In a recent NelsonHall blog, we looked at the key themes and investments being made across digital workplace services. The overarching themes were employee experience, AI-enabled digital support services, sustainability, and digital re-skilling (read more here). For this blog, we spoke to NTT DATA’s digital workplace leadership team to understand its key focus and strategic roadmap investments over the next 12 months.

The new NTT DATA Group is a much-enlarged firm with ~$30bn in revenues and 195k employees. The group comprises NTT DATA Japan, with ~$12bn in revenues, and NTT DATA Inc., the $18bn international business with integrated application, infrastructure, and network capabilities (read more here).

NTT DATA’s digital workplace services innovation is focused on four key investment areas:

• Generative Workplace: utilizing GenAI to provide personalized digital support services
• Experiential Workplace: using XLAs to support total experience
• Sustainable Workplace: includes sustainable device as a service (SDaaS)
• Smart Workplace: facilitating productive and safe workplaces with IoT-based services.

Utilizing GenAI to provide personalized digital support services

NTT DATA is investing in GenAI across all its digital workplace towers, including employee experience enablement through conversational AI. This provides the ability to mimic agent behavior and translate language in real-time. IT Service Desk use cases include incident creation/resolution, approvals and updates, request fulfillment, knowledge management, ticket details and self-service, access management, and password reset. The agent can also deliver other self-service and administrative tasks across other industry use cases including retail, financial and banking (FSI), airline and travel and more. NTT DATA has a single delivery team for GenAI in its high-performance delivery centers and consulting & advisory services and sales at a local level through its Glocal model approach. Below are examples of deployments.

NTT DATA deployed a conversational AI chatbot in partnership with kore.ai for a multinational food processing company with 150k employees. It further integrated specific LLMs, resulting in ~40% call deflection.

NTT DATA is also engaged in multiple Microsoft Copilot workshops, providing advisory and consulting services, readiness and deployment, organizational change management (OCM), and Copilot extensibility. Typical engagements include Microsoft 365 Copilot calling and meetings workshop, Copilot proof of value with NTT DATA Cloud Voice (Modern Work and Copilot Engagement Program), and Copilot Studio/Sales workshop. NTT DATA also offers a 3-week Copilot advisory workshop to assess Copilot readiness across all workloads, discover use cases, and ensure data governance and implementation roadmap and Copilot for Azure PoCs.

For a Spanish telco with 15m customers, NTT DATA provided consulting and advisory services supporting a 300-license pilot for Microsoft 365 Copilot. This included training in the transversal use cases of M365 Copilot and additional use case identification, including document summarization and creation, agent assist, outage and remediation notification, knowledge management, etc. In the pilot, 76% of users saw increased productivity, and 70% had a positive experience. The client is now entering a second phase, extending the licenses to 1k. A key factor in the adoption was NTT DATA’s change management approach to drive mindset change and generate interest in the pilot groups.

NTT DATA will continue embedding GenAI across its digital workplace offerings, leveraging IP LLMs and AI-powered Copilot for engineers and use cases supporting client experience and expert advisory. Using smaller LLMs and proprietary data to solve vertical or business-specific problems will increase moving forward. NTT DATA’s investments in OCM and Microsoft Copilot consulting services are also key as organizations seek to drive AI technology adoption. In particular, organization change management (OCM) and AI with OCM will play a key role in helping clients adopt GenAI technologies by driving a greater focus on personalization to expedite adoption, and we expect to see POCs and pilots moving strongly into production over the next 12 months. There will also be more emphasis on proactive experience centers supported by SRE teams that look at every aspect of experience and monitor users in real time as they engage across services.

Utilizing XLAs to support total experience

NTT DATA has developed Experience-as-a-Service (EXPaaS) with the aim of providing its clients with a total experience using persona-aligned services and XLA delivery supported by its experience management office (XMO) and dedicated DEX squads.

EXPaaS for EX focuses on operational, people, and technology experiences and combines them with CX assurance, services management, and analytics to enable total experience. NTT DATA aims to identify issues that impact UX and respond quickly to prevent issues, using its DEM platform to increase observability and visibility. It collects multiple telemetry info from devices, apps, networks, etc., in real-time, which it runs through its XMO and digital analytics fabric to derive insights and improve EX.  

NTT DATA uses its 5A framework to implement EXPaaS and enable XLA standardization. It starts with the initial Ask phase to understand the key stakeholders, the environment, the client’s experience aspirations, and what part of the scope is influenced by NTT DATA, the clients, or its partners. The next phases are Analyzing, Assessing, Acting, and Attuning and providing continuous monitoring and improvement of experience indicators through its dedicated XMO.

For a global airline client, NTT DATA implemented EXPaaS with its 5A framework and persona-based XLA dashboards, measuring multiple metrics parallel to SLAs. It utilized its DEM platform, OCM, and modern device management to support 30k devices. The client achieved an improved overall EX score of 9.5/10, using XLA-delivery and persona alignment, and reduced ~35% of service desk contacts through proactive automation.

NTT DATA’s focus on EXPaaS to drive its XLA approach along with its dedicated XMO capability are key, and we expect the company to continue to ramp its SREs in support of its SRE/agile POD-led approach to bridge the gap between operations and deployment.

In addition, NTT DATA’s Workplace Orchestration platform delivers consolidated client experiences across the workplace. For example, its digital twin capability built on Power BI looks to expedite the employee onboarding process from 4 weeks to less than a week, with accelerated Day 1 onboarding being a major element in the overall employee experience.

Infusing ESG into its Digital Workplace Services offerings

NTT DATA focuses on persona-aligned VDIs, rightsizing devices based on personas, and increasing remote technical support with AR/VR and digital humans to reduce carbon footprint. This also includes accessible devices, kiosks, inclusive meeting rooms, and remote device wipe services. A key offering is Sustainable Device as a Service (SDaaS), available per device per month or per user per month, with devices and peripherals aligned to the employee persona.

NTT DATA deployed this capability for a global biotech company with 54k devices, identifying opportunities for remote support and field dispatch avoidance. It also provided smart refresh by persona supported by 1E and Nexthink on a needs-only basis through a phased approach. It provided automated provisioning through Autopilot and streamlined the catalog to ensure the correct configuration for the user, for example, moving them to a VDI platform if more suited to the persona. The client achieved an ~85% increase in device provisioning time.

Adoption of NTT DATA’s Sustainable Device as a Service (SDaaS) is likely to increase in importance in support of clients’ ESG and sustainability goals.

Another key capability includes eSIM, which integrates personal and corporate telephony on one device with a single number for Teams and mobile phones.

In partnership with HP, NTT DATA offers re-manufacturing and refurbished device allocation at the end of three years, providing users with the same out-of-the-box experience. This approach will resonate with clients as they seek to lower their carbon footprint and sustainably extend the device lifecycle.

NTT DATA also helps clients optimize office space and improve energy efficiency using Workplace Orchestration platform employee intranet.

Providing smart workplaces

NTT DATA provides managed private 5G, SD-WAN, SPEKTRA platform for networks, IoT, and edge computing, infusing this into digital workplace services to create a smart workplace. This also includes its Private 5G Device as a Service, with a fully configurable device selection aligned to the user’s persona and a choice of lease versus buy. Industry use case examples include manufacturing (industry 4.0 and autonomous factories), healthcare (providing clinicians with access to patient data on any device), and automotive (providing visibility of the global supply chain). NTT DATA will increasingly invest in further industry use cases in support of its P5G Device as a Service offering.  

For a global construction and utility client, NTT DATA utilized Workplace Orchestration platform, conversational AI, and employee intranet to develop a mobile app to streamline physical bookings, corporate service access, and communications for employees and external collaborators. It also enables the optimization and management of common spaces and occupancy visualization. The client achieved several outcomes, including increased energy efficiency, reduced environmental footprint, and improved worker productivity.   

NelsonHall recently completed an in-depth analysis of advanced digital workplace services, in which we spoke to multiple leading IT services vendors and their clients. This blog looks at some of the key themes from this research, the investments vendors need to make to meet client demand, and how the market will evolve over the next 12-18 months.

The four overarching themes from this study were:

• Applying a human-centric approach with employee experience at the center
• Enhancing digital support through AI
• Increasing focus on sustainability
• Ramping digital re-skilling and up-skilling.

Employee experience at the center

Clients continue to utilize digital workplace services as an enabler for hybrid workplace transformation and to improve the overall employee experience. There is a greater focus on hyper-personalization through a consulting-led approach. This includes the implementation of DEX and DEM platforms to measure the experience by persona, including device and sentiment analysis. There is also more commitment to total experience (TX), a combination of employee and customer experience. Over the next 12 months, the focus on proactive experience centers will increase, supported by SRE teams looking at every aspect of experience and real-time monitoring of users as they engage across services.

We expect to see a greater focus on experience performance indicators (XPIs) supporting XLAs to measure experience outcomes. Vendor examples include:

• DXC Technology provides managed service experience and deploys XPIs in client engagements. Through its Experience Cube, DXC mixes experience, technology, and operational data, feeding this into reporting and analytics to understand perception and sentiment
• Compucom is also evolving XPIs into XLAs, working jointly with clients on business outcomes
• Infosys has developed a Key Experience Indicator (KEI) framework to help clients define XLAs through a five-step process over 15 weeks
• Unisys has also developed an experience governance board (XGB) with clients to manage the lifecycle of XLAs and, as the XLAs plateau over time, uses the XGB to focus on the next XLAs in line with business imperatives.

Enhancing digital support services through AI

The most significant impact on digital workplace services in the next 12 months will be AI and predominantly GenAI. Vendors are running multiple POCs with clients across Copilot for Microsoft 365 to augment service desk agent capability, create knowledge base articles, and identify gaps in KB articles. It also enables agents to focus on experience as opposed to tasks; in addition, providing expert connect capabilities in the field for problem management with AI-enabled root cause analysis and assisted insights with GenAI responses.

Examples include:

• Cognizant recently purchased 25k M365 Copilot seats for its employees with plans to deploy it to 1m users within their global 2000 clients across 11 industries
• TCS has launched TCS WisdomNext, a platform that integrates multiple GenAI services into a single interface to expedite adoption at scale
• Kyndryl recently partnered with NVIDIA on GenAI, integrating NVIDIA with its Kyndry Bridge platform to enhance AI and automation capabilities in support of digital workplace services.

We expect vendors to utilize smaller LLMs, using proprietary data to solve vertical or industry-specific problems. Vendors need to focus on organization change management (OCM), which will play a key role in driving the adoption of GenAI technologies and using AI with OCM to drive a greater focus on persona preferences. There will be a greater focus on AIOps and ML for intelligent event management and trigger automation to auto-remediate and fix issues and drive real-time insights and recommendations across the workplace.

Supporting clients’ ESG and sustainability goals

Vendors are deploying IP and third-party tools to support clients’ ESG and sustainability strategies through Evergreen devices and PCs as a service. ESG management and reporting with analysis through hyperscalers (e.g., ServiceNow) providing custom ESG analytics and dashboards. Vendor examples include:

• Infosys, which provides infrastructure in carbon-neutral regions, services, and resources with a low carbon footprint
• NTT DATA also offers open API integration into cloud carbon footprint data from hyperscalers
• TCS takes a two-pillar approach to sustainability, including Greening of IT (reducing IT's carbon emission and footprint across infra, platform, data, and apps) and Greening by IT (solutions to decrease emissions and resource consumption while allowing for growth)
• Atos is also contracting on decarbonization-level agreements.

Over the next 12-18 months, vendors need to increase the use of green apps and gamification to allow employees to measure and reduce their carbon footprint across the hybrid workplace.

Digital re-skilling continues at pace

We continue to see traction in digital re-skilling initiatives and hyperscaler certifications supporting digital workplace services. New skill sets are emerging, including machine coaches developing algorithms for AIOps and automation, AI architects supporting GenAI, and experience and innovation leads. Vendors are developing specific power programs to enable freshers to become full-stack engineers and up-skill industry-specific skill sets through domain SMEs, dedicated automation, and experience CoEs.

Vendors need to expedite resources building automation, GenAI use cases, and AI leads by client account. This includes developing industry and business-specific LLMs, both IP and open source. They must also enable a real-time data insights-driven approach supported by site reliability engineers (SRE) approving machine recommendations.

Outlook

The most significant impact over the next 12-18 months will be AI, with multiple GenAI POCs running across Copilot for Microsoft 365, for example, to augment agent capability, improve KB articles and conversational AI in the field, and GitHub Copilot to improve developer experience and drive legacy modernization. Also, there will be greater leverage of hyperscaler AI capabilities across ServiceNow, Amazon Q, Google Gemini, and Open Source LLMs. However, OCM will play a key role in driving the adoption of these technologies, with greater use of AI in OCM to drive personalization.

Vendors must focus on an experience management office (XMO) approach to drive and measure total experience across client organizations. Digital re-skilling will continue focusing on AI specialists, platform SMEs, and business value specialists. This includes building SRE CoEs in support of delivery locations.

Sustainability and ESG will be key drivers over the next few years, with clients utilizing Evergreen services, including DaaS, to manage device lifecycle, PCaaS, and circular computing. There will also be more focus on employee empowerment through gamification and green apps, and greater use of cloud to reduce carbon footprint and SMEs providing infrastructure in carbon-neutral regions. We expect vendors to increase their GTM and joint IP with hyperscalers and key ecosystem partners to support hybrid workplace transformation in the next 12-18 months.

NelsonHall recently attended Compucom’s Analyst and Advisor Event 2023 in Charlotte, NC. It provided an opportunity to meet the executive leadership team, which has evolved over the last 12 months. Kevin Shank was appointed CEO in December 2022, having served as a senior executive at Compucom for nine years. He was joined earlier this year by Matt Olson as COO, also a previous senior executive at the company.

Founded in 1987, Compucom supports digital experience management through device lifecycle services, digital support, field services, and modern device management. The company provides end-to-end digital workplace services for large enterprises and mid-size businesses, supporting 9m devices and handling 8m service desk contacts per annum. In December 2021, it was acquired by Variant Equity Advisors, providing new impetus and investment to its focus on improving the digital experience in support of hybrid working.

Compucom is aiming to enhance its clients’ workplace transformation programs by:

• Implementing single points of contact for clients to drive innovation and NPS
• Establishing a Customer Experience Office and Experience Level Indicators to drive XLA discussions
• Driving the use of automation and AIOps across its digital support services.

Implementing Single Points of Contact to Drive Client Innovation & NPS

Compucom has reorganized its account management approach to drive innovation within its clients in a more cohesive and client-centric manner. A program director in charge of sales, solutioning, and client resourcing for the account now becomes the client’s single point of contact. The program director is also responsible to Compucom for the account P&L.

Compucom has deployed this model across its top 65 accounts (~80% of total business), driving greater account opportunities and improved client NPS.

The company continues to utilize its end-to-end capabilities across product provision, professional services, managed services, and staffing services at scale to provide a continuous lifecycle approach for the client.

Establishing a Customer Experience Office & Experience Level Indicators to Drive XLA Discussions

Compucom has established a Customer Experience Office (CXO) to provide a centralized and holistic approach to continuous improvements, increasing service efficiency and customer experience across clients. It includes a dedicated team building automations and improving proactive resolutions through AIOps.

At the same time, Compucom has developed multiple Experience Level Indicators (XLIs), covering metrics such as device and application performance, to measure experiences across four key indicators through its DEX platform and to drive XLA discussions with clients. The four key indicators, each containing multiple XLIs, are:

• Technology choice: covering device performance, application experience, and employee productivity
• Workplace flexibility: covering network, device, and connectivity experience
• Self-sufficiency: covering self-service resolutions, knowledge usage, and self-service support experience
• Well-supported: covering onboarding experience, device lifecycle experience, and support experience.

These XLIs are supported by Systrack, or clients’ end-user analytics tools, putting multiple telemetry points into dashboards to identify opportunities for experience improvement.

In addition, Compucom has a dedicated analytics team that works closely with account management. It takes data from multiple points, including digital support, endpoint, lifecycle, field services, cloud, and security, collecting data via telemetry and metrics from services and sentiment.

The analytics team then utilizes AI/ML to identify actionable insights, which are solutioned to drive service or content improvements. Service enhancement use cases include performance-based refresh to understand if a device is not performing at the level an employee needs to do their job effectively. It also looks at software license optimization to understand usage and identify opportunities for cost-out, including applications on devices not being utilized. Compucom has developed several support interaction use cases, including quality enhancement, knowledge content, AI-chat content, and process improvement.

It also has the opportunity to further support clients’ ESG agendas through its device lifecycle services, immersive technologies, AR/VR, remote support, OEM partnerships, and by developing Green apps to help users monitor, track, and reduce their carbon footprint.

Driving Use of Automation & AIOps across Digital Support Services

Compucom is continuing to invest in digital support models with more automation, self-service, conversational AI chat support, and generative AI POCs with clients. It looks at different telemetry and events from the devices deployed across the workplace and aggregates this data to view patterns and deliver appropriate automation as required.

This includes using AIOps to trigger actions, propose preventative measures to predict, prevent, detect, and fix potential issues before they reach the service desk, and enable self-healing to increase autonomous remediation. It is developing a field technician mobile application to track, for example, ETA and routing automatically.  

Compucom will continue to increase this focus on AIOps and drive a real-time data insight-driven approach across the workplace supported by dedicated skills, including data scientists, automation and AI architects, and UX/EX leads. It will need to ramp up its digital re-skilling and hiring to ensure the requisite skillsets are in place, and this is underway as part of its strategic roadmap.

The company is also investing in Microsoft IaaS and PaaS capabilities, and taking advantage of and securing technologies including Microsoft Copilot to enable GenAI use cases. In addition, there will be greater use of Intune, including Autopilot and cloud-based managed services in support of modern management.

Cybersecurity is also a key focus for Compucom, and it is investing in new cybersecurity tools and standards. The increasing client shift to SaaS is increasing the number of devices that require network connectivity and bringing new security and networking challenges to edge locations. It also provides the intersection between IoT, operational technology, and the workplace in support of hybrid working environments.

Outlook

We expect Compucom to expand its customer-centric approach across key accounts to drive innovation and overall experience.

Compucom is increasingly focusing on how its offerings can support specific client outcomes, and we expect to see contractual XLAs being deployed through its XLI-based approach in support of client outcomes.

We also expect to see increased tailoring of its services by industry, including a more persona-based focus on frontline workers and industry-specific roles across the workplace and via its GTM with key ecosystem partners and hyperscalers.

NelsonHall recently attended Compucom’s Analyst and Advisor Event 2022 in Paulsboro, NJ.  As in-person meetings and events resume, it was great to engage with Compucom executives, including CEO Mick Slattery, face-to-face once more.

Founded in 1987, Compucom provides end-to-end digital workplace services for enterprises, midsize and small businesses. In December 2021, it was acquired by Variant Equity Advisors, giving new impetus and investment to its focus on improving the employee experience in support of the future of work.

Digital workplace services are becoming increasingly important in driving the overall employee experience, and organizations continue to invest in digital workplace services at pace. In a recent NelsonHall study of multiple IT stakeholders across industries, 91% identified digital workplace services as highly important in improving the employee experience and supporting hybrid ways of working across the enterprise. In addition, 93% rated greater personalization of services as key to improving collaboration in support of hybrid working.

Compucom is aiming to enhance its clients’ employee experiences by:

• Assisting clients to move beyond XLIs to XLAs
• Using its CXO office to drive improved resolution
• Accelerating its investment in automation of its digital support processes.

Moving beyond XLIs to XLAs

As hybrid working becomes the norm, a key goal for Compucom is to provide a holistic employee experience, enabling its clients to achieve experience parity between working from home, office, and other locations in support of hybrid working collaboration.

Accordingly, Compucom is increasing its focus on XLAs (Experience Level Agreements) and contracting on risk/reward in the areas it can control to support business outcomes. Heather Lockhart, Chief Marketing Officer, showcased Compucom’s new branding and reiterated the company’s focus on employee experience and the direct correlation between EX and, ultimately, CX for clients.

Compucom seeks to be the key enabler for XLA development across its client base and evolve Experience Level Indicators (XLIs) into XLAs working jointly with clients on business outcomes.

Current XLIs developed by Compucom include:

• Technology issues: age of devices and browser usage
• Self-sufficiency: self-service, knowledge use, and contacts per user
• Support quality: sentiment, response times, and onboarding
• Flexible workspace: cloud utilization, VPN usage, and peripheral access.

These XLIs will further translate into XLAs linked to contractual engagements to improve business processes and outcomes. The company will continue to expand these across its client base.

Compucom will increasingly focus on how its offerings can support specific client outcomes, and we expect to see more focus and investment in providing end-to-end experience across the workplace. Its persona-based approach will enable it to define personas by industry further and develop personalized experiences across the workplace.

In addition, digital workplace services have a key role in clients’ ESG agendas. This includes using remote support, immersive technologies, and Advanced Exchange to reduce onsite support to benefit carbon emissions and utilize Green apps to give end-users visibility of their carbon footprint.

Using its CXO Office to Drive Improved Resolution

Compucom has established a Customer Experience Office (CXO) to provide a holistic approach for continuous improvements, increasing service efficiency and customer experience.

It created the CXO office to look across its clients and enable more analytics and automation to drive a faster resolution or increased self-help. It has dedicated teams building automations and improving proactive resolutions. Through ITSM, it seeks to improve customer experience efficiency by driving SLA attainment, incident resolution, and reducing MTTR and contact volume while driving a knowledge management program to assist operations and improve customer experience through metrics including FCR and knowledge consumption.

Compucom’s CXO includes a single-pane view to track employee sentiment and performance across clients’ investments in end-user analytics tools such as 1E Tachyon, NexThink, Systrack, Medallia, and Qualtrics. This further enables the measurement of UX across devices, applications, networks, and home office WiFi environments.

Accelerating the Automation of Digital Support models

Compucom is investing in digital support models with more automation, self-service, and predictive AI-powered, natural language support options. This includes remote technician support, swapping deskside for remote support, and dispatches with remote and Advanced Exchange; in addition, looking at different telemetry and events from the devices deployed across the workplace and aggregating this data to view patterns and deliver appropriate automation as required.

This also includes triggering actions to propose preventative measures to improve configurations and predict, prevent, detect, and fix potential issues before they reach the service desk. Compucom also provides a catalog of automation, including scheduled maintenance for core applications and a simple interface for single-click resolutions and requests for assistance. Through analytics and telemetry, it is helping clients move from a group policy administration model to an Autopilot-driven approach that enables greater device choice.

Outlook

Compucom is ramping up digital re-skilling and hyperscaler certifications, and we expect it to continue investing in AI-based platforms and tools to enable a self-heal framework and increase autonomous remediation. In addition, we anticipate that Compucom will shift from a traditional L1/1.5/2/3 mindset to a real-time data insights-driven approach supported by site reliability engineers (SRE).

In general, we expect to see newer skill sets emerging, including machine coaches developing algorithms for AIOps systems, business value specialists, automation and AI architects, and experience and innovation leads. It will be important for Compucom to continue to ramp up its digital re-skilling, hiring, and retention initiatives to ensure the requisite skills are in place to meet future clients’ requirements and support business outcomes.

In addition, Compucom recognizes that the ever-increasing shift to SaaS and the increasing number of devices that require network connectivity is bringing new security and networking challenges to edge locations and continues to enhance its capabilities on the edge along with security. 

We also expect to see more emphasis on partner ecosystem and hyperscaler GTM initiatives and a greater focus on how Compucom’s offerings can support specific client outcomes.

NelsonHall recently attended Unisys’ Analyst and Advisor Event 2022 in Boston, MA. As IRL meetings and events begin to resume, it was great to engage with Unisys executives face-to-face once more.

The $1.2bn sale of its Federal business to SAIC back in February 2020 is being partly used to fund acquisitions and portfolio investments for Unisys’ digital workplace and cloud & infrastructure solutions businesses. Unisys has made three acquisitions to date: two have enhanced its digital workplace services capabilities, the third its cloud and infrastructure management services capabilities.

Unisys has well-established capabilities in cybersecurity, particularly Stealth and digital workplace services. There is now an increasing emphasis on cloud-native applications and taking a more consultative-led approach across Unisys.

There has been a nearly total refresh of the senior leadership over the last 18 months, with new appointments for CFO (Debra McCann; former CFO Mike Thomson is now COO), CTO (Dwayne Allen), CMO (Teresa Poggenpohl), CCO (Maureen Sweeny), and new heads for Digital Workplace (Leon Gilbert), Cloud and Infrastructure Solutions (Manju Naglapur) and Enterprise Computing Solutions (Chris Arrasmith). All are external hires (Naglapur came with CompuGain, acquired in December 2021). We note much greater diversity in the senior leadership.

The tagline for the event was ‘what’s next – accelerating success’. CEO Peter Altabef focused on Unisys’ new emphasis of driving outcomes that enable enterprises to be more profitable with supporting hybrid, cloud, and multi-cloud environments playing a pivotal role.

Digital workplace solutions: focus on the proactive UX

Leon Gilbert, SVP of Digital Workplace Solutions, highlighted the traction gained since his appointment in February 2021 and the increased focus on driving proactive experiences across the workplace and helping clients transform through next-gen capabilities. Unisys has enabled all existing clients with the latest technology, including journey analytics, at no charge. It also exited some non-strategic DWS contracts in 2021. Unisys claims to be enabling ~1.4m end-users with proactive experiences, up from 50k just 18 months ago.

Two recent acquisitions enhancing Unisys’ digital workplace services capabilities are:

• Unify Square, acquired last June for $150m, whose cloud-based PowerSuite solution for Enterprise Communications and Collaboration captures an individual's experience and can operationalize and improve that experience in real-time through analytics. Unify Square also brought in ~50 digital workplace consultants who can support Unisys’ consulting-led approach
• Mobinergy, a much smaller acquisition last November, has enhanced Unisys’ UEM capabilities and its positioning around modern device management.

There is an ongoing emphasis on VDI (Dell, VMware, Azure) and cloud-native VDI services to support secure and modern workspace environments and AIOps in support of first-time fix across field services, AR, and automation in service desks. Again, there have been several recent senior hires supporting these capabilities.

Priorities for Unisys’ digital workplace services include aligning offerings by geography, optimizing hybrid working models, and driving more outcomes-based engagements.

Driving application modernization and containerization

Unisys is also investing in its cloud and infrastructure business and recently acquired CompuGain, bringing 400 employees with capabilities across cloud-native, application modernization, and data analytics.

Unisys continues to invest in its CloudForte portfolio, including CloudForte CMP AIOps for AI-led operations. In addition, CloudForte Containers automate the end-to-end container infrastructure, application modernization, and DevSecOps deployment processes. This enables applications to be brought quickly into production and provides automation across the entire lifecycle, including security. It is also investing in Stealth and its hybrid cloud-managed security solution (MDR), providing AI-enabled threat response.

Unisys continues to ramp its investments across automation, self-healing, and AI/ML capabilities in support of cloud services.

Outlook

Unisys has overhauled its senior leadership team and is looking to pivot to a business-unit-led organization to increase traction in selected markets and geographies. There will be a stronger focus on using a consulting-led approach and on driving client outcomes: expect to see a further increase in dedicated business consultants. Also expect to see additional bolt-on acquisitions in support of application and data modernization capabilities, plus further developments in its CloudForte container services roadmap, and a greater focus on DevSecOps and automation enablement across the entire lifecycle. We also expect to see more joint-IP and GTM offerings with key hyperscalers.

With digital workplace services, expect to see greater traction across Unisys’ XMO organization, proactive experience, dedicated XLAs through the PowerSuite platform and partner ecosystem, and expansion of modern device management with Mobinergy capabilities. This should enhance field services, including AR/VR and immersive technologies. We also expect to see further acquisitions supporting digital workplace transformation advisory and a greater focus on AIOps and SRE-led operations.

Unisys will be rebranding this year: expect to see a greater emphasis on how Unisys’ offerings can support specific client outcomes.

John Laherty and Rachael Stormonth

NelsonHall recently completed an in-depth analysis of advanced digital workplace services, in which we spoke to multiple leading IT services vendors and their clients. This blog looks at some of the key themes from this research, the investments vendors need to make to meet client demand, and how the market will evolve over the next 12 to 18 months.

The three overarching themes from this study were:

• Applying a human-centric approach and placing employee experience at the center of everything
• Enhancing digital support and increasing predictability of services
• Ramping digital re-skilling and empowering end-users.

Let’s look at these key focus areas in more detail.

Employee experience is paramount

In addition to the recent market analysis, NelsonHall carried out a study of multiple IT stakeholders across industries. Here, 91% identified digital workplace services as highly important in improving the employee experience and supporting new hybrid ways of working across the enterprise. In addition, 93% rated greater personalization of services as key to improving collaboration in support of hybrid working. Within employee experience, the main sub-themes we identified included:

> Identifying and measuring employee experience and establishing roadmap (includes the use of analytics and dedicated experience centers)

Vendors need to support their ability to drive the customer experience by continuing to invest in end-user analytics tools to measure employee sentiment and performance, with typical tools including 1E Tachyon, Nexthink, SysTrack, and Qualtrics. These measure UX across devices, applications, networks, and home-office WiFi environments. We expect to see more use of Microsoft Viva through APIs to measure employee HR, wellbeing, cultural sentiment, and combining this with sentiment analytics and measuring across dedicated experience frameworks.

Over the next 12 months, focus on dedicated experience centers will increase, supported by SRE teams that look at the experience aspect of IT service delivery and proactively monitor the sentiments of end-users as they engage across services and XLAs (and work with clients to create specific XLAs by persona).

> Delivering employee experience (through personalization and holistic experience)

Here, vendors should look to enable a hyper-personalized approach at the start of client engagements to understand clients’ business and customize solutions accordingly. Also, it is essential to define personas by industry and personalized experience services across the workplace and wider enterprise ecosystem.

Also, it is important to focus on providing a holistic experience in both physical and virtual environments to drive location-independent collaboration in support of hybrid working. This will increasingly involve the deployment of AR/XR, including Microsoft Mesh Services and HoloLens.

Overall, it is now critical for organizations to provide a holistic employee experience, with experience parity between working from home, office, and other locations in support of hybrid working collaboration.

Other key investment areas include building XLAs to support business outcomes (e.g., automation effectiveness, virtual agent effectiveness, accurate technical resolution, chat uptake, self-service, and knowledge article first-time resolution).

> User training (use of MarTech and Microsoft Viva)

We expect to see more investment in MarTech, used for contextualizing the workplace for users, targeting ads to an end-user in an enterprise for training and adoption services, and continuing focus on OCM to drive digital adoption. User learning will be further enhanced by greater utilization of Microsoft Viva and targeting installed M365 client bases with Viva to improve productivity and UX.

Driving predictability across the workplace through digital support services

Vendors are increasing investments in proactive and predictive support services, including AI-led service desks, to facilitate the move to a fully automated ‘zero-touch’ service desk capability. They need to provide end-users with access to digital support through a single touchpoint (e.g., Teams). Within self-serve, vendors need to increase the resolution capability of virtual agents and integrate self-heal capabilities to enable greater self-remediation of issues. It includes self-heal scripts and self-help libraries, including one-click automated solutions, knowledgebase articles, and targeting self-healing at L0, L1, and L1.5 incidents. This is supported by utilizing data from the log files of the different devices deployed across the workplace and aggregating this data to view patterns. This is used to trigger actions to propose preventative measures to improve configuration and predict, prevent, detect, and fix potential issues before they reach the service desk.

Automation is key in:

• Direct automation of incidents, driving continuous transformation through a data-driven approach and automating the bulk of L1 incidents
• User support, extending AI virtual agents across the enterprise (e.g., in HR for onboarding and offboarding), facilities management, and procurement functions.

Over the next 12 months, we anticipate more focus on AIOps and the interoperability with existing and new environments through a catalog-based service and bot store for reusable automation assets. As more insights are gained across the end-user environment through analytics, ML, and AI, it enables greater adoption of self-healing technologies and auto-remediation capabilities. It will improve predictability across IT environments, rectify issues before an end-user realizes they have an issue, and support the transition to a future No-Ops model.

Digital re-skilling continues at pace

We continue to see traction in digital re-skilling initiatives and hyperscaler certifications supporting digital workplace services. We are seeing a shift from traditional L1/2/3/mindsets to a real-time data insights-driven approach supported by site reliability engineers (SRE) approving machine recommendations. New skillsets are emerging, including machine coaches developing algorithms for AIOps systems, business value specialists, experience and innovation leads, automation, and AI architects.

Over the next 12 to 18 months, we expect to see more focus on end-user empowerment using low code/no-code platforms and managing M365 through the Microsoft Power Platform. Vendors also need to expedite resources, building automation use cases and system capability by industry to meet clients’specific business needs. There is also an opportunity for vendors to hire from a much larger digital skills pool than previously, driven by remote working.

There will also be more focus on Evergreen-as-a-Service, and supporting SMEs enabling clients to keep up to date with the latest features and updates from hyperscalers and the provision of advisory services through Evergreen CoEs to help clients adopt new features and transform the way end-users work. This includes greater utilization of modern management to provide a centralized solution for all devices, including PCs, tablets, IoT devices, smartphones, and Macs, bringing all endpoint management together into a single unified service to manage all devices from one solution. Invariably, cloud-based management toolsets will manage the full lifecycle of all endpoints from onboarding to retirement.

Outlook

Investment in digital workplace services will continue at pace, driven by the need to enhance the employee experience and the opportunities created by digital support services, SaaS (M365 and Intelligent Collaboration tools), VDI, and AR/VR. We anticipate increasing adoption of fully-cloud-based digital workplace platforms driven by ongoing hybrid remote working requirements.

In addition, we expect to see more investment in decarbonization measurement, including reducing onsite support to benefit carbon emissions and utilizing Green apps to give end-users visibility of their carbon footprint. This will also include avoiding costs related to unused hardware and engaging and educating employees to influence sustainable practices.

5G, edge technologies, and IoT-enabled solutions, including health testing and biometric building entry, and voice and gesture control, have a key role in facilitating a safe return to the office. These technologies are often integrated with third-party platforms, particularly the ServiceNow safe workplace suite.

Overall, the transformation of digital workplace services will be underpinned by increased uptake of Windows 365 Cloud PC, Windows 11, Apple DaaS, and modern management toolsets. In addition, there will be more focus on joint IP and GTM initiatives with hyperscalers in support of hybrid working environments.

Find out more about NelsonHall’s ‘Advanced Digital Workplace Services’ market assessment report here or contact Guy Saunders. 

We recently spoke with Infosys on its sustainability strategy, where its philosophy is to ensure its business, clients' businesses, and ecosystems are all sustainable. It approaches sustainability at the enterprise level across Environment, Social, and Governance (ESG) dimensions.

Infosys started its sustainability journey in 2008 and says it became carbon neutral in 2020, some 30 years ahead of the 2050 timeline set by the Paris Agreement. Recent achievements include a 55% reduction in per capita electricity consumption compared to the 2008 baseline and 50% of electricity coming from renewables. The company has achieved 60 MW of total installed solar capacity and a 64% reduction in consumption of water across campuses. Overall, Infosys has achieved an 83.6% reduction in Scope 3 emissions, including reductions from business travel, employee commute, upstream leased assets, waste, and work from home. Infosys claims by 2022, for every project, there will be a sustainability aspect for clients.

We have also seen recent ESG developments from other IT services vendors, including Capgemini's commitment to achieving carbon neutrality for its operations no later than 2025 and its ambition to be net-zero by 2030. Also, Atos announced end-to-end decarbonization capabilities to enable clients to accelerate their journeys to net-zero. Atos invests in decarbonization measurement, including reducing onsite support to benefit carbon emission and utilizing the Atos Green app to educate and give end-users visibility of their carbon footprint.

Infosys capabilities and IP

Infosys is positioning itself to be clients' end-to-end sustainability partner, combining IP and a consulting-led approach. Key capabilities include its ESG platform (ECOWatch), powered by Microsoft applications in Azure to enable data capture and analysis of sustainability KPIs and ESG metrics, IoT-based energy, water, and waste management solutions, and KRITI 4.0 for asset maintenance. Additional Infosys capabilities include integrated command and control center (AR/VR in the field), Smart Spaces platform, and PLM and circular commerce material compliance. The Infosys Wingspan Platform is used for knowledge and change management, and Infosys Meridian for sustainability events and communities.

Infosys has recently announced a strategic partnership with The Economist Group to enable and accelerate sustainability solutions and drive impact through a business-to-business model and unlock long-term sustainability thinking across global enterprises, and is aiming 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.

Infosys sees six distinct aspects to clients' sustainability journeys: sustainability plan, growth plan, digital & physical assets, addressing the supply chain, offset strategy, and sustainability-first culture.

Focus on smart buildings capability

From an ESG perspective, buildings account for 40% of GHG emissions. Consequently, we are seeing a number of vendor capabilities in support of smart buildings and offices using workplace safety platforms and IoT-enabled wayfinding solutions. This includes providing health testing and biometric building entry, including voice and gesture control to facilitate a safe return to the office for clients. These services are often integrated with third-party platforms, particularly the ServiceNow safe workplace suite.

Here, Infosys is partnering with several global hyper-scalers to offer its Smart Buildings and Spaces offering, managing the lifecycle of solutions, including pathfinder and visitor management. In addition, Infosys offers Azure health and wellness platform focused on occupancy wellbeing and health and safety. Also, Infosys has capabilities to enable the physical workplace to become digital by installing and managing IoT devices, beacons, sensors, and wayfinding solutions. Employee-centric solutions include AR/XR experience, intelligent workplace platform/return to the workplace, employee experience, and touchless experience. These solutions are complemented by an integrated command center, IoT-enabled occupancy analytics, connected field services, Infosys intelligent workplace solutions, and low-carbon eco spaces. From a sustainability perspective, key capabilities include water management, carbon monitoring & control, solid waste management, energy assessment and consulting, and Greenfield building consulting (LEED).

Infosys enabled RXR Realty, a leading real-estate owner, investor, operator, and developer with a commercial portfolio of 26 office buildings in and around NYC, to deploy an Azure-based health and wellness platform focused on occupancy wellbeing and health and safety, incorporating Face Mask Detection, Social Distancing, Indoor Air Quality, Monitoring Occupancy, Energy Management, and Remote Operations.

Additional capabilities across decarbonization include smart metering, smart grids, renewables, electric cars, IoT sensor deployment, command centers, and predictive analytics (including predictive maintenance) across utilities, focusing on optimizing machinery, facilities and operations to reduce costs and overall energy and resource use.

ESG vision 2030

Through its Sustainable Business Practice, Infosys has launched its ESG vision and ambitions for 2030, which include:

• Environment: includes leveraging technology to support the transition to a low-carbon world and support climate change, maintaining 100% water recycling each year, and ensuring zero waste to landfill
• Social: extending digital skills to 10m people, including employees, clients' workforces, students, teachers, and communities by 2025. Empowering 80m lives through tech for good programs and having 45% of women in the Infosys workforce (currently 38.6%); also, delivering 33% of work through flexible/remote work options and driving employee wellness and experience
• Governance: includes building sustainable and responsible supply chains, adopting leading data privacy standards across global operations, and upholding the digital trust of stakeholders.

Summary

Infosys became carbon neutral in 2020, has a clear ESG strategy through 2030, and estimates that it has enabled clients to achieve a 30% reduction in per-capita energy consumption and a 20% improvement in operational efficiencies. 

We expect Infosys will increase its industry-specific capabilities in support of clients’ ESG and carbon-neutral strategies. Across Digital Workplace Services, there is a greater focus on supporting clients’ ESG and carbon-neutral agendas through Evergreen services, including the use of AR/VR in the field to reduce onsite field visits, remote working and onboarding, smart buildings, and use of Green apps to notify users of their carbon footprint. There is also a clear focus on employee experience and wellness and digital re-skilling to support ESG agendas. Here, we expect Infosys to see increased traction across its Wingspan learning platform, where it currently has ~2m users, as clients seek to train, re-skill, and educate employees to support future sustainability initiatives.  

NelsonHall completed an in-depth analysis of advanced digital workplace services (DWS) in 2019. This blog looks at some of the key findings from this research, in which we spoke both to leading IT services vendors and clients of their services. We will also take a look at some of the drivers and trends we expect to see as we move into 2020 and beyond.

DWS is enabling the future-ready workplace

Organizations are placing greater emphasis on overall employee experience through the deployment of digital workplace services. In addition, the role of central IT is changing, adopting the role of a service broker to enable end-users to provision the services they need, when they want, and how they want. This is increasing the need for more personalized engagement models, including self-service (mobile support apps, virtual agents, chatbots, and knowledge articles). DWS is also driving the use of proactive and predictive engagements, including self-healing, AI and automation, and specialist onsite support through Tech Cafes and smart lockers, while utilizing AR/VR in the field for remote services.

A key development is the use of DWS tools and techniques across the entire organization, with examples including the use of chatbots and virtual agents in HR for onboarding and off-boarding activities. Gamification methods are being deployed across marketing and communications departments to drive engagement and adoption of services. In addition, there is greater integration with facilities management through the use of IoT-enabled devices and wayfinding solutions to drive smart office concepts.

Intelligent collaboration services & design thinking take personalization further

Vendors are developing social and collaboration platforms to integrate multiple platforms (including Microsoft Teams, WhatsApp, Workplace by Facebook, G-Suite, Skype for Business, and Yammer) into one. This is driven by organizational requirements to enable employees to collaborate more effectively on projects through the platform of their choice, and improving overall UX. It also enables targeted communications to specific user groups or personas. We expect activity will ramp in this area, in particular as vendors partner more with disruptors in the market, including Google and AWS.

Many vendors are further utilizing consulting and advisory services to drive a collaborative design thinking approach to client engagements, to develop the digital workplace user experience. They are further investing in and developing dedicated design and digital studios in support of DWS initiatives. This also includes the use of immersive technologies, including AR/VR, to showcase ‘smart office’ capabilities.

Analytics is playing an even more critical role across DWS

Vendors are increasingly looking to use advanced data analytics, NLP, and ML tools to manage and analyze data, including Hadoop and Kafka, and DataRobot to evaluate different ML algorithms.

They are seeking to better understand the big data generated in the end-user environment and act on this data to stop issues in the first place, working out what to automate to drive the best outcome. This also includes the creation of automation scripts or bots to improve service quality pre-emptively.

Another key focus area is the use of end-user analytics tools, including Nexthink and Systrack, to improve end-user monitoring and overall UX. Vendors are collecting data from log files across the different devices deployed across the workplace and aggregating this data to get a view of patterns in data. This is then used to trigger actions to propose preventative measures to improve configuration and to predict, prevent, detect, and fix potential issues before they reach the service desk.

AI-led service desk initiatives are increasing

Many vendors are expanding capabilities in support of AI-led service desk to facilitate the move to a fully automated ‘zero-touch’ service desk capability. This includes automation and self-serve capabilities (IVR, RPA, chatbots, auto-scripts, biometric password reset capabilities, including fingerprint and face recognition).

A key focus includes the development of AI-based virtual agents, using NLP and acting as an L1 agent, learning from past data, and improving through ML. These are invariably a mix of IP and third-party solutions. If the virtual agent is unable to rectify, it may log a ticket on behalf of the end-user (whether incident or request), passing the data and intelligence collected to a specific L2/L3 resolver group. Vendors are also integrating common AI interfaces into VAs, including Siri, Cortana, and Skype for Business, to improve UX.

Self-healing ecosystems will enhance predictive capabilities further

As vendors gain more insights across the end-user environment through analytics and AI, it is enabling greater adoption of self-healing technologies and auto-remediation capabilities. Typical toolsets deployed include Nanoheal and Nexthink, enabling self-heal frameworks that run interactively, helping end-users fix their own issues, or providing agent-assisted services (for example, through ServiceNow to remotely fix issues, or run silently to address issues proactively). Vendors are building libraries of self-heal scripts and self-help including one-click automated solutions, knowledgebase articles, and invariably targeting self-healing at L0, L1, and L1.5 incidents.

Future developments

The DWS market will continue to evolve with demand for even deeper personalization of services driven by increasing workforce expectations across the enterprise. It will also be key to attracting and retaining new talent.

AI-led service desk will expand

The propensity to adopt AI, ML, analytics, and self-healing technologies will increase to facilitate the transition to an AI-led, zero-touch service desk with greater predictive and preventative capabilities to further improve both the end-user experience and employee experience across the entire enterprise. This also includes AI-enabled virtual agents utilizing ML and semantic analytics and enhancing use cases to deal with more complex support issues (L3 and above), and expanding VA capability across the enterprise.

In addition, we expect to see further development in areas including proactive mass healing (L2/3), with super-users within the service desk resolving data corrections or data validation errors with site reliability engineers (SREs) approving solutions offered by self-healing, although we anticipate this will be across a more protracted timeframe.

Microsoft MMD will gain traction

Although end-of-life support for Windows 7 kicked in on January 14, 2020, we expect there will still be considerable migration activity for the foreseeable future, with laggards moving to Windows 10, which provides added security along with device flexibility and improved UX.

We also foresee more traction with Microsoft Managed Desktop (MMD), enabling organizations to allow Microsoft to manage their Windows 10 devices, providing the latest versions of Windows 10 Enterprise edition, Office 365 ProPlus, and Microsoft security services. We also expect to see more uptake for Windows Virtual Desktop on Azure, enabling Windows 10 virtual desktops to run on the Azure platform; these will also provide a real alternative to Citrix.

Other developments will include increased provision of ‘aaS’ offerings for Windows and devices, and Evergreen services for Windows 10; and also, EUC as a Service (providing Win10, 0365, DaaS, and unified endpoint management) on a price per-user basis.

IoT-enabled smart buildings will increase

We expect vendors will further enhance their capabilities in support of workplace IoT across the smart office (utilizing beacons, sensors and wayfinding solutions) for smart meeting rooms, reservations, facilities, space management; and expanding field services through AR/VR for asset tracking and worker safety, and remote technical support – in addition to using AR/VR for immersive learning, training, and development.

Greater focus on XLAs and business outcomes

It is likely we will also see greater adoption of business outcome-focused XLAs, which include end-user journey quality, zero-time-to-fix where incidents are avoided, measuring digital adoption (end-user satisfaction, engagement, omnichannel, number of liked and shared knowledge articles).

We anticipate vendors will focus on developing dedicated digital transformation centers and CoEs in areas including AI, ML, automation, data science, cognitive virtual agents, and NLP bots/chatbots – in addition to creating joint R&D capabilities and go-to-market initiatives with key ecosystem partners.

Market disruption

Finally, we expect Amazon and Google will continue to become major disruptors in the DWS market, already evidenced by a number of recent collaboration initiatives with vendors.

NelsonHall recently completed an in-depth analysis of advanced digital workplace services (DWS). This blog looks at some of the key findings from this research, in which we spoke both to leading IT services vendors and clients of their services.

Changing workforce expectations are driving DWS transformation

Organizations are deploying digital workplace services to improve productivity and efficiency while also improving the overall employee experience with more self-service tools, more personalized support, and gamification methods. Offering a digital workplace is also key to attracting new talent.

Employees’ experiences in their personal lives in using mobile devices and AI assistants such as Alexa and Cortana are driving similar expectations at the workplace. There are three engagement models for offering personalized support:

• Proactive & predictive (remote monitoring, self-healing, RPA, AI and intelligent automation, predictive analytics)
• Self-service (portal-based, mobile support apps, virtual agents, knowledge items)
• Specialist on-site support (e.g. Tech Cafes, smart lockers, IT vending machines, video support, smart FM).

There is also an increasing focus in contract agreements on business-aligned ‘XLAs,’ or experience-level agreements (i.e. on user journey quality including zero-time-fix, user hours saved and marginal gain methodology).

Maximizing value from DWS requires collaboration across the enterprise

The buying profile of organizations is evolving as they endeavor to enable more collaborative working by their employees. Where traditionally central IT would drive services as a means to improve cost, IT is now adopting the role of a service broker, offering self-serve capabilities to end-users to provision the services needed, when the end-users want, and how they want.

Recent developments include engaging with marketing and communications departments and using gamification as a means to improve adoption of self-service tools, and with HR for more efficient on-boarding and off-boarding of employees. In addition, collaborating with facilities management to drive the adoption of smart offices (smart conference and booking facilities) and intelligent space management and wayfinding solutions through beacons and sensors.

Design thinking takes personalization even further

Many vendors are now engaging with their clients through collaborative design thinking workshops to generate ideas to improve the end-user experience. This includes the use of ethnographers to understand the profile of target clients and their needs and priorities, including self-serve portal creation. We expect vendors will ramp their design thinking capabilities over the next 12 months.

Social collaboration tools are an important part of UX

There is also growing demand to enable workers to collaborate more effectively through tools such as Yammer, Workplace by Facebook, Slack, Hangout, G-Suite, Skype for Business, SharePoint, WhatsApp, and Microsoft Teams to drive better collaboration across projects and improve end-user experience. Vendors are developing social and collaboration platforms to integrate various social collaboration platforms into one and partnering with disruptors in the market, such as Google. It is evident some vendors are further ahead of the curve than others in this area, with some having already implemented dedicated social collaboration platforms to improve UX.

Windows 10 migration services will continue to ramp

Windows 10 migration has been high on the agenda for some time now, with the end of Windows 7 support in January 2020 forcing the move to Windows 10. Windows 10 provides added security, along with device flexibility and improved UX. There will be a significant uptick in migration rates for the laggards.

Recent developments have also seen the introduction of Microsoft Managed Desktop (MMD), which enables organizations to allow Microsoft to manage their Windows 10 devices. Microsoft also introduced Windows Virtual Desktop on Azure, allowing organizations to run Windows 10 virtual desktops on the Azure platform.

Field services will play an important role in targeting IoT-enabled workplace opportunities

The role of field services is evolving with an increasing deployment of field engineers on servicing IoT-enabled solutions such as wayfinding type ones for smart offices and smart facilities. Their activities include installation, management, and maintenance of sensors and beacons in support of these initiatives. We anticipate vendors will also develop further use cases for AR/VR services in the field for remote technical support and training.

Future developments

The DWS market has evolved considerably in recent years with changing workforce expectations driving a greater personalization of services with a higher propensity to adopt AI, cognitive, ML and analytics technologies through a collaborative approach to improve the employee experience.

This evolution continues, with greater use of models including zero-touch service desk enabled through AI, smart offices, and increased use of IoT-enabled devices, AI and AR/VR in the field.

Also expect to see new technologies such as Microsoft Managed Desktop (MMD) and VDI on Azure gain substantive traction, and Amazon and Google becoming major disruptors in DWS.

In a surprise transaction, Office Depot announced the acquisition of U.S.-based CompuCom, an end-user computer specialist. The price is significant: ~$1bn, including $750m in cash and 45m shares of Office Depot, with the seller, PE Thomas H. Lee Partners, owning 8% of the share of Office Depot. Despite revenues of $10.6bn, Office Depot has a market cap of just ~$2bn.

With the acquisition, Office Depot expects to add $1bn in annual revenue and deliver $40m in cost savings within two years. The real value is deemed to be in projected longer-term revenue synergies.

Founded in 1987, CompuCom has historically specialized in break-fix services, with 6k of its 11.5k employees being field technicians. The company services around 5.15m users (6.4m desktop/laptops and 1m mobile devices), across 57k locations. 2016 revenues were $1,086m, with an EBITDA margin of 6.4%.

CompuCom also leads (with Getronics) the Global Workspace Alliance (GWA), an alliance of several IT providers, offering workspace services including field and remote services in over 90 countries globally. Key GWA capabilities include 38,000 employees, 9.9m serviced PCs, and 6m users supported onsite.

Having sold its European operations, Office Depot is focusing on North America. After its failed merger with Staples last year, the company has a new CEO, Gerry Smith, who joined from Lenovo earlier this year. Although a program of store closures continues, and revenues on a like-for-like basis continue to decline in mid-single digits, he has secured a number of significant senior leadership appointments, including Janet Schijns (who left Verizon somewhat unexpectedly in July to head Office Depot’s services division), and a new CMO, Jerri Devard, who left ADT Corp. It is now evident that these appointments were part of a broad strategic transformation plan to evolve Office Depot’s positioning from being seen primarily as a retailer to a company that provides integrated technology services to the SMB market. Gerry Smith, in an interview with the Wall Street Journal mentioned “our goal is to grow the services piece faster. This is a necessary pivot for us to be a highly valued company in the future.”

The acquisition of CompuCom puts tech support/field services back into the spotlight, a capability that has largely been divested by most IT infrastructure management services giants, the latest example of this being the divestment by Atos in 2016 of its field services in the U.S. and France. Given the competitive nature of field service tech support, most activity is now done by small to mid-sized specialist firms. It is not yet clear how Office Depot will bring innovation to this service with Compucom.

The big advantage that Office Depot will have is its ability to cross-sell CompuCom’s desktop support services through its network of 1.4k stores across the U.S. and its concept of the “business center”. Having a local physical presence for break-fix (and also replacement) services continues to be an attractive proposition. The company believes Compucom can potentially access 6m SMBs that are located within three miles of its stores. The potential is therefore significant.

But this will not be easy. CompuCom has targeted mid-sized businesses to large enterprises; its Tech-Zone offering for small businesses is not a major part of its business. Servicing SMBs brings a set of specific challenges, requiring, inter alia, very standardized services, extremely efficient delivery, and (particularly difficult to achieve), a strong channel strategy: both Smith and Schijns have great expertise in the latter.

Office Depot looking to be a consolidator

Office Depot’s press release emphasized this is a first step in its transformation to a technology services company. It claims that CompuCom has a 3% share of the North American EUCS market, and is the second largest vendor therein. More acquisitions are likely. As well as field services, capabilities of interest are likely to include security and mobility.

By Dominique Raviart and Rachael Stormonth

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.

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).

Capita states it believes the acquisition would:

• Position Capita as a leading provider of technology-enabled BPS
• Provide a stronger platform for Xchanging to accelerate sales growth and to develop its offerings
• Enable Capita to secure £35m+ in cost synergy benefits
• Be immediately earnings accretive.

Capita has been in discussions with Xchanging since early August regarding a possible offer, upping its initial 140p offer to its final 160p proposal on September 24 - which Xchanging’s board confirmed it would be willing to recommend on September 29 should Capita make a firm offer. Capita was granted due diligence access and had until 5pm on November 2 to make an announcenent.

There is another suitor, Apollo, with whom Xchanging has been having discussions about a potential 170p offer. Will this announcement push Apollo into making a counter offer? Xchanging's share price has surged since the news of the potential talks (over 165p at the time of writing, though still below its one-year peak).

Xchanging has been contending with a range of issues, and its global portfolio lacks coherence, partly a reflection of its heritage in a few large and diverse “Enterprise partnerships”. Xchanging is currently between CEOs, Ken Lever having announced his intention in July to step down at the end of the year, and new CEO Craig Wilson not yet started.

If Capita were to complete, this would be its largest ever acquisition, dwarfing its second largest, the £157m acquisition of avocis this February (though there have been a number of £50m+ acquisitions since 2011, helping Capita expand into new markets or extend its IT capabilities).  So why is Capita so interested?  

In recent years, Xchanging has repositioned and invested to emphasize its capabilities in “technology-enabled BPS”- exactly what Capita is emphasizing with its own various BPO offerings.  Also, the private sector is increasingly important to Capita (over 60% of its current pipeline is in commercial sectors) and Xchanging would increase its presence in the Lloyds market, where Capita already has a presence for specialist services.

Looking in more detail at Xchanging assets that would be attractive – or at least very relevant - to Capita:

1. Xuber software suite for the non-life commercial market: the biggest investment to date (a whopping $200m+ in total investments since 2011), both in platform development and in acquisitions: in 2014, Xchanging invested £75.6m in acquiring Total Objects, whose binder software is now integrated into the Xuber suite, and Agencyport Europe,extending its software into the health insurance sector, with software for international private medical insurance and exposure modeling (acquisition was delayed), plus a further £11.7m on development of Xuber. Xchanging has found converting interest in Xuber to sales more challenging than anticipated, particularly in the U.S. Will Capita’s greater commercial clout help? It would inherit sales teams from Xuber, Total Objects and Agencyport Europe that need integrating into a single unit to cross-sell, where relevant, the portfolio. Would Capita place the Xuber business in its newest operating division “Capita Digital and Software Solutions”, or would it place it in an insurance sector division?
2. The Xchanging Claims Services BPS unit : Capita is already active with a range of specialist services in the London insurance market: this capability would neatly expand its portfolio
3. Xchanging’s business in Germany, where it provides investment account administration BPS for Fondespot Bank, will also be of interest to Capita, who is building a presence in the DACH region, via an acquisition spree in the CMS BPS market, also via an insurance BPS contract with Zurich. The complex administration services in Germany that Xchanging would bring in to Capita would fit well in its Asset Services division
4. Procurement: Xchanging has been through a significant change of direction with its procurement services in recent years, to technology-led offerings, boosted by the acquisitions of MM4 (which was U.S centric) and Spikes Cavell Analytics Ltd (SCAL, which was U.K public sector centric). These offerings may find traction in the Capita client base
5. Expanded offshore IT services capabilities: in India, Xchanging has centers in Chennai and Pune, Bangalore, and tier 3 cities such as Shimoga (Karnataka).  It also has a center in Kuala Lumpur, Malaysia, most providing IT infrastructure services to YTL Communications, and a smaller ADM unit in Singapore (where Capita also has a small presence, targeting the reinsurance sector). There is also some offshore BPO activity in India and Malaysia. Capita may rationalize some of these sites, but would certainly be interested in the expanded offshore application services and BPO delivery capabilities
6. IT services: Xchanging has some networking capabilities, with a client base in the education and health sectors, as well as Lloyds – this would fit well into the Capita IT Enterprise Services division, which has grown through a series of acquisitions in recent years

And less attractive to Capita?

• The Australian operations, where Xchanging’s New South Wales Workers’ Compensation contract was not renewed, and where its procurement business has not really gained traction.
• The U.S. business: Capita’s international efforts are currently focused on Northern Europe. It would be a major change of strategy for Capita to start targeting the U.S., and its management will be highly aware of other service providers who have tried and failed to penetrate the U.S.

But overall, Xchanging’s portfolio is particularly well suited to Capita's business and where it is looking to develop over the next few years. And the cost synergies from the head office rationalization are also a particularly good match.  

We thus believe is highly unlikely that, even if there is a higher counter offer from Apollo, the Xchanging board will change it recommendation to shareholders: Capita presents a better option longer term. Howver, a counter offer from another IT services vendor might be more attractive.

NelsonHall has just published a comprehensive Key Vendor Assessment on Capita. We have also historically included Xchanging in the KVA program.

This is a wise move, given the high growth rate of Workday. Although Workday does not break out its financial results between HR and finance, total company FY 2015 revenues were $787.9m (up 68% y/y), with ~700 global clients.

In FY 2015 Workday added 1,150 employees, ending the year with 3,750. An additional ~1,250 employees are expected to be added in fiscal 2016 to end the year with 5,000 employees. The bulk of the employees will be added in Europe and Asia Pacific as part of Workday's global expansion. By KPMG acquiring Towers Watson's resources in the U.K. and four key Asia Pacific countries, KPMG will be prepared with the right resources to support this high growth.

Clearly, KPMG is focused on HR transformation, having made five other related acquisitions since 2011: EquaTerra, Optimum Solutions, The Hackett Group's Oracle Enterprise Resource Planning practice, Zanett Consulting Solutions, and the Workday practice of Axia Consulting.

And now KPMG is strengthening its Workday implementation ability to rival HR consultancies and HR BPO vendors including Deloitte, Mercer, Accenture, IBM, Aon Hewitt, CSC, HP, and NGA HR. This is big business. Major Workday implementations to date include:   

• HP, with over 300k employees in >100 countries
• AstraZeneca, with 66k staff in 130 countries
• Sanofi, with operations in 100 countries
• Flextronics, with 200k workers in 25 countries
• CSC, with ~70k employees globally.

With the high growth rate of Workday, it appears there will be no shortage of client implementations to go round, with a good choice of vendors. Vendor selection will depend on a number of factors including prior experience, in-country resources, desire to engage an HR consultancy or an HR BPO provider, or both! 

• Revenue was $4,817m, down 15.5% y/y, and down 10% in constant currency (CC), reflecting key account run off and weakness in EMEA
• Segment earnings before taxes (EBT) were $194m, a margin of 4.0%, up 143 bps y/y.

Q2 FY 2015 revenue by service line (with y/y revenue growth) was:

• IT Outsourcing $2,871m (-20.2%, -10% in CC)
• Applications and business services $1,946m (-7.6%, -2% in CC).

HP ES contributed 18% of HP Group revenue and 8% of Group EBT (up from 5% last quarter)

HP Group is nearing the completion of its 2012 restructuring plan. In Q2 FY 15, ~3.9k people exited HP making the total reduction to-date ~48k. The program has a total of 55k people expected to exit by the end of FY 2015, so a further 7k departures over the next two quarters.

HP has maintained full FY 2015 guidance for Enterprise Services of a revenue decline of between 4% and 6% on a constant currency basis, with an improvement in H2.

So where are the positives in HP ES' performance this quarter?

• A significant improvement in revenue performance in the Apps and Business Services segment, with a CC y/y decline of just 2%. This is led by the BPO business. And some geos are showing flat to slight CC growth
• Signings were up year over year, even without the $2bn Deutsche Bank deal closed at the beginning of the quarter (see our commentary here).
• And “Strategic Enterprise Services” signings continue to grow.... though no details are provided.

But the problems continue at  HP ES’ ITO business. It not only continues to be impacted from contract runoff from three large accounts continues, but is also being challenged by the evolution in the market. Meg Whitman refers to “risk in the longer term sustainability of this profit level if we don’t do further cost reductions”. As such, the current intention is to streamline HP ES and take up to $2bn of gross annualized costs out of the business over the next three years in pursuit of a longer term EBT margin target of 7% to 9%. The likely charge represents around 9% of HP ES overall revenues - and 14% of the revenues of the ITO business.

The restructuring actions in HP ES and in particular ITO will include initiatives such as further offshoring, data center automation, pyramid management… the same actions highlighted by CSC earlier this week.

Nevetheless, Whitman has made a clear statement of commitment to the future of HP ES: "the Services business in ES - (and the) -  TS Consulting businesses are  becoming more strategic to the future of Hewlett-Packard Enterprise…. “increasingly, services is becoming the tip of the spear”.

The acquisition will enhance Accenture’s digital capabilities in analytics, cloud and mobility for federal agencies. It also will add agile delivery expertise. Agilex brings in capabilities in agile software development for digital solutions. The company currently serves a number of federal departments and independent agencies, such as the VA, DoD, DHS, and Department of Commerce.  Commercial sector clients have included Amtrak.

Agilex was founded in 2007 by the late Robert La Rose (who had previously founded Advanced Technology Inc. and Integic, both of which were subsequently acquired), Jay Nussbaum (ex. Citibank and Oracle) and John Gall and quickly attracted senior talent to its leadership. The company offers services around

• Mobile applications for activities such as field inspection, emergency response management, performance dashboards, biometric identification, asset management, case management, personal productivity, etc.
• Healthcare IT - for example Agilex was involved in the deployment of the NHIN CONNECT Gateway. Also m-health - for example in May 2014 it was awarded a contract by the VA to develop and implement an enterprise web and mobile application image viewing solution
• CRM solutions.

Agilex has grown from 20 employees in 2007 to about 800 today. Nussbaum and Gall will leave when then acquisition closes, while the company’s leadership team will be integrated into AFS.

So why the acquisition? 

• AFS is already one of the largest U.S. federal systems integrators – this is about continuing to evolve its capabilities to be at the forefront of newer areas of demand; quite simply, Agilex brings in capabilities around digital technologies – and digital is clearly among the top priorities of the government sector
• And governments, not just in the U.S., are looking with much more interest in agile delivery as they move away from massive monolothic projects (for example, agile delivery has been a key element in the U.K. in the development of a new Universal Credit system for the DWP)

Accenture’s 2013 acquisition of ASM Research expanded its presence in the military healthcare market (DoD and VA) - and Accenture has worked alongside Agilex in projects at the VA. 

However, IBM is in the midst of a major adjustment of its portfolio. In line with this, the company is reporting $25bn in revenues (and 16% revenue growth) in 2014 (out of a total of $92.8bn) from its "strategic imperatives". IBM's acquisition of Softlayer, where it continues to invest strongly, appears to be delivering $3.5bn annual "as-a-service" run rate and IBM reports that its "Cloud" business had 2014 revenues of $7bn and 60% revenue growth (this includes hardware, software and services),

The revenue growth reported from IBM's other "strategic initiatives" were:

• Analytics +7% (2014 revenue approx $17Bn)
• Security +19%
• Mobile >200%.

Maintaining a high mix of software remains important to IBM but its strategy is now much more nuanced than the simplistic "software good" strategy the company sometimes appeared to adopt in earlier years, with the company rediscovering success in IT infrastructure management. Indeed IBM's acquisition of SoftLayer and its ongoing investment in Cloud infrastructure including in additional in-country SoftLayer data centers and cloud enablers such as security and its Bluemix cloud development platform is arguably having more impact on its signings than any of its investments outside Watson and analytics. In Q4, IBM's cloud infrastructure business moved way beyond the standard fare of IaaS contracts with start-ups to facilitating major infrastructure transformation contracts with values of a $1bn+ with the likes of Lufthansa and WPP.

Indeed, while the impact of SoftLayer was insufficient to lead to material growth in IBM's outsourcing revenues in Q4 2014, its impact is certain to be felt on outsourcing revenue growth  in 2015 as a result of these and additional major transformations to cloud infrastructure. Led by these deals, IBM's outsourcing signings transformed in Q4 2014, up 31% (in constant currency and adjusted for disposals). IBM now just needs its application management business, which is continuing to decline under competitive pressure, to undergo a similar transformation.

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.

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.

The company is aiming to enhance its end-user experience, de-emphasizing its traditional service desk approach and aiming to add alternative channels for connecting end-users and support personnel.

As part of this initiative, the company is spreading the usage of its Tech Cafés. Tech Cafés provide largely onsite technical assistance in large sites (over 1k users). Key features of Tech Café include:

• End-users can schedule appointments with Tech Cafés, as opposed to waiting for onsite support personnel to come to their desk
• Available spare parts
• Provisioning of a spare computer while PCs are being repaired
• Providing concierge services for specific equipment, e.g. video conferencing.

Key clients of Tech Cafés include Unilever.

One of the major end-user initiatives is its self-service portal, which Unisys offers through its software product VantagePoint. The objective of VantagePoint is to reduce incoming calls by pushing self-service. VantagePoint's features include:

• Communication channel: chat and video conferencing based on Microsoft Lync
• A knowledge management base, reporting procedures for solving issues. Unisys highlights it has created the documentation with end-users in mind with step-by-step instructions. The KM also includes access to YouTube for tutorials
• A service catalog and workflow engine for ordering PCs or applications. This also includes automated password reset and ticket status display
• Mobile device management and telecom expense management.

VantagePoint is accessible on PCs and mobile devices. Looking ahead, Unisys is looking to expand end-user interaction channels to include Twitter.

The company is also working on expanding its Resolver offering, largely a Level 1.5 sitting between Level 1.0 for catch and dispatch and L2 for more technical activities. The objective of L1.5 is to reduce work backlog for L2 support and help work on pro-active monitoring and maintenance. Unisys argues that L1.5 reduces time to solve simple tasks and therefore increases end-user satisfaction.

Along with this customer experience effort, Unisys is also involved in several activities to reduce the level of incoming calls. This includes rolling out usage of analytics around ITSM tools (BMC Remedy, ServiceNow or its own BMC Remedy-based Edge IP). The company is collecting data around incidents and route cause analysis with the intent to provide proactive maintenance. An example of this approach is when Unisys rolled out PCs for a client and later identified that a certain percentage of PCs had a specific issue with hard drives. The company proactively replaced hard drives that showed signs of potential failures, based on ITSM data analyses.

Another important move is Unisys’ role-/persona-based approach. The company is taking a role-based approach for providing certain support levels. Examples of persona include road warriors/mobile workforce, VIPs, administration personnel and office workers. Unisys argues that its role-based approach helps expanding from the traditional one-size-fits-all approach (along with VIP service) for support services. For each persona, Unisys is to associate a number of mobility options, access to applications, and CPU uses. To formulate this approach, the company relies on methodologies and discussions with end-users, businesses and IT as well as deploying agents sitting on end-user PCs to identify and measure application, CPU and network needs.

Also, as part of PC roll-outs, Unisys is working increasingly with PC manufacturers to have images (OS and applications) of PCs preloaded, fully or partially on the PC, before shipment.

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It is interesting to see that the phenomenon of IT consumerization has largely failed under the BYOD form. This is true especially in Europe where demand from end-users to select and maintain their own PC/devices has not materialized and where different tax rules in different countries have made employee allowances somewhat of a complex issue.

Nevertheless, an outcome of such IT consumerization has largely materialized into a self-service approach. While self-service actually shifts work previously done by IT support to end-users, it is increasing end-user satisfaction with end-users taking over responsibility for basic tasks such as email resets, and overall being more active with tutorials and access to incident status.

Nevertheless, productivity gains remain a key objective of support offerings. The creation of L1.5 service desk, along with self-service usage, also frees up the time of more expensive personnel found in L2 support. Along with this, the wider usage of chat as opposed to phone is also increasing productivity, with support personnel being able to handle more end-user enquiries simultaneously than through phone. Chat will also drive further offshoring of work to India, with lack of English accent proficiency becoming less of a problem in written interactions, as opposed to voice discussions.

The good news is that productivity improvement is also driving interest in proactive maintenance and early identification of issues, based on ITSM data collection and analysis. This will also help reduce the volume of incoming calls and interactions.

Finally, the persona approach of Unisys has close links with desktop virtualization, whether through VDI or SBC. The role-based model is very attractive on paper. However, client acceptance has remained fairly limited at this point for desktop virtualization. That is not to say that occasional deals will not happen: Unisys has won a very large desktop virtualization contract with a large European utility, which potentially could involve up to 100k end-users with a high desktop virtualization ratio. Yet, examples of such contracts remain rare.

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

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

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

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

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

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

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

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

Visa formed an alliance with Monitise in 2009 to provide Visa with mobile platform development services. The agreement runs through 2016. As part of the agreement, Visa made a capital investment in Monitise and received 14.4% of the company's equity. Over time, Visa has reduced its ownership to 5.5%. Visa has now contracted with J.P. Morgan to evaluate its options for its ownership stake in Monitise.

According to Visa, the reduction in ownership is consistent with Visa’s investment practice to seed emerging players and, over time, reduce such investments. Visa has also announced it intends to continue increasing its investment in its own in-house mobile payments development capabilities and reduce its use of external resources for those purposes.

Visa’s announcement caps off a weak year for Monitise in the stock market (down 59% for 2014 as of September 18). Does the market know something or is this a natural development in the growth of Monetise, as Visa has indicated?

First let’s consider Monitise’s business results to date:

Among the positives:

• Revenue growth of 105% CAAGR over the past five years to the FY year end June 2014
• Transaction volumes has grown 3,300% over the past four years to 4,000m per year to year end June 2014
• The number of registered users has grown 3,000% over the past five years ended June 2014
• Numerous partnerships and markets entered over the past five years around the world. The majority of these partnerships are with tier one players in their respective markets, providing uplift to Monitise in its quest for adoption

Among the challenges:

• Monitise is still loss-making
• It recently changed its business model from a mobile payments platform provider model to a subscription based “content” enhanced mobile payments provider. Here content means the ability to provide sales and marketing content to users and to analyze transaction data in support of sales and marketing campaigns
• Mobile payments remains a demonstration project at most banks and businesses. It has not yet turned into a driver of revenues or profits (for tier one global enterprises)

Where Monitise is going and why Visa is reducing its relationship:

Monitise is moving into more intimate relationships with merchants and enterprise clients by providing them with content enhanced services. Monitise has made this initiative very credible by:

• Starting a partnership with IBM in August 2014, which leverages IBM’s IT development and services staff also its cloud delivery infrastructure. This partnership means Monitise can scale delivery as much as the market might require
• Hiring senior staff from Visa to manage and grow Monitise’s business in the U.S. and Europe
• Partnering with Mastercard (including an equity investment from Mastercard) to drive emerging market growth

These moves create a direct conflict with Visa because Visa wants to deliver content to its clients and Visa is a direct competitor to Mastercard. To succeed, Monitise needs to continue its aggressive acquisition of users and transactions. If Monitise can establish content leadership in the emerging markets, it will have created a unique and highly valuable asset.

To create that content leadership, Monitise needs to do more than acquire users and transactions, it needs to understand the mind of the emerging market consumer. There is no one emerging market consumer profile. Each market has unique characteristics, economics, and tastes. Creating content that can adapt to multiple markets requires extreme discipline at the taxonomy creation stage, and extreme autonomy at the individual country level. Monitise will need to partner both aggressively and effectively to accomplish that. 

Alliance Data's Epsilon division has ~$1,5bn in revenues; Conversant has ~$600m. 

Alliance Data is acquiring Conversant to enhance its Epsilon business. Epsilon generates revenues primarily from labor based, offline: data acquisition, analysis, and marketing services. Conversant generates revenues primarily from automated processing, on line: data acquisition, analysis, and marketing services. Alliance Data believes that Conversant is in a faster growing segment of its market, with solutions that provide higher operating leverage. 

Each company brings technology capabilities which will be integrated after the merger. These capabilities include:

• Conversant:
  • In-house data set combined with client acquired data 
  • CommonID, which identifies an individual consumer across multiple devices (e.g., desktop, mobile, tablet) and channel
  • Ability to dynamically send personal ads to the correct device ant the correct time
• Alliance Data: Agility Harmony, a digital messaging platform with the artificial learning and analytics to inform a digital marketing campaign, combined with the ability to manage and execute a digital marketing campaign.

The acquisition will provide more purchase data (from additional channels including: display, mobile, and video) to put through Epsilon's marketing analytics platform, Agility Harmony. The increase in data throughput will develop greater insights by Epsilon into consumer behavior. Conversant also brings a greater number of clients to Epsilon, to whom Epsilon hopes to sell additional services. 

Conversant is an excellent acquisition for Alliance Data. The ability to engage consumers across multiple channels and devices, while also maintaining identity awareness, is not generally available today. Most of today's on-line marketing organizations are facing consumer push back and brand deterioration the more they continue to make identity errors and push the wrong offerings, to the wrong people, at the wrong time.

Alliance Data is also aware of its limitations. It intends, according to its CEO Ed Heffernan, to continue to pursue opportunities in niche markets rather than take on major payments vendors in major markets. Its specialty areas include:

• Geographic: Canada and Brazil
• Industry: travel, SMBs, and specialty retail

Successful integration of these two offering sets will create a unique database of transaction level data in some of the fastest growing, high margin markets in consumer buying. As long as Alliance Data can successfully integrate the two cultures, the businesses should succeed. It is a good sign of what the Conversant management thinks about the merger that the CEO of Convergent will tender his shares for all Alliance Data stock (not taking the cash option). 

• 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]. 

T-Systems Dynamic Workplace was introduced to address client needs for virtual desktop and mobility overall, based on a centralized approach to applications and data. T-Systems with this offering has taken several decisions:

• Lowering the TCO of its hardware and service offering in order to drive adoption. T-Systems has redesigned its virtual desktop service architecture, and selected technologies from lesser-known technology vendors e.g. Allen Systems Group , Cortado and Gladinet, as well as still relying on Microsoft and Citrix
  - T-Systems highlights its single standard architecture approach has allowed it to very significantly automate to the point where it only uses a tenth of the operations personnel used previously
  - The company is also promoting a server-based computing (SBC) approach, as opposed to the more expensive VDI options
  - Along with this effort, T-Systems is promoting the use of self-service and delegated administration portals to reduce desktop service-related costs
  - Using a centralized virtual desktop, resulting in lower costs related to onsite support, roll out and energy
• Expanding its service portfolio beyond a pure virtual desktop to include application services, e.g. preparing applications for enterprise mobility. This is taking the form of a self-service corporate apps store combined with a workflow engine for authorization purposes
  - T-Systems highlights its workplace transformation practice can speed up migrations by using a template database of over 10k previously virtualized applications
  - Other services include SaaS/centrally hosted based services to complement its offering in areas such as collaboration tools and communication, and document management.

T-Systems has a modular pricing model based on the general use of a core, virtual service plus options and add-on services. T-Systems continues to enhance the offering. Its current V2 of Dynamic Desktop includes MDM and MAM capabilities, Windows 8.1, a thin client option, and the latest version (v7.5) of Citrix XenApp/XenDestkop as well as an offline option for Microsoft Office/Lotus Notes.

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In total, for a client, the price of virtual desktop, depending on options, ranges from €200 to ~€320 per user per year. This includes offline management, mobile & collaboration (Microsoft Exchange, SharePoint and Lync) applications.

For large enterprises, the pricing is adequate largely because virtual desktops bring additional benefits in terms of centralization of security, storage and because they enable mobility.

T-Systems Dynamic Workplace seems to be resonating relatively well in the market: the company has 50k users on Dynamic Workplace. And it has a pipeline that could represent an additional 125k seats by mid-2015, working with ~40 potential clients. This probably means that T-Systems is growing faster than the market for virtual desktop services.

Nevertheless, NelsonHall remains cautious about potential acceleration of spending in virtual desktop services. Key inhibitors remain cost-related (which T-Systems in addressing) and overall lack of client appetite for changing the way they use and consume desktop services. In many respects, the recent rebound in PC shipments in H2 2014 indicates that organizations still prefer procuring traditional PCs rather than massively adopting VDs.

NelsonHall has published an extensive profile of the virtual desktop services activities of T-Systems. The profile is available here for subscribers. For further information, contact Guy Saunders at [email protected].

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

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

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

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

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

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

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

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

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

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

Q2 2014 revenues (and revenue change) by activity, excluding reimbursables, were:

• North America: $233.2m (+8.7%)
• International: $84.7m (+10.6%)
• Merchant services: $108.3m (-4.1%)
• Netspend: $116.8m (n.m., acquired Q2 2013)
• Intersegment: ($5.1m) (-59.1%).

TSYS grew its revenues slower than it grew its transaction volumes in:

• North America (transactions +20.7%)
• International (transactions +13.3%)
• Merchant services (transactions -8.0%, a slower shrink)

TSYS is facing pricing difficulties in its core businesses and volume/revenue shrink in what should be its primary growth engine. Its overall revenues have primarily grown due to its acquisition of Netspend.

TSYS has announced a new CEO (starting on July 31, 2014) who will face the task of putting its organic business back on track for revenue growth at profitable margins. Since the payments market is strong overall, if TSYS focuses on aggressive contract pursuits at good prices, it should be able to resume revenue growth with good margins. 

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

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

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

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

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

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

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

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

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

Is this really so?

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

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

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

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

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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: 

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

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

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

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

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

The company derived in 2013

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

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

The company has take several measures including

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

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

In 2014, CS has accelerated its transformation plan with:

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

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

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

The companies have worked together in two significant contracts:

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

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

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

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

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

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

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

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

Service capabilities brought by Bull include:

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

Atos is to:

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

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

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

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

Atos is to:

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

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

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

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

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

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

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

Sopra's rationale for the acquisition includes:

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

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

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

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

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

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

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

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

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

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

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

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

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

CEO Mike Norris referred back to 2002 and the acquisition of Compaq by HP, which led to it losing a major source of revenues and profits and which forced a change in its strategy, to become a services- rather than product-led business, backed by hardware.

Computacenter has grown through a number of acquisitions, the most important of which was that of GE / Compunet in 2003. This brought in a presence in the key European market of Germany, which today accounts for 41% of Computacenter’s global revenues - the same as its traditional stronghold of the U.K. A recent key decision was to implement a company-wide SAP ERP system to help it achieve consistency across geographies. The implementation has just been completed with a rollout in France, its third largest geography, in 2013.

Today, Computacenter is a £3.07bn business with a headcount of 14,000. Despite its increased focus on services since 2002, they still account for under a third of total revenue today. The company has no intention of giving up its reselling business; the emphasis is on cross-selling services to its client base. 

There is a clear focus on the desktop (hardware, software and services): 

• Workplace hardware represents 26% of worldwide revenues
• Computacenter services 2.4m workplaces and 3m users (through service desks). This makes the company the largest Europe-headquartered company in terms of desktops serviced, ahead of Atos (~2.1m). 

Computacenter has traditional strengths in field services, with 2.5k field engineers in Europe. The company has a slightly larger headcount in its service desk operations (~2.6k).  The company is looking to increase the productivity of its service desk business. Computacenter notes that around 30% of inbound Level 1 calls are password related, and another 15% are related to end-users calling and following up with requests. In response, Computacenter is taking several steps including:

• An end-user service portal for password resets and that will include a KM tool. Another feature of the self-service portal will be chat capabilities: chat agents can conduct chats with 5 to 7 users concurrently
• A mobile app, initially for providing end-users with a service request follow-up. Mobile apps could open up new functionality in the service desk e.g. verifying the identity of the caller using the device's camera; using a device location to provide contextual information, for instance the location of the closes printer.

Computacenter is introducing new services largely around mobile device management and the convergence of management software around mobile devices and enterprise workplaces. It is planning to deploy its device management service internally with the intent of offering the service to external clients soon. Along with traditional end-user role-based and related application mapping, the company is taking a centralized view of applications, sometimes through corporate app stores. It is also investing in increasing its capabilities around security and networking.

Computacenter has been fine-tuning its client segmentation. The company now primarily targets

• Large enterprises, focusing on end-user computing services
• The upper tier of the mid-market for a wider range of services, across network services to datacenter and end-user computing services.

Computacenter included three client presentations in its event: Lloyds Banking Group (LBG), Daimler and Sanofi, all of whom mentioned Computacenter’s flexibility and partnership approach. These clients between them cover Computacenter’s three largest geographies.

• LBG: Computacenter has had a relationship with the bank since 2007, initially around products and related services. Following the merger of Lloyds and HBoS, LBG selected Computacenter for onsite desktop services and servers. The relationship has since expanded to include network cabling and services; datacenter managed services and video conferencing hardware. Computacenter also provides services around Windows XP migration and server virtualization
• Daimler: Computacenter provides largely network services to the car maker, connecting 490 locations. The relationship has seen some geographic expansion
• Sanofi: a recent (2013) desktop services client. Sanofi has grown through a number of mergers and acquisitions. Its priority is around business processes and desktop service standardization.

Computacenter performed relatively well in 2013 with services revenues up 3.7% at CC and supply chain up 2.0% at CC. But the margin clearly shows its continued dependence on h/w reselling: its EBIT margin was just 1.6% (adjusted EBIT margin 2.7%). Margin was also impacted by poor performance in France.

Computacenter has ambitious targets to further improve its profitability from 48 pence per share in 2013 to £1 per share by 2020. Levers to improve profitability include:

• Increasing the proportion of revenues coming from higher margin IT services. This will require strengthening account management capabilities around up-selling
• Reducing the cost to serve in its service desk business, as discussed above
• Overhauling its loss-making French business. Work is underway on eliminating unprofitable accounts and re-energizing the sales force in France. The French business is workplace oriented and Computacenter needs to hire staff to expand into other service areas such as datacenters
• A targeted 50% increase in revenue. Computacenter intends to increase its share of the larger enterprise market with acquisitions in Northern Europe.

One distinct attribute of Computacenter is people-related, in particular their ability to discuss both strategy and go deep in terms of service offerings or technical attributes. This combined market and technical understanding within in service offerings remains uncommon in the industry.

In spite of the shift become service-centric for over a decade, Computacenter is still primarily a reseller. Acquisitions (in Belgium, Switzerland, Germany, U.K. and France) have been reseller centric. Computacenter appears to have been opportunistic in some of these, purchasing several companies at attractive prices. The company claims it does not now want to acquire another reseller addressing the mid-market, as the focus is more clearly on large accounts. Will we see an IT services acquisition in Continental Europe (where several local champions are struggling), as Norris hinted?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The terms of the contract require Northgate to:

• Modernize the ICT including desktops and servers
• Extend its regional business center, Northgate House, in Hartlepool to increase its workforce from 235 to 300
• Set up the new Northgate Academy, in conjunction with Hartlepool College of Further Education to offer up to 35 IT modern apprenticeships over the term of the contract

The partnership deal is to save the council >£1m a year.

The delivery center in Hartlepool is one of a number of key centers that Northgate PS is establishing to deliver shared services to the public sector. We understand that there will soon be 235 staff working on:

• Hartlepool Council’s IT contract
• Revenue and benefits services for a number of local authorities
• The Blue Badge improvement scheme for the DfT
• Welfare funds administration for ~nine local authorities in England.

We expect some consolidation of Northgate PS non-strategic delivery centers as the company focuses on establishing the four key centers.  

NelsonHall will be publishing Northgate PS' public sector shared services BPO vendor assessment very soon.

NelsonHall's Global Public Sector Shared Services BPO Market Report and vendor positioning, NEAT, will be published in March 2014.

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

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

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

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

In 2014, Serco expects:

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

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

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

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

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

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

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

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

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

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

Other key measures include:

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

In 2013 TSYS continued to enjoy strong revenue and earnings growth. Growth in the merchant business is continuing to accelerate, based partly on:

• Competitor weakness (others such as First Data will report in early February and will indicate whether that trend will continue) 
• Merchant dissatisfaction with card schemes and the desire to obtain a processor with fewer if any issuer loyalties.

The international business grew at 5.8% in fiscal Q4, the strongest of any segment. This growth occurred in spite of headwinds from currency exchange rates due to a strengthening dollar. If the dollar moderates, TSYS will have very strong double digit growth in its international business, where its long-term growth opportunities lie. 

The next few years should see international growth for TSYS accelerate to even higher levels (20% and 30% growth rates). The payments business, in particular merchant acceptance, is certainly not subject to the rules of the "new normal". The question is whether high growth rates and low capital charges from regulators will draw in new competitors to the payments business - but the complexity of the business would make it very difficult for most would-be entrants.  

Wipro’s Energy and Utilities unit, boosted several years ago by the June 2011 SAIC unit acquisition , continues to be a major revenue growth engine: E&U contributed an estimated 31.5% of the y/y growth this quarter. Wipro’s Healthcare and Life Sciences unit has also delivered two quarters of double digit growth.

BFSI continues to contribute around 20% of the y/y revenue growth, but it has been two years since BFSI, Wipro's largest industry group, achieved double digit growth. There will be some revenue contribution to BFSI in Q4 FY 2014 from the imminent acquisition of mortgage origination and servicing specialist Opus CMC. Optus will boost Wipro's BPO revenues in FY 2015, also expanding its onshore delivery presence in the U.S. Wipro is looking to leverage Optus to build an end-to-end mortgage BPO offering introducing more automation and increasing the application of analytics.

While Wipro’s telecoms business continues to be soft (the company does a lot of R&D work in the telecoms sector), it has now had two consecutive quarters of positive growth and appears to have bottomed out after seven quarters of negative growth.

If we look at service line performance, IT infrastructure services and Business Application Services between them contributed $81m of the $101m incremental y/y growth for Wipro. Its Analytics & Information Management is not the growth engine it was in FYs 2012 and 2013; it is now regularly delivering quarterly revenues of around $120m.

Where Wipro is underperforming, in particular compared to TCS, is in bread-and-butter ADM services. For TCS, ADM delivered an estimated $173m in additional revenue this quarter, more than Wipro achieved across all its service lines ($173m in incremental revenue for Wipro would have meant a growth of 10.8% for the company). In contrast, Wipro’s ADM business has now had six quarters of negative growth. Infosys has been focusing on getting back to basics and is now seeing a recovery in its ADM business: we imagine Wipro is looking to do likewise (though in its service line reporting, ADM is just 20% of its business).

With headcount down 814 sequentially and y/y growth trailing topline growth, expect to see utilization improve next quarter. Attrition in both the IT services and BPO businesses continues to increase, to a level that is possibly of concern.

To finish on a positive note, we have been keeping an eye on y/y revenue growth from Wipro’s top 10 clients; its efforts to strengthen key account management continue to pay off, with these accounts growing faster than Wipro overall.

If we look at where the growth is coming from:

• The more established ADM services (where Infosys took its eye of the ball in FY 13) contributed an estimated $173m in additional revenue, or 35.4% of the y/y growth of $490m. (Infosys achieved $53m growth in its ADM businesses). Enterprise solutions contributed over 19% of the growth. Assurance services and IT infrastructure services both continue to enjoy very strong growth and between them contributed over 27% of the y/y growth. IT infrastructure services and BPO both crossed the $400m revenue mark this quarter. The only service line not delivering double digit topline growth is the software business (TCS BanCs), for which the market is soft
• By vertical, the y/y growth is dominated by BFSI, which contributed an impressive $200m (nearly 45 of overall growth) in incremental revenues this quarter: full FY 2014 revenues are likely to approach $5.8bn. TCS is confident of sustaining ongoing growth in this vertical. In two other verticals, the difference between TCS and Infosys is marked:
  • Telecoms: Infosys continues to experience negative growth (down 10% in Q3 FY 14) and says its client budgets for next year are down. In contrast, TCS saw accelerated revenue growth this quarter (17.8% estimated, or $50m)
  • Life sciences & healthcare, which Infosys indicated a few years back was a new target market but now considers is soft.  TCS, in contrast, is enjoying over 30% growth, again with $50m in additional revenues.

These data points, are, of course, simplifications, but they do expose significant gaps between the two.

Among the regions, y/y revenue growth, unsurprisingly, continues to be dominated by North America (an estimated $232m in additional revenue. But Continental Europe contributed an impressive $122m in additional revenue. If anyone is in any doubt about its penetration of Continental Europe, TCS is likely to achieve over $1.5bn in revenue in the region this FY, with the U.K. delivering around $2.3bn. It is a major player in EMEA, and by far the largest IOSP.

Looking ahead, TCS is very bullish about prospects for FY 2015. CEO N Chandra commented on expecting FY 2015 to be a "much stronger" year than FY 2014. With 16.5% topline growth in FY 2014 nine months year-to-date, that indicates very aggressive targets for next fiscal. Should we expect some acquisition activity for IP-based capabilities, to boost efforts to drive non-linear growth?

This is the third quarter of improved topline growth. Management has raised revenue guidance for full FY 2014 to growth of 11.5-12% (up from prior guidance of 9-10%, and double the level of growth achieved in FY 2013). This would mean Infosys is getting back to Indian IT services market growth rates (NASSCOM predicted 12-14% for FY 2014).

So where has the growth come from this quarter? It is the last quarter of acquisitive growth from Lodestone (acquired Oct 2012) contributing 41% of the y/y growth (55% last quarter).  Infosys’ traditional areas of ADM (which underperformed for much of FY 2013) contributed a healthy 28% of the overall growth. This indicates the effectiveness of the recent drive at Infosys to go back to basics; its BITS businesses overall contributed 55% of the overall growth this quarter. Management commentary on client budgets emphasized their ongoing focus on initiatives cost optimization, is where Infosys BITS service lines play.

In terms of service lines, BFS and Manufacturing continue to be the growth engines. But Telecoms continues to be a major drag (down an estimated 9.6% y/y): it has declined from contributing 12.9% of revenue in FY 2011 to 7.9% this quarter.

The revised FY 2014 revenue guidance implies anticipated y/y growth in Q4 of between 8 and 9.9%, thus H2 overall will deliver slower growth than was achieved in H1. Accenture also saw a slowdown in its quarter ended November 30: the indications from these two bellwethers are of slower revenue growth in Q4 CY 2013: we shall know more next week when more results are published.

The operating margin of 25.0% is up 322 bps sequentially (up 150 bps excluding the one-time visa provision last quarter). Infosys has been stripping out costs by offshoring both billable (where relevant, depending on service type) and non-billable roles (notably in marketing: sales & marketing expense is 5.0% of revenue, down from 5.8% last quarter, with management referring to increased investment in sales). Narayanan Murthy commented on ensuring that “all jobs that can be done in lower cost locations are done in lower cost locations”. Increased pricing also contribute to the sequential margin improvement. Nevertheless, this is the sixth consecutive quarter when operating margin is down y/y.

Another factor contributing to the sequential improvement in margin is the 1.1% q/q decline in headcount (the last time this happened was four and a half years ago, in the June 2009 quarter), or 1,823 employees.

Infosys has been looking to get utilization up to its 78% to 82% target range, but it has again declined sequentially to 76.9% (from 77.5% last quarter).

Attrition continues to increase, to 18.1%; this may be part of the drive to weed out underperformers, but is also possibly indicates a trend in employee morale, in spite of the wage hikes from July 2013. There has been a string of departures of senior execs in the last six months (since the return of N.R. Narayana Murthy) and this is likely to have caused some short-term disruption.

As part of a reshuffle at the top, B. G. Srinivas and Pravin Rao have been appointed as Presidents, with B. G. Srinivas focusing on global markets and Pravin Rao focusing on global delivery and service innovation, on top of their existing portfolios. These are clearly the two front runners for the next CEO after S D Shibulal retires in May next year, unless Infosys elects to go for an external hire. One indication of the level of rethinking that is going on at Infosys is that just a couple of months ago it significantly expanded its Executive Council. That same Council is being disbanded from April 1 with the two new Presidents being given responsibility to put in place “appropriate governance sectors for their respective areas”. Historically, Infosys was a company where any major changes tended to focus on its long-term vision and were planned in detail beforehand; today it appears to be focusing on shorter term imperatives.

Infosys continues to enjoy a very strong balance sheet, ending the quarter with $4,236m in cash, up from $4,130m in the prior quarter.

Looking ahead, management shared its outlook for FY 2015 client IT spending; the tone was cautious, referring to “a mixed bag” across segments.

So what should we expect from Infosys in FY 2015? The company is clearly making progress on getting back to basics with its BITS offerings and it continues to enjoy the boost from the Lodestone operation; next quarter will indicate whether Lodestone is helping drive organic growth in its consulting business. It is still too early to tell whether the newer PPS offerings, on which Infosys places so much store, will pick up steam this year and begin to approach, even outstrip overall company growth. PPS businesses currently contribute 5.3% of company revenue, down from 7.1% back in FY 2012. PPS is key to Infosys' long-term vision, but two years on it is hardly a success story. Indian media is speculating on setting up a separate subsidiary for PPS; we would expect to see some inorganic growth in the next year. Meanwhile, there are several new key roles still to be appointed including a global Head of Sales. Infosys is looking in a better shape now than it was three quarters ago but it going through an unsettling period.

NelsonHall will be publishing an updated comprehensive Key Vendor Assessment of Infosys within the next few days. For details, contact [email protected]

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].

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

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

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

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

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

FY 2013 results for HP ES were:

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

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

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

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

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

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

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

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

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

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

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

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

FY 2013 results for HP ES were:

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

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

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

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

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

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

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

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

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

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

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

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

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

• Flattening the labor pyramid, in terms of both skill sets and locations: currently HP ES is weighted towards high-cost location with over-skilled personnel in relation to their duties. In future it will take more advantage of its  global delivery centers including those in Bangalore, Manila, Sofia, and Costa Rica
• Focus on getting better at taking contracts away from competitors: in FY 2013, ~ 4% of HP ES’ sales force has been deployed on proactive new logo wins. In FY 2014, this is going to increase to 29%, with a clear focus on new business and selling the new style of IT
• Build-up HP ES’ advisory offerings, to put itself in a stronger position to shape the transformation activity that comes from advisory work
• Build client road maps in every area to help clients go from the traditional to the “new style of IT” e.g. for workforce or workplace mobility with the addition of advanced analytics and integrating multiple devices with enterprise applications.
• - See more at: http://research.nelson-hall.com/blogs-webcasts/nelsonhall-blog/?avpage-views=blog&type=post&post_id=73#sthash.b0nY9tIP.dpuf

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

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

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

Pindar leaves the company in good shape, with:

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

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

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

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.

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

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

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

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

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

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

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

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

Its aims are:

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

Axelos is looking to achieve these objectives by:

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

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

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

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

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