario.

In North America, NTT DATA Inc. has been relatively successful in integrating the likes of Keane, Intelligroup, and Optimal Solutions. The integration of Dell Services, a business twice its current size, poses more of a challenge. In addition to its size, it also means an organizational realignment to a vertically-oriented go-to-market. However, CEO John McCain highlights the project management capabilities brought in by Keane. And the restructuring is not being done with undue haste: Dell Services former CEO remains until January to support the handover, and there are five more months for the new organizational structure to be implemented (the new leadership becomes effective from April 1, 2017).

Dell Services will clearly be the glue for ‘One NTT DATA’ in North America.

This is not the end of NTT DATA's M&A activity

“The acquisition of Dell Services is another step toward achieving our vision of becoming a top five global IT services leader.” Toshio Iwamoto, President and CEO, NTT DATA Corporation

NTT DATA is currently a Top 10 IT services provider: its growth ambitions remain.

In international markets, NTT DATA remains a series of geographical organizations, with a presence in Germany, Spain/Latin America, and Italy, rather than an integrated firm.  It has a gap in the key IT service market of the U.K.

Will NTT DATA continue to make small to mid-sized acquisitions such as Spain’s everis, or, perhaps, like it is doing with Dell Services, acquire a more significant player which could be the glue for an integrated One NTT DATA EMEA?

Will there ever be a global One NTT DATA? We don’t think this is likely in the short term.

Dominique Raviart and Rachael Stormonth

Four years ago, at the time of the London 2012 Olympics and Paralympic Games, NelsonHall reported on the work Atos does for the International Olympic Committee (IOC) though its Major Events unit. See our previous commentary here. This week we visited its center in Barcelona to get an update on the work it is doing for the Rio Games starting next month,

The Olympic Games remain a fantastic opportunity for Atos to demonstrate it can handle complexity and scale for a very visible event. The numbers are humongous: 4bn viewers, 300k accreditations, 70k volunteers, 30k media members, 10.5k athletes - and also on the IT side: an expected 1bn security alerts, 200k hours of testing, 250 servers (equivalent to 1,000 physical servers) and 80 applications.

Major Events is a relatively small unit within Atos (we estimate revenues <€100m), with activity fluctuating significantly from one year to the other in terms of headcount and revenues. Major Events has diversified its client base from the IOC to other international sporting events, including the 2015 Pan American Games in Toronto. The unit is Spain-centric for historical reasons: Atos, then SEMA Group, had started servicing the IOC for the 1992 Barcelona Olympic Games. And in 2012, Atos acquired MSL Group a scoring and time group with sport domain experience, based in Madrid.

In addition to managing scale, Atos Major Events manages uncertainty: at the time of its contract renewal (until 2024) in late 2013, the company did not where the Olympics would take place in 2022 (Beijing) and 2024 (still TBD). The location impacts Atos significantly from a delivery perspective e.g. for the Sochi 2014 Winter Games, Atos faced IT labor shortage in Sochi and had to source personnel across Russia, and in Russian-speaking countries (i.e. Romania and Serbia). For the 218 PyeongChang Winter Games, Atos Major Events is facing a similar challenge, and will be relocating IT personnel from Seoul, 200km away. In total, the financial impact is significant (up to 20% in additional costs), all within the context of a fixed bid, done eight years before the event. Nevertheless, Atos highlights its margins on Major Events are positive.

Atos Major Events provides a full IT outsourcing service. This includes a SIAM role, working with ~30 technology partners (which it has not selected to work with, but has gained years of experience in joint work). In addition to its SIAM role, Atos provides systems integration services and software products (Games management System, including volunteer portal, sport entries and qualifications, accreditation service, and workforce management), as well as security services. Testing, of course, is a priority: “when we are finished testing, we start testing again”.

IOC Budget Shifting from Run Services to Digital

Reflecting a broader market evolution, the Rio Games take place in the context of shifting budgets: the IOC is looking to drive down costs on run services. IaaS (on Canopy private cloud) is a part of this change, with Atos using a Canopy datacenter in Eindhoven, Netherlands for the 2018 Winter Games. The biggest savings will come from removing the need for migrating 1k physical servers in a new onshore datacenter for each Games. Also, there a very significant space gain element. Obviously, the datacenter is located on the other side of the Atlantic for the Rio Games and Atos Major Events will be using dedicated leased lines for critical applications.

Delivery is also changing: the company will deploy its last onsite Integration Center (mostly providing testing services) for Rio 2016. Going forward, this center will be located in Madrid. As for Canopy/IaaS, the creation of a centralized remote center in Madrid will remove equipment migration needs, and associated costs. And Atos is moving back its application management work (~25 FTEs supporting its software products) from the host city to Barcelona.

What will remain in the host city is the Technical Operating Center (TOC), a command and control center providing IT infrastructure management, service desk, project management, security services. The TOC is significant (500 personnel of Atos, IOC and technology partners, over three shifts, operating 24/7 during the Games) but still needs to be onsite in the host city at this point.

The IOC is rebalancing its budgets towards digital, starting with mobility. In the London 2012 Games: just 1% of information was accessed through mobile. In Sochi, this number reached 80%! Rio will be the Games where visitors will attend one competition in one venue while accessing results of another competition on their smart phones. In total, ~8bn devices will at some point during the Rio 2016 Games access information provided by Atos Major Events.

In addition to mobility, Atos Major Events is working on integration with social media, and is investing in its media player (for streaming video, audio and data). It is also refreshing its software products to make them further user-friendly to the different communities and the media in priority.

What Else Will We See Next?

Digital will continue to be a priority for IOC, extending from mobile services to wearables and IOT (and therefore big data).

Another big digital push is services to the media and broadcasting industry. Provisioning of some level of media content is part of the plans.

To some degree, Atos is leveraging Atos Major Events capabilities in other units: certainly, in security, Major Units and the Big Data & Security unit are collaborating on methodologies, common IT architectures, and also on security scenarios.

There is also an element of cross-selling with the usage of Atos Bull SIAM software products and Bull Hoox encrypted phones. Looking ahead, Atos is considering using software products from its Unify subsidiary.

Our understanding is that Major Events is currently self-contained and uses the larger Atos, apart from security collaboration, on sourcing talent, for instance around testing. Will we see more experience sharing from Atos Major Events to the wider Atos? As Atos focuses more and more on being an integrated firm, to accelerate organic growth, this may happen. We also expect to see Major Events benefit from Atos’ investments in automation and AI over the next few years.

We would have liked to have heard more about plans around big data, analytics, AI and content, suspect that Atos is constrained contractually to disclose much about these.

In summary, the Olympic Games are a wonderful opportunity for Atos to showcase its capabilities around SIAM, project management, testing and security services, and to demonstrate it successfully handles scale, complexity and uncertainty, each time in a new location, every four years.

In short, 2016 started off with a bang, with two very large IT services acquisitions announced in the first quarter:

• Leidos acquiring Lockheed Martin’s IS&GS unit for $6bn
• NTT DATA is acquiring Dell Services for $3.1bn.

Compared with last year, the whole of 2015 saw just one multi-billion acquisition announced: that of IGATE by Capgemini for $4.5bn. We expect to see more large deal activity.

Atos and CGI Likely Bidders for Large Transactions in 2016

Among all IT services vendors, Atos and CGI are the most likely buyers: their business models are based on inorganic growth.

• Atos has clear growth ambitions. Its net cash position (estimated by NelsonHall) is ~€200m after the Unify acquisition. The U.S. continues to be a priority, in particular Managed Services, adding to the scale brought in by Xerox ITO
• CGI now has net debt under control (estimated at ~CDN $2.0bn) and can borrow up to CDN $1.7bn. CGI acquisition targets include around software IP, U.S. commercial and U.K. commercial.

Meanwhile, three other acquisitive vendors, Leidos, NTT DATA and Capgemini, have put a temporary hold on their M&A activities. Leidos and NTT DATA obviously will focus on finalizing and integrating their acquisitions, also on reducing their net debt (~$3.4bn and ~$6.5bn respectively). Capgemini has a lower debt (~€1.8bn) but less appetite for debt leverage than, for instance, CGI, and still needs to integrate IGATE and prove this acquisition is working. The company has denied any interest in acquiring Hexaware.

TCS, Cognizant and Infosys have the cash make large acquisitions. TCS does not have a track record in large transactions and does not need one: it still is enjoying industry-leading growth in spite of its size ($16.3bn in revenues in calendar year 2015). Cognizant has also enjoyed industry-leading growth but appears to be more large acquisition minded, even after TriZetto. For both Infosys and Wipro, inorganic growth is key to their 2020 revenue targets. Infosys’ target is $20bn (up from $9.2bn in CY 2015). Wipro’s target is $15bn (up from $7.2bn). Both have experience in small to mid-sized acquisitions. Neither has of integrating a large acquisition. 

CSC is in a different situation: acquisitions are a key component of its turnaround. Having acquired UXC to gain scale in Australia, it is now in the process of acquiring Xchanging which will bring in insurance software assets, inter alia. We expect to see more mid-sized acquisitions from CSC.

Finally, the network of companies that is Deloitte continue to make small acquisitions across the globe, many of them digital related.

So what themes will prevail in 2016? In short, all the current hot topics will remain

Gaining scale in India

Mphasis, Hexaware and Zensar are likely targets in 2016. And PLM service vendor, Geometric Ltd, whose largest client is ISV Dassault Systems, is also rumored to being up for sale. Valuation multiples in India defy gravity but firms like Hexaware and Mpashis are within reach, at ~$1bn-$1.5bn.

Mid-sized deals in U.S. Commercial

As we have noted above, the likes of Atos, CGI and CSC, also some of the Indian oriented service providers are interested in mid-sized vendors with a presence and IP in specific U.S. commercial industries, including utilities (but not energy, although there will be some fire sale opportunities) and healthcare.

BpaaS, or at least a BpaaS aspiration, is likely to be a feature of some of these deals. An early example this year is Wipro’s announcement in February it is to acquire HealthPlan Services for $460m.

Digital Capabilities and RPA IP: Small to Mid-Sized Acquisitions

Looking at smaller acquisition activity, obvious attractive targets will continue to be firms, often privately held:

• With digital services capabilities, including in digital marketing, UX, cyber security, and SaaS implementation services. In particular, we expect to see M&A activity around cyber hot up this year
• That have IP around RPA or cognitive intelligence.

Many of these targets have headcounts in the 50 to 200 range and are local players. Competition for these firms is high and includes the largest global IT services vendors, with Accenture having led this drive for the last four years.

The hunt even extends to very small firms. Giants such as Accenture and IBM are acquiring firms with specialisms in perhaps digital strategy or SaaS services that have fewer than 100 employees.

The market is getting further crowded; telecom service providers continue to acquire in security while the advertising sector has expanded its M&A scope from UX to SaaS services.

And what will we see in the mid-term?

IoT, IT/OT and Big Data Will Become Increasingly Important in the Mid-Term

IoT, also the integration between IT and Operational Technology (OT) will drive a lot of M&A investment in the years to come, initially around IoT platforms, with the intent to reach scale, create a vertical-specific IOT platform, or gain point capabilities e.g. device security testing, creating device-specific apps. In all likelihood, acquisitions will be small in scale; an early example is that of Radius by Luxoft.

On a large scale firms that have IP around big data will be attractive (while this was not an IT services acquisition, that of The Weather Company for $2bn by IBM was an interesting move that will prove its value in the longer term).

In its FY15 (ending March 31, 2015) this part of CSC achieved revenues of $8.1bn, and an adjusted operating margin of 10%.  

However, H1 FY16 revenues were just $3.55bn, and guidance for FY16 is $7.5bn. So this is a company still in negative growth, with no sign of topline recovery in either division: GBS revenues were down 13.4% y/y (down 5.7% in CC) to $1.8bn and GIS down a painful 19.8% (down 13.2% in CC) to $1.754bn.

Yet management is now talking about a resumption of organic growth (of 1%-2% in constant currency) by H2 FY 2017, with acquisitions expected to bring an additional 1% - 2% per year. Is organic growth likely? We think not.

While we believe CSC may well resume topline growth by H2 FY17 (for the first time in many years) we believe this will be driven by acquisition activity.

Since the arrival of Mike Lawrie as CEO, there has been a sharp improvement in profitability - and the drive continues. For example over the next three years CSC is targeting a margin improvement of 125 to 175 bps from delivery and workforce optimization. And in procurement, it is looking to take out another $300m in spend

But achieving topline growth in the legacy business? Let’s look briefly at the current portfolio.

GIS: still impacted by red contracts; may shed its data centers

While the number of red contracts in Global Infrastructure Services (GIS) is far fewer than the 45 when CEO Mike Lawrie, a handful still remain – and their impact continues: they will represent a revenue decline of 200m to $250m in FY 2017.

GIS has changed its market approach, only going after large deals very selectively. But strengthening the sales culture, for both hunting and farming, and account management is not something that can be done speedily, particularly in a global organization like CSC. The company has increased sales-related expenses to 5% of revenues and claims it is both retraining and hiring aggressively. However, it is hardly an employer of choice currently.

In recent years, GIS has standardized and streamlined its portfolio, and repositioned from large asset transfer deals to smaller deals, in line with a general market shift. CSC has sought to reduce delivery fragmentation across clients, and drive hardware, software, tool and process standardization. As it admits“[previously] we had volume but we did not have scale”. This will help in pricing – but enough to win enough new business to drive topline growth?

In what would be a dramatic move to move to an asset-lite model, CSC is now considering shedding its large estate of datacenters and moving to a co-location partner model.

GBS: Turning around US consulting and growing Celeriti Fintech both key

Within Global Business Services (GBS) the consulting unit has recently seen mixed performance in terms of topline growth and profitability. In Q2 FY16, the U.K. was back to growth (18% in CC) whereas the U.S. consulting was (down 5%). CSC is confident it can replicate its success in its U.K. consulting practice in the U.S. We are not convinced.

Elsewhere, GBS is expecting slight organic topline growth (up to 2%) in its Industry Solutions and Services (ISS) business in the banking, insurance and healthcare/life sciences sectors.

Key to this will be the JV with HCL Technologies (‘Celeriti FinTech’) in which CSC has put Celeriti and Hogan, and which addresses modernization opportunities in the banking sector.  It is too early to tell how successful this JV will be - but speed is of the essence, both in the platform development and in the sales efforts.

CSC did not address in the investor day how it is going to address its fast decline (~7% in CC in H1 FY16) in its application management and software testing businesses. Traditional application management continues to prove tough, even for some of the larger IOSPs. And the AppLabs acquisition has not helped CSC achieve the kind of growth in software testing that other vendors have been enjoying recently.

“Next-Gen” Offerings: Targeting 30% CAGR

CSC claims its “next-gen” offerings will represent ~$700m of its FY16 revenues (or just over 10%). They comprise

• Cloud $210m
• Cybersecurity $150m
• Big data $80m
• “Other next-gen”: $260m.

A targeted 30% CAGR means revenues of over $1.5bn by FY19 - excluding any contribution from acquisitions. And here the targets for the legacy business get a little cloudy, particularly in “other next gen”, also what is in scope in “cloud” (e.g. does it include BPaaS).

Overall, the aspiration to achieve organic revenue growth seems optimistic.

Acquisitive Growth Will Reshape the Portfolio

CSC is essentially a company that continues to look to reinvent itself. We believe any profitable growth in the next few years will be dependent on acquisitions.

The four that CSC has recently closed or is actively considering (we have written separately about all of them in other blogs) indicate where CSC is looking to reshape its portfolio:

• Fixnextix and (if it completes) Xchanging will boost the ISS and industry-specific BPS business in the BFSI sector
• UXC (again, if it completes) brings in additional scale in Australia, plus useful practices for ServiceNow and Microsoft Dynamics
• Fruition Partners brought in ServiceNow integration capabilities.

Together, these will mean an investment of ~$1.2bn…. above CSC’s guidance of acquisitions accounting for 15% of its capital allocation.

Before, CSC was talking about acquiring in areas such as cyber (for commercial, enterprises, not just in the federal). The emphasis now appears to be more strongly on GBS, and on industry IP, domain expertise and BPS in a few target sectors. While CSC has longstanding experience in both insurance software business and in insurance BPO, it has not historically really leveraged the former to build a BPS business: this would mean a shift in focus.

Another area where we might expect to see inorganic growth is in analytics.

We recognize that organic topline is not the Holy Grail when it comes to shareholder value: CGI provides a great example of a company that is superb at managing and integrating very large acquisitions every few years without achieving organic growth. In comparison, CSC’s track record in acquisition is mixed, and it does not have CGI’s “Management Foundation”. 

But CSC knows it needs to move fast. Will it reach $8.5bn revenues by FY 19? Possibly. Will it achieve this through organic growth? Probably not.

Dominique Raviart and Rachael Stormonth

Why Trissential?

Unlike its two previous acquisitions (Bit Media in Italy and Thinksoft Global Services in India, both software testing services companies), Trissential is a consulting firm providing program and project management services to help CIOs manage their IT contracts. The company specializes in JD Edwards, ERP and SCM contracts, and has developed several IPs around JDE.

SQS’ strategy is to mirror what it did in 2007 with the acquisition of Triton in Austria, a management consulting firm involved in business process reengineering and project/program management services. Triton (now SQS Management Consulting) has continued operating as a separate unit, and its revenues have doubled to ~€12m between 2007 and 2014. More importantly, Triton has built from scratch the revenues that SQS now derives from the insurance sector (NelsonHall estimate in 2014: €43m).

Hence, SQS is seeking to replicate this success with Trissential. Like Triton, Trissential has software testing needs that it previously sourced from third party organizations and will now be sourced from SQS.

Because of its track record with Triton, the signs are good. SQS also has very little presence in the U.S. (~€12m in 2014), with no overlap in clients, and this should help the integration process and cross-selling opportunities.

Update on the Bit Media Acquisition

SQS closed the acquisition of Bit Media on February 1, 2015 and named the company to SQS Italia S.p.a.

SQS Italia provides software testing and QA services to Italian clients, especially in the public sector and financial services. It provides mostly on-site services and specializes in functional and integration testing. The company had 2013 revenues of €11.5m (NelsonHall estimate for 2014: ~€12m). It is highly profitable (PBT of €1.1m) but with low-growth (low single digits per year, as per NelsonHall estimate). More details here.

An interesting characteristic of Bit Media is that it has a huge backlog of services (~€33m), corresponding to a little bit less than three years of revenues. This is due to the company’s client base in the Italian public sector, with which it has contracted long-term engagements.

SQS has also highlighted:

• It wants to continue developing its presence in Europe
• The similarities between the German and Italian markets, with their structure of SMBs in the manufacturing sector. SQS is hoping to replicate its success in its domestic market in Italy
• Bit Media is complementary to SQS, as SQS did not have any legal entity presence in Italy
• The timing of the acquisition was important, with valuations still reasonable and a re-acceleration in GDP growth after difficult years.

Looking ahead, SQS wants to grow SQS Italia in the private sector, particularly with MNCs in financial services, and is investing in sales activity locally. SQS is expecting first revenue synergies in the next six to nine months.

The Year Ahead: U.S. Again

The Bit Media and Trisstential acquisitions were unexpected moves (in terms of geography for Bit Media; and in terms of services mix for Trissential).

What is interesting, however, is that even after the two transactions, SQS has moderate net debt: NelsonHall estimates that at this point SQS has a net debt of €6m (based on 2014-end financial information and the cash payments for Bit Media and Trissential).

In short, the Trissential deal is not the last M&A move for SQS this year. The company highlights that if it makes another acquisition in 2015, it will again be in the U.S. It has even instructed the financial community that it will have a (limited) net debt at the end of 2015 as a result of acquisitions.

SQS has not given a lot of detail regarding its next target, but from the discussion, the acquisition will be more of a traditional testing services firm with an onshore factory capability to service clients in the government and defense sectors.

SQS has announced that it wants to eventually derive 50% of its revenues from North America. And with Trissential, the company is roughly half-way towards its mid-term objective of €100m in revenues (NelsonHall estimate: ~€43m in 2014 pro-forma revenues).

SQS is currently servicing a number of banking and financial services clients from India, several manufacturing clients (automotive, Siemens PLM), and now has onshore presence in the U.S. Mid-West. So, while we can expect to see more M&A activity from SQS, there also remains ample potential for organic growth.

Background

In 2010 Capgemini created BIM as a GSL which, in Capgemini terms, means the service line crossed through different Capgemini units, namely Applications1, Applications2 and Sogeti. One of the main reasons for grouping together internal activities was not only to mutualize resources and personnel but also to accelerate its industrialization journey. As part of this industrialization initiative, BIM set up factories in India (NelsonHall estimates that I&D now has a headcount of 5k in India, up from 1.5k in 2010). As a result, BIM expanded from traditional short-term projects to longer framework agreements.

Service Portfolio Expansion

With the rise of big data in the past few years, BIM expanded its service offering during the 2010-2015 period. The unit initially offered data architecture warehousing and management, blueprinting, data analysis and performance reporting, and electronic file management, retrieval and collaboration portals.

BIM expanded its services offering to MDM (in 2011) and in terms of partnerships, e.g. Fatwire (website analytics), Exalead (management, aggregation and interpretation of high volume) and SAP HANA. The practice also invested selectively in verticalizing its portfolio, an example being its smart analytics services for utilities (with Teradata and SAP) and for the U.S. retail sector (around SAP HANA). Finally, around big data, Capgemini partnered with two main organizations: Cloudera (which provides a distribution of Apache Hadoop) and Pivotal (a SaaS ISV provider of data, application development and analytics software).

Capgemini also acquired BI Consulting in the U.S. (Minneapolis) to fill a gap in its service portfolio (business intelligence and enterprise performance management around Oracle applications). In 2010, BI Consulting brought in revenues of ~$19m and had a headcount of 85.

One of the largest client contracts has been with Unilever, awarded in 2011 for three years, and renewed since then. Unilever was initially a F&A BPO client, which BIM was able to expand to BIM services, e.g. consolidating data warehouses and implementing new data mining and analytical tools.

Why the Change to Analytics & Insights?

Capgemini felt that clients now take for granted that their IT service vendors have capabilities around big data. Expertise in Apache Hadoop was no longer a differentiator. Also, Capgemini clients have gone beyond the proof-of-concept phase: Hadoop-related projects are becoming mainstream.

The company therefore wanted to position around new in-memory offerings, along with other priorities including:

• Consolidating its IP and accelerators, to systematically address automation gaps
• Increasing its sales focus and address businesses, as opposed to IT only
• Further expanding its focus from project services/framework agreements to a platform. This is where Insights-as-a-Service comes into play.

Insights-as-a-Service

The newly renamed Insights & Data (I&D) has created the Insights-as-a-Service platform around broad principles:

• Based on pay per use, rather than traditional T&M and fixed price
• Re-use as much as possible
• Based on a service catalog
• Automate as much as possible.

Insight-as-a-Service is currently being piloted and will be released in H2 2015. I&D wants it to address several key issues: large amounts of data (‘data flood’ and IoT), security and privacy, embedded analytics, provision via a service catalog, and monetizing data.

Insight-as-a-Service aims to provide semi-off-the-shelf services around key themes. For example, compliance analytics for banks (determining the level of adequate liquidity), and fraud management analytics for tax authorities.

Capgemini has yet to finalize the initial features of Insights-as-a-Service and announce its functionality roadmap. Several topics have to be further understood in terms of pricing details and model; for example, will Insights-as-a-Service be a platform with little customization, or have single-tenancy for each client with much more customization allowed? Another key question is whether Insights-as-a-Service will be a technology service only or if Capgemini will bundle it with BPO services over time.

However, the release of Insights-as-a-Service will be a step change for Capgemini, moving from project services and a set of IPs and accelerators, as well as verticalized solutions, into a more consistent approach to service industrialization and reusability. This is a welcome move in a fast-moving area.

This blog was written before the announcement of the planned acquisition of IGATE. NelsonHall will provide an update on the analytics capabilities brought by IGATE separately.

Background

ITO Index data shows a steady (but non-linear) decline in Total Contract Value (TCV) from 2002 onwards. The level of new-scope contracts declined from ~80% towards ~40%, signaling fewer new deals. Then came the subprime-driven recession of 2008-9, which triggered a vast level of ITO renegotiations, and a further reduction in new-scope contracts. The ITO market has also been impacted by offshoring, with very significant reduction in prices and TCVs, and increasingly by cloud computing (and in particular public clouds).

What does our short-term spending analysis tell us?

Spending in IT services has continued to grow, albeit at low levels (~2% in Q4 2014 and about the same during full-year 2014). Growth is driven by professional services (+3% in Q4 2014 and ~4% full-year). ITO spending growth was slightly negative in Q4 2014: it has been since Q1 2013. This is a bit of a surprise: when we did our initial spending analysis and estimates three months ago, we expected flat ITO spending in Q4 2014, not a (small) decline.

What does our 12- to 18- month bookings quarterly analysis tell us?

During 2014, ITO bookings were flat across geographies, including North America and Europe. Activity in fast-growth countries (India, Brazil, China) was anecdotal. In Q1 2015, growth in bookings was significant at +40%, driven by Europe. Activity in North America was stable and activity in fast-growth countries was limited.

An important KPI is the level of new-scope contracts (as opposed to existing scope contracts), and an estimated 72% of contracts with a TCV over $100m were new-scope in Q1 2015. The level of new-scope contracts varies from quarter to quarter significantly and therefore we cannot read too much into Q1 2015’s high level of new-scope contracts. However, it is worth pointing out that the level of new-scope contracts has gradually increased from 30% in 2012 to 40% in 2014. Q1 2015 therefore fits well with this trend towards a higher level of new contracts.

NelsonHall’s forecast for 2015

Despite Q1 2015 bringing good news in its three main KPIs (better economic conditions, contract bookings in dollar terms, and percentage of new-scope contracts), we believe the outlook for IT services in 2015 remains mixed.

Indian offshoring will have a continued deflationary impact on prices and spending across IT services. To a lesser extent, public cloud computing is also impacting spending in server management and datacenter services. Both adoption of offshoring and public cloud is accelerating: evidence of contracts has expanded from Nordics and the Netherlands to Germany, and adoption of public IaaS is also accelerating in the U.S. primarily, but also in Europe.

We are therefore predicting limited higher growth in IT services spending overall (2.5-3.5%), professional services (4-5%), and ITO (1-2%).

You can listen to a recording of this week’s ITO Index webcast here. NelsonHall regularly blogs about the ITO industry here.

You can register for the next ITO Index webcast scheduled for July 2nd, 2015 here.

With NETRA, TCS Assurance Services Unit (ASU), the main testing unit of TCS, is pursuing its strategy originated with Intelligent Testing Systems (ITS) to develop broad-reaching IPs, encompassing open source software, COTS, and TCS-developed accelerators. ITS is focused on the full testing life cycle, from test design to automation and execution, relying on tools including those from Informatica (for information life cycle management) and CA (largely for service virtualization). See “TCS to Release V3 of Intelligent Testing System To Automate Full Testing Lifecycle” comment.

With NETRA, TCS ASU has focused on DevOps/continuous integration/continuous development activities from development, to testing and deployment, onto production, with the intention of offering a comprehensive automated offering encompassing the software testing lifecycle. NETRA targets primarily client organizations using agile development and testing methodologies. NETRA aims to address in particular issues related specific to DevOps i.e. putting into production frequent releases (through a pipeline approach). NETRA also aims to tackle traditional issues e.g. provisioning of development testing environments involve production and application stakeholders that work in different units of a client (or third party) organization; and conflicts arising from environments being shared across different stakeholders.

NETRA includes:

• Provisioning of test environments (including booking and tracking ) and of test data
• Continuous integration
• Release automation
• Monitoring services (of databases, IT infrastructures and of URLs).

NETRA includes at its core CA Technologies tools, mainly release automation (RA, the tool from the former Nolio) as well as open source tools such as Jenkins CI, COTS such as Microsoft Team Foundation Server (TFS), and other monitoring tools.

NETRA also includes other offerings and IPs from TCS, namely integration with test execution tools (Selenium and HP QTP), performance testing (JMeter) and test support services such as test environment management and provisioning (based on VMware technologies or from Amazon Web Services), and test data management; as well as code quality analysis (SonarQube).

Essentially, TCS ASU markets NETRA as a suite of pre-integrated software tools and IPs. Yet, the company can also deploy NETRA’s functionality with a modular approach. TCS will also deploy NETRA accommodating client specificities, e.g. a client using continuous integration tool CruiseControl rather than Jenkins CI (the default CI choice within NETRA).

NETRA shares with CA Lisa Release Automation several features e.g. automated deployment (“zero touch”) and using pre-populated software options e.g. a specific database (“provisioning by templates”). The company has worked on making NETRA based on “service consumption”. Service consumption refers to having to use a single screen for a service irrespective of different application technologies, COTS or release.

NETRA also has a feature to define,  during the various phases of an application, services to perform under each phase. This helps creating a service pipeline and automating execution of this pipeline.

Deployment time for NETRA is varies from 4 to 6 weeks to up to three to six months:

• TCS is able to reduce deployment time to 4 to 6 weeks (“jumpstart”), when the client has selected software products to NETRA (CA Lisa Release Automation, Red Hat JBoss, IBM Websphere, Oracle WebLogic, Oracle databases, Microsoft SQL Server, MySQL, and Microsoft IIS). For those software products, TCS has developed automation scripts (“manifests”) and processes to deploy applications automatically
  - TCS is currently working on developing similar manifests for HP QTP, Selenium and JMeter
• Three to six month deployments occur when TCS has to develop new manifests and processes for CA Lisa Request Automation, for tools other than Jenkins CI or for specific tools.

TCS has currently two clients deploying NETRA, one of those clients being an energy firm in the U.K. and the other a large banking client in the U.S. Interestingly, TCS is piloting with clients active on major initiatives including SAP Transport and J2EE/.NET development languages.

TCS is therefore positioning NETRA for all kinds of applications and technologies, whether front-office or back-office. NETRA does not accommodate mainframes nor does it accommodate COBOL applications.

In its roadmap, TCS wants to further enhance the features of NETRA. One priority is to integrate with SaaS ITSM tool ServiceNow to process service and change requests from the service desk into NETRA for handling continuous development and continuous integration.

Analyst Comment

TCS continues its IP approach, this time focusing on DevOps and taking a full lifecycle testing approach. The automation approach plays well in DevOps and especially in the continuous development/continuous integration space: agile development comes of course to mind and also front-office applications, with its approach based on short development and testing cycles, frequent releases, and overall need for IT reactivity.

TCS ASU with NETRA is not offering an off-the-shelf product but a journey, taking a best-of-breed approach and pre-integrating all tools and software. In so doing, TCS brings experience and repeatability to its clients. The company also takes a pragmatic view of technology and will use open source software, whenever it is feasible, rather than COTS. Also, TCS ASU will be reviewing its technology elements within NETRA and potentially will turn to alternative software products when necessary. This should help reduce potential lockup in a given technology and ISV.

Additionally, the pre-integrated approach means that implementation times required for NETRA are likely to be relatively short: an implementation duration of three to six months may seem a long time but is acceptable given the potential benefits of creating a continuous development/continuous integration strategy.

A business case will be required to understand the financial implications, not only because TCS is selling its tools as an IP, but also because of the license price of embedded COTS.

Finally, one area of development for DevOps is to expand from an asynchronous continuous development/continuous integration approach into a true bilateral journey where experience of IT operations will automatically provide feedback to development and testing teams. Current monitoring activity is the start of this approach, and the next step is TCS’s integration of ITSM tools into NETRA. TCS can then write the next chapter of IT server management, providing feedback into software design.

Background

The data shows a steady (but non-linear) decline in Total Contract Value (TCV) from 2002 onwards. The level of new-scope contracts declined from ~80% towards ~40%, signaling fewer new deals. Then came the subprime-driven recession of 2008-9, which triggered a vast level of ITO renegotiations: in 2009, bookings were up to a very high level, but that of new-scope contracts were low (~20%). Unlike 2001 when the internet bubble burst, the 2008-9 crisis was about existing contract renegotiations, not about new deals.

Contract signings were high during 2009 and 2010. But then, booking levels declined to their lowest level since 2008, to ~$32bn. Meanwhile, the level of new-scope contracts continued to be low. In short, the market is quiet with few transactions, mostly renewals and recompetes. This signals a maturing market, also marked by the impact of offshoring (which is reducing prices and TCVs very significantly) and also - and increasingly - by cloud computing (and in particular public clouds).

About three years ago, NelsonHall complemented its ITO Index approach based on contract data with a quarterly spending analysis of IT services, professional services (i.e. consulting and systems integration) and ITO. Our quarterly spending analysis has several benefits: it provides a quarterly view on how ITO spending is going to evolve, while our contract signings analysis provides more of a 12 to 18 month view of how ITO spending will change.

What does our short-term spending analysis tell us?

Spending in IT services has continued to grow, albeit at low levels (~2% in Q4 and about the same during full-year 2014). Growth is driven by professional services (+3% in Q4 2014 and ~4% in full-year).

Meanwhile, for the first time since Q4 2012, ITO spending growth was in positive territory in Q4 2014 (up by almost 1%) and down 1% for full-year 2014. This final quarter improvement in spending growth results from better economic conditions in mature countries.

What does our 12- to 18- month bookings quarterly analysis tell us?

During 2014, ITO bookings were flat across geographies as well as in North America and Europe. Activity in fast-growth countries (India, Brazil, China) was anecdotal.

An important KPI is the level of new-scope contracts (as opposed to existing scope contracts): an estimated 40% of contracts (with a TCV over $100m) in full-year 2014. This is better than 2013, when new scope contracts accounted for ~35% of bookings (and 30% in 2012). This level is at the higher end of the traditional range and is good news.

What does NelsonHall forecast for 2015?

The outlook for IT services in 2015 remains mixed, with the improving economic conditions driving some spending. For ITO specifically, the higher level of new-scope contracts will also have an impact on spending.

However, the economic environment in mature economies is only somewhat better. It is positive for India, unclear for China and Brazil, and clearly negative for Russia. In addition, offshoring will continue to further drive prices down, resulting into lower spending.

We are therefore predicting limited higher growth in spending in IT services overall (2.5-3.5%), professional services (4-5%), and ITO (1-2%).

You can listen to a recording of this week’s ITO Index webcast here. NelsonHall regularly blogs about the ITO industry here.

This NelsonHall Vendor Evaluation and Assessment Tool (NEAT) is now available to NelsonHall clients, and is also available for a period free-of-charge to buy-side organizations through NelsonHall and through its partners SIG and SSON.

The tool covers a number of business situations related to AO services, addressing the needs of organizations looking to:

• Use managed services to centralize spending and industrialize their processes
• Optimize their balance sheets by focusing on personnel transfer and the potential sale of assets
• Lower spending on application maintenance, support and enhancements, to fund new systems integration or application development projects.

Suppliers of AO services covered by this NEAT evaluation are Accenture, Amdocs, Atos, CGI, Capgemini, Cognizant, HCL Technologies, HP Enterprise Services, Infosys, TCS, Tech Mahindra, Unisys, and Wipro.

The NEAT tool for AO services is part of NelsonHall’s Speed-to-Source initiative. The tool sits at the front-end of the vendor screening process and consists of a two-axis model: assessing vendors against their “ability to deliver immediate benefit” to buy-side organizations and their “ability to meet future client requirements”.

The NEAT evaluations are based on a combination of interviews with the vendors and their clients. The vendors are scored against a wide range of criteria, establishing a number of scenarios, each representing a different business situation or client business need.

To add further value, the NEAT tool enables buy-side organizations to input their own weightings and tailor the AO dataset to their specific requirements across ~ 40 individual vendor evaluation criteria. Using the interactive web-based tool, sourcing managers can configure the NEAT evaluations in accordance with their own priorities and business requirements for service offerings, delivery capability, customer presence, benefits achieved, and other criteria. 

Luxoft is a young company - it was founded in 2000 - that is enjoying very fast growth (20%-25% depending on the year). For its FY 2015 it has guided on revenue growth of at least 28% (of which 25% organic) and an adjusted EBITDA margin in the 17% to 19% target range.

Luxoft is targeting $1bn in annual revenues by 2017, while maintaining an adjusted EBIDTA margin in the target range.

The company also wants to reach a market cap of $3bn, up from ~$1.2bn currently during this time frame.

Financial Services the Main Growth Engine

The financial services sector is Luxoft’s primary revenue engine, contributing over two thirds of its total revenue and delivering very high growth (39% in FY 2014; 44% in H1 FY 2015) - and at a time when even the Tier 1 Indian vendors have been seeing market softness in financial services.

Luxoft offers specialized application services, largely around back-office, in areas such as wealth management, trading, treasury and equity derivatives. Luxoft is also very active in regulatory compliance, where it sees no slowdown in demand, with deadlines for new provisions of Basel and Dodd-Frank ranging until 2019. Most activity is project-based.

Luxoft has been moving to more fixed price contracts, away from pure T&M pricing: 58% of revenues are now fixed price (vs. 21% in H1 2013).

A key initiative is around reuse of IP. In one example Luxoft bought the IP of a management reporting tool it developed for Deutsche Bank, and branded it Horizon; it now has five 5 clients for Horizon, which it sells as licensed software. Luxoft is developing a network of service partners around Horizon: Deloitte is a major partner.

Investing Now in Auto and Telecoms Sectors

Luxoft is looking to replicate its success in financial services to the automotive and telecom sectors. In the telecoms sector, focusing on opportunities around software-defined networks and network virtualization.

In automotive, focusing on opportunities in human machine interface (HMI) in-vehicle-infotainment (IVI), IoT and autonomous car. Investing some of the funds it received from its IPO: it has made two acquisitions:

• Populus Suite from Swedish ISV Mecel (a subsidiary of Delphi), helps in designing, developing and deploying HMI for embedded systems. Populus complements the functionality of Luxoft’s Teora and should act as a door-opener to new clients
• Radius, an IoT services firm based in Seattle active in four areas: mobile devices (to collect data), cloud computing (data hosting), data management and analysis, and APIs. While IoT has been inhibited by lack of standards, market conditions are changing as costs of telecoms and of sensors go down, making it easier to make business cases. Radius  also highlights big data technologies are maturing to be able to process data transmitted by sensors. And increasing adoption of API is helping interoperability across devices and sensors
  Radius has been verticalizing its IoT offerings for the high-tech, retail, telecom, manufacturing and aerospace sectors. It is also aiming to develop a IoT offering relevant to automotive together with Luxoft.

Both sectors contribute ~8% of revenues; neither is yet in organic growth mode. Further acquisitions are likely.

Risk Mitigation Initiatives for Delivery and Client Base

With three quarters of its headcount in Ukraine and Russia (45% and 29% respectively), Luxoft is potentially exposed to the current crisis between the two countries. The company highlights none of its personnel worked from Crimea and that the geopolitical conditions in Ukraine have not led to significant work interruption.

Nevertheless, Luxoft wants to de-risk its delivery presence and has launched its global upgrade program (GUP), under which no geography will account for more than 25% of headcount. Luxoft is applying two levers:

• Relocating Ukrainian and Russian personnel to other centers (~150 achieved and plans to reach ~200 by end of FY 2015).
• Growing alternate centers: Romania has reached a headcount of 1,000 (12% of global headcount) and Poland 500. The company recently opened delivery centers in Sofia, Bulgaria and Guadalajara, Mexico, its first nearshore center for the U.S. (with plans to reach 200).

Another risk mitigation initiative that Luxoft is conducting relates to revenue stickiness. The company is not active in run services, which typically provide long-term recurring revenues. Luxoft is not planning to enter the IT outsourcing space, although its provides application outsourcing services as part of enhancement activity, largely because it considers application maintenance and support as a less value-add activity than, say regulatory compliance. Growth in the company’s IP business should drive a larger share of long-term contracts.

Luxoft also addressed concerns about the high level of client concentration in revenues: in H1 FY 2015, its largest clients were Deutsche Bank (~38% of revenues, +60%), UBS (~21%, +38%) and Harman (~8%, +32%). Under its high potential account (HPA) initiative, Luxoft is identifying clients with the potential to contribute revenues of >$5m p.a. It added three new HPA accounts in Q2 FY 2015, none in financial services, and is also counting on acquisitions to diversify its client base. Meanwhile, the company highlights potential for further growth in its largest accounts is still very high.

This event provided more light on a highly-successful but little-known IT services vendor.

Luxoft is emerging as a different kind of application services vendor: it is less process oriented than India-centric firms, has a different pyramid model (75% of Luxoft’s delivery personnel have three years and more of experience), and is very focused on specialist offerings in a few vertical segments.

Mitigating its exposure to a few large clients will be a major focus in the short term.

SAP

IBM’s largest partner has been, and remains, SAP. IBM conducts SAP-related work around GBS, including C&SI and AMS, Systems & Technology (including AIX servers, cloud computing and storage, now that IBM has sold its x86 server business to Lenovo). As always with IBM, no idea of scale was provided. Yet, 60% of SAP services work is project services and the remaining AMS.

Activity in SAP services remains driven by large ERP implementation in fast-growth markets, adoption of SaaS applications, especially in the U.S., and of new technologies, e.g. mobility and big data (along with SAP HANA). Work around SAP instance consolidation is less prominent. Interestingly, the success of SaaS applications in HR and CRM is resurrecting best-of-breed discussions, a topic that had disappeared in recent years.

Nevertheless, the vast majority of SAP services activity remains on-premise and implementation-related. IBM wants to increase its focus on SAP newer technologies: the company has invested in growing the number of consultants on SuccessFactors to 1.5k and is also accelerating on hybris.

SAP HANA is also a priority: IBM is officially certified for hosting SAP HANA.

SAP’s shift towards newer technologies is also inducing changes at IBM. IBM GBS EA’s SAP practice is investing in a skill shift towards more PMO and handling more complex engagements involving on-premise, cloud and SaaS services. Another area of investment in its SAP project business is towards Indian offshoring and onshore factories, selectively.

Oracle

A rising partner is Oracle, with whom IBM provides services from two main units: its Oracle practice, as part of Enterprise Application, itself a unit of GBS; and GTS, around Oracle middleware and databases.

Interestingly, Oracle shares with SAP the same strategy towards newer technologies. Differences exist, however:

• Like SAP, Oracle is undergoing a change towards SaaS and mobility. And like SAP, Oracle-related work is largely related to traditional on-premise implementations. IBM GBS’s Oracle practice is working on further strengthening the relationship with Oracle, investing in retail (former Retek) and omni-channel. Meanwhile, the Oracle unit is also investing selectively in professional services around Oracle software products specifically by geography, e.g. iflex in Middle East/fast-growth economies
• Unlike for SAP, IBM is investing selectively around Oracle SaaS products, focusing on two main initiatives: a ‘retail in a box’ offering, which combines a pre-configured Retek application hosted on IBM’s cloud; and the HCM Fusion Cloud application.

Mobility

Meanwhile, mobility remains an important driver for growth. This is where IBM's recent alliance with Apple comes into play: IBM is to develop 150 standalone apps in the next months that it will sell as software products. IBM’s apps are verticalized and target specific feeds: one such targeted app will help plane pilots to estimate their fuel needs for a given flight, based on parameters including weather conditions during flight duration, including time to take off and land.

The agreement with Apple on these standalone apps is mutually exclusive and IBM will only develop apps as "products" for iOS and not for other OS including Android. Yet, as part of traditional custom projects, IBM is to continue to develop apps for all OS.

Other terms of the agreement include reselling Apple mobile devices, and providing repair and maintenance services, including spare parts in countries where Apple is not present. Interestingly, IBM is open to buy the existing mobile device estate running on Android or on BlackBerry OS and replacing them with iOS devices, when necessary.

Work conducted with Apple is nascent at this point.

Along with this initial agreement, IBM is developing its apps strategy and also developing on a custom basis (whether on its IBM MobileFirst products or on SAP Fiori/Oracle OVD technology), to integrate with SAP and Oracle ERP applications. The offering is a work-in-progress but remains an important long-term development plan.

Tackling Increasing IT Complexity

IBM highlighted the similarities between the strategy of Oracle/SAP (i.e. cloud computing, big data and mobility) and its own strategy. And indeed, the three companies are well aligned. Nevertheless, from an IBM point of view (e.g. the SAP practice within GBS), the move towards cloud, big data and mobility has very considerable implications in terms of reskilling and the sales model, and even more in terms of handling complexity.

And perhaps one overlooked aspect of the move towards SMAC is that the world of IT is not getting simpler but largely more complicated. IBM's service mix (as well as Accenture's) around SAP and Oracle applications shows the co-existence of on-premise applications, SaaS applications, technical upgrades with SAP HANA driving new usages, and of course mobile apps, as well as public cloud, virtualized servers, and hybrid clouds. This increasing complexity is accelerating: as mentioned earlier, SaaS discussions are bringing back the notion of best-of-breed. In addition, IT services vendors are now reporting that SaaS implementations are becoming more comprehensive and more costly.

A lot of this growing heterogeneity has driven in the past five years the emergence of the cloud orchestration notion.  Cloud orchestration is a useful activity to handle complexity. Yet, in principle, this growing IT complexity seems in contradiction with what IT departments and also IT services vendors have aimed to achieve in the past 10 years, through process standardization initially, through IT vendor consolidation, and  IT product standardization. The question therefore remains how to reconcile complexity with a need for standardization and lower costs.

Looking ahead, it is becoming clear that the next economic slowdown will drive further standardization, similar to 2008-2010 when SAP clients invested heavily in SAP instance consolidation. The big question is therefore how to do this now, rather than in 5 years. The question remains open but NelsonHall argues several broad principles should be applied, including:

• Asking businesses to re-use existing tools, software, hardware or resources. In particular, IT departments have a role to play in offering a limited choice of, say, three standard technologies for one given business requirement. Limiting choice will optimize personnel usage and drive license cost down/maximize reuse
• Evaluate and measure on an ongoing basis the usage and impact on service desk/technical help desks, as well as proceed to code quality audits
• Be flexible by managing increasing heterogeneity. For instance, clients may want to maintain IT standardization in applications such as ERPs that are integrated with many other systems, while allowing more customization of little-integrated ones, e.g. SaaS CRM or mobile apps.

Background

The data shows a steady (but non-linear) decline in Total Contract Value (TCV) from 2002 onwards. The level of new-scope contracts declined from ~80% towards ~40%, signaling fewer new deals. Then came the subprime-driven recession of 2008-9, which triggered a vast level of ITO renegotiations: in 2009, bookings were up to a very high level, but that of new-scope contracts were low (~20%). Unlike 2001 when the internet bubble burst, the 2008-9 crisis was about existing contract renegotiations, not about new deals.

Contract signings were high during 2009 and 2010. But then, booking levels declined to their lowest level since 2008, to ~$32bn. Meanwhile, the level of new-scope contracts continued to be low. In short, the market is quiet with few transactions, mostly renewals and recompetes. This signals a maturing market, also marked by the impact of offshoring (which is reducing prices and TCVs very significantly) and also - and increasingly - by cloud computing (and in particular public clouds).

About three years ago, NelsonHall complemented its ITO Index approach based on contract data with a quarterly spending analysis of IT services, professional services (i.e. consulting and systems integration) and ITO. Our quarterly spending analysis has several benefits: it provides a quarterly view on how ITO spending is going to evolve, while our contract signings analysis provides more of a 12 to 18 month view of how ITO spending will change.

What does our short-term spending analysis tell us?

Spending in IT services has continued to grow, albeit at low levels (~2% in Q4 and about the same during full-year 2014). Growth is driven by professional services (+3% in Q4 2014 and ~4% in full-year).

Meanwhile, for the first time since Q4 2012, ITO spending growth was in positive territory in Q4 2014 (up by almost 1%) and down 1% for full-year 2014. This final quarter improvement in spending growth results from better economic conditions in mature countries.

What does our 12- to 18- month bookings quarterly analysis tell us?

During 2014, ITO bookings were flat across geographies as well as in North America and Europe. Activity in fast-growth countries (India, Brazil, China) was anecdotal.

An important KPI is the level of new-scope contracts (as opposed to existing scope contracts): an estimated 40% of contracts (with a TCV over $100m) in full-year 2014. This is better than 2013, when new scope contracts accounted for ~35% of bookings (and 30% in 2012). This level is at the higher end of the traditional range and is good news.

What does NelsonHall forecast for 2015?

The outlook for IT services in 2015 remains mixed, with the improving economic conditions driving some spending. For ITO specifically, the higher level of new-scope contracts will also have an impact on spending.

However, the economic environment in mature economies is only somewhat better. It is positive for India, unclear for China and Brazil, and clearly negative for Russia. In addition, offshoring will continue to further drive prices down, resulting into lower spending.

We are therefore predicting limited higher growth in spending in IT services overall (2.5-3.5%), professional services (4-5%), and ITO (1-2%).

You can listen to a recording of this week’s ITO Index webcast here. NelsonHall regularly blogs about the ITO industry here.

vMT mostly focuses on reducing consumption of MIPS. In the context of mainframes, reducing MIPs usage is a key lever for lowering costs, as IBM mainframe-related hardware and software typically have license fees based on MIPS.

To achieve lower consumption of MIPS, vMT thus focuses on reducing dependency on mainframes, through mostly:

• Proceeding to development and testing activities outside of mainframes
  - Tech Mahindra is using Micro Focus’ Enterprise Developer and Enterprise Test Server for replicating mainframes development and testing environments respectively (with their related zOS and middleware) on open severs
  - vMT is based on Micro Focus Enterprise Test Server for isolating the tested applications from the mainframes (and therefore reduce consumption of testing and development MIPS). It provides specific tasks e.g. call on mainframe processes, access mainframe source data, control and execute test batch processing and ensure coverage
• Lessening dependency on external interfaces, whether for interfaces to application running on mainframes or being enhanced
  - Tech Mahindra uses CA’s service virtualization COTS for removing the need for using interfaces with other applications, whether on mainframes or not.

From a testing perspective, vMT is relevant for conducting regression testing, and other testing activities including systems integration as well as testing of software components as well as unit testing (by developers). vMT can also be used for UAT and performance testing but Tech Mahindra acknowledges clients are likely to use mainframes for UAT and performance testing.

Tech Mahindra sells vMT, for its development part; under two options: connect and non-connect. Under the connect option, the development environment is configured within 48 hours but requires more mainframe usage (i.e. more MIPS). The non-connect requires up to 10 working days of configuration work but is much lower on MIPS consumption.

Tech Mahindra also highlights its vMT offering  has several additional benefits, including:

• Increased access to dev and test environments (access to mainframes can be difficult both during day time, while in production, and also during the night, due to batch job processing
• Expanded test coverage (again, because using mainframes for test purpose is expensive in terms of MIPS and therefore tends to limit time spent on testing). The number of test cycles can be increased without depending on availability of mainframe hardware and software resources
• Higher interest in developers. Micro Focus Enterprise Developer provides integrated development environments (IDEs) such as Eclipse or Visual Studio. This has two benefits:
  - Remote development, using more modern user interfaces than the traditional green terminals mainframes are known for
  - Better programming using well-known IDEs, coming with associated COBOL syntax verification, ultimately reducing the number of program compilations.

Tech Mahindra estimates vMT may drive cost reductions by up to 20% in MIPS lower usage. Other benefits come from improved productivity, largely on the development side, using standard IDEs.

vMT is a new offering; it currently has one client; among its prospects, one is evaluating rolling it out to 300 internal developers.

The offering is a joint effort between the testing team of Tech Mahindra and its mainframe CoE. The two units have set up a mainframe TCoE in Bangalore. They have certified 40 personnel on how to configure Micro Focus Enterprise tools. Tech Mahindra’s mainframe unit has also trained 40% of its own personnel (~1,700 currently) on using the Micro Focus tools.

Tech Mahindra has a license resell agreement with both Micro Focus and CA for the respective products.

vMT, unlike other traditional testing offerings, is less about testing effectiveness, less about expanding testing automation, than addressing a key aspect of mainframe applications: MIPS consumption, solving a problem that is specific to mainframes. It has another aspect: traditionally tools in testing tend to automate what human beings could do. vMT is also about doing what human beings could not do anyway e.g. service virtualization; or lower MIPS usage.

vMT is specifically about conducting enhancements and testing for applications in maintenance mode. This responds to a large number of cases with clients maintaining their investment in mainframes and mainframe applications. To date, in spite of recent waves in interest in exiting mainframes and despite the solid cloud computing trend, legacy modernization is yet to occur on a massive scale. When legacy modernization does happen, especially in the context of migrating applications on a virtualized environment or to a public cloud, NelsonHall will be looking to Tech Mahindra releasing a specific testing IP or offering to address this trend. In the mean time, Tech Mahindra is building a testing service portfolio that is one of the most comprehensive in the market with recent offerings around service virtualization offerings performance engineering and testing.

TriZetto has a headcount of 3.7k (Cognizant at end of H1 2014: 187k.4). In its last 12 months, TriZetto had $711m in revenues and a non-GAAP operating margin of 18.4% (Cognizant in 2013: 20.6%).

TriZetto LTM revenues breakdown by service/product line is:

• Payer software: 40% (~$277m)
• Consulting: 23% (~$164m)
• Hosting: 13% (~$92m)
• BPO: 5% (~$36m). BPO services are provided on the Payer side
• Provider SaaS: 20% (~$142m).

Cognizant has higlighted the acquistion of TriZetto as an important step in the company's history:

• Towards a non-linear growth business. TriZetto is obiously an ISV business and has higher revenue per head (~$190k) than Cognizant (~$50k). Howevever, Cognizant is not buying a provider of plartforms: TriZetto is essentially a traditional ISV selling on premise perpetual licenses, where applications are implemented and customized by the client
  - SaaS revenues represent 20% of revenues, BPO services 5% only
• As a revenue generator with planned $1.5bn in additional revenues over 5 years. TriZetto has been a flat growth vendor overall in spite of M&As. In addition, the additional $1.5bn in additional revenues does not mean that Cognizant will triple revenues of TriZetto. Taking an assumption of revenue synergies happening towards the endof this 5-year period, TriZetto could reach sales of ~$1.3bn, up from $700m currenly. This is nice but hardly exponential for the company of the quality of Cognizant
• TriZetto with its software product business has high margins. Yet, TriZetto has lower operating margins than Cognizant. In addition, TriZetto under the ownershipby Apax Partners, offers little cost synergies. This means that under Cognizant, which will be focusing on revenue growth and investment in sales and products, the operating margin of TriZetto is likely to go down.

This lack of growth raises the question of price. Cognizant has not provided detailed information regarding its net profitability. Yet $2.7bn in cash for a company with flat revenues at best, a net profit likely to be  in the $70m-$100m range and no cost synergies expected seems a bit expensive. However the market seems comfortable with the price Cognizant paid for TriZetto: Cognizant's share price was relatively flat after the annoucement.

This acquistion will put on hold any other significant M&A for Cognizant for while as the company will be focusing on small tuck-in acquistions to strengthen specific capabilities and focus on share buy-backs.

• Usage of Wipro IP and recommended COTS tools across the client’s operation for various tasks including ITSM, change management, demand management, problem management
• Analytics, based on data from ITSM applications, including number and categories of tickets, incidents, problems and nature of tickets (i.e. applications or data). This data analysis is used for root cause analysis and to help predictive and prescriptive maintenance, and to identify incident patterns
• Adoption of Wipro best practices e.g. preventive maintenance through pro-active event monitoring and event correlation; automation of repetitive tasks; usage of KM tools
• Consulting services to perform root cause analysis in the case of events, across applications and IT infrastructures
• Monitoring of several key business processes and of the underlying applications, IT infrastructure and networks to quickly identify where problems lie. Wipro has developed its business level agreements (BLA) approach, where the company is taking some for responsibility for the availability of business processes: such responsibility ranges, depending on client requirements, from monitoring flow of data exchange across applications (and informing clients) to, in the next future, being responsible for application availability (provided Wipro also manages IT infrastructures.)

Launched in May 2013, Wipro continues to enhance ServiceNXT. Additional features that have been added include:

• Insightix: Wipro has built on its existing analytics service based on data collected from ITSM and other tools. With Insightix, Wipro aims to identify applications and IT infrastructures that are costly to support (as measured in tickets and other events)
  - The service comes an application portfolio management approach to link application cost (in terms of support) with their importance to end-users and lines of business
• DevOps: in the context of agile projects with very frequent releases, Wipro has selected tools from HP (QC and QTP), IBM (Jazz) and Microsoft to automate testing (HP), deployment to UAT, and put into production of new releases
  - Wipro is putting a lot of emphasis on developing its DevOps approach as it is finding that 30% of new ADM project are agile-centric
• BLAs: as part of one engagement with an energy client , Wipro has worked on identifying several processes, including daily process milestones for energy trading and monthly closing milestones. Expand on its custom work with this specific client, the company is also capturing process knowledge, which it wants to offer as an accelerator to clients. Examples of such business processes include:
  - Retail stores: customer order fulfillment
  - Health insurance: percentage of claims auto adjudicated
  - Across industries: on-time invoice processing; on time delivery of spare parts; on time closure of predicted stock out.

Wipro believes that ServiceNXT has been instrumental in wining 14 contracts for a combined TCV of $1bn in the past 10 months. Two contracts stand out: Carillion (construction, U.K., 10-year, February 2014)) and Corning (manufacturing, U.S., May 2014,).

In the case of Carillion, Wipro has taken over the full IT including applications and IT infrastructures and some level of BPO work (F&A, back-office, HR, and sales administration), from a U.S. centric incumbent. The priority of the contract is to drive further cost savings, which Wipro is doing through the rollout of ServiceNXT across business to drive standardization and productivity. In the mid-term, once the transition is over, Wipro is to work with the client on a BLA approach to monitor key business processes. It is also to drive more synergies with ServiceNXT (used for ITO) and the BPO productivity framework used by Wipro’s BPO operations.

The Corning contract is IT infrastructure services-centric with some application management activities around SAP Basis. The priority for the contract is to drive cost savings through deployment of ServiceNXT across business units.

Wipro positions ServiceNXT for managed services contracts and with contract lengths of at least three years. Overall, Wipro is finding ServiceNXT fits contracts where it is taking over responsibility from the client to manage applications and IT infrastructures.

--------

ServiceNXT is an example of a new offering which applies a number of levers to substantially reduce the cost to serve in large IT infrastructure management and/or applications outsourcing contracts, while also focusing on the delivery of business-oriented benefits to clients. Several vendors have refreshed their offerings significantly: in the case of Wipro, ServiceNXT is a brand name for a productivity effort that the company has been pursuing for several years. With applications contracts, ServiceNXT is focused on run-the-business services as opposed to change-the-business services embedded in a multi-year contract. This shows that productivity improvements can still be found at the support and run level.

An increasingly common feature in ServiceNXT and other vendor offerings is the business process approach, in this case with its BLAs, where it monitors key business processes of a given client. At the moment, only a handful of vendors are currently on this path, but this approach is likely to become more widespread, at least in the larger vendors. Wipro is investing in building some level of pre-defined scenarios to accelerate adoption of business process-led AM services.

With ServiceNXT, Wipro is building its analytics approach to the application level, as opposed to a set of applications. Again, this is part of a long-term where several vendors, but far from all, are now adopting a single application view of application management. This is important as understanding at the application level paves the way for application-specific SLAs and analysis.

All in all, Wipro with ServiceNXT is one of the leaders in productivity improvements around AM and ITO.  It appears to have boosted Wipro’s success in securing very large outsourcing contracts.

NelsonHall recently published

• An analysis of the application outsourcing capabilities of Wipro
• An updated Key Vendor Assessment of Wipro, which looks at various initiatives to boost revenue growth and increase the number of very large accounts.

For more information on either, please email [email protected]. 

Sopra combines its application management capabilities with systems integration to promote an application service approach to clients. This application services approach also reflects the company’s focus in AM on level 2 and level 3, which implies a greater focus on maintenance and enhancements and much lesser so on level 1 end-user support.

The company promotes an AM value proposition based on a mix of industrialization and client proximity.

Industrialization

The industrialization approach is very evident in its delivery approach. Sopra has in recent years moved from onsite to factory-based delivery. Onshore, its network of regional delivery centers domestically, is now based on seven locations (Aix-en-Provence, Lille, Lyon, Nantes, Paris, Rennes and Toulouse). These centers tend to address regional opportunities, with the exception of the Nantes  and Lille centers that service Paris-headquartered clients, together with the Paris suburbs center. In total, the headcount in these domestic factories is ~4k (out of a NelsonHall total estimated app services headcount of 8k in France).

Sopra has also invested in its delivery capabilities in Spain (application services headcount: 470, 400 in Madrid and 70 in Valencia), servicing mostly French-headquartered clients. The Valencia center was opened in 2013 and acts as an extension of the Madrid center.

Sopra has also invested in building its factory-based delivery unit to over 1k personnel in Noida. Sopra Group India (SGI) is taking a growing role within the firm, having expanded from a delivery only approach to project governance now being shared between France and India and growing domain knowledge in India. Sopra has moved towards a global delivery network where India is taking a growing part, as France is, for managing client contract delivery, away from an internal subcontracting mode. Interestingly, 70% of SGI personnel services French clients.

Client Proximity

The proximity approach of Sopra in AM relies on location and regional application services centers. The company highlights that it is taking a different approach to HR, relying less on the traditional pyramid model, and aims to keep attrition level low (2013 for overall Sopra: 9.4%, of which 8.3% in France, 7.6% in Spain and 17.8% in India). A consequence of this approach is higher labor costs than those of competitors relying on the pyramid model, which Sopra highlights it counterbalances by lower attrition, more experienced personnel delivering higher productivity, and higher client satisfaction.

What next for Sopra in AM?

Looking ahead, Sopra has recently launched an offering, IT asset portfolio enhancement. The offering includes sourcing rationalization; cost optimization; go-to-market; security; legacy modernization; end-user satisfaction; usage of new technologies; and business involvement.

Sopra wants also to increase the involvement of Sopra Consulting with its application service contracts in terms of governance, application services strategy and contract pricing. An example of this approach has been for a telecom service provider to link contractual pricing to application performance in terms of business needs. Sopra highlights it has vertical knowledge in sectors including banking, telecom, retail, aviation industry, energy, and transport.

Sopra will go through a significant change with the likely merger of Steria and the planned creation of Sopra Steria Group (SSG). As far as AM is concerned, Steria will bring:

• Scale to Sopra outside France: Steria derived in 2013 ~€300m in AM revenues, of which 60% from the U.K. (~€220m). Steria France accounted for 30% (~€100m). Steria AM headcount is ~4k
• A successful U.K. operation, largely recently with the €1bn SSCL BPO contracts. SSCL is to provide significant application services opportunities during 2014/15, while Steria builds new applications for the client. SSCL builds on other current AM and BPO  contracts including those with NHS SBS, Cleveland Police and BT
• A track record in winning large deals: SSCL in the U.K., and to a lower extent in France: Ministry of Budget (6 years for a combined TCV of €120m), with Capgemini as main subcontractor.  Another example is Pôle Emploi (application services, 3-years, TCV estimated by NelsonHall to ~€75m). Steria also brings a success story in Norway in servicing central government with mid-sized AM contracts
• Additional offshore and nearshore presence, with 1,000 personnel in Noida, Chennai and Pune; 100 in Casablanca, Morocco and a small 30-strong presence in Krakow, Poland.

However, AM has not been a growth driver for Steria since its acquisition of Xansa, in spite of its references and presence in India. NelsonHall assumes that the forthcoming SSG will align the capabilities and approaches of Steria and align in particular its approach to application management: Steria tends to have Indian offshore and factories delivering AM services while C&SI is more onsite or onshore.

NelsonHall has recently published a profile of the application management capabilities of Steria. The report is available here for subscribers. For non-subscribers, please contact Guy Saunders at [email protected].

CSC’s SAP practice is relatively large within CSC (headcount 7.7k, ~10% of CSC’s overall 80k). CSC has recently engaged in a service portfolio refresh to increase its differentiation through more specialized SAP-related services. This differentiation relies on adoption of automation tools and enhancing its industry domain knowledge.

CSC's SAP practice Next Gen SAP offering relies on several pillars, including SAP HANA, cloud computing, industry templates, alignment on SAP’s product strategy and legacy-to-SAP application modernization and SAP next-gen (including SaaS offerings).

Cloud-Hosted Industry Templates

CSC’s SAP practice has developed several industry templates (some of which are based on SAP HANA). These assemble-to-order industry solutions, as CSC refers to them, are more than templates and include pre-set standard business process blue prints, and CSC recommendations on configuration.

They have a short implementation duration (4 to 6 months) and depend on a client accepting use of standardized processes and no further customized application development. CSC is aiming to reduce further implementation times to weeks, as opposed to months, over time. Also, CSC intends to offer several hosting options, including hosting in public clouds, to accelerate the deployment of its templates.

The offering is targeted at large enterprises and mid-sized firms.

CSC’s SAP practice has to date developed templates for engineering, construction and operations; public sector social services (initially in the U.S.); and for the banking industry. The latter is part of CSC’s Q2 2013 partnership with SAP to migrate clients of CSC’s Hogan (core banking) and Celeriti (cards and payments) to SAP’s own corresponding application for the banking industry. With its engineering and construction template, CSC’s SAP practice is targeting a growth industry with under tapped SAP acceptance.

In total, CSC has developed or is developing ~12 industry templates including ones for real estate, global trade, environment and safety, aerospace, and expanding its social services to sub-verticals, e.g. at federal and state level, initially.

CSC has currently two clients for its “assemble-to-order industry solutions”.

Cloud Services

CSC recently announced a cloud computing initiative that involves hosting of SAP HANA applications, based on:

• Public clouds: Amazon Web Services and other public cloud vendors
• Private clouds: reliance on VMware technology and on CSC BizCloud
• Migration of applications towards IaaS, based on CSC’s ServiceMesh Agility Platform as well as based on SAP tooling
• Hitachi Data Systems as recently-certified SAP HANA server hardware vendors.

Alignment on SAP Software Products

CSC’s SAP practice is aligning its go-to-market and capabilities around SAP’s commercial strategy. SAP HANA is a primary target as the next evolution for on-premise applications and around products from hybris. CSC also aims to expand its capabilities around SAP’s SaaS products, which include Ariba and SuccessFactors. CSC is working with HCL to identify additional personnel with relevant skills, especially around SuccessFactors.

Legacy-to-SAP Application Modernization

This sub-offering is to be put in the context of the larger CSC-HCL application modernization initiative announced in February 2014. Under the partnership, both companies are to behave operationally like a JV, sharing revenues and direct costs on a 50-50 basis. For further information on this announcement, click here.

As part of this modernization partnership and service offering (under the FuturEdge brand), CSC’s SAP practice is building a SAP HANA upgrade service (from previous SAP releases). The offering expands from an upgrade service to address SAP instance consolidation and overall simplification of SAP applications. CSC highlights one of its priorities is to address migration/re-engineering of custom code developed around SAP applications into, as relevant, either a new SAP module or new code, in an automated manner.

The service is a work in progress but will include COTS e.g. Panaya and SNP. CSC is also developing service offerings in support of migration from on-premise SAP applications to SAP SaaS applications, in an automated manner.

---

CSC’s SAP Next Gen offering has several benefits:

• It is part of an effort to change its client interaction, away from a cost and price discussion to a benefits discussion, whether related to usage of automation for migration purposes or to domain knowledge/templates
• It addresses in a rather comprehensive manner the full extent of SAP challenges for clients, whether in terms of SaaS or IaaS adoption or vertical templates.

CSC’s SAP Next Gen offering also touches on the notion of platform-based delivery, where a specialized center of excellence/factory delivers a centralized service. In the case of this offering, the likely service is more of a technical service e.g. automated code re-engineering, replatforming to a different OS or even to a different architecture e.g. from client server to more centralized like SaaS.

The trend towards platform-based delivery is a journey; we think CSC’s SAP Next Gen journey is an early step in the right direction.

Q2 2014 revenue (and growth both on an actual and CC/organic basis) by service line was:

• Managed Services: €132m (+5%, +9%). Half of the CC organic growth this quarter resulted from hardware reselling as part of a large IT infrastructure management contract
• Consulting & Systems Integration: €97m (-10%, -4%). Tieto continues to suffer in its AM unit, which represents half of revenues of C&SI. Meanwhile, the company is recording double digit growth in its growth business, which include its Customer Experience Management and transformational consulting
• Industry Products: €97m (-7%, +2%). Industry Products enjoyed good growth in healthcare (a key priority offering) and welfare, but suffered in the financial services sector in Russia and Latvia, as well as postponed decisions in oil & gas
• Product Development Services (PDS): €60m (-24%, -19%). Tieto still suffers from its two largest clients, assumed by NelsonHall to be NSN and Ericsson, insourcing their R&D service activities. The company is developing its client base in California, but not fast enough to stabilize the business.

Tieto continues to be a recovery story in terms of profitability: EBIT reached 5.6% of revenues, and 7.8% excluding one-off items. The company has maintained its midterm objective of reaching a 10% EBIT margin, including one-offs. While all units in IT services have decent profitability and increasing, Product Development Services (PDS) continues to drag profitability of the company overall.

The recent announcement of massive lay-offs by Microsoft in its Nokia handset business did not seem to worry Tieto management. Nokia is no longer a major client, since it has stopped and sold its Symbian business. NSN remains a top 2 client for Tieto’s Product Development Services unit. 

One can't blame the company for having migrated delivery location to offshore: offshore ratio for PDS is 61.6% (Q2 2013: 60.8%) while it stands at 42.0% for IT services personnel. However, one can certainly blame the company for not having diversified earlier its client base.

Revenue growth has unfavorably impacted by the performance of PDS (-19% in CC/organic). Excluding PDS, IT services revenue growth was up +3% (EVRY +2%). The company is satisfied with the performance of its Managed Services unit and is really focusing on its project services business, which includes C&SI and Industry Products. In C&SI, it is getting back to basic with high focus on utilization rates, portfolio management (mobile and omni-channel overall, transformation consulting). Tieto acknowledge it needs to make its application management cost-competivive, largely through automation, something it has achieved already in its Managed Services business (IT infrastructure management).

The comparison with Capgemini comes to mind. Capgemini has the same levels of offshoring as Tieto. Like Tieto, Capgemini is more of a C&SI company than an IT infrastructure management one. Capgemini finally increased the cost competitiveness of its AM offering in 2012/2013, and seems very optimistic about recent wins and its pipeline. Also both companies focus heavily on portfolio management, something Capgemini started much earlier. There is no reason therefore that Tieto could not replicate the apparent success of Capgemini in AM and C&SI.

Both companies have a R&D services business of roughly the same size. Yet, Tieto has suffered for years from the state of the European telecoms equipment manufacturing industry. Capgemini is now beginning to experience the pains of Airbus having completed its major airplane design and development programs. Capgemini has taken action and launched its Global Engineering Services unit last year, which may help balancing work. Tieto could not indicate when its PDS unit would stabilize. Development relationships with new client is a priority. In all likelihood, Tieto will be under pressure to fix or sell the business. The stock of Tieto is down 6% today, after the results, with much questioning on PDS.

IT outsourcing spending growth is different and is much less cyclical. Growth in spending has varied between -2% and +4% again since 2008. It is well known than organizations turn to outsourcing when they want to lower their costs, usually when facing poor economic conditions: this is driving spending. 

Is this really so?

NelsonHall advocates that the dynamics of how clients spend their ITO budgets have fundamentally changed:

• Indian offshoring is by nature reducing prices by a factor of two to three. Adoption of Indian offshoring has expanded from the U.K. and U.S. commercial sectors to reach Norway, Sweden, Netherlands, and, to a lesser extent, Germany and France
• Cloud computing is also having a deflationary impact on IT outsourcing spending
  - For the most part, from a client perspective, building a private cloud whether in its own datacenter or in that of a third party, mostly means virtualizing servers and allowing fast provisioning. With this in mind, private cloud adoption is a technological enhancement, not a revolution that will lower costs dramatically
  - Public cloud computing is a different story: it is used mostly for new applications, whether apps or web sites and tends to be used for development environments, as opposed to production environments. Public clouds tend to capture spending of new projects and less of current production environments management services. However, it is fairly sensible to predict that over time public clouds will be used for production environments and impact overall ITO spending.

The prospect of a resumption in ITO spending growth to up 4%, under favorable conditions, is unlikely. In the mid-term, NelsonHall expects therefore that ITO outsourcing growth will not exceed +1.5% to +2% in good economic conditions and probably -4% during bad ones. On average, flat growth is to be the norm, assuming good market conditions last longer than periods of economic unstability.

From a vendor perspective, on average IT services vendors with an onshore background will not grow their ITO revenues beyond 0% to 1%. Meanwhile, some India-centric majors will continue to enjoy growth of 20% and above in the short term.

-- -------

NelsonHall tracks the ITO market on a continuous manner, through 2 ways: contract awards and spending in the previous quarter. Those two metrics are complementary.

• Contract signings help understanding the dynamics of the market in terms of volumes, prices, content i.e. new scope vs. existing scope, geographies and verticals. ITO bookings help predicting how spending is going to evolve in the next 3 to 5 quarters.
• Spending is unlike the booking metric, a backward-looking metric. It provides a view of how IT outsourcing spending has evolved in the past quarters. It is a precise metric..

In short, ITO bookings provide indications on future trends. Spending help refining our analysis, based on historic data. With those 2 KPIs, we think we are as much equipped as one can be to understand how IT outsourcing spending is going to evolve in the next quarters.

NelsonHall provides –freely- - the finding of its analysis on the short-term future of ITO spending, as part of its quarterly ITO Index Calls. For more information, please refer to Guy Saunders or attend our quarterly ITO Index calls: 

• CS is to proceed to a €12m convertible bond issuance (maturity 5 years, conversion price per share: €3.6; interest rate: 4%; delivery: July 2014). As part of this issuance, Sopra agreed with DUNA & Cie, the largest shareholder (45.1% of shares) of CS, to buy 45.1% of all convertible bonds issued. In addition, the company has guaranteed the full bond issuance
• Sopra has been granted by DUNA a  first offer status, meaning that if were DUNA were to sell its stakes in CS, it would have to start negotiations first with Sopra
• Sopra is have one member of on the Board of Directions, acting as censor
• Sopra is to help CS improve its financial performance, further develop its existing "industrial and commercial collaboration" in aeronautics and defence, and expand to new offerings including security, space & energy.

In an article by Les Echos, Mr. Eric Blanc-Garin, CEO of CS provided further details about the agreement with Sopra:

• Sopra could own, once bonds are converted to shares, a 7.5%-16% stake in CS
• DUNA & Cie has 4 years, starting from July 2014, to sell its stake to Sopra.

CS is a public sector and aerospace specialist providing IT and engineering services e.g. embedded systems; real time applications; PLM services; cyber-security. The company is headquartered in the suburbs of Paris and has a large office in Toulouse.

CS had in 2013 revenues of €162m down 6.2% at CC/CP in 2013. Headcount was 1,791. Operating margin was 0.2%. Application service account for 90% of revenues. 80% of revenues are fixed priced. The company is heavily focused on defense spending, with its largest clients accounting for 29% of revenues in 2013.

The company derived in 2013

• 52% in revenues from the defense, space and security sector: Services provided include services around command centers, security, logistics and space applications, as well as increasingly, cyber-security
• 38% of revenues from aeronautics, energy and manufacturing:. Services provided include embedded systems , real time computing and PLM services. Key clients include Airbus Group, Praatt & Whitney in aeronautics; and CEA, IRSN and EDF in energy.

CS has faced in the past years a decline in revenues from its key clients in the defense sector, as the French Army reduces its spending.

The company has take several measures including

• Geographical expansion towards North America
• Sectorial emphasis on aeronautics, energy and manufacturing
• Scope re-definition including
  - 2007: the sale of its IT infrastructure management activities (€138m in revenue and headcount of 1.4k) to BT France for €60m
  - 2012: the sale of its transportation unit (€31m in revenues, headcount of 200) to SANEF, a highway operator, for €15m.

CS has been on restructuring mode for several years. in the past 2 years, the company has raised capital through several means including, in 2012 the sale of its transportation unit (for €15m), a capital increase in 2013 (€15m raised) and now through this convertible bond issue (€12m).

In 2014, CS has accelerated its transformation plan with:

• Increased sales activity
• More focused R&D effort to drive more products sales
• Cost cutting and streamling of processes.

Sopra continues its M&A activity after the recent offers to acquire Steria and the HR Access service line of IBM France. CS has been struggling for year and has only returned to break-even operating profitability in 2013. As a result, CS has a low market cap, €36m before the announcement. At this point however, it is still unclear how much Sopra will spend in total to acquire the full CS. 

CS has a different profile from Sopra. It is more positioned on technical IT and engineering services e.g. real time applications and embedded systems, where Sopra has a background in services around business applications. Sopra is only marginally present in embedded systems, servicing mainly client Airbus. CS is therefore a nice service expansion for the company. It also expands the vertical capabilities of Sopra into the defense sector.

The companies have worked together in two significant contracts:

• Sopra acting as sub-contractor to CS in designing the architecture and integration of a new application named SIA (Army information system). The purpose of SIA is lower IT costs (€3.5bn per year) of the French Army and drive its simplification.  SIA has an overall of €750m and aims to converge systems of three French Armies towards a single system. The contract is reported to have a value of €100m. It involves a reported 130 personnel, in Chartres de Bretagne
• The two companies were awarded in 2013 a consulting contact around the SIMAD project for the development of a system related to maintenance of aircrafts. CS was lead on this €32m contact with Sopra and SQLI as contractors. 

The challenge for Sopra will be to restore the profitability of CS, which CS has struggled to achieve in years. With Steria, Sopra had mentioned it was hopeful its own sales activtity was likely to absorb the bench of Steria. In all  likelihood, Sopra believes it can do the same with CS, whose headcount is just 1,700.

The French IT services market is going an incredible acceleration towards its consolidation. Major 2014 M&A transactions include Atos with Bull; Sopra with Steria; Capgemini with Euriware. Last year, Econocom had acquired Osiatis while TCS had purchased Alti. While many had announced the consolidation of the French IT services market, it had been slow to occur, until this year. Nevertheless, France still has a high number of mid-sized standalone IT service vendors: GFI Informatique. of course, but also Devoteam, Neurones, Groupe Open, Aubay, Businesss & Decision, or SQLI.

Bull had 2013 revenues of €1,262m and an adjusted EBIT of €45m, a margin of 3.5%. It had a net cash position as of end of 2013 of €213m. Headcount is ~9k, of which 5k in France. It would bring to Atos a tax loss carry-forward of ~€1.9bn (mostly for its French and German operations), which Atos is currently examining.

Bull has a very wide portfolio of offerings ranging from hardware, software and services. It also has a vast geographical presence with operations in 50 countries. The company has a portfolio of 1,900 patents of which 600 in the U.S. Bull spends 6% of revenues in R&D and employs 700 R&D personnel. 

The company was until 2013 aligned around three main business units:

• Innovative products & computing solutions (e.g. higher performance computing servers, and related services, IT infrastructure management including hosting and cloud computing) €820m (-1.9%)
• Business integration solutions (e.g. C&SI and AM): €312m (-4.6%)
• Security solutions (security and critical systems design and architecture, consulting and integration): €130m (+5.9% y/y).

The company recently announced its 'One Bull' program to re-balance its portfolio (around complex systems integration, high performance computing, security and big data), reduce its cost structure and simplify its personnel contracts (with notably the standardization of contracts and internal mobility). Part of the One Bull program also relied on divesting geographical operations where Bull was breaking even or loss-making or transforming then. Overall Bull, expected 2017 revenues to remain at the same level as 2013 but its adjusted operating margin to double to 7.0%.

Service capabilities brought by Bull include:

• Consulting & systems integration:
  - Specialized defense services (including the Scorpio project with the French Army Scorpio program)
  - Legacy modernization capabilities
  - Presence in Poland and Brazil
• Managed services:
  - Hosting (Agarik)
  - Maintenance and support of third party technology products from EMC, other and own Bull products as well as datacenter, server and storage consulting services around IBM, EMC and Intel products
  - IT infrastructure management: Bull was awarded by ErDF in 2013, along with Osiatis/Econocom a Microsoft Exchange, SharePoint and Lync project with 160k users
  - IaaS: Bull also owns a JV, Numergy, with SFR and CDC, which targets SMBs (€6m in revenues expected by 2014), whose services it marketed under the Le Cloud brand
  - Datacenter, server and storage consulting and integration capabilities
• Big data: higher performance computing high end hardware, as well as entry-level Bullion appliances
• Security: software products (Evidian line of software products).

Atos is to:

• Integrate the different units of Bull into its own Consulting & Systems Integration, and Managed Services units
• Move the cloud computing capabilities of Bull into Canopy
• Move to Bull its own security and big data capabilities and marketing them under the Bull brand.

Overall, Atos is expecting 1% organic growth through cross-selling and a more dynamic service portfolio resulting from the acquisition.

Atos is estimating cost synergies to €80m, of which:

• €30m from One Bull program (which it plans to execute in 24 months, rather than the 30 months planned by Bull)
• €30m G&As (with Bull having a ratio of G&As to revenues of ~25% before the effects of One Bull and Atos targeting by 2014 G&As in the 9.5% - 10.0% range)
• €20m in hardware procurement and real estate savings.

Atos is to:

• Reconsider the Bull’s divestment plans in several geographies (apart from operations representing €25m in revenues in 5 countries). Atos has highlighted it has critical mass in countries where Bull had high overheads and will help improve costs
• Accelerate profit improvement in its French unit, Bull adds €690m in revenues in France and Atos is expecting the additional scale to help improve its own financial performance in the country
• Spend €100m in restructuring costs, of which €50m to €60m, will be accrued in the accounts of Bull before the acquisition.

After the acquisition, Atos will have pro-forma revenues of €9.9bn, of which

• Cloud services: €392m
• Big data and security: €490m
• Managed Services: €4,690m
• Consulting & systems integration: €3,190m
• Worldline: €1,115m.

​From a financial perspective, Atos is making an expensive acquisition. The €620m values Bull (based on its 2013 performance) at a PER of 41. The company has a history of flat revenue growth and limited net margin (net margin of 0.8% in 2013). However, Bull is financially sound with a net cash position of €213m. 

The stated rationale for the acquisition has centered on cloud computing, big data and security, (35% of revenues of Bull, including hardware and software). Yet, Bull brings a very wide portfolio that includes computing products, a legacy mainframe product and OS base, as well as security software products. Thierry Breton, CEO of Atos is a former Bull CEO and he therefore must have a strong opinion on what Bull could bring to Atos. One big question mark is to understand what is left of the legacy products into Bull's current offering: NelsonHall estimates it at ~€200m. Also, the HPC line of products (NelsonHall estimated: €170m in revenues) seems to have been successful but requires significant R&D effort. We therefore expect divestments targeted around non-core hardware elements, and potentially software. Bull would reduce Atos' dependence on IBM or HP hardware, potentially making it more price competitive in cloud deals.

The impact of the €1.8bn tax carry forward element is to be fully understood. It may represent a significant tax reduction incentive in its French and German operations for Atos.

Atos' management continues to pursue a very bold M&A strategy: buying Bull, maintaining its offer for Steria, and ready to use the forthcoming June IPO of Worldline for acquisitions in the payment sector. Meanwhile, Atos remains committed to growing in the U.S. With Bull, Atos is now almost the size of Capgemini: something that was unlikely several years ago. There is no question that Thierry Breton has brought Atos to the European tier-one league. Logical next steps for the company are expansion in the U.S. market and the adoption of a sizable India-centric delivery model.

Sopra's rationale for the acquisition includes:

• Expanding its geographical presence from France to the U.K., Germany and Norway
• Gaining a new service portfolio in BPO services and IM.

Sopra is to launch a public exchange merger where Sopra offers 1 share of its stock for 4 Steria ones. The offer values each Steria share at €21.5 (based on a Sopra Group share at €86.16), a 40% premium to last Friday’ value of €15.74, and about 12 times Steria's forecast 2014 earnings.

The combined entity will have Sopra's founder and president Pierre Pasquier as chair and Steria's Francois Enaud as CEO.

The acquisition will be a major service expansion for Sopra, which had remained very application service centric: systems integration accounted for €730m in revenues in 2013, consulting: ~€95m; and application management: ~€530m.

In the past three years, since the IPO of Axway, Sopra Group has made several ISV acquisitions, of which the major ones were Callatay & Wouters in Belgium, and HR Access in France. In 2013, software products and related IT services accounted for ~€340m in revenues.

By comparison, Steria has an extensive portfolio of services, including IT infrastructure management (~€526m), BPO services (€316m), consulting & systems integration (~€649m) and application management (€263m). In fact, Steria brings Sopra capabilities in areas where CEO Pierre Pasquier had in the past expressed it did not want to go into e.g. IT infrastructure management for margin reasons. in todays presentation on the merger presentation, Pasquier's position on IM had changed, commenting that more clients are asking for AM services or SaaS applications together with the underlying IT infrastructure services.

In all likelihood, the potential acquisition of Steria for €722m in shares was a deal Sopra could not refuse. If we look back to 2007, Steria acquired Xansa for €680m in an all cash transaction. Today's valuation includes all the operations of Steria in France, Norway and Germany.

The big benefit of the Steria acquisition from a Sopra perspective is that it finally solves the company’s lack of internationalization. While Sopra Group has been successful in its domestic market with good organic revenue growth and operating margins, it has struggled to grow its U.K. and Spanish operations (both have remained at ~€80m in revenues). And Sopra's profitability in the U.K. and Spain has been hurting the company for several years. Steria brings a U.K. business with revenues of €692m and a 10.0% adjusted operating margin that is on the verge of high growth thanks to the ISSC2 contract.

Steria also brings a good country unit in Norway which has been performing decently.

The big question market remains its operations in France, where Steria had ben preparing for significant redundancies in back office and support activities. Interestingly, Steria France has put on hold its job redundancy program as Sopra France is expected to absorb some of the personnel on the bench through existing contracts and through removing subcontractors. SSG appears confident of being able to resume growth in Steria France rather painlessly.

Looking back, Steria has had a rather successful journey since 2002 and its first major acquisition, that of Integris/Bull. The company managed to increase its profitability year after year in spite of an unfavorable economic environment, adoption of industrialization and standardization and offshore. The acquisition of Xansa was a strategic (and expensive) move but it was impacted just nine months later by the U.S. subprime crisis impacting the global economy. However, Steria was was not able to cross-sell BPO and offshore to its client base in Germany and France. The company has clearly a competitive advantage it was not able to make us of. Currently, Capgemini now uses an Indian offshore leverage of 20% in its French operations. Steria does not. That is possibly the most major drawback of Steria’s performance in the past 15 years.

Sopra/Steria combined will become the third largest European IT services vendor, though some way behind Atos and Capgemini.

Consolidation within the European IT services market has been on the cards for some time, so today's news should not be too much of a surprise. Will we see further mergers or strategic partnerships in Europe this year?

The two companies are to:

• Offer application modernization services around migrating applications to the cloud. The service will rely on several IPs, including the recently CSC-acquired ServiceMesh
• Enhance their existing vertical-specific app modernization offering, initially in banking and overall financial services, with a creation of a banking CoE in the U.S.
• Create a joint delivery network with the first delivery centers to be launched in Bangalore and Chennai. HCL and CSC will share revenues on projects and direct costs 50/50.

In addition, HCL is to white-label CSC’s BizCloud offering, complementing its own MyCloud, and sell it to its clients.

The first client for the joint offering is longstanding CSC client and partner AT&T.

The partnership is part of CSC’s drive to generate business around clients' adoption of cloud computing by building a service ecosystem:

• In February 2011, CSC launched its BizCloud offering, a private cloud offering which offers a pay per use model, whether servers are located in the client’s or CSC datacenters, with a claim that it could be ready for workloads within 10 weeks
• In August 2013, CSC announced a broad partnership with AT&T which included CSC deploying its BizCloud VPE entry level IaaS offering in several AT&T datacenters
• A third step was the acquisition of ServiceMesh, who brings in a cloud orchestration platform
• This fourth step is partnering with HCL Technologies on application modernization.

CSC is not expecting any revenues from it this fiscal year (ends March 30, 2014).

CSC has briefed NelsonHall on the partnership and answered queries such as:

• Why did CSC need to partner with HCL? (given that CSC has a decent presence in India, at ~24k personnel). Each company would have struggled to make the necessary investments in automation software on its own; this is perhaps more important than access to HCL’s offshore application services delivery capabilities
• How will HCL and CSC ensure the partnership succeeds? Where previous alliances between IT services vendors have failed to deliver, the agreement tended to favor one of the partners more than the other. This agreement has exec sponsorship at the very top of both companies, plus a commitment to share revenues and direct costs 50/50. So any application modernization deal that has been sold entirely by one partner to its client, both partners will receive 50% of the revenues. All delivery on application modernization will be done from joint delivery centers. This apparently straightforward model should help make the partnership work
• What types of application modernization deals are they targeting? The focus is on opportunities to move mainframe/Wintel/UNIX applications to the cloud, whether public, private or hybrid (not traditional mainframe to Wintel/UNIX re platforming and COBOL to /NET/Java re-writing projects). CSC is emphasizing:
  - Refactoring: application running on mid-range and mainframes computers to Java with blue printed database and middleware
  - Re-platforming Celeriti and Hogan
  - Wrap and reface: mobile and web enablement of legacy applications through (RESTful) APIs
• -  Refactor and replace: extraction of processes and and information; and development of new applications
• How does this announcement enhance CSC’s existing application modernization offerings? CSC has previously developed offerings for legacy modernization (FuturEdge), and for ERP modernization through BPM (Cordys). This offering is targeting all sectors with the two partners creating a specific center of excellence in financial services, and especially in banking, a sector with traditionally a high level of mainframe-based applications, and one of the core commercial verticals of CSC and accounting for ~26% of HCL’s revenues. CSC is adapting its strategy to the banking sector, having in Q2 2013 announced a partnership with SAP to help clients migrate from CSC’s Hogan (core banking) and Celeriti (cards and payments) to SAP’s core banking applications. Clearly, it has changed its approach, and is now looking instead to modernize its platforms 
• How will the centers be set up? Each of the two new centers is part of one CSC’s or HCL’s largest Indian campuses, but both partners will bring related assets/IPs and personnel into the operations. CSC’s modernization offering hub will be in Chennai while HCL’s will be in Bangalore. The aim is to increase the number of centers.

NelsonHall research has shown that application modernization has not been a growth area in recent years, in spite of vendor hype, because of the cost and risk involved. However, over the next few years, growth is likely to really take off as clients look to modernize their legacy applications, whether in old languages e.g. COBOL or old architectures e.g. mainframes and client server, to the cloud, particularly if service providers can offer low-risk and lower-cost solutions.

This partnership is a bold move by CSC

• From an application modernization perspective, it provides a means to modernize Hogan et al, strengthens the  go to market for its IP, and increases its delivery capabilities in India as well as ability to invest in automation tools
• From an IT infrastructure management/cloud computing perspective, CSC is getting an additional go to market with HCL Technologies’ white labeling of CSC BizCloud services
  - It supports CSC’s positioning in the market shift from traditional, asset-heavy IT infrastructure management deals to smaller but higher-margin cloud deals
  - This partnership, combined with its agreement with AT&T, means CSC is in a position to offer to modernize cloud applications at scale (with offshore delivery where appropriate for lower costs), orchestrate them through ServiceMesh, host them, using CSC IaaS or third-party cloud infrastructure, and run them on AT&T’s network.

CSC points out that its partnership with HCL Technologies is a-one-of a-kind. With its simple governance model, it believes it is positioned to make the alliance work. It cannot be ignored that CSC is helping a competitor, which has made it very public that it is targeting IT infrastructure outsourcing contracts renewals of clients of IBM, HP and CSC. A relatively recent example of a CSC contract taken over by HCL is Freescale. 

Dominique Raviart and Rachael Stormonth

Managed Services

Managed Services (MS) is planning to grow at a 5% 2013-2016 CAGR with a slight organic growth. The unit has stabilized (organic growth 2011: +1.7% ; 2012; +2.4%; 2013 Q1-Q3 -0.6%) in spite of having absorbed SIS' MS unit, whose revenues were declining due to SIS reducing revenues from loss-making contracts. The legacy Atos Origin MS itself was a relatively flat growth business line.

MS is still being impacted from its decision to exit or renegotiate loss-making former SIS contracts.  Those contracts represent ~€450m in revenues currently and should stabilize from 2014 to ~€250m. Atos is therefore expecting  a 1% organic growth for MS in 2014 and then an acceleration in its business in 2015 and 2006, driven by large wins.

MS is aiming to increase its adjusted operating margin by 30-60 bps by 2016, from 2013 (H1 2013 8.1%). MS intends to continue its effort on productivity (aiming to gain efficiencies in the 15%-30% range), global delivery (from 35% to 50% of headcount between 2013 and 2016) mostly in India, Poland and Philippines, driving its delivery center personnel to be servicing multiple clients as opposed to being client-dedicated. Meanwhile, MS is consolidating of 2/3 of its datacenter estate, closing 14 of those and opening 5 new ones. The unit is planing to have all datacenters be tier 3 by 2016.

The unit is launching a new effort on further improving its service quality, based on the understanding that further quality will help driving down incidents and effort, and increase client satisfaction. Specifically, Atos MS is working on a zero incident program on its top 100 accounts to reduce incidents by 15% in the next 12 months.

MS is also adjusting its portfolio by focusing on several offerings including service integration, security, vertical offerings, project services (expand from NL and U.S. from datacenter consolidation, US and desktop virtualization) and cloud computing (largely though Canopy). Examples of recent service integration contracts include NSN where Atos MS is coordinating 44 suppliers and the U.K. Post Office. Examples of verticalized MS offerings including for the manufacturing sector Siemens MES applications and the underlying IT infrastructure.

In addition:

• Managed Services assets that its recent midsized to large deals are not dilutive to its operating margin.
• Is is wining against competitors including IOSPs systematically
• Its specificity is to offset by 100% of datacenter carbon foot print.

Systems Integration

Systems Integration (SI) has the ambition to

• Growth by 3.7% (2013-2016 CAGR)
• Improve its margin by 120bps-240bps by 2016 (H1 2013: 4.9%). SI has potential for further operating margin improvement is the most important, especially since the service line has suffered specifically in two geographies: France and the Netherlands.

The service line is focused on several initiatives

• Continued development of near/offshore presence with currently 8k personnel offshore (representing 30% of SI headcount) and the intention to reach  50% by 2016
• Launch of its META program, focusing on
  - Account management (focus on top 30 accounts in addition to delivery and project managers)
  - Pursuing large deals
  - Expanding in North American, where Atos has appointed a form Cognizant, focusing on ERP, CRM and MES systems
• Portfolio aligned around
  - Mobility
  - Testing
  - Service integration (doing work for MS)
  - BI and big data
  - Security
  - Verticalization of offerings
  - Application management.

Atos is putting a renewed focus on its AM business, which represents one third of revenues of SI. AM has resumed growth in its business, gaining its first non-Siemens AM mega-deal (~$1bn, by NelsonHall's estimate) with a large network equipment manufacturer. It is also interested in small to midsized AM opportunities where there is the possibility to grow the account.

Meanwhile, AM is refreshing its service portfolio with a three-tier offering: core application maintenance and support, focused on cost reduction; business transformation of applications embedded in multi-year contracts; and IT modernization and cloudification in cooperating with Canopy/

AM is also introducing vertical-specific run-build-run offerings. Examples include:

• Energy production: nuclear power command and control plants; smart metering and grid management
• Manufacturing: design-build-run PLM, MES and ERP applications, integration of SAP and MES and PLM applications through its digital plant solution. The company services 5 automotive OEMs with this offering
• Financial services
• Telecoms.

AM continues its push towards global delivery with the intent of reaching by 2016 65% of personnel in low-cost countries (up from 50% in 2013).

Together with its effort in MS and SI, Atos continues its Sales Strategic Engagement (SSE) activity, focusing

• Continental Europe, where the company is targeting first generation ITO contracts with TCVs of €40m to €100m
• Expanding its offering to service integration
• Be opened to personnel and assets transfer. SSE has developed its M&A expertise to accommodate captive purchases.

Atos has provided some information on how its two main IT services unit Managed Services and Systems Integration will grow in the coming years. To some degree, Atos is moving to a financial model similar to CGI, where margins are relatively high. The comparison with CGI ends here: margins of Atos MS in particular may reach ~9%, at the upper range of the traditional industry margin range.

Systems Integration, traditionally higher margin than MS, will continue under-performing MS in 2016. This is unusual and signals Atos being conservative in its guidance, or acknowledging the impact of Indian vendors on prices or a long-lasting reinvention of its SI business. Atos highlights that by 2016 around 50% of its headcount will be located in low-cost countries. Unlike Accenture or Capgemini, Atos is more centric around non-Indian countries. Unlike CGI, Atos SI has not developed a large ISV business (which Atos has put into Worldline). AM is where Atos may find most success within SI: the company has now two AM mega-deal references (with Siemens and a large network equipment manufacturer). Atos' focus on large deals, traditionally in IT infrastructure management, may also pay off in AM: it has recently won two deals against competition from both IOSPs and global SIs. In the AM business, Atos has strong industry credentials in manufacturing and in nuclear energy, but there is work to be done in developing vertical offerings in financial services sectors, in retail banking somewhat surprisingly, given the heritage of Atos.

Finally, Atos, again net cash positive, is turning back to its former business model, of relying on acquisitions to fuel revenue growth.

Financial objectives for the 2013-2017 period include:

• Revenue growth of 5% to 7% (2013-2017 CAGR) all organic (2012 revenues €1,066m, +5%; 2013 estimate +5%)
• At least a 200 bps increase in its operating margin (before depreciation and amortization) by 2016 (to ~20.0%), from 2013 (2012: 17.2%; 2013 estimate ~18.0%).

Organic revenue will come from:

• Growth in payment volume counterbalanced by pricing pressure
• Clients investing in their payment and digital software, as a result of
  - Regulatory changes such as SEPA 
  - Consumer behavior changes e.g. mobile payment and wallets; "drive" in the retail industry; 
  - Changes in the market: M2M or value-add services: card analytics, fraud management
• Internationalization of Worldline e.g.
  - Expanding the service offering in Germany from merchant issuing and Belgium from acquiring
  - Rolling out in new geographies either directly or through partnerships.

The margin improvement will come from revenue growth, and Worldline implementing its TEAM program (consolidate datacenters, delivery centers creation and consolidation, application consolidation). The intent of TEAM is to maintain costs under control while revenues grow.

Worldline is structured into three global service lines:

• Merchant services and terminals (H1 2013 revenues €178m; +3.7% organic growth, 18.3% adjusted operating margin)
• Financial processing services and software licensing (€189m; +2.8%; 18.5%)
• Mobility and etransaction services (€182m; +10£; 11.4%).

Its intent is to roll out each service line in all geographies. The company believes that with the integration of several SIS units and its past growth, it now has large enough service lines to grow organically while covering SG&A costs.

Geographical priorities are:

• Latin America: where Wordline is present mostly in Chile and Argentina in Mobility and etransaction services
• APAC: China and Hong-Kong, Taiwan, Singapore, Malaysia, Indonesia and India: Financial processing services and software licensing
• Europe: France, BeLux, Germany, U.K. and Spain.

In addition Atos is to provide an additional entry point to 25 other countries where Worldline is not present. The company is also looking at addressing larger clients, especially in the Financial processing business to 69 large accounts.

In detail, the action plans are:

• Merchant services and terminals
  - Doubling indirect channel network
  - Expanding offering by introducing two new vertical offerings per year. Areas of focus include mobile payment and mobile commerce for e.g. movie theaters. The unit want to achieve 10% of revenues from mobile transactions in the next 2 years
  - Driving value-added services e.g. an instant survey on a payment terminal
• Financial processing services and software licensing
  - Consolidating application platforms
  - Introducing two to three new offerings per year
  - Consolidating presence from Germany, France and Belgium into U.K., Austria, and then expanding to Latin America, Asia, Northern Europe and Eastern Europe (Poland)
• Mobility and etransaction services:
  - Investing in mobility and big data offerings and around security and privacy
  - Introducing in each country a more segmented service approach
  - Focusing on connected living services e.g. rail: journey planing, payment and ticket fulfillment, within 2 years (and double revenues).

Worldline and Atos management expressed strong confidence in the future of Worldline, and highlighted its size now permits a service line approach to the geographies in which it operates, in a profitable manner. The carve-out of Worldline will also bring flexibility and timeliness for inorganic moves as well as for any partnerships. Acquisitions is a clear priority. Worldline's targeted growth over the next three years means revenue of ~€1.36 - €1.47bn in 2017. Given the scale of Atos, higher growth in Worldine will not have a major impact on the revenue growth of Atos overall.

Worldline currently comprises a set of country operations with very different businesses; there is a lot to do before Worldline is able to go to market with a broadly similar portfolio in its core geographies, let alone achieve its ambitions for global expansion.

Ultimately, the IPO is about giving financial power to Worldline. NETS, the second largest payment services in Europe is reported to be on sale for an amount ranging from €1bn-€2bn. NETS had 2012 revenues of ~€800m and a net profitability of ~€92m. This gives an idea of the market capitalization of Worldline.

Dominique Raviart and Rachael Stormonth

Software testing is quickly evolving from a manual activity and use of testing COTS to a form of managed service with some level of pay-per-use and towards a more non-linear growth. This is good news as software testing has in the past and still is a very human labor-intensive activity.

The company is looking to build its Consulting & Systems Integration (C&SI) and Product & Platform Solutions (PPS) businesses while further strengthening its core Business and IT Services (BITS) businesses; the intent remains to derive, by around FY 2017-18, a third of revenues from each of these areas of its business.

Business and IT Services

An ongoing key priority of Infosys is reigniting growth (by Indian standards) and increase profitability in its BITS service lines. The company has acknowledged several times that in application outsourcing it was facing fierce price pressure resulting from competition by several industry peers.

Infosys is using its Strategic Global Sourcing (SGS) unit to target contracts with TCV over $50m, looking at recompletes and new scope opportunities in application outsourcing and IT infrastructure management, also in software testing. In total SGS has around. The company claims it secure 12 large deal wins in Europe over the last 12 months. NelsonHall identified examples of large wins include RWE (application management) and BMW (IT infrastructure services) in Germany and Harley-Davidson (multi-scope ITO) in the U.S.

Initiatives to further strengthen its efficiency and increase its win level include:

• Increasing its productivity through
  - Investment in automation, either through partners e.g. IPSoft, or through proprietary accelerations. Examples include the  creation of its Infosys Application Management Platform (see NelsonHall’s reporting on Infosys’ application outsourcing capabilities)
  - Creating methodologies and assets e.g. methodologies and processes around agile development and testing
• New pricing models, away from T&M to technical SLA-based and potentially more business outcome-based: aiming to sell bundled application management, IT infrastructure and BPO services

With its BITS service lines, Infosys is targeting contracts that include a level of transformation along with core run services. It wants to stay away from pure commodity contracts unless they are strategic.

Consulting & Systems Integration

In C&SI, Infosys has already reached its 33% overall revenue target. Some of the achievement has come from the acquisition of Switzerland-based Lodestone Consulting. Click here for more information.

With the acquisition, Infosys has transferred its other consulting capabilities in Europe, mostly in the U.K., to the newly-named Infosys Lodestone. The unit has a headcount of ~1,000 and is a standalone organization within Consulting and Systems Integration. In the U.S., Infosys had formerly announced it was bringing back its consulting capabilities in North America into its vertical units, representing a NelsonHall estimated 4,000 consultants.

Infosys Lodestone reports that since the acquisition, attrition has reduced and Infosys is helping the company recruiting and keeping talent. Go-to-market together with the rest of Infosys is intensifying and Infosys Lodestone reports it is now able to address design and build contracts involving India offshore delivery.

Overall within C&SI, Infosys has a headcount of ~31K worldwide. SAP revenues amount to ~$1bn (and a headcount of ~10,000), of which 30% from consulting (as opposed to systems integration).

Product & Platform Solutions

PPS is perhaps Infosys’ boldest ambition: to increase revenues, currently representing ~5.7% of overall company revenues to ~33%. Infosys’ most mature IP is its Finacle core banking suite, which is currently not seeing growth. The major investment is in developing its Edge family of software products. The platform strategy is still  very much in incubation phase: in FY 2013 it was not profitable.

Infosys’ strategy is to create horizontal products and then contextualize them by vertical. The company is also using parts of Finacle to create horizontal IP. Examples include taking out the digital wallet functionality of Finacle in creating its WalletEdge product.

Infosys is proceeding to a systematic scan of market needs, then identifying market potential and competition level. Once decided on a given opportunity, the company aims to identify a potential client, with which it will co-create an Edge product. It has three methods to do so: 1. Co-create with the client, offering the client a competitive price 2. Create the product with the client and share profits with the initial client from license sales to other clients 3. Co-create and go-to-market together. Examples of the latter case include AssistEdge.

The company claims 80 clients and already $725m in bookings around its PPS assets.

Opinion

Infosys has a dual objective of further strengthening its price competiveness together with providing transformation services.

With C&SI , the company now has a presence in three major geographies U.S., U.K. and Germany where it believes it can now compete with the likes of IBM, Accenture and Capgemini.

Infosys is also being more open about investments to build its PPS portfolio, with around 1,000 engineers now deployed on software development. The 33% objective is bold, but at this stage Infosys remains on the early stages of a journey, with little progress yet to highlight to investors. At this point, Infosys’ share of revenue from proprietary applications is not significantly from competitors, whether onshore or offshore. It is clear that achieving this goal will involve inorganic growth. Lodestone was the first ever substantial acquisition by Infosys: we expect to see more acquisition activity within the next year.

Infosys efforts to complement its labor-arbitrage advantage by investing further automating delivery and building tools and accelerators to increasing efficiency is a path currently being trod by other major service providers. Infosys (as do some other Indian oriented service providers) tends to take a client-dedicated delivery approach, whereas some vendors with an onshore background tend to be more aggressive on sharing tools across clients, also to sharing some level of delivery across clients, usually around specific roles.

• TCS’s assurance services were up (a NelsonHall estimated) ~24% to ~$256m
• Infosys testing revenues were up ~+14% to $165m.

The Q1 FY 2014 information is consistent with their Q4 FY 2013 (TCS: ~24%; Infosys +16%).

Infosys and TCS obviously have had somewhat different performance in their testing activities in calendar H1.

Yet, the two companies are giving the industry a clear signal that spending on software testing remains very healthy in calendar H1 2013 in spite of the macro-economic concerns and GDP slowdown. Spending is in line with H1 2012 performance, with a slight acceleration in growth (+4% for combined TCS and Infosys).

Interestingly, spending on software testing in 2013 is holding up much better than during the subprime-time crisis of 2009, when testing revenues of the combined TCC, Infosys and Wipro had grown by ~+9% only

Looking ahead, the question is whether clients will keep on increasing their testing spending. Prices are under pressure and a number of services, including manual functional testing and automated testing are commoditized and offshored. Meanwhile volume is still up significantly. Growth rate in the industry is slowing down but it is unclear yet whether this slowdown is due to the macro-economic conditions or to the market reaching over time maturity.

Discussions with client suggest that new contracts still represent a majority of opportunities, as opposed to renewals of existing contracts. Client spending is therefore to keep on increasing in the short to mid-term.