Capgemini’s 2014 revenues in North America were €2,230m, a growth of 8.5% at constant currency and perimeter. The year ended strongly, with 10.5% CC/CP growth in Q4. North America is now its largest single market by revenue, overtaking France in Q3: of Capgemini’s major markets, North America has delivered the strongest organic growth in each of the last four years, and it is also Capgemini’s most profitable region.

While contract wins in North America in 2014 were all re-competes, the contract extension in every case expanded the services in scope, and almost a third of the wins were for its “strategic global offers”.

Capgemini is now increasing its focus on new logo pursuits, some of which have the potential to be large engagements. A key feature in many opportunities is digital transformation, though client requirements for aggressive cost take-out, often in multiple geographies (Capgemini works primarily with global enterprises in North America), continues to be a common feature.

Capgemini is able to offer aggressive cost take out because it:

• Has extensive offshore delivery capabilities in India and expanding nearshore capabilities in Latin America, notably in Brazil (see here) and Guatemala), though its rural shore capabilities in the U.S. are nascent
• Has been industrializing its delivery processes, an ongoing development
• Is keen to commit contractually to delivery of cost savings

Capgemini is now looking to further enhance its ability in North America to:

• Provide clients with a digital roadmap by:
  • Creating specific strategic offers (34% of 2014 sales, which are built on as-a-service "stacks" (infrastructure, applications and BPO) for a particular domain
  • Partnering with a wide range of emerging technology vendors to access current technology and provide clients with advice on suitability of vendor’s products for a digital engagement
• Create more offering “stacks” with integrated SLAs and KPIs across the various elements of the stack (whether delivered by Capgemini alone or by multiple vendors)
• Offer multi-shore delivery: this implies expanding its onshore delivery capability
• Position on innovation, led by Capgemini Consulting, to help clients drive topline growth. Recent activity has been primarily around digital customer experience. Capgemini highlights its sector domain capabilities, enabling it to provide advice to clients on modernizing their businesses. 

Capgemini is working on a number of initiatives to develop further offering “stacks”. Two examples are:

First Data partnership: First Data Corp. (FDC) software processes the payment transactions for ~830m card accounts. The partnership, apparently proposed by a joint client, a global financial institution, will focus on developing solutions and stack offerings in three areas:

• Prepaid offerings for governments: primarily government benefits payments
• Analytics: primarily for loyalty programs
• Mobile: including speed to deployment for consumer engagement initiatives

FDC and Capgemini have a high degree of client overlap in North America, so the intent of the partnership is to drive new offerings to existing clients. They have a much lower geographic overlap in international markets, where the intent is to support new market expansion: they have identified twelve markets to focus on initially. A typical model for new market expansion is through a global client, who has internal payments operations in its home market, but looking to FDC/ Capgemini to provide local payments operations for a market where it has subscale operations.

Innovation Centers: Capgemini is making a major commitment to restructure and build out its innovation center capabilities to convert its SMAC capabilities into offerings and client engagements. Currently Capgemini has 40 innovation centers globally, with three types of center:

• Level 1: 90% of existing facilities; demonstration capabilities for new technologies
• Level 2: ~10% of facilities; primarily located in India, have the ability to create new prototypes
• Level 3: 1 facility to date (Lisle, France, retail sector focus); ability to do client work at industrial scale.

Capgemini intends to add two new Level 3 centers, to be able to build, in concert with clients, full production-scale operations and platforms, in:

• Mumbai: primarily a project management capability
• Silicon Valley (San Francisco): primarily a project sponsor destination for LOB input to projects

All the centers will be networked to other centers and house products and tools of technology partner, also those of some tech start-ups.

In terms of governance, the centers will operate from a common set of processes, project requirements, and branding to facilitate alliance partners contributing to the output and clients expectations being met by the work product

2015:

To date all of Capgemini’s 2015 pursuits have been self-generated (i.e., not brought to Capgemini by advisors). Capgemini is aggressive about creating its pipeline, both from its own consulting projects and from alliances with incumbent product vendors, generating opportunities to provide a roadmap to implement a “stack”.

As we noted here, while it is enjoying double digit growth in North America, Capgemini is not a tier 1 vendor (by size) in the U.S., and it is actively looking at inorganic growth in the country, where the commercial sector is a very attractive market, in terms of size, growth, and appetite for innovation. The transaction could be a client operation which brings in an onshore presence, a specialist capability in a target sector and a long-term outsource, or another vendor that can bring in scale and, ideally, IP. There has been, for example, speculation about CSC’s commercial sector business: while the U.S. business would attractive to Capgemini, it is less likely to be interested in the EMEA business.

Capgemini is one of two European majors currently focusing on expansion in the U.S. With the acquisition of Xerox IT services business, Atos’ revenues in the U.S. will nearly triple, to ~€1.7bn, and North America overall will move from 7% to 17% of its global revenue (still short of Capgemini’s 21%). Atos is more interested in IT infrastructure services, whereas Capgemini’s interest is likely to be more on domain focused stack offerings to target sectors, typically underpinned by consumer focused technologies.

As Capgemini aggressively builds out its alliance ecosystem – and perhaps acquires - it will accelerate new logo acquisition in North America. 2014 was an excellent year for Capgemini North America, built on contract extension - 2015 could well be a breakout year for it in the U.S.  

Looking at the recent financial results of six key incumbent vendors (four payment processors and two card schemes, all global vendors) highlights where the industry is going and what it takes to succeed. Below are results for the quarter ended September 30, 2014 (refer to NelsonHall’s tracking service articles for more detailed analysis).

How Payment Processors are Winning in the Current Environment

Headline results for payment processors are:

• Alliance Data: Q3 FY 2014 revenues of $1,319.1m, up 20.3 % year-on-year (yoy). International revenues grew at 23.5%
• Euronet: Q3 FY 2014 revenues of $453.4m, up 25.7 % yoy. International revenues represent almost all revenues (~90%). EFT services grew 28.6%
• First Data: Q3 FY 2014 revenues of $2,791.1m, up 2.9 % yoy. International revenues grew at 4.1%. Merchant services grew 0.3%
• TSYS: Q3 FY 2014 revenues of $552.9m, up 8.5 % yoy. International revenues grew at 12.2%. Merchant services grew 1.2%.

Vendors growing revenues (and profits) are focused on:

• Non-U.S. and non-mature markets growth
• Emerging services such as mobile payments, EFT payments (especially ATM networks in emerging markets), and P2P payments, including cross border money transfers

Among the payment processors, two vendors with winning strategies are Euronet and Alliance Data.

Euronet

Euronet's growth is the result of:

• Continuing expansion of its payments network (primarily ATM machines in India and Europe)
• Products:
  • Electronic payments in Middle East, Germany, and India
  • Money transfer, consumer to consumer, and Walmart2Walmart

The key to Euronet's success has been its ability to identify under-penetrated markets and pursue those opportunities. For example, Germany is not typically thought of as emerging, but its use of EFT is accelerating. Similarly, Walmart is a merchant with leading technology, but deployment of money transfer capabilities into retail merchant environments is leading edge in the U.S. 

Euronet should continue to grow revenues in double digits just based on its existing footprint, which is not yet fully saturated. As it develops new initiatives, its revenue growth can accelerate further. 

Alliance Data (ADS)

ADS’ growth is the result of:

• Growth of its loyalty programs in Canada and Brazil (Loyalty One in Canada, Dotz in Brazil, and BrandLoyalty/LoyaltyOne for grocers in Europe and LATAM)
• Growth of its merchant marketing programs in Europe and LATAM (Epsilon globally)
• Growth of its private card program, primarily the loan balances on the merchant clients’ private label cards)

The key to ADS’ success has been supporting clients in increasing their sales. ADS centers its offerings on marketing and sales support, driven from its proprietary technology and underlying transactions data. Payment processing, a core deliverable of ADS’ services, does not stand center stage in its value proposition.

ADS’ delivers services which are scarce in the marketplace, but not unique. For example, funding and managing card loans is especially important to merchants now that banks are withdrawing from that market. ADS is embracing this profitable business, while other participants are withdrawing.

ADS should grow its revenues in double digits by expanding into new markets in LATAM and Europe. Its Canadian market opportunities are saturated, by logo, but not by service offering. New analytics and payment types (e.g. mobile) should help drive growth in the Canadian market for ADS over the next five years.

Card Schemes Find Their Own Path to Success

Headline results for card schemes are:

• Mastercard: Q3 FY 2014 revenues of $2,503m, up 12.8 % yoy. Cross border volume grew 15% on a constant dollar basis. Total processed transactions grew 18.3% to 11.7 bn
• Visa: Q4 FY 2014 revenues of $3,229m, up 9.9 % yoy. Cross border volume grew 10% on a constant dollar basis. Total processed transactions grew 4.2% to 20.9 bn.

The card schemes face a somewhat different set of challenges because they sell highly standardized services, which are underpinned by massive capital investments, through card issuers (banks). Despite the limitations placed on card schemes by the nature of their underlying services, card schemes are finding the same drivers of success. Critical to growing the business is international markets and new services.

Mastercard has aggressively moved into emerging markets, staking out an aggressive growth strategy in Asia, Africa, and the Middle East. Key examples over the past year alone include:

• National identity card program in Nigeria with payments capabilities
• Electracard acquisition in India to expand processing services for banks in 25 countries
• Opening various delivery centers in Middle East and Asia
• Launch of a development platform in Ireland for ISVs to develop APIs and solutions for Mastercard processing services

These aggressive moves into markets and services have allowed Mastercard to grow revenues faster than Visa over the past year, and in the past quarter alone 28% faster.

Competitors Face Limited Window of Opportunity to Challenge Incumbents

In summary, the winners are moving into new markets and services. Critical new markets are emerging markets with little payments infrastructure and mature markets with legacy payments infrastructure where newer payments technologies (mobile, EFT networks) are starting widespread adoption. Establishing proprietary networks or distribution outlets (such as P2P payments) will create barriers to entry in the future and the opportunity for upsell of additional services, such as analytics.

Over the next two years, the window for competitors to catch up by pursuing these vendors will close. Already, presence in smaller countries, such as ADS in Brazil, makes it challenging for competitors to displace an entrenched vendor. Once payments vendors have created dominant market positions in major country markets, over the next five years, the payments industry will begin a consolidation phase in order to convert local leadership into multi-country leadership.  

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). 

Top line results for each vendor in the quarter ending June 30, 2014were: 

• Visa: $3,155m, up 5.1% y/y
• Mastercard: $2,377m, up 13.4% y/y.

Looking more closely at each vendors' income statement: 

Visa continues to grow revenues at a moderate pace due to increasing sales incentives. Earnings, overall are growing faster due to concerted operating cost control. Per share earnings are also growing faster than revenues due to share buybacks. The income statement dynamics can be shown in an income statement percent growth waterfall for Q3 FY 2014:

• Overall revenues: +5.1%
• Number cards outstanding: +6.0%
• Payments volume: +9.0%
• Net income: +11.0%
• Net income per share: +15%
• Sales incentives: +22%

This waterfall shows that revenues are growing at a level similar to recent quarters, but the cost of generating those revenues (selling costs: pricing reductions and sales incentives) keeps growing at a faster rate. Aggressive share buybacks are driving EPS up even faster than prices and marketing. 

Visa's moderate revenue growth coupled with strong operating earnings (+10.5%) is typical of most payments vendors (and most IT services vendors) today. However, it does mean the business is becoming progressively less efficient at generating earnings (payments volume grew 12%, much faster than revenues or operating earnings, meaning pricing or revenue per payment fell). Pricing can only continue to fall for so long before margins begin to shrink despite operating cost cutting. Declining prices have been going on for three years. 

Mastercard, in contrast to Visa above, is growing revenues faster than cards and transaction volumes.  

• Overall revenues: +13.4%
• Number cards outstanding: +12.6%
• Payments volume: +11.4%
• Net income: +9.8%
• Net income per share: +14.3%
• Advertising and marketing: -7.0%

Mastercard is able to grow its revenues faster than cards and transactions because it has pricing power. The pricing power reflects it aggressive push into key markets (outside the mature markets) and key services (merchant acquiring services, especially consulting) where pricing reflects the introduction of services under conditions of uncertainty. 

All levels of Mastercard's income statement waterfall show strong growth in double digits (except sales cost which is declining, a plus) versus Visa.

When the next downturn in consumer spending comes in the next one to two years, Mastercard will be better able to withstand the downturn with a client base tilted towards emerging market.

Visa will face a downturn with a client base tilted towards mature markets, where consumer debt levels will make the downturn harder and more resistant to sales incentives. Visa needs to aggressively focus on building out its emerging market presence faster, even if it means slower net income growth in the short term. 

IGATE’s acquisition of Patni in 2011 nearly quadrupled its annual revenues from ~$250m to $1bn. Patni brought in business in sectors such as insurance, manufacturing and retail, reducing IGATE’s heavy dependence on banking clients such as Royal Bank of Canada. IGATE’s full year 2013 revenues were up 7.2% to $1.15bn, and the company has been enjoying revenue growth of 10% in the last two quarters.

• Increasing its investment in IP development, up from 3% to 6% of revenues. This means a committed $70m investment in IP development this year; the intention is to maintain its investment in IP at this level over the next three years
  - In March 2014, the company also announced a refinancing of its existing debt, which should lead to significant interest cost savings over time
• Organizational restructuring into vertical-based BUs: IGATE has reorganized from geographic/ functional units into six verticals: banking & financial services (23% of revenues); insurance (20%); manufacturing (26.5%); healthcare/life sciences; retail/CPG; services. The company previously reported nine verticals: Vemuri describes this as evolving from being “Mile Wide, Inch Deep” to “Inch Wide Mile Deep”
  • As part of this process, key accounts have been identified and are now managed by a key account team
  • IGATE aspires to develop industry shared services utilities for key processes, where IGATE can deliver IP to clients and share the development and delivery costs across multiple clients. Initial plans for utility development include a reference data management utility developed with its client UBS, and a third party life insurance administration (3PA) utility. Additional utilities will be developed as resources and client interest is developed
• A clearer definition of the ITOPS approach, offering, and use cases. The ITOPS engagement model provides a combined IT/operations engagement model priced and driven by outcomes, rather than inputs such as labor. Since IGATE introduced the ITOPS model it has sought to apply it to all engagements; however, uptake has been weaker than the company expected as clients have tended to remain conservative in engagement models. Based on the experience of the past few years, IGATE has identified where ITOPS has worked and how to pursue deals which would benefit from an ITOPS engagement. Key attributes of an ITOPS deal are that it:
  • Requires IT transformation to deliver savings and efficiency that pure labor arbitrage is unable to deliver. These types of engagements require domain specific IP to succeed hence the increased investment in developing that IP
  • Requires aligned organization to succeed, with delivery consolidation and standardization across silos managed from a single point of contact
  • Benefits from variable pricing
• Increasing its investment in employee development: opening an education center in Pune, IGATE University, which is supported by contributions from several education institutions. IGATE sees that mid-career employees are most at risk in the traditional offshore model, due to atrophying of skills. IGATE University will attempt to address this issue and increase employee domain skills and reduce turnover rates
  • After several quarters of no headcount growth, the company has also increased its hiring rates in the last six months, and last quarter crossed the 30,000 mark
• A rebranding this month intends (to quote from the press release) “to showcase the company in a recharged form with a refreshed vision, mission and core values”. The company wants to be admired for its technical capabilities, executional excellence and agility.

The offshore and IT services industry has been changing from one that was based on labor arbitrage to a supplier industry based on IP and delivery scale. The manufacturing industry was transformed decades ago from a vertically internalized industry to one with complex supply chains fed by highly efficient and differentiated vendors. Today’s service based industries are making the same transition. These include financial services, healthcare and pharmaceutical, retail, and professional services (all of which are IGATE focus industries).

Scale and efficiency go hand in hand to create value. IGATE’s focus on global clients makes it easier to justify large investments in IP and demonstrate large cost savings. For example, for one global investment bank, IGATE is consolidating 20 data platforms to just one. These engagements run for long periods (30 months scheduled for the data platforms) and require detailed technical knowledge of the platform to integrate the new platform, as well as enable new functionality.

The investment challenges are daunting to develop successful utilities. IGATE has doubled its investment allocation to 6% of revenues while targeting a careful rollout of utility initiatives. Many large BPO vendors are working on developing industry utilities in financial services right now; not all can succeed. Key levers to success include:

• Time to market: success of any given utility will require significant market share (a minimum of 20%, and in some cases minimum of 40% market share), which means only one to three utilities can survive in a space
• Market selection: barriers to entry for a utility rest on regulations, market infrastructure (e.g., securities exchanges, distribution networks), and industry structure (e.g., number of industry competitors among potential clients). All these barriers change by country or market
• Service selection: defining the service scope (platform definition) will drive speed to market and client acceptance of the utility. To date, most BPO vendors attempting to create a utility have defined too broad a service set to place into the utility, and as a result utility acceptance has been very poor to date
• Analytics: analytics, including benchmarking, is critical to proving out the value of the service. Most utilities to date have not provided benchmarking analytics. If clients can't measure the value of what they have bought, it becomes a challenge to retain clients or attract new clients.

IGATE is primarily targeting Continental European organizations for ITOPS engagements due to the European market’s relatively high need for technology refreshes and highly fragmented legacy operational delivery. EMEA overall currently represents just 16.5% of IGATE’s global revenues, but has been its fastest growing region for nearly a year, and IGATE recently secured two major wins here: a five-year $80m ITO contract with Orange Switzerland, in what is a vendor rationalization, and a five-year $35m ADM contract with Swedish insurance services group Länsförsäkringar Alliance which involves IGATE opening a delivery center in Stockholm to service the client.

This is a good time to go to market with its ITOPS approach. IGATE is focusing its IGATE approach on a few key engagement types (i.e., required IT transformation, variable operational volumes requiring variable pricing, and required organizational/platform alignment at large scale to drive client value) where it can make a large impact for clients. As IGATE increases its IP in ITOPS it will narrow the range of engagements (increasingly become an inch wide), but deliver greater value on those engagements (a mile deep). 

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.  

Go to Market by Vertical

Capgemini North America is transitioning its client-facing organization from being service-line led (consulting, application management, BPO) to being industry-led. Financial services is already a standalone vertical in Capgemini North America, with several service lines under its umbrella. Six other verticals (Retail/CPG, Telecoms, Manufacturing, Energy, Government, Hi-Tech) currently share horizontal service lines. The intention is that all verticals will become standalone over time. Telecoms & Media, a sector advanced in digital transformation, is likely to go first.

The sales approach is changing to rely not only on RFP-led opportunities, but to also focus more on upsell demand generation within the client base. Capgemini is expanding its North American sales team and building four key roles in the sales organization:

• Business development
• Sales: pursue warm sales leads from advisers, consultants, and industry sources
• Account development: assigned one or more existing clients to work with the relationship manager and identify and pursue other opportunities within the client
• Sector development executive: pursues industry-specific opportunities.

Portfolio Development:

Capgemini North America has also been undergoing a portfolio rationalization initiative to focus on high growth opportunities where it can be a major competitor. 

In the past Capgemini North America pursued a “string of pearls” strategy for portfolio development, pursuing high margin businesses, with less regard to growth potential. Today, it is focused strategy on offerings that have all the following characteristics:

• High growth potential
• Scale: big enough to be a significant contributor to overall revenue growth
• Differentiation: where Capgemini can be a market leader with an offering

Examples of offerings, some still under development, include:

• Service aggregator: managing multiple vendors for a client (e.g., State of Texas)
• Brazilian tax management (see our blog on Capgemini’s BPO business in Brazil, which discusses this new offering)
• Sales support for financial services clients: two solutions; preconfigured customer analytics and sales stations
• ‘Elastic analytics’: leveraging the Amazon cloud to deliver business analytics
• Digital distribution of movies and media
• Software testing priced on a transaction basis (using Test Case Point). Capgemini has established a presence for software testing in the U.S. in the financial services (via Kanbay) and government sectors, where it has won very large contracts with the Department of Agriculture and U.S. Army
• Mobile app testing.

Capgemini is also partnering with ISVs to expand its IP-led offerings, for example a partnership with Data Ventures. An ISV whose management has worked in advanced analytics at Los Alamos labs, Data Ventures is owned by a Coke bottler, who uses their capabilities for sales and marketing. Capgemini is using this partnership to expand its sales and marketing analytics capabilities.

Capgemini highlighted that 76% of companies it has surveyed list innovation as one of their top three strategic priorities, with North American organizations in particular moving from cost optimization initiatives to focus on innovation and growth. Capgemini is focusing on digital transformation engagements. In joint research with MIT it has mapped organizations within these categories

• Fashionistas, interested in innovation but not pulled together
• Digital Masters, in the vanguard, with innovative initiatives under way (media & telecom sector)
• Beginners, where management is still skeptical of innovation
• Conservatives, have large assets and see digital transformation as a strategic accelerator, but have concerns about investment, for example banking and mutual funds sectors.

In terms of target sectors, Capgemini is looking to build on its presence in North America in the manufacturing sector, a sector where it is already strong in Europe. Its offerings portfolio span planning, ERP, PLM and MES solutions, and Capgemini is also targeting opportunities that leverage big data, analytics & mobility.

In BPO, Capgemini is looking to build industry-specific offerings, expanding beyond its primarily F&A business.

North America has been one of Capgemini’s fastest growing regions since 2011. This reflects partly its renewed focus on the U.S. in recent years and partly a lack of growth in western Europe - like Atos, Capgemini has had to contend with a softer market in western Europe, and its U.K. business remains very dependent on one large outsource (the Aspire contract).

Looking ahead, the level of future growth in North America will depend on factors such as:

• Effectiveness of training employees for “everyone sells”, without everyone stepping on each other’s toes
• Acquiring a few key businesses to drive growth in certain markets, e.g., transaction banking and healthcare
• Its partnership initiatives, including recent cloud partnerships such as Skysight with Microsoft, storageaaS with EMC.

In BPO, growth of industry-specific offerings, particularly in financial services, will help boost growth. We expect to see some new BPO offerings (probably through acquisition) in transaction heavy segments, such as payments in banking and insurance policy processing, to support profitable growth.

Andy Efstathiou and Jessica Soler

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.