NelsonHall: Cloud & Server Management blog feed

BT Merges Global & Enterprise Units to Simplify GTM and Save Costs

A New Focused Division

BT has announced the merger of its two ICT services units, Global and Enterprise, into a new division, BT Business. The new division will have pro-forma revenues of £8.5bn and an EBITDA of £2bn. The current CEO of Global will lead BT Business.

With this move, BT wants to unify its B2B market and focus its capabilities on connectivity, unified communication, networking, and security. It also wants to simplify its GTM for its corporate and public sector clients and remove duplication across Global and Enterprise.

Cost savings are an important element of the merger, with BT targeting cost savings of £100m by FY25 through consolidating management, support functions, product portfolios, and IT.

Financial Pressures

For the 3Q ending September 2022, the BT Group reported revenue of £10.4bn, up 1% due to growth in its Consumer and Openreach segments, and partially offset by legacy declines in large corporate customers in Enterprise and lower equipment sales in Global. Large corporate accounts and the decline of legacy products continue to present a challenge to the BT Group.

Global and Enterprise suffered from the pandemic, with revenues down by 14% and 8% respectively in FY21 (the year ending March 31). However, the two units did not benefit from the digital and cloud catch-up after the pandemic. Revenues were still down in FY22 (by 10% and 5% respectively) and in H1 FY23 (by 2% and 5% respectively).

The decline of Global and Enterprise reflects, unsurprisingly, portfolio changes. Global suffered from lower equipment sales and divestments (in Spain, Latin America, and France). Enterprise has suffered from the decline in legacy services, such as fixed telephony, despite mobile and VoIP growth in the SME and SoHo segments.

EBITDA struggled under pressure despite efficiency actions taken by BT, from its FY 22 in March, where EBITDA was down for Enterprise and Global, by 4% and 23% respectively, YOY. The decline continued into the results for the six months reported in September 2022, with Enterprise (23% down) and Global (5% down) for the six months YOY.

Fiber Deployment

The creation of BT Business is part of a larger cost savings program, with BT targeting £3bn in cost optimization by FY25. BT announced in November 2022 it wanted to save operational costs to fund its investment in deploying fiber options, OpenReach, throughout the U.K. The company targets 25m home and business customers by December 2026, up from 9m in December 2022. The investment comes at a time when BT, like many other European firms, faces rising energy costs. BT’s needs for investments do not stop with fiber deployment. The company is also investing in deploying 5G.

BT Business Outlook

Global and Enterprise had overlapping offerings and also suffered from internal competition on the large U.K. accounts. The merger should help BT Business simplify its GTM and achieve cost savings. It should help the new division to invest more in specific areas, e.g., digital, cloud, and security for large enterprises.

The merger will, however, probably not solve BT Business’ exposure to traditional voice and equipment resale, whose revenue decline has been long-lasting. BT Business will need to develop high-growth offerings through M&As to increase its service mix. Also, given the growing overlap between telecom and IT services, we think that BT Business will need to further lower its cost structure by increasing its India delivery network.

BT Business keeps an important SoHo and SME business, which intrinsically have different dynamics than ICT services to large enterprises. BT has a good track record in packaging services and offerings to its clients. The deployment of fiber and 5G should help the company gain market share in this customer segment. The question is whether this customer segment should be part of BT Business or BT Retail.

Certainly, between the two divisions, better clarity on customer focus and reduction of duplicative services and roles like solution and deal architects, financial analysts, and bid managers will provide the focus that the two units need and assist in meeting BT Group’s financial goals.

The new BT Business division will report as a single unit from April 1, 2023.

Infosys Cobalt Cloud Focuses on Transformation, Security & Sustainability

NelsonHall recently attended the ‘Infosys Cobalt World Tour’ conference in New York and, as the world begins to open up again, it was great to engage with Infosys executives face-to-face.

Infosys presented its Cobalt Cloud strategy and use cases to increase awareness of the benefits to the marketplace and highlighted that its cloud approach is focused on achieving business objectives rather than simply moving current solutions to the cloud.

To set the context, Infosys launched Infosys Cobalt in 2020, which includes services, solutions, and platforms to enable cloud-powered enterprise transformation. The Infosys Cobalt Cloud Community currently provides a catalog of 225 industry cloud-first blueprints and 35k cloud assets curated from Infosys' experience in delivering cloud programs for G2K enterprises. The Cloud Community includes Infosys experts plus partners, clients, academic institutions, start-ups, gig workers, and cloud developers.

Expediting the move to the cloud

Infosys takes a three-layered approach to the cloud through Infosys Cobalt to develop new business capabilities to meet emerging business needs and faster time to market. It also aims to reduce multi-cloud complexity through a secure cloud platform, bringing elasticity to the resource layer. The three approaches are:

Consumption Layer (Business Services): Infosys sees a new paradigm in the consumption layer, utilizing data analytics to derive business outcomes within the organization, including industry-specific solutions
Platform Layer (Technology Platforms): Infosys aims to move clients up the value chain, including helping them transform data lakes to the cloud, refactoring apps to be cloud-native, and using PaaS
Resource Layer (Cloud Resources): most clients start here with IaaS and cloud for consumption, network, and storage, and establishing virtual private cloud and connection between private, public cloud, and on-premise. This approach includes accelerating migration, taking native services from hyperscalers, and building on top of the cloud platform.

Infosys enables clients to create services consumable within their enterprise utilizing multi/hybrid cloud services, with platform technology enabling leaner operations with a heavy focus on engineering. Automation and IaC enable a developer-centric model that extends from DevOps to DevSecOps to NoOps in an agile manner. Key assets utilized in cloud platform engineering include Polycloud Platform, Cloud Automation Café, and Security Reference Architecture.

Enhancing security

Infosys enables enterprises to build cyber-resilient and compliant cloud ecosystems by adopting their ‘Secure by design, ‘Secure by scale’ and ‘Secure the future’ approach. Infosys assures ‘Digital trust’ through a structured execution process of diagnose, design, deliver and defend. From a Cobalt perspective, the blueprints and assets provided to their clients have regulatory and security compliance built into its solution and technical and financial governance. The security strategy utilizes strategic partnerships and pre-negotiated contracts in a platform security stack.

Sustainability is top of the agenda

Infosys looks to enable and accelerate sustainability solutions and drive impact through a business-to-business model and unlock long-term sustainability thinking across global enterprises. It aims to deliver the following benefits to its clients:

Making an impact on the triple-bottom-line of people, profit, and prosperity
Attracting a new wave of sustainability-minded clients, supply chain partners, and employees
Enhancing ESG attractiveness to investors and brand reputation
Securing resiliency in uncertain conditions.

Cloud is providing a vehicle for achieving carbon neutrality for its operations. Infosys offers Smart Buildings and Spaces services that enable the physical workplace to become digital by installing and managing Internet of Things (IoT) devices and sensors. Water management, carbon monitoring and control, solid waste management, energy assessment, and greenfield building consultancy are crucial sustainability competencies.

Outlook

Enterprises are accelerating their migration to private, public, and hybrid multi-cloud environments to satisfy greater demands for flexibility, scalability, resiliency, and security. This includes migrating on-premise infrastructure to hybrid cloud, including legacy application modernization to cloud-native systems. We expect Infosys to continue to build assets and cloud-first blueprints. In addition, in support of the Polycloud platform, we expect continued investments in the smart catalog and cloud-native services. The Cobalt suite of tools and assets enables enterprises to begin their cloud journey quickly and effectively with security in mind and an eye toward carbon-neutral outcomes.

Whishworks Expands from MuleSoft Heritage to Whole Salesforce Service Ecosystem for Coforge

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.

Cognizant Focuses on Growing its Salesforce Practice while Verticalizing Capabilities

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.

HPE Unveils Pointnext Brand to Refocus its IT Services Capabilities

We recently talked to HPE Technology Services (TS) about its recent Pointnext branding campaign. Despite the divestment of its Enterprise Services unit, HPE has retained very significant IT services capabilities, provided through Pointnext. Technology Services is a sizable unit with FY16 revenues of ~$7.9bn (for the period ending 31 October 2016), and has a headcount of 25k across 80 countries.

It would be tempting to view Pointnext as the product-related services arm of HPE, providing mostly support and IT consulting services, all within the context of product “attach” sales (i.e. service sales tied to hardware sales). And indeed, product support (and the attach sales model) remains a key element of the services provided by Pointnext, with IT consulting services providing a small part of the overall revenue.

Nevertheless, the services portfolio under the Pointnext brand is broader than product support and consulting capability. Pointnext wants to accompany the full project lifecycle: capabilities include consulting services, professional services, and run services (“operational” services). So how will Pointnext rebalance its service portfolio mix away from support? HPE won’t say but we assume consulting (directly) and professional services (both directly and with the help of the indirect channel/VARs) are a priority.

With the Pointnext brand launch, the business has also had a portfolio refresh on the digital transformation theme, largely around IT infrastructure, in areas including cloud computing (application modernization and cloud migration) and hybrid cloud (“hybrid IT”), big data and analytics, IoT edge devices (“Intelligent Edge”), and IoT.

With its refresh around digital transformation, Pointnext is counting on HPE’s own hardware and software portfolio transformation. It is also investing in expanding its portfolio – e.g. in advisory services (emphasizing workshops and assessments), and run services (pushing aaS consumption models), together with its cloud computing partner Microsoft with Azure.

Pointnext’s delivery is also evolving, with the unit moving further towards offsite delivery. Currently, ~ 60% of its delivery is done remotely. This number will increase, with more CoEs being created onshore and offshore to drive a factory approach, even for systems integration activities such as migration of mainframes to open servers, and to private/hybrid/public clouds. Meanwhile, Pointnext continues to hire onshore for its advisory services.

The topic of delivery is closely related to that of VARs and partners, which provide professional services for installing HPE’s products, and for providing L2 and L3 support. Pointnext highlights that partners remain a core element of its go-to-market approach and continues to create repeatable and packaged offerings that can be resold by partners. Examples include strategic offerings HPE Flexible Capacity, an aaS model for onsite servers/datacenters that is supported by HPE Datacenter Care.

In many ways, with its focus on packaged offerings, its inclusion of the indirect model, and its “attach” business model, Pointnext differs from most tier-one IT services competitors. Dynamics are at work in IT infrastructure services towards more packaged, standard offerings. So, let’s welcome the new HPE Pointnext brand as a vendor focused on making that happen.

Dell Services: the Glue for "One NTT DATA" In North America

Dell Services is a strategic acquisition, though an expensive one

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

Rio 2016: How Atos is Helping the IOC Redeploy its Budget from Run to Digital

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.

IBM Cloud Computing: Hybrid, IoT, Cognitive ... and Video

NelsonHall recently attended a cloud computing event hosted by IBM, its first such event in Europe since it introduced a new segment structure at its investor briefing in February. With this new structure in place, plus the recent addition of revenue disclosures for cloud from each segment, we were interested in the extent to which IBM is combining its relevant cloud capabilities across segments.

The focus on IaaS and on Bluemix continues apace
There is also accelerating focus on IOT from Watson IoT, the second industry focus for Watson after Watson Health, and The Weather Company: expect new offerings leveraging these over the next couple of years
Cloud for streaming video is also a new area of focus
For cloud intiatives, GBS continues to lag.

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"we are becoming a cognitive solutions and a cloud platform company"

As it undergoes a corporate reinvention, not for the first time in its history, IBM is positioning as being more than a “hardware, software, services” company; its current mantra is “we are becoming a cognitive solutions and a cloud platform company”. This positioning is reflected in the new segment structure:

Cognitive Solutions: solutions software (incl. analytics, security, and social) and transaction processing software
Global Business Services (GBS): the consulting, GPS and AM units, as before
Technology Services and Cloud Platforms: the Global Technology Services (GTS) unit plus IBM’s cloud infrastructure and platform capabilities. This segment now includes WebSphere and related integration software products
Systems: z Systems, Power and storage hardware offerings, and now also related operating systems software
Global Financing, as before.

The priorities for investment clearly will continue to be Cognitive (e.g. the acquisitions of The Weather Company and of Truven for Watson Health) and Cloud Platforms.

Meanwhile, the GBS business, which has been kept very much in the shadows in recent years, has been increasing its focus on ‘Cognitive Solutions”, including setting up a cognitive consulting practice, and also strengthening its industry capabilities. Looking ahead, IBM has stated it intend to combine some Cognitive Solutions and GBS offerings in what it calls “Cognitive Solutions and Industry Services”.

IBM asserts that this new structure is in support of its drive to both transform existing businesses and also address new opportunity areas (even build new markets) in areas such as Watson Health and Watson IoT.

IBM is also now providing additional revenue disclosures for revenues from “strategic imperatives” (analytics, cloud, mobile security, social), cloud, also as-a-service within each segment.

This provides a little more transparency on, for example, on the nature of its cloud revenues. Thus IBM reports it generated ~$10.2bn in cloud revenues in FY15, a growth, of which $4.5bn in as-a-service, of which approximately:

$1.4bn from the Cognitive Solutions segment
$1.8bn from GBS
$4.0bn from Technology Services and Cloud Platforms
$3.0bn from Systems

IBM is generating significant cloud revenues from:

SaaS, with a range of IP
Analytics/cognitive software: various IPs, with Watson key to the future of IBM. And IBM now sells Watson only on the cloud
PaaS, with Bluemix fast becoming the platform of choice for developers
IaaS, IBM claims its IaaS business grew by double digits in FY15

Continued Focus on IaaS and Bluemix

IBM continues to focus on IaaS (Softlayer and IBM Cloud Managed Services). In spite of the dominance of AWS, IBM still believes the potential for growth is huge, given the low proportion of applications hosted on the cloud currently (IBM estimates 10-15%). Inorganic growth continues to be part of the IaaS strategy, in particular for hybrid cloud, with moves like the June 2015 acquisition of Blue Box for its OpenStack capabilities.

In line with this hybrid strategy, IBM also recently signed a significant agreement with VMware to deploy VMware technology in its cloud datacenters to simplify the integration between clients’ private clouds and IBM cloud datacenters. Also relevant is the acquisition last October of Cleversafe for Internet-based object storage (for storing relatively inexpensively unstructured data and media files).

With PaaS, IBM continues to expand the functionality of Bluemix, which now has ~150 services and is onboarding 20k new registered users a week. Of course, the model of Bluemix relies on massive adoption; it is relatively inexpensive and will not materialize into revenue flows before many quarters. But the importance of Bluemix should not be downplayed. In many respects, IBM has produced with Bluemix a disruptive approach with its financial and product power. This is great news for client organizations.

Watson IoT and the Weather Company

IBM has several priorities for Watson IoT:

Continue to develop the platform in terms of functionality, including expanding on communication protocols, on data provided by devices, on gateways (for ingesting other sources of data), real-time data visualization. IBM is applying cognitive APIs to its IoT platform: the intent is to detect sensors that are transmitting abnormal data and of course, understand the cause for those abnormal data.
Driving its IoT effort towards verticalization: with use cases in telematics for the automotive and insurance sectors, and client examples across industries. The recently announced IBM-Cisco partnership on IoT analytics is looking at situations where devices have limited access to connectivity (e.g. containers in boats) and focusing on providing analytics at the device level, rather than within the datacenter
Blockchain technology is also in IBM’s IoT horizon. IBM is helping a Finnish municipality creating a decentralized database, based on blockchain technology, for registering data across forestry and logistics firms. There is a security element to the blockchain approach. However, the business case for blockchain (vs. a centralized registration system) was not made quite clear in this use case. Expect to see an increasing focus by IBM on blockchain technology in the near future.

The Weather Company is another cornerstone of IBM’s IoT strategy. IBM expects a major differentiator will come from the combination of weather data with all sorts of external and internal data, which will drive use cases for many sectors, including the retail industry. This clearly makes sense at a high level but it is not obvious why IBM needed to spend $2bn in acquiring the assets of the Weather Company, rather than partner with it. It is not yet clear if competitors of IBM will be able to access data of the Weather Company.

We expect to see specific offerings that leverage the Weather Company start to be launched before the end of FY16.

Cloud Video

This January IBM launched IBM Cloud Video Services (services, analytics and software), enhanced by the acquisitions of Aspera, Cleversafe, Clearleap and streaming video service Ustream. Like weather, video is one of the richest and fastest-growing data sources, with some sources expecting it to comprise 80% of internet traffic by 2019. IBM is looking to benefit from the increasing use of video:

In the media & entertainment industry. IBM is combining in IBM Cloud Video Aspera (for sharing large files such as videos) and Cleversafe for storing large data volumes.
By marketing departments: positioning Ustream and Clearleap to help marketing departments stream videos as part of events and create buzz. This is the next phase for IBM Cloud Video.

Integrating IBM’s Cloud Initiatives

IBM provided us with consistent messaging for its many cloud computing initiatives. It has been acting fast on cloud computing (as indeed in all its “strategic imperatives”), using acquisitions as development accelerators. This approach provides speed and is indeed helping to strongly differentiating IBM but it is also expensive and requires integration work.

IBM is aware of this challenge and is aiming to bring together its platforms. It has created a Cloud Platforms unit, initially focused on Softlayer and Bluemix. The rationale is that IBM clients start their cloud adoption with IaaS and then expand to other offerings including Bluemix and then Watson. IBM released a new console/portal for Bluemix in February and is progressing on integrating the portals and service catalogs.

No mention of GBS

However, there was no mention of IBM GBS in the event, and the extent to which IBM GBS is aligned with any cloud computing initiatives from other segments is not clear. That could be a mid-term focus in IBM’s reinvention.

By Dominique Raviart and Rachael Stormonth

M&A Activity (Part 3): Further Scale and Digital Remain Priorities in 2016

In December 2015, we published two blogs about M&A activity in the IT services industry in 2015 (here are the links for Part 1 and Part 2). This blog examines M&A activity in IT services in Q1 2016 and sets our expectations for the rest of this year.

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).

M&A Activity in 2015 (Part 2): Few Vendors Acquire in Digital; IaaS Industry Consolidation Begins

This is the second of three articles examining M&A activity in IT services during 2015. Last time we looked at how M&A activity was being driven by $10bn to $15bn vendors. This time we take a look at M&A around newer service offerings and digital transformation. The firms that are acquiring capabilities in digital services are vendors in good financial health that have mostly already set up a large offshore presence in India (Deloitte being the exception).

Accenture Drives M&A Activity in Digital Services

The topic of digital transformation services (DTS) has been dominating conversations and management focus for the past three years. Yet, quite surprisingly, it has not been a major focus of attention in M&A activity, apart from Accenture and Singtel.

Accenture acquired 18 companies in its FY15 for $800m. The majority of those were digital agencies or in DTS overall. And Accenture is very likely to make further acquisitions: the company has guided it is targeting acquisitions will represent 1% to 2% of its revenue growth in FY16. The company has the funding: it has a net cash balance of $3.1bn and will receive a further $0.8bn from Amadeus for the sale of its Navitaire business.

Deloitte has a similar M&A strategy to Accenture, though the Deloitte Consulting network also continues to grow its capabilities in traditional ERP services as well as acquiring digital agencies and security firms. Deloitte Consulting is a third of the size of Accenture and has wider gaps in its service portfolio.

Among the Indian oriented service providers, Infosys, Wipro and HCL Technologies are also accelerating in DTS investments with each having made two to four acquisitions this year. Wipro and Infosys want to gain local capabilities in digital agencies for digital UX, HCL Technologies in specific SaaS skills. Wipro and Infosys are also investing in newer offerings such as BPaaS and automation.

Finally, looking at new offerings, Singtel made a significant move with its $80m acquisition of Trustware, a managed security services vendor with revenues of $216m. While telecom service providers have shown little interest in acquiring IT services capabilities this decade, managed security services is more of an adjacent capability –and is a high growth, potentially high margin, market.

Consolidation of the Public IaaS Industry Begins

Amazon Web Services continues to enjoy impressive revenue growth and very high margins. Microsoft with Azure, and Google Cloud are also growing well. The rest of the public IaaS industry is probably in a different shape. The IT industry seems to have decided that the public IaaS was no longer an open industry with large capex investments and few winners. M&A has been limited as a result and we are expecting more divestments. HPE is shutting down its public IaaS business (HP Helion Public Cloud) on January 31, 2016 and emphasizing its private cloud capabilities and its expertise in managing heterogeneous environments.

We are seeing this growing aversion to large capex investments reach the adjacent hosting industry: Equinix is buying Telecity for £2.3bn. On a much smaller scale, AT&T sold its managed application hosting to IBM and Colt its cloud/hosting unit to PE-backed Getronics in the U.K. And IBM won a $1bn IT infrastructure management deal (involves the transfer of 580 personnel) from Norway’s EVRY to develop a hybrid infrastructure based on IBM’s public IaaS SoftLayer.

Looking ahead, we expect several more regional vendors will follow EVRY’s approach and divest their capex-intensive hosting and datacenter activities. Similarly, we expect to see large telecom service providers either investing further in IaaS or exiting/selling the business.

We will soon publish a third article on our M&A expectations for 2016.

The New CSC Targeting Topline Growth Within 3 Years: Is Organic Growth Possible?

CSC has just laid out the financial targets of the standalone business which will retain the CSC moniker when the U.S federal company, CRSA, breaks off. As well as CSC’s global commercial business, it includes non-U.S. public sector businesses (~$700m revenues in FY15).

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

NelsonHall Remains Cautious about ITO Spending in 2015 Despite 40% Increase in Q1 Bookings

This week NelsonHall held its quarterly IT Outsourcing (ITO) Index webcast to report on the latest developments in ITO contract activity and present an analysis of spending activity for IT services, professional services (i.e. consulting and systems integration) and ITO.

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.

ITO Spending Growth Dips Slightly & Bookings Flat in 2014, but Expect Improvement in 2015

This week NelsonHall held its quarterly IT outsourcing (ITO) Index webcast. We have conducted these calls for the last six years to monitor developments in ITO from a quantitative perspective. When we introduced the Index, ITO had largely moved from full outsourcing to a selective outsourcing approach, and Indian vendors were deploying their land and expand strategy with the occasional one-off mega-deal (TCS comes to mind). The Index has been reporting market developments closely ever since, though we have been collecting and analyzing ITO contract data for many years.

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.

IBM Aligns its SAP and Oracle Capabilities Around Mobility, Big Data and Cloud Computing

IBM recently held its annual IBM Alliances event, focusing on SAP and Oracle (other major IBM-wide partners include Microsoft, Infor, Cisco, Juniper Networks and Citrix). IBM Alliances manages major relationships with technology vendors that cross several IBM service lines, e.g. GBS, GTS, Systems & Technology, and Software. Those seven major partnerships are significant and command ~15% of overall IBM revenues;

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.

ITO Spending Growth Dips Slightly & Bookings Flat in 2014, but Expect Improvement in 2015

Background

What does our short-term spending analysis tell us?

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.

What does NelsonHall forecast for 2015?

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.

Wipro ServiceNXT: Early Successes in Helping Win Large IT Outsourcing Deals

Wipro has updated NelsonHall on its ServiceNXT initiative. ServiceNXT aims to increase productivity in both IT infrastructure management and application management contracts. ServiceNXT is based on:

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.

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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].

Tieto Q2 2014 Revenues: Product Development Business Remains Problematic

Tieto's Q2 2014 revenues were €386.4m, down 7.3% y/y, and down 1.3% y/y at constant currency. (for full details see here)

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: Flat Growth is the New Growth

In the world of IT services, professional services, e.g. consulting, systems integration and application development, are a cyclical business. Spending growth – or decline – depends very much on GDP growth, corporate moral and investment intentions. Professional services growth has varied since on a quarterly basis, since 2008, between -8% to +9%, on a worldwide basis.

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.

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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:

Sopra To Acquire Convertible Bonds of CS to Strengthen Capabilities in Engineering Services

Sopra and CS Communication & Systèmes, a French IT services vendor, have announced a multi-tiered agreement:

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.

Atos to Acquire Bull to Strengthen Big Data, Security and Cloud Capabilities

Atos is to acquire France-headquartered technology vendor Bull for €620m in an all cash transaction. Atos offers €4.9 per Bull share, a premium of 22% over May 23’s closure price of €4.01. The offer is conditional on Atos receiving 50% and 1 shares. The largest shareholders of Bull, Crescendo Industries and Pothar Investments, which own a 24.2% stake in Bull, have agreed to participate to the public offering. The offer has been approved unanimously by the Board of Directors of Bull. Atos is to file for the offer by June 2, 2014. Expected closing of the public offer is to end by mid- to end of August. Once the public offering completed, Atos is either to proceed to a mandatory squeeze-out procedure (if Atos owns 95% of shares) or merge with Bull.

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 To Acquire Steria to Grow International Presence and Expand into BPO

Sopra Group is to acquire Steria for an all-share transaction valuing Steria at €722m. The acquisition is presented as a merger of equals.

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?

Amazon Launches Packaged Virtual Desktop Offering Amazon WorkSpaces

Amazon Web Services has launched Amazon WorkSpaces, a public cloud-hosted standard virtual desktop offering. The offering mirrors the IaaS Amazon EC2 offerings of Amazon Web Services, with shared IT infrastructures, multi-tenancy, fast provisioning and opex models.

Amazon Workspaces features include:

A choice of different CPUs, memory, storage
Storage is attached to each virtual desktop and has an option for access of a given folder trhough Amazon WorkSpace or other devices. Storage availability is 99. 999999999% from Amazon Simple Storage Services (Amazon S3)
A Windows 7-like desktop based on Windows Remote Desktop Services
Standalone directory or integration with Microsoft’s Active Directory for PC administration rights and access to applications
Access options include VPN access based on Amazon Virtual Private Cloud or AWS Direct Connect.

Workspace offerings are:

Standard: $35 per user and per month
- Hardware: 1 virtual CPU, 3.75 GiB memory, 50 GB user storage
- Applications: Adobe Acrobat Reader; IE 9 or Mozilla Firefox; 7-Zip; Adobe Flash and JRE
Standards Plus: $50 per user and per month
- Hardware: same as Standard offering
- Applications: same as Standard offering; in addition: Microsoft Office Professional 2010; Trend Micro Worry-Free Business Security Services
Performance: $60 per user and per month
- Hardware: 2 virtual CPUs; 7.5 GiB memory; 100 GB user storage
- Applications: same as Standards offering
Performance Plus: $7 per user per month
- Hardware: same as Performance offering
- Software: same as Standard Plus offering.

Amazon WorkSpaces is the latest standard virtual desktop offering to be launched in the past few years. These standard offerings are pre-packaged with a set of pre-available office and personal productivity applications, virtualization software hosted in the datacenter of the vendor, single-tenant or multi-tenant, and have cloud features including fast provisioning and an opex model. The success of these offerings has been rather limited despite the quality of such offerings and their relative low prices.

There are several reasons for this lack success: several of such offerings are targeting SOHOs and small businesses. In spite of their low prices, such offerings have had to compete with the continuously dropping prices of traditional laptops and desktop prices. Amazon’s Standard offering starts at $420 per year: the pricing is therefore similar to laptops with similar characteristics in the U.S. and shipped with Microsoft Office. In other words, Amazon WorkSpace’s price for a year is similar to brand new hardware. This is too expensive.

Large enterprise clients would have stronger interest in desktop and application virtualization than SMBs, as they have more sophisticated needs. However their adoption of standard virtual offerings has been limited. Cost is one inhibitor to such adoption of standard offerings. Lack of interest in overall in public cloud, as compared with private clouds, is another important inhibitor. Success for this offering is likely to be marginal.

Meanwhile, Amazon has launched AppStream, an application virtualization. See separate article.

NelsonHall recently launched a new report on virtual desktop services and BYOD. For more information, please contact [email protected].

Atos to Float Worldline by Mid-2014

Atos has unveiled its financial objectives for its Worldline unit. The company is to float Worldline by mid-2014, while keeping a majority stake in the company. Proceeds from the IPO are to finance organic growth and especially acquisitions.

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

Atos Unveils 2016 Financial Objectives

Atos has unveiled its Ambitions 2016 plan in whch it has detailed how two of its key service lines (Managed Services and Systems Integration) will evolve over the next three years.

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.

Capgemini Elaborates on its SAP- and Amazon- Based MDM Offering

Capgemini Group, through its Mobile Solutions (MS) unit, has briefed us on its recent mobile device management (MDM) offering, called Mobile Secure, launched with SAP and Amazon Web Services in May 2013

Capgemini MS has designed this offering to be as affordable as possible: the offering is marketed at a price of €1/$1.11 per device per month. It is based on SAP Afaria (acquired by SAP through the 2010 Sybase acquisition), but is not SAP back-end systems dependent; available on a SaaS model; and is hosted on AWS. To favor its adoption, the offering includes a 30-day trial.

Functionality includes MDM and reporting. The offering supports devices running Android, iOS, and Windows Phone 8 operating systems. Administration is done through a self-service portal.

The service exists under three options:

Tool only: SaaS under a minimum one-year contract for €1/$1.11 per device and per month
Service: as above with device administration done by Capgemini
Solution: as above, plus
- Mobile application management
- Content management
- Additional SAP-based Capgemini proprietary templates e.g. Crescent (retail) and Energy Path.

Service delivery is India-centric, representing 75% of the effort.

Capgemini stresses that the three parties in the offering will make a profit. The company considers the €1 price will be attractive to clients, providing a base to drive additional conversations and services marketed by Capgemini Mobility Solutions.

Capgemini MS claims strong early success for its offering. In the first two months, the offering has 185 clients on trial representing several hundred thousand devices. Early clients include Lubrizol (2010 revenues of $5.4bn and headcount of 6,900) and Sun Products Corp. (revenues of ~$2bn and headcount of 3,000).

The company announced the creation of its Mobile Solutions business unit in March 2012. The unit is part of Capgemini’s top line initiatives (TLI), which also includes testing, the recent cloud computing SkySight offering, and BIM. TLI can be considered as an incubator for new service lines or services that require coordination across several Capgemini units. Capgemini MS draws on personnel and offerings from several business units including App Services 1 and 2,and Sogeti.

Capgemini MS has a headcount of 3,000. It was built on the 2010 acquisition of Abaco Mobile, an Atlanta-based vendor specialized in SAP mobility software and services. Abaco had a headcount of 100.

The unit has a worldwide focus, with notable growth in France, Germany, the Netherlands, North America, the Nordics, Southern Europe and Brazil. Capgemini has ambitious growth plans for Mobile Solutions, targeting a triple digit growth in new revenues by 2015.

Approaches being taken by Mobile Solutions include:

Taking a factory-based approach to address small project opportunities around mobile apps development, having several Mobile Application Factories, of which one in Bangalore is is the largest. The company offers three options, taking a fixed price approach, when relevant
- Simple: 5 screens, 1 to 3 use cases, one single data source: 4 FTEs * 4 weeks: €40k
- Medium 6 to 15 screens, 3 to 5 use cases, up to 2 data sources, 4 FTEs *n 7 weeks: €60k
- Complex: 15 to 20 interactive screens, 6 to 10 use cases, 2 and more data sources, 6 months and 4 updates, 4 FTEs * 11 weeks: ~€95k
Investing in creating mobile-related SAP templates. Capgemini is a preferred partner with SAP for the consumer goods sector. The partnership builds on work that Capgemini has done for eight clients. The first outcome of this initiative focused on the CPG sector is Capgemini’s SAP Mobile Sales Execution template.

Capgemini MS has a comprehensive service portfolio that expands from its MDM service. Services offered include

Mobile strategy i.e. consulting
Mobile applications e.g. development
Managed mobility e.g. management of application and of devices as well as cloud hosting
Mobile platforms e.g. tools and related services around MDM, mobile application management, secure content management, EMM services e.g. TEM.

MS has centered its effort around:

Internal IT: support mobile business personnel to access applications and data
B2B2C and B2B: helping clients interact with their mobile end-clients through several channels
M2M/Internet of things: projects to connect user-owned wireless devices to IT applications.

It will be interesting to see how Mobile Solutions evolves. The unit has several options: focusing on mobile apps, potentially working alongside the several Digital Services units that Capgemini has in its Consulting Services business, or aligning further with its IT infrastructure services unit around virtual desktop services and BYOD services offerings.

TCS and Infosys Report Strong Growth in their Testing Units in Q1 FY 2014

Infosys and TCS published recently their Q1 FY 2014 (calendar Q2) financials. The two companies provide as part of their financial reporting indications on their software testing activities. In detail, in Q1

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.