NelsonHall recently wrote a PoV on the current disconnect between GDP growth and IT services spending[1]. In October 2023, the IMF refreshed its GDP growth predictions; these include better 2023 GDP growth in the U.S. (+2.1%) and Japan (+20%) than the U.K. (+0.5%) and the Eurozone (+0.7%). Unusually, the IMF's predictions are not in line with our observations of IT services spending. In calendar Q1-Q3 2023, IT services spending growth fell sharply in the U.S. (to low single-digit), while the U.K. and Europe remained solid.

Performance Convergence in Q3 2023 Despite Different Footprints

In Q3 2023, NelsonHall launched a new IT services research product, Market Update[2], that looks at and explains the financial performance of tier-one IT service vendors in Q3 and compares their performance. There was a strong pattern of these vendors seeing decelerating constant currency (CC) revenue growth in the quarter.

Most vendors saw y/y growth of 2-5% in CC, and this, despite significant variations in their geographic footprints. For instance, TCS and Capgemini have different geographic mixes (TCS derives ~52% of its revenues from clients in North America; Capgemini: ~61% from clients in the U.K./Europe), yet they saw similar y/y revenue growth (TCS: +2.8% in CC, Capgemini: +2.3% in CC). Notably, although the U.S. continues to be soft, vendors with a dominant North American footprint did not underperform those (e.g., Capgemini and CGI) stronger in the U.K./Europe.

The vendor's vertical mix had a clear impact on their performance in the quarter. Vendors exposed to softness in the high-tech, financial services, retail & CPG, and North American telecom sector suffered more than their peers with a greater presence in the following sectors: government, U.S. healthcare, energy & utilities, and manufacturing. For instance, CGI was resilient in the U.S. in Q3 thanks to its government and healthcare footprint. However, a vendor's vertical mix is not the only factor explaining its topline performance in the quarter. There are other reasons: not all verticals are global.

Banking is an example of an industry impacted by the same factors globally (e.g., stock markets, inflation). In contrast, buying behaviors of IT services in sectors such as healthcare and telecoms tend to be more regional and have different dynamics. While healthcare is largely commercial in the U.S., it tends to be part of the public sector in the U.K./Europe.

Even in a global industry such as financial services, performance has been uneven: HCLTech's BFSI revenues were up 12.5% y/y in CC in Q3, while almost all its competitors experienced negative growth. Overall, vendors are still hit by mortgage slowdowns, and demand has also fallen in asset management, investment banking, cards, and payments. Some vendors will win out in the medium term from large vendor consolidation deals. Unsurprisingly, Insurance has been more resilient.

Big Deals Made the Difference

Several vendors have a track record in large deals, accepting competitive pricing for those in open tenders and the ability to raise their profitability. Other vendors emphasize they are being "selective" in their contract pursuits.

There is no silver bullet for understanding the various factors underlying the performance of different IT services vendors. It requires domain knowledge and experience combined with detailed knowledge of individual IT services providers' capabilities and financial performance: these are strengths of NelsonHall's research. Don't hesitate to contact Guy Saunders or Darrin Grove to connect with NelsonHall.

Dominique Raviart gives his reaction to today's announcement by Atos, who issued its second profit warning in seven months.

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

Accenture Has Repivoted

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

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

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

Accenture Technology and Innovation

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

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

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

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

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

Liquid Studios…

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

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

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

… and Liquid Talent

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

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

In a nutshell: Execution of strategy

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

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

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

Dominique Raviart and Rachael Stormonth

We recently met with the head of Capgemini’s Digital Manufacturing unit to get a perspective on the challenges in manufacturing and how Capgemini is helping to address them.

Digital Manufacturing (DM), one of Capgemini’s newer strategic offerings, is a virtual service line across Capgemini units, having both portfolio and delivery responsibility.

So What Does Digital Manufacturing Offer?

Capgemini created DM to focus on the notion of Industry 4.0 that originated in Germany: in short, the digitalization of the manufacturing sector. The concept is broad and DM has a range of offerings, taking advantage of its dual positioning in IT services and engineering and R&D services, and the growing overlap of capabilities between the two (e.g. connectivity, cyber-security, cloud computing, analytics, and manufacturing applications).

In more detail, DM targets both the product side of manufacturing (with themes including PLM services, 3D printing, and digital asset management), and the production side (with themes including control systems, manufacturing intelligence such as product quality and preventive/predictive maintenance, and digital operations covering mobile apps, and augmented/virtual reality). IoT is also part of the service portfolio, and covers both product design and production.

Product Services

PLM services are a priority, and draw on the strengths of Capgemini in application services. DM is focusing on both traditional PLM activities (product modelling and collaboration) and also on newer activities (e.g. automated feedback into product design, based on data collected by sensors, and from capturing UX, starting with sentiment analysis). Work done by colleagues in Capgemini’s DCX offering and in its testing service line will help, we believe.

Other priorities include:

• The deployment of IoT-based predictive maintenance. This is important to DM: predictive maintenance is one of the earlier IoT use cases in manufacturing.
• 3D continuity, targeting existing products, taking a reverse engineering approach, and creating a digital version of a product. This is more than putting the design of older products into a PLM application, and Capgemini is also expanding this approach to manufacturing equipment under digital asset management, with the intention of digitizing the full product-to-production cycle. This links nicely to DM’s other service focus: production services.

Production Services

Within production, DM is focusing largely on manufacturing operations across discrete and process industries, both requiring adherence to manufacturing processes and guidelines. To enforce process adherence, and individual-based variations, DM wants to help clients deploying sensors and communication modules on manufacturing equipment or assets. This sounds simple, but DM points to the high heterogeneity of the installed base, largely a result of equipment cost and longevity (up to 30 years). From a DM standpoint, each machine is unique and requires its own communication module and communication interoperability. This brings another challenge: once you have connected manufacturing equipment to a network, the next step is security services, and how to secure equipment that does not have security capacity at the edge.

So How Is Digital Manufacturing Addressing Those Opportunities?

DM is taking a selective approach, specializing in industrial IoT, and also on digitization of the product to production process. It is also expanding its service portfolio, from project services to remote monitoring services. IP and repeatability are next: DM has several IPs that the various Capgemini units have developed and it continues to identify others internally. Examples of existing IP are:

• Digital Asset Lifecycle Management with U.K. ISV Aveva, hosted on AWS
• 3D modeling, based on open source software Open Cascade
• eObjects, an IoT middleware platform.

Looking ahead, DM believes it has barely scratched the surface in the product and production side of manufacturing, with other opportunities also available in the manufacturing supply chain.

NelsonHall will comment further on this in a separate profile of Capgemini’s IoT capabilities, to be published soon.

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

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

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

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

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

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

Japanese Owners take long-term view

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

‘One NTT DATA’ integration ambitions

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

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

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

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

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

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

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

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

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

Dominique Raviart and Rachael Stormonth

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

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

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

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

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

IOC Budget Shifting from Run Services to Digital

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

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

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

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

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

What Else Will We See Next?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“Next-Gen” Offerings: Targeting 30% CAGR

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

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

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

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

Acquisitive Growth Will Reshape the Portfolio

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

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

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

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

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

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

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

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

Dominique Raviart and Rachael Stormonth

Background

Sogeti High Tech (SHT) is a subsidiary of Sogeti (itself a subsidiary of Capgemini). It provides product engineering services (PES)/R&D services. The company has a background in servicing key aeronautic sector clients. The company has expanded its client base to other verticals, e.g. railway equipment, energy, defence, life sciences and automotive. Sogeti High Tech is present mostly in the South of France as well as in other Airbus Group countries.

With the July 2015 merger with Euriware’s project services business (the former captive of nuclear energy specialist Areva), Sogeti High Tech is active mostly in two areas: physical engineering (40% of revenues) and software engineering (30%), with the rest coming from systems engineering, PLM services, consulting and testing.

NelsonHall estimates the pro-forma revenues of Sogeti High Tech to be ~€300m, with a headcount of ~4.5k.

Sogeti High Tech’s Testing Practice Overview

Within Sogeti High Tech, testing is one of the smaller service lines: its headcount nevertheless is ~500 (including Euriware personnel), of which 400 are in France.

Sogeti High Tech’s testing practice (SHTTP) services the same client base as Sogeti High Tech, having historically a stronger focus on the aeronautic industry (60% of its revenues) and on the transportation/railway equipment industry (20%). Another significant sector is telecom (both on the service provider and OEM sides).

SHTTP provides testing services mostly around physical engineering (together with systems engineering; representing a combined 70% of revenues), and around software engineering (30% of revenues, mostly around embedded systems plus command & control systems, used in industry notably in nuclear power plants.

Unsurprisingly, a lot of the testing activity performed by SHTTP is about handling complexity – arising from the bundling/overlap between embedded software and devices/equipment/hardware, and also from the more technical nature of the product (testing elaborate products is more complex than business applications) and conditions of usage (in a plane, car or a train, rather than being hosted in a datacenter). Consequently, testing effectiveness needs to be much more robust than business application testing.

Influenced by a key aeronautic sector client, Sogeti High Tech’s testing practice has transitioned from staff augmentation/onsite work to work packages (where it is taking ownership of the deliverables, most of the time off-site). Today most of work done for aeronautic clients is through work packages, which SHTTP identifies as being multi-year agreements which drive investment in automation and lay the ground for offshoring. SHTTP is planning in the short-term to perform some of its work offshore in India, focusing on telecom equipment test scenario design.

Key Priority 1: Portfolio Expansion

Unlike the IT services industry, where the number of potential clients is very large, the number of potential clients in R&D services/PES is smaller and found mostly in the manufacturing sector. This lower number of potential clients is driving an account management approach to business development, as opposed to a RFP approach. This is driving the unit overall to invest in diversifying its client base (energy is a priority, thanks to skills brought by Euriware).

Testing service portfolio expansion is also a key priority. This is true for its key aeronautics client that in 2014 completed its main aircraft programs. The client is shifting to supply chain and manufacturing efficiency driven by a massive order book. SHTTP is therefore further developing its service offerings, e.g. prototype testing work, and in supply chain/manufacturing process-based testing.

Other service portfolio expansion priorities include:

• Consulting services: SHTTP intends to be involved earlier in the decision life cycle of the client and provide TPI-based test process QA, tool selection services, change management, and training services
• Security: SHTTP currently has ~50 specialists providing traditional assessment services (security compliance, vulnerability consulting, reverse engineering-based risk analysis); implementation services; test services (e.g. penetrating testing, code review, certification and compliance report); and operational monitoring, resiliency services and technology updates. SHHTP’s security services go beyond IT security and include device and facility access security. The experience of Euriware in securing nuclear power plants helps significantly here
• IPs: developed upfront ahead of client needs, or as part of project work, when commercial tools are not available. The unit is trying to make its tools achieve a balance between client needs and potential reuse by other clients (and moving them to Capgemini Group’s Ready2Series branded IP effort). Examples of IPs include e-lab (testing of electronic boards in embedded systems) and TAKT Engine (testing of voice, video and text content in devices including set-up boxes).

Key Priority 2: Internet of Things

IoT is clearly a key strategic initiative for SHTTP, not only because it fits well within the type of work it provides (testing of bundled hardware and software) but also because of the types of testing activities required: sensor/device security testing, data communication performance and security testing, analytics and big data testing. Key SHTTP clients include large manufacturing forms and utilities for their gas and electricity smart meters programs.

SHTTP is also driving IPs for IoT. Examples include:

• eObject, focused on collecting data from sensors, where different data transmission protocols can co-exist and communicate. Examples of work include asset tracking of nuclear waste and, for the telecom industry, analyzing telecom usage at the aggregate level or at the individual consumer level
• Smart Engine for transmitting reporting data to different devices and in particular to smart phones, set-up boxes and PCs.

Summary Analysis

The level of testing complexity handled by SHTTP is impressive. It has a comprehensive set of testing capabilities that are not commonly found in more traditional software testing practices, and is also more comprehensive than the offerings around software products for ISVs and high tech product manufacturers/OEMS.

SHTTP ensures the reliability of equipment in real life conditions, e.g. in a live train or aircraft. This requires more stringent testing work than for traditional business applications. However, Capgemini Group’s Testing Global Service Line does not seem to have leveraged the experience and capability of SHTTP for business application testing , something NelsonHall would like to see. As the world of testing is shifting to digital, especially around e-commerce web sites which potentially process hundreds of thousands of transactions every day, there is surely a great opportunity for vendors with PES testing capability to exploit this expertise in traditional business software testing.

We would also like to see how Capgemini Group plans to handle the complexity arising from overlapping offerings. This applies to security testing, now that Capgemini Group has its own dedicated service line around cybersecurity. And it is certainly applying to IoT, which will require testing capabilities around traditional applications, around embedded systems for  functional and non-functional needs (e.g. IT security and safety), around analytics and big data testing. We expect Capgemini Group to launch another Global Service Line around IoT, a move that has worked very well in the past with Testing Global Service Line, Insights & Data, and more recently with Cybersecurity, as evidenced by growth in revenues.

The announcement ends a long period of speculation over the posssible sale of CSC's North American Public Sector unit (NPS) to private equity funds and the sale of its Global Business Solutions (GBS) and Global Infrastructure Services (GIS) businesses to another IT services firm. Given some kind of breakup has been in mind for some time, the costs of the separation are not significant (certainly not compared with some of the exceptional charges CSC has reported in recent years): the estimates are between $50m and $75m.

The rationale of some aspects of the break up are not yet clear, for example why a distribution of shares to shareholders and not a flotation of NPS, like Atos did with Worldline to raise cash and have a quoted vehicle ready for acquisitions? But one thing is certain: CEO Mike Lawrie has aimed to increase CSC's stock value, and here he has succeeded: CSC now has a significant market cap of $9.8bn (Booz Allen Hamilton in U.S. federal: $4.2bn: CGI in commercial and in U.S. federal: $13.6bn). The intention with the split is to further increase the market cap of the two standalone firms and to maximize shareholder value, in a manner that is intended to be tax efficient. At closing, there will be a cash dividend to shareholders of $10.50 per share, intended to be tax free.

CSC's financial performance is a mixed story. Lawrie and his team have increased the operating margin of the company over the past three years: EBIT margin reached 8.0% in FY 2014, a very decent level. A lot of costs have been stripped out of the business: the "Get Fit" strategy has delivered $1.9bn in cost savings. But exceptional items continue to have a massive impact on CSC's EBIT margin: exceptional items in FY 2015 that are legacy issues include pension funding and a pending settlement with the SEC related to historic misreporting. CSC also announced a "special" restructuring charge of $246m. This charge, funded by the reversal of a tax loss in the U.K., will further increase the offshoring/nearshoring ratio of CSC's commercial business from ~40% by another ~600 bps. CSC management higlighted that eventually it wants to have this ratio reach 50% to 60%, also to reshape its age structure from a diamond to a pyramid, hiring many more young graduates.

In short, further restructuring will be needed over the next few years. We anticipate CSC's commercial business current target of an offshoring ratio of 50-60% will be revised upards over time by another 10% to reflect current market ratios in U.S., U.K and Nordics (NelsonHall estimates that at least two thirds of the revenues of CSC Commercial are located in offshore-friendly geographies - excluding CSC's presence in the U.K. public sector). A comparison: Capgemini with its pending acquisition of IGATE will have a presence in North America similar to that of CSC's commercial business (~$4bn for Capgemini vs. ~$3.8bn for CSC), with 50k Indian personnel servicing North America, an offshore ratio of 75%. Eventually, CSC will look to adjust to similar offshoring levels.

CSC is far from being over with its downsizing effort of onshore personnel. Another example of CSC's lack of push to offshoring: CSC, with its 2007 Covansys acquisition, gained a headcount of 14k in India. In FY 2015, headcount in India was 19k (including ~1k from the acquisition of AppLabs). In short, CSC has barely grown its Indian presence in the past seven to eight years. This is hard to believe given the fact that CSC probably derives ~$3.7bn in revenues from the U.S. commercial sector and that U.K. is a ~$1.6bn business too. CSC is also lagging in its ability to service clients in Continental Europe, only now building capabilities in Bulgaria and Lithuania.

Meanwhile, the revenue decline continues, down 8% in constant currency FY 2015, after a 7% decline in FY 2014. Back in 2007, CSC was a $16.7bn revenue business; it is now a $12.2bn business. CSC has divested a number of business units, which overall represent a NelsonHall estimated $1.7bn in revenues. Looking ahead, the revenue decline will continue in the short term: in FY 2015, bookings were down by 12% in CSC's commercial business. GIS continues to move away from capital-intensive deals towards smaller contracts relying on more standard services. GBS is more worrying: so far, the unit has failed to benefit from the positive market conditions in the U.S. in the past two years, the relatively good conditions in the U.K. and the improved conditions in Continental Europe. Within GBS, application services are not growing (down 5% at CC in FY 2015) and Industry Solutions and Software was flat at CC. CSC continues the reshaping of GBS, but is predicting slight growth in the unit in FY 2016, possibly a confident prediction. Uncertainty about the future of the company must have made it very difficult for to win new logo commercial sector business in FY 2015. Now there is more clarity, this should ease somewhat.

Apart from developing the global delivery capability and changing the age profile if the workforce, what else might we see with the Global Commercial company over the next few years?  

• For the company overall, topline growth will not happen before FY 2017 at the earliest 
• In the GBS business (down 5% in CC in FY 2015), its applications outsourcing business continues to look vulnerable. Will CSC become more successful in leveraging its industry IP in the insurance, banking and healthcare sectors to cross-and up-sell both project-based and also annuity services? 
• The GIS business, where it has been hit hard by having a heritage steeped in large, traditional IT infrastructure management deals, will continue to lag GBS in the short- to mid-term at least as some contracts expire. Will CSC begin to see a demonstrable increase in the proportion of overall revenues coming fron newer and renovated parts of its portfolio such as cyber, aaaS offerings, and myWorkStyle? The shift to smaller, less capital intensive, and higher margin will become more evident. This requires a completely different go-to-market approach, a journey on which CSC has embarked. The days of asset and personnel transfer deals appear to be over for CSC. A separate challenge that will be more difficult to address will be the inability to cross-fertilize the cybersecurity and big data capabilities from the U.S. Public Sector business,

The NPS business is generally healthier, and will benefit from improving market conditions, though again topline growth will not happen before FY 2017

The turnaround of legacy CSC is coming to an end: its reinvention is still in its early stages.

Dominique Raviart and Rachael Stormonth

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

TriZetto LTM revenues breakdown by service/product line is:

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

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

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

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

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

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

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

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

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

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

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

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

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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]. 

• 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.

Capgemini’ growth dynamics are based on continued growth in strategic offerings (contributing up to 5% in total Capgemini revenue growth), and adoption of offshore (up to 2%) and overall market competitiveness (up to 4%). Growth inhibitors include price erosion (-1%) and the impact of cloud (up to -2%).

The details that Capgemini shared about its plans for growth reveal a number of assumptions.

The company believes it has completed the transition to offshore in the more mature markets (U.S., U.K. commercial sector and Nordics), that represent 75% of revenues. This means that Capgemini is exiting the crisis with offshore delivery, finally, being a growth driver, rather than just a margin expansion engine. The Netherlands and France remain the two large geographies likely to be affected by revenue erosion over the next few years, as a result of offshoring.

Meanwhile, Capgemini is relatively optimistic about the impact on topline growth of cloud. IaaS is driving down spending in IT infrastructure management. This is an activity where Capgemini through its Infrastructure Services unit is selectively present, focusing on RIM/asset lite services, cloud brokerage and orchestration services, service integration and management, and professional services.

Capgemini is also at ease with the increase in SaaS adoption, highlighting (as Accenture has done) that SaaS still requires traditional technical services: configuration, development of additional functionality and integration with other applications; as well as triggering new consulting activities around big data and adoption of digital transformation-led business process re-engineering. The company has also developed its SAP services portfolio, expanding from core ERP services to SAP HANA/mobility and verticalized offerings, with together now represent 50% of SAP-related bookings. This is important as Capgemini has a SAP practice headcount of 13.5k, of which 800 SAP HANA specialists.

One controversial item of those growth assumptions is Capgemini’s market competitiveness in being selected by clients as one of their strategic services providers following their supplier reduction initiatives. The company argues that it is more likely than smaller competitors to be part of those selected vendors, because, inter alia, of its sheer size. This rationale has logic. But the growth assumption (3 to 4% in additional growth for overall Capgemini) looks out of proportion, given that the number of competitors with size relative similar to that of Capgemini has increased recently: Atos, CGI, and NTT DATA to name but three, with TCS, Cognizant, Infosys, Wipro and HCL providing increasingly strong competition in relevant outsourcing opportunities.

Along with organic growth, Capgemini is also resuming its geographical growth intentions, with Asia Pacific as a key priority, possibly in Australia. The company is also reconsidering China as its next phase of investment, but being cautious about margins in the country. It is also targeting in the long-term Korea and expanding its Japanese operations (a country it recently re-entered and where it operates with 100 personnel). Altogether revenues from Asia Pacific are to growth from 3% of Capgemini overall revenues to 10% over time. Capgemini is also targeting expansion in Latin America, where as well as expanding its Brazil operations, it is considering local opportunities in Mexico.

Capgemini’s other priorities include:

• Continued focus on cost savings. It has introduced another efficiency program, Augmented Competitiveness, increasing standardization of hardware and software used internally, also automation technologies. The company has reiterated its intention to reach, in the short-term, a 10% operating margin
• Increased emphasis on career development of its offshore workforce (now 45% of global headcount), with a “promote first, hire second” policy, and further investment on training, including for leadership development
• Global key account management, with its Account Management Strategic Initiative (AMSI), currently covering 12 global accounts and including exec sponsors for each. Applying a “One group” approach to these selected accounts to sell, where appropriate, the full Capgemini portfolio will clearly boost efforts to be regarded by clients as a strategic partner. Will this initiative be expanded, in a slightly diluted form, to other accounts? We would imagine so; it would certainly support any attempts to increase client centricity. Capgemini’s organizational structure, of global service lines (a relatively recent organizational development) and geos has clear merits, and it has gone a long way to break country silos, but has made it difficult at times to up-sell across service lines.

Capgemini has achieved a huge amount in recent years: it has completed its offshore transformation (75% of revenues are now transformed), and has made substantial progress in its portfolio management initiatives: Strategic Global Offers are now a major contribution to both the topline and to margin. The company expects to out-perform the market in spite of the mediocre economic conditions in two of its key geographies: the Netherlands and, to a lesser extent, France.

Question marks remain, however, about two of its service lines: Sogeti and Capgemini Consulting (CC), which also are its most cyclical activities

• Sogeti is looking to accelerate its transitioning from a staff augmentation business to a specialized business, with testing, and to a lesser extent security, as key drivers. Sogeti is currently working on a new business plan to accelerate its focus on several key offerings.
• Resuming growth at Capgemini Consulting will probably take some time: Capgemini is aligning CC around digital transformation and SMAC, mirroring similar activities in its Apps businesses. It is unclear if this digital transformation-alignment will be sufficient to resume growth in CC.

Overall, Capgemini is reaching the end of its transformation to achieve a 10% adjusted operating margin.  Resuming stronger organic growth, the next ambition, will be at least as difficult a challenge. It depends on a variety of levers. The company’s strong ongoing focus on portfolio and innovation is evident; it is also the best positioned European headquartered IT services provider for offshore delivery (though its nearshore capabilities in Europe are dependent on just one country, Poland, which is not the cheapest). More needs to be done on client centricity – and the impact on the U.K. business of the end of the Aspire contract cannot be ignored: while Capgemini is likely to pick up other business, this is not likely to replace the lost revenues. 

Dominique Raviart and Rachael Stormonth

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?

• 2014-2016 CAGR of 5% with half of this growth to come from acquisition
• A 100 to 200 bps improvement in adjusted operating margin by 2016

The two days focused on the two global service lines that remain after Worldline has been floated: Consulting & Systems Integration (C&SI, also contains applications outsourcing activities) and Managed Services (MS). The event sought to convey what Atos is doing in MS and in C&SI in order to meet its financial targets for IT services for 2014-2016. NelsonHall will be producing an updated Key Vendor Assessment on Atos next week which will outline the various initiatives in detail.

Consulting & Systems Integration

In a major reorganization, Atos is regrouping the Systems Integration (SI) and the Consulting & Technology Services (C&TS) units under one umbrella, C&SI. In total, C&SI has revenues of €3.1bn and a headcount of 31k, of which 8k in lower cost geographies (for fixed priced business, the offshore ratio is 30% currently with a target to reach 50%).

• SI is a recovery story; revenues were down just 0.7% at CC/CP in 2013, and margin was up 180 bps to 6.4%. Offshoring and lean management (13.5k personnel have been trained on lean techniques) are contributing to the margin improvement
• C&TS has been suffering declining revenues for some time and has been a drag on margins. 2013 revenues were down 5.6% organically, though adjusted operating margin improved 160 bps to 5.7%. C&TS is itself the amalgamation of two former units: Consulting Services (with its largest teams in France and the Netherlands, with smaller units in Iberia and the U.K.); and Technology Services, a staff augmentation unit largely in France, Netherlands and Spain.

Most C&SI business lines (CS, SAP, and Solutions) are also to become global, taking over P&L responsibility from country units. The change does not end here: Atos C&SI has created practices within its Solutions unit for testing, mobility, Oracle, cybersecurity and application development integration management, which also are of a global nature. This globalization is part of a wider standardization drive.

C&SI outlined a number of priorities, including:

• Winning large deals, an ongoing focus; the €350m (baseline) NSN ADM contract was the mega win of late 2012 driving transformation in 2013. C&SI also landed a ~€60m testing contract with a European automotive OEM, its largest standalone testing services win
• The introduction of an account management structure for 50 accounts that should help in developing business and coordinating the activities of the various practices
• Pursuing a verticalization effort, with vertical units developing industry-specific offerings and reshaping existing ones. Here, Atos is continuing an initiative that SIS had started before its acquisition
• Geographic expansion. The U.S. is a top priority (as it is for MS). Atos’ presence in the U.S. is currently dependent on European accounts that have a North American presence e.g. Siemens, NSN, Daimler, with a few big brand clients such as P&G and John Deere. C&SI is increasing its salesforce.

In Anglo-Saxon countries, or for deals with high offshoring ratios, C&SI has introduced its India Direct initiative, where account management, project management and functional expertise and business analysts are all based out of India.

C&SI, has like MS, rather bold financial ambitions in its 3.5%-4% CAGR target for 2014-2016 (which includes acquisition) and a desire to approach a 10% adjusted operating margin in the long-term.

What Are Our Takeaways on the New C&SI?

This is a major centralization effort by Atos, with impacts on delivery, service portfolio and investment decisions. And it is probably not one it could have made while it was still addressing everything that was involved in the integration of SIS businesses.

C&SI is looking to become more Indian in terms of centralization and also in delivery centricity. This is clearly important for service lines as testing, AM, and the SAP and Oracle practices. The increasing importance of both C&SI and MS as global service lines is also diminishing the historical influence of the various regions (the GBUs). We believe the reorganization will put Atos in a different place from competitors that continue to have a strong onshore presence and regional differences. Capgemini Technology Services is not a global service line but is aligned by geography (apart from its Apps 1 Financial Services and Apps 2 Telecom units). CGI is completely geography-oriented. T-Systems Systems Integration is aiming to align capabilities across geographies but remains geography-led.

By folding C&TS into SI, Atos is facilitating the deployment of consulting resources into the front end of transformational and AM engagements, a move that will help resolve issues such as utilization in CS, and also in presenting a single face to the client. The move will also help reduce G&A expenses.

The increased vertical focus is not a surprise. For a vendor of its size, Atos arguably is somewhat light in industry-specific offerings. We would like to see greater investment in this area, and expect this to become a more important priority from 2015 onwards.

To some degree, there are challenges in having what remains a complex organization with service lines leading but countries still having P&L responsibility to drive business locally. One of the obvious ones is lack of responsiveness in client facing activities.

In what is a major reorganization of all its IT services activities, Atos is certainly not being complacent. The integration of SIS is no longer a priority and the company is now able to focus more intensely on the next stage of its evolution: from what has been a group of regionally focused businesses to a more integrated company that can compete in both Europe and North America for deals that require global delivery. 

Dominique Raviart and Rachael Stormonth

See also "Atos Managed Services: Strong Progress on Margin Improvement; Further Acquisition Will Be the Key to Future Growth" at: http://research.nelson-hall.com/blogs-webcasts/nelsonhall-blog/?avpage-views=blog&type=post&post_id=159#sthash.YQsvDRS4.dpuf"

NelsonHall will soon be publishing an updated Key Vendor Assessment on Atos which looks at current initiatives in more detail.

Principles of T-Systems 2015+ rely on a change in it service portfolio mix:

• Stopping of unprofitable offerings
• Adoption of more standardized service offerings, which will be platform-based and scalable. T-Systems is to derive 50% of revenues from standard IT services by 2017
• Emphasis on select offerings e.g. M2M, cloud computing, big data and security services. High-growth offering are to represent “nearly half” of revenues by 2017, up from “one third” currently.

Guidance for Market Unit is:

• 2014: revenues: ~€6.7bn, of which
  - “Scalable IT and TC services; transformation and integration”: 35% of revenues (2013: 34%)
  - “Classical ICT services (MAKE)”: 45% of revenues (44%)
  - “Classical ICT services (BUY)”: 13% of revenues (12%)
  - “Stop offerings”: 7% (10%)
• 2017: revenues: ~€7.7bn, of which
  - “Scalable IT and TC services; transformation and integration”: 46% of revenues
  - “Classical ICT services (MAKE)”: 37% of revenues
  - “Classical ICT services (BUY)”: 17% of revenues
   “Stop offerings”: 0%.

Deutsche Telekom's new CEO, Tim Höttges, is determined, among other things, to increase the profitability of T-Systems. Mr. Höttges has wasted no time, unveiling a plan initially focused on personnel restructuring (Reuters reported redundancies of ~4k, out of a total headcount of ~51k) and on an improved service mix. And indeed T-Systems, after years of restructuring remains a loss-making business, with a negative 2.9% EBIT margin in 2013. From an operating point of view, T-Systems year after year gradually improves its profitability. But the company remains impacted by the high level of restructuring expenses (2013: ~€431m: 2012: ~€417m). By comparaison, Capgemini had in 2013 €68m in restructuring costs and Atos, a NelsonHall estimated ~€150m in 2013.

T-Systems continues to incur very large restructuring expenses, where Atos, a vendor also with a large IT infrastructure management business, seems to have put this behind it.  T-Systems' business model, which relies on large IT outsourcing contracts is very capital intensive. The company probably needs to diversify very significantly its business model towards project services and overall professional services that are less capital-intensive. The problem is that project services are becoming in T-Systems' core markets very India-centric. This latest phase in the reinvention of T-Systems is only starting. 

The two companies are to:

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

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

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

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

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

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

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

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

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

This partnership is a bold move by CSC

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

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

Dominique Raviart and Rachael Stormonth

Capgemini's capabilities in PES/R&D services were consoderably enhanced back to 2003, when it acquired with Transiciel, a €136m R&D services business, mostly active in France servicing mostly the aerospace and automotive sectors, with the former EADS, Snecma, Alcatel, Renaul and PSA as key clients. Transiciel was merged with Sogeti and its R&D service business was rebranded as Sogeti High Tech. Initially a French business, in 2006 Sogeti High Tech acquired Future Engineering (FuE). FuE serviced mainly the aerospace sector in Germany with Airbus a key client. FuE brought in 250 personnel and revenues of ~€19m. In 2008, Sogeti expanded its sector presence with another niche acquisition, of Euratec, a French transportation-focused vendor with 35 employees. Sogeti and Capgemini then appeared to have reduced their focus on Sogeti High Tech. Recurring rumors of the sale of the business to Assystem emerged in 2011 but were not confirmed. More recently, Capgemini has been more keen to build an engineering services business, leveraging Sogeti High Tech. Capgemini CEO Paul Hermelin has commented that, as part of the pending acquisition of Euriware, the IT services captive of nuclear firm Areva, Capgemini will gain R&D services personnel that it will transfer to Sogeti High Tech. Nuclear energy is one of the fast growth segments of R&D services and will help balance the client base of Sogeti High Tech.   

With the creation of Global Engineering Services, Capgemini is expanding the scale and offering of Sogeti High Tech by:

• Adding a delivery engine in India (NelsonHall estimate: ~800 personnel)
• Expanding its service offering with technical documentation services (through the 2005 Bombardier technical documentation contract) around embedded software and PLM software-related services. This is a niche capability that Capgemini has not known what to do with.

At the moment, GES is avoiding markets where IOSPs are the most active: telecom R&D services (currently a soft market) and software product development and maintenance. Capgemini GES will be selling India-based R&D services to clients in Europe. Capgemini India has a key role to play in this offering: the company has a target of reaching a 70k headcount by end of 2015, up from 45k in Q3 2013. NelsonHall has been expecting inorganic growth in PES in suport of this ambition: certainly, today's announcement indicates Capgemini's increased focus on this market.

Accenture is also investing in developing its PLM services capabilities.

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.

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

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

Business and IT Services

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

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

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

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

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

Consulting & Systems Integration

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

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

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

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

Product & Platform Solutions

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

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

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

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

Opinion

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

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

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

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