Yesterday morning, DXC announced its intended acquisition of Luxoft in an all cash transaction of $59 per share, around $2bn. This represents a 48% premium over Luxoft’s average closing share price over the previous ninety days (and ~86% premium on Friday’s closing price). The deal is expected to close by end June 2019.

In recent years DXC (including as CSC) has made a number of acquisitions that have expanded its ServiceNow, Microsoft Dynamics, and recently Salesforce capabilities and formed the bedrock of its Enterprise & Cloud Apps (ECA) practices. This is different: the Luxoft transaction is closer in feel to its 2016 acquisition of Xchanging, which brought in Insurance sector capabilities, or the more recent acquisition in the U.S. of Molina Medicaid Solutions. In all three cases, DXC is acquiring a company that has specific issues and challenges but that also expands DXC’s own industry capabilities; Luxoft will in addition expand DXC’s capabilities around Agile/DevOps.

Luxoft is a company in transformation

With revenues of $907m in FY18 (the year ended March 31, 2018) and nearly 13k personnel, Luxoft is a mid-sized firm. DXC is presenting Luxoft as a “digital innovator”, but it is a company that is grappling with significant client-specific and market challenges. Until FY17, it was highly successful, enjoying revenue growth in the range of 20% to 30%. FY18 saw a slowdown, still to a very solid level of 15.4% (of which we estimate ~7% organic), but FY19 has seen flat growth.

In particular, Luxoft has been hit hard by its dependency on the investment banking/capital markets sector, in particular on two clients: UBS and Deutsche Bank. Back in FY15 they accounted for over 56% of Luxoft’s total revenues (~$294m). Since then, Luxoft has been growing its share of wallet in other key accounts, and the combined revenues from clients 3 to 10 have increased from $123m in FT15 to ~$208m in FY18, a CAGR of ~19%, with clients 5 to 10 growing at nearly 30%. In FY19 Luxoft is expecting around 13% revenue growth from these accounts (to, we estimate, ~$235m).

But while it has been very strong growth in its other top 10 accounts, Luxoft has since FY18 been impacted by declining revenues at both UBS and Deutsche Bank (the later by 13.4%). H1 FY19 saw a 11% y/y decline and these two accounts now account for just over 30% of total revenues. Both have been insourcing some talent. While Luxoft believes that the UBS account is now stabilizing, Deutsche Bank is more challenged, and the account remains an issue: revenues are likely to decline by ~44% in FY19 to ~$90m, or <10% of total revenue, with a further contraction in FY20.

Outside these two, Credit Suisse is also a major client and Luxoft is clearly exposed to the slowdown in the European capital markets/investment banking sector. But elsewhere in financial services, there are much stronger opportunities in the near-term in the wealth and asset management sector, particularly in the U.S. and there is the potential for DXC to help Luxoft expand its presence in the Australian banking sector.

Luxoft has been looking to diversify its sector capabilities in recent years, in particular beefing up its offerings to the automotive sector, developing relationships, mostly in Europe, with tier-one OEMs and suppliers such as Daimler, Continental, and Valeo. Automotive & Transport is a hyper growth business for Luxoft, delivering nearly 43% growth in FY18, but for a company the size of DXC, this is a small business it is picking up: FY18 revenues were $158m. (FY19 revenues are likely be ~$220m, boosted by Luxoft’s acquisition of embedded software specialist Objective Software, which has brought in some U.S. client relationships. Some of these are large accounts (four of the top 10 accounts are in the automotive sector.  And one is a common account to both DXC and Luxoft.

In its Digital Enterprise unit, which is servicing all other verticals, Luxoft has been driving its offerings to more digital offerings, at the same time looking to reduce its exposure to low-margin work. Revenue performance in the Digital Enterprise Unit has been erratic with a strong performance in FY18 followed by a 13% decline in H1 FY19 though Luxoft claims to be confident that it has completed the transformation of the unit.

In brief, among the capabilities that Luxoft will bring to DXC we see:

• Significant agile development capabilities, enhancing DXC’s application services business.
• Some analytics capabilities
• Some product engineering services capabilities in the automotive sector, plus some experience in IoT-centric projects
• Offerings around UX design (in June 2018, Luxoft acquired Seattle-based design agency Smashing Ideas from Penguin Random House).

Luxoft has also been developing its capabilities in blockchain, an area where we suspect DXC has little experience, with pilots in the healthcare, government (evolving in Switzerland) and automotive sectors.

And, of course, Luxoft has a sizeable nearshore delivery capability in Eastern Europe. Luxoft’s delivery network has its roots in Ukraine and Russia. In reaction to the 2014 Ukraine-Russia crisis, the company initiated its Global Upgrade program with the intent of de-risking its profile and increasing its presence in other nearshore locations, in particular in Romania and Poland. Since FY14, Luxoft has decreased its headcount in Ukraine from 3.6k to 3.1k and in Russia headcount from 2.3k to 1.9k.  In parallel, Luxoft has significantly increased its presence onshore with now 1k personnel in North America and made its delivery network far less risky for clients. DXC highlights that it will be able to help Luxoft scale its delivery footprint in The Americas and India.

DXC is betting Luxoft will help accelerate its topline growth

While Luxoft has been grappling with declining margins – partly, but not solely due to the declines at Deutsche Bank and pricing pressures in other accounts – DXC is emphasizing the topline opportunities, rather than cost synergies. Given DXC’s track record in stripping out costs, we imagine Luxoft employees will be glad to hear this.

DXC is targeting revenue growth from:

• Luxoft achieving 15% revenue growth over the next three years
• Revenue synergies of $300 to $400m over this period, representing 1% to 2% of additional revenue growth for DXC

To achieve this, DXC is looking to cross-sell, for example, the:

• Product engineering capabilities of Luxoft to North American and Asian automotive clients and other sectors, e.g., high-tech, manufacturing and healthcare in priority
• Digital capabilities of Luxoft into DXC’s client base. DXC claims that all of Luxoft’s business is, by its definition, digital, thus adding nearly $1bn in revenues to DXC's own $4bn digital business, and expects to grow this $5bn business by another 20% annually
• Managed cloud and digital workplace capabilities of DXC into the Luxoft base (where, however, there are typically well entrenched incumbents).

DXC is also looking to broaden the use of Luxoft assets, taking FS and automotive capabilities and applying these to industries where Luxoft has not historically had a large presence. As an example, Luxoft has developed data visualization assets for FS clients, capabilities it believes that could be applied to other sectors.

How will DXC and Luxoft Integrate?

One key question is how DXC will manage the integration. In the short term at least, Luxoft will remain an independent company, retaining its brand and senior leadership (DXC intends to have retention plans in place for key Luxoft execs). For DXC to ultimately position as an end-to-end and global IT services organization, able to offer clients a full spectrum of services ranging from digital transformation advisory and concept testing through to IT modernization in all its key geographies and target markets, there will need to at least appear to be an integrated go-to-market and also a standardized global delivery operation that leverage this newly acquired assets.

David McIntire, Dominique Raviart, Rachael Stormonth

HPS' 2015 revenues were $223m. It has achieved a CAAGR of 38% in the last three years, driven both from adding new healthcare payers and from the increase in individuals or groups eligible for first-time insurance coverage due to the ACA initiations; the company now supports ~20% of Individual health plans in the U.S.

The acquisition will be a major boost to Wipro’s ambitions in healthcare and specifically healthcare payer BPS, an area where the company had made modest at best progress since its acquisition of Infocrossing, and the Infocrossing Healthcare Services, Inc. unit in 2007. Wipro Infocrossing currently has healthcare payer BPS contracts with two State Medicaid agencies, including Missouri’s Department of Social Services.

The acquisition of HPS will enable Wipro to move beyond support for the Over 65 market in the form of Medicaid and Medicare, and to address the growing market for individual plans in the Under 65 B2C market. It will provide Wipro with a more modern building block around which to position its healthcare payer BPS business. Such is the importance attached to this building block by Wipro that it is conducting a reverse integration of its healthcare & life sciences business into HPS, with the overall unit being led by HPS' President and CEO Jeff W. Bak.

The Individual policy market is currently a small part of the overall health plan policy base, but it is one that has been showing double-digit growth with the ongoing extension of health insurance coverage in the U.S. Looking at the future dynamics of this market, Wipro expects that the Individual plan member base will continue to grow for the next three years as health insurance coverage of the population continues to expand and will then stabilize. By this point, Wipro perceives that there will be a secondary growth driver for exchanges with health insurance exchange markets becoming attractive to employers as a mechanism for providing health plans to certain groups of employees such as part-time staff.

HPS currently serves ~35 healthcare payers, with its top ten clients accounting for ~80% of its revenues. Its client list includes Ameritas, Allstate, Assurant Health, Beazley, Cigna, Foresters, Humana, Kaiser Permanente, Starmark, UnitedHealthOne, unum, and vsp. HPS’ niche is in assisting healthcare payers to enter and control their costs around state-based and Federal exchanges; it is focused on the ‘individual’/B2C health plan market. HPS has a platform to support healthcare payers across the Individual policy lifecycle and views the typical journey with a healthcare payer in four steps:

• Helping them to connect with private & public exchanges (using its ExchangeLink platform)
• Assisting them in policy administration & member services (ServiceLink platform)
• Helping them with member acquisition through its licensed agents (SalesLink)
• Assisting them in member retention & loyalty (LoyaltyLink).

With these services, HPS can connect healthcare payers to 40 public exchanges and 150 private health insurance exchanges; and the HPS Insurance Agency connects to a network of ~100k nsurance agents. HPS aims to help payers move beyond medical insurance and offer servicing around digital products in other areas such as dental insurance and even life insurance.

HPS has ~2k employees, all onshore U.S. It offers both SaaS and BPaaS services. Clearly the BPaaS element is extremely attractive to Wipro and in line with its strategy for developing its BPS service. HPS will also give Wipro access to a wider client base among commercial healthcare payers and an opportunity to cross-sell wider services such as offshore-centric claims processing while adding credibility to the company’s onshore presence in the U.S. The non-FTE pricing models used by HPS (such as per member per month for member servicing and on a share of premium/commission for new business) will also be attractive to Wipro

Overall, this acquisition will give Wipro both a leadership position in BPS in the Individual healthcare payer market and also the potential for a fresh start in healthcare payer BPS overall, including opportunities to leverage its services around digital and analytics and to start to move into complementary areas such as population health management, patient monitoring, and ACO support. Possible synergies with other analytics offerings should not be excluded, such as with Wipro’s Marvel CX, in order to further enhance customer experience.

Wipro is on a bit of an acquisition spree at the moment: this will be its fourth acquisition so far in FY 16, following those of:

• Designit, which has enhanced the capabilities of Wipro Digital (part of the Change strategy)
• cellent AG, bringing in scale and local relationships in the key European market of Germany
• Viteos Group, bring in BPaaS capabilities in the financial services sector.

Including HPS, Wipro will be making an overall investment of ~$750m in these acquisitions, all of which are strategic, rather than bolt-on, acquisitions. Like Viteos, HPS will afford Wipro the opportunity to build a ​BPaaS business in one of its principal target sectors.

Footnote: NelsonHall prediction was spot on!

In our January blog on the announcement of the appointment of Abid Neemuchwala as the new Wipro CEO (see here), we said an acquisition like this was highly likely. And in our December 2015 Key Vendor Assessment on Wipro (which will be updated later this week) NelsonHall anticipated that the acquisition spree in FY16 was not finished with Viteos.

If you would like to know more about NelsonHall's extensive coverage of Wipro in our Key Vendor Assessment or any of our IT Services or BPS programs, please contact [email protected]

A year later, EXL delivered full year 2014 revenues that beat revised non-GAAP guidance by $11.6m, finishing the year with 9% growth in Q4, bolstered by better than expected contribution from the recently acquired Overland Solutions (OSI, $12.2m, against the anticipated $10m).

By service type,

• The newly named Operations Management segment (formerly ‘Outsourcing’), continues to represent over three quarters of total revenue and was up 2.7% y/y, or 11% excluding disentanglement costs
• The ‘Analytics and Business Transformation’ segment delivered double digit topline growth every quarter, and 31.9% growth in 2014 overall, reaching $110.6m. EXL’s analytics services business grew 44% in 2014, and now account for 13% of revenue, or $66m. Including contributions from its latest acquisition, RPM Direct, EXL expects its analytics business to reach over $100m in annual revenue in 2015 (or ~20% of total revenue).

Though details of the ‘new EXL’ won’t be revealed until the Investor Day next week, the journey that has been made by EXL this year has been marked by three specialist acquisitions within seven months, the third announced only this week.

• The spending spree started off reasonably small, with Blue Slate Solutions last July for $7m. Blue Slate generates ~85% of its revenues from health insurers (including Medicare contractors) and brings with it a consulting framework that EXL is integrating into its BPO and healthcare technology and analytics capabilities. Blue Slate brought to EXL a specialist onshore staff with domain experience in the U.S. health insurance sector
• The October acquisition for $53m of OSI further added to EXL’s onshore delivery network in the U.S. and to its BPaaS offerings for P&C, particularly in workers’ compensation premium audits
  • These two acquisitions will bring in over $105m incremental revenue in 2015, more than offsetting the headwind of ~$49m from transitioning clients. As well as onshore resources, both have developed proprietary tools and frameworks to support their service delivery
• The third acquisition, yet to be completed, is of RPM Direct (for $47m in cash plus earn outs of up to $23m). RPM Direct will enhance EXL’s marketing analytics capabilities in U.S. insurance, across P&C, life and health segments. EXL had indicated a year ago that marketing and customer analytics are focus areas within its “Decision Analytics” services unit. RPM will broaden the range of services EXL can offer to insurance sector clients

All in all, EXL will have invested over $130m in these three acquisitions, all of which

• Boost its onshore presence in the U.S
• Bring in IP (tools, frameworks, marketing database)
• Bring in specialist domain capabilities in the health payer and other insurance sectors
• Broaden its U.S. client base.

Looking ahead to 2015, EXL has given revenue guidance of $570m to $590m, excluding any impact of RPM, a growth rate of 8.5% to 12.5%. Q1 is the last quarter where revenue headwinds from transitioning clients will have a significant effect.

EXL is developing analytics CoEs, particularly in support of healthcare and insurance and is expecting to sign a number of $10m plus annual revenue clients. Will we see further tuck-in acquisitions to further expand its capabilities in different areas of analytics for insurance and healthcare in 2015? The indications are that this is very possible.

EXL started emphasizing its analytics offerings around 18 months ago: at the time, much of the portfolio was based on India delivery. EXL today has a much richer portfolio to offer in its target verticals in the U.S.

Meanwhile, the U.K. , which accounts for over 20% of global revenues, delivered a strong year; EXL does not provide constant currency growth figures, but reported revenue growth for the U.K. in 2014 was 10%, all of which organic. Were EXL’s spending spree to continue into 2015, maybe U.K./EMEA will come higher up its investment priorities.

Finally, EXL has authorized a three-year $20m annual share repurchase program to offset share dilution from annual employee equity grants.

We note that EXL’s share price is at its highest for over two years and has surged by ~20% since the beginning of the month.

By Fiona Cox and Rachael Stormonth

NelsonHall will be producing its first ever Key Vendor Assesment on EXL in March.

EBIT margin was 13.0%, down both sequentially (-7 bps) and y/y (-157 bps). And adjusted operating margin (the metric Genpact prefers to comment on its performance as regards profitability) of 15.6% was also down both sequentially (- 76 bps) and y/y (-108 bps).

In Q2 the number of clients contributing $25m or more increased from 12 to 14, so there is some progress in making more money from its clients but we have yet to see the results from Genpact’s transformational plan announced in February this year (see our blog “Genpact: Slow Progress on Transformation Strategy in 2013 - Unveils Next Phase of Plan: http://research.nelson-hall.com/blog/?avpage-views=blog&type=post&post_id=139#sthash.u2IRYAcO.dpuf). This plan includes expanding/enriching the sales force (the intention is to invest at least 6% of revenues in sales and marketing) and increasing domain expertise with SME hires, and increasing industry specific capabilities through acquisitions.

With 37 new sales hires so far this year, client coverage has increased by 10%. The investment in client facing teams is presumably not just about generating new logos but also to improve the protection of existing business, with F&A BPO in particular being an increasingly competitive market (for example, Genpact recently lost most of the Honeywell renewal to Capgemini).

Expenditure on SG&A, at 25.4%, was at its highest for four years. Taking out S&M costs, G&A spend remains very high at over 19% of revenue – there was no mention of improving efficiency in G&A.

Management highlights three transformational deals this year, one of which an F&A win in the insurance sector. Revenue growth this quarter in the BFSI sectors which are key to Genpact (they account for 41% of total revenues) was the lowest it has been for years, at 3.8% y/y, though generally BFSI has been resilient this quarter. We note that no reason has been given by management for Genpact’s slow growth in BFSI this sector. Looking ahead, CEO N. V. Tyagarajan referred to ongoing discussions about setting up a potential BPO utility in the capital markets sector in H2, presumably through a client acquisition. Elsewhere, Genpact saw the strongest y/y revenue growth in its manufacturing sector business since 2012. at 14.5% y/y.

Genpact remains in the early stages of its transformational journey, with Tyagarajan again referring to 2014 as a "pivotal" year.

We have yet to see the benefits flowing through to the topline of a refreshed and expanded sales force, with early wins tending to be smaller project-based engagements. Management continues to guide on accelerated revenue growth in 2015 with margin improvements lagging slightly, presumably in 2016, once new large deals are past initial ramp-up stages.

So far in 2014 we have seen an IP enhancing acquisition and a vertical focused partnership. Expect to see more niche acquisitions such as Pharmalink, as Genpact continues its shift to promoting industry-specific BPO services with IP application and analytics.

Jessica Soler and Rachael Stormonth

Growth in the English-speaking market & Asia-Pacific SBU was led by new contracts in North America, and China where Teleperformance has won business to support multi-nationals’ expansion in China, also domestic and locally based foreign government agencies in China. Teleperformance has been rapidly expanding operations in China, including through its acquisition of TLS Contact in January last year.

Ibero-LATAM was hard hit by negative exchange rates, turning moderate constant currency growth to a 6.4% negative growth as reported. The Brazilian real lost 20% of its value against the Euro while the Argentine Peso lost a staggering 40% compared with Q1 2013. Colombia, Mexico and Portugal reported the highest growth while the Brazilian business continues to experience reducing volumes, a reflection of Brazil’s economically challenging periods in Q1 and Q3 last year. Brazil is an important market to Teleperformance: all the delivery is domestic, and it has ~13,000 agents in the country, its fourth largest country operation, with nearly 10% of the global agent headcount.  The Brazilian economy is once again growing relatively strongly this year, 0.7% in Q1 2014 and expected growth of 1.62% in Q2 2014. However, much of this growth is due to the temporary GDP injection from the football World Cup starting in June; whether this will transfer into growth in the domestic CMS BPO market, other than temporary contract expansions during the tournament, remains to be seen.

Within the Continental Europe & MEA SBU, there is a return to growth in several Continental European countries including Italy, and three countries - the Netherlands, Greece and Turkey - which have benefited from a refresh of the sales force. The telecoms vertical in France continues to be a challenging market.

Teleperformance has reiterated its desire to acquire during 2014. It is looking to enhance its higher margin capabilities in developed regions such as the U.K. and U.S, probably including capabilities in automated services and e-commerce, with a possible foray into the paid-for tech support market.

Teleperformance’s 2014 EBIT guidance of between 9.5% and 9.7% is a major improvement from the 8.1% margin achieved in 2013. The firm is looking to exit some unprofitable contracts and focus on higher margin activities although recent contract activity does not indicate a big take up by clients as yet. Acquisitions undertaken from this point on in the year would be highly unlikely to dramatically shift margins in the time available. Topline like-for-like guidance for 2014 is more conservative then the company’s margin aspirations with growth of between 5% and 7% expected for the full year; this is a softening of what the company has achieved since Q1 2012 and indicates a shift towards margin expansions over out and out topline growth. 

Following a strategic review, where it used McKinsey to advise on how to achieve the next phase of its growth (it is looking to move from a $2.5bn organization to a $5.5bn one), Genpact decided to focus on a smaller group of sectors, service lines & geographies. Following the Pareto rule, the nine sectors it selected (from 23 it was servicing in total) cover roughly 80% of its existing business.  Its target sectors are:

• Retail banking
• Capital markets
• Insurance
• Healthcare
• Life Sciences
• Retail
• CPG
• Manufacturing
• High Tech

We would argue that these still cover a huge range of sub-sectors, and it is difficult to find what has been left out beyond the public sector (in which Genpact did not operate) and energy and utilities. Nevertheless, this deepening focus on verticals, which is evident in many BPO service providers today, is clearly a positive move. Genpact is looking to expand its expertise within each sector and is hiring SMEs, for example its F&A insurance lead, hired from a client, used to previously work for Genworth.

After four years of attempting to expand in emerging markets in Latin America, India, China & the Middle East, Genpact has found that companies in these regions are typically not yet ripe enough for transformational engagements.  Genpact will continue to assist clients looking to enter or expand in these regions, but will not invest or pursue new clients within them. Japan, where it believes appropriate opportunities exist, remains in consideration.

As analytics became a key capability, Genpact is now looking to advise clients on what they should be doing to seek improvement and which analytic models will be of use.

Part of the new ‘Design, Transform & Run’ model includes differentiating through industry-specific processes. And there have been several developments already since February. For example:

• The recently announced partnership with Oliver Wyman to jointly offer risk management services to the financial services sector provides Genpact with risk consulting expertise  (see http://research.nelson-hall.com/search/?avpage-views=article&searchid=24796&id=202604&fv=2)
• The acquisition of Pharmalink announce in early May provides domain expertise in regulatory services in the pharma sector (see http://research.nelson-hall.com/blogs-webcasts/nelsonhall-blog/?avpage-views=blog&type=post&post_id=172) 

Genpact’s decision to acquire Pharmalink reflects its recognition of a broader BPO trend: that many BPO clients (assuming they are satisfied with the quality of the existing services being provided) are willing to increase the level of business they outsource to their service provider to include specialist services should these services be offered at reasonable rates.  

Genpact hopes investments such as these will make it a more attractive choice for both existing clients who have benefited from the traditional labor arbitrage model and also organizations that are experiencing major changes in their business models and are looking to outsource to support a targeted business transformation.

There is a clear intention at Genpact to shift from a position where its reputation has been based on process excellence (its GE heritage) – to a newer generation of BPO services where industry-specific services that involve the application of IP and analytics are part of the mix.

We should expect to see further partnership announcements, and maybe further niche acquisitions to support what will be a major development in its portfolio and positioning.

NelsonHall will be updating its Key Vendor Assessment on Genpact in June.

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

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

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

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

In 2014, Serco expects:

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

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

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

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

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

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

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

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

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

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

Other key measures include:

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

This is the second signifcant contract win for Capita driven by the Cedar HR acquisition. The other was in May 2012, an award by Leicestershire, Nottinghamshire and Derbyshire police forces to share back office services under a collaborative agreement. The deal involved Capita deploying Origin to manage all three forces’ data for HR, training, duty management, and health and safety under a contract worth £2.3m over 5 years.

More opportunities are to be expected in the U.K. polic sector, as forces deal with further budget cuts.

Initially the partners will work together to improve quality of community healthcare in Suffolk, with Bromley Healthcare acting in an advisory capacity and supporting clinical leaders. In the long term, they intend to join forces to bid for a range of opportunities in community services and integrated care across the UK.

This move is part of Serco's drive to enhance the quality of its healthcare services in Suffolk after the service came underfire when  NHS commissioners, reportedly, found it missing targets. Improving the quality of services is key to Serco's ambitions to grow its healthcare business. Major recent contract wins have included the troubled £140m Suffolk Community Health contract, won in 2012 and the £120m Anglia Support Partnership, awarded in 2011.

Capita has been awarded a £145m contract by Transport for London (TfL) to operate the congestion charging, low emission zone and traffic enforcement notice processing schemes. The contract is for five years starting from November 2015 with an option to extend for a further five years.

Services to be provided include:

• Operating the traffic congestion scheme
• Operating the low emissions scheme
• Traffic enforcement notice processing for penalty charge notices for bus lane and yellow box junction contraventions.
• Provision of IT systems, back office and contact centre to run the schemes and the associated enforcement processes.

After months of speculation, Capita finally confirmed today that it has won back the London congestion charging and low emission zone contract. The contract awarded by TfL is for £145m for 5 years starting from November 2015 with an additional option to extend for a further 5 years. The scope has expanded to include traffic enforcement notice processing for penalty charge notices for bus lane and yellow box junction contraventions.

We estimate that the value of the contract has shrunk by >40% while the scope has expanded to include administration of traffic enforcement penalty notices.  Capita will have to work hard to deliver against lowered revenues. Its £100m five-year contract with the DVLA to provide Vehicle Excise Duty (VED) and Continuous Insurance Enforcement (CIE) services nationally was terminated three years early in August 2013. Price may have been a contributing factor to problems with that contract.

All too often we see public sector bodies focus heavily on price as the key factor in making buying decisions. We would like to see more risk assessment on the impact of low prices on the service in question, in the long term.

Capita has won a series of public sector contracts recently, including picking up the interim contract for offender tagging services after the G4S and Serco overcharging debacle. All the while, the Cabinet Office has been attempting to break up what it refers to as an oligopoly of suppliers. In the IT segment, initiatives such as the G-Cloud and the Digital Services Framework are helping increase the government's supplier base but BPO is proving tougher to crack.

Capita has been preparing for this contract for some time, and in October 2013 acquired Parking Eye to enhance its ANPR capabilities.

Capita and a consortium led by Thales Alliance, originally designed and implemented the technology and then operated the congestion charging scheme when it was first launched by TfL in February 2003.

IBM and a consortium including NCP Services won the renewal against Capita, to run the scheme from 2009. The size of the IBM deal was not disclosed: Capita's revenue from the Congestion charging contract had been ~£56m per annum.

•     Revenue was £555.3m  
•     EBIT was £28.1m, a margin of 5.1%.

Comparisons with the prior year were not provided as the company in its present from came into being in August 2012. For the new company, for the five weeks to the end of 2012 FY, revenue was £49.9m, EBIT, £1.1m and a margin of 2.2%.  

Prior to the financial restructuring in August 2012, Mouchel made an operating loss.

Mouchel Business Services (MBS) results were:

• Revenues were £167m, in a challenging local authority market
• EBIT of £5.3m and margin of 3.2%.

The restructuring which started in early 2012 was completed at the end of March 2013.

Over the priod, Mouchel has reported > £1bn contract wins. These were mostly in its construction and infrastructure business. In its BPO business the company won a three-year, £50m, contract extension for the provision of business and ancillary services with the Unity Partnership, its JV with Oldham Council. It also also won a place on the North West Pensions Framework in July 2013.

In this period Mouchel also completed the acquisition of the 50% share of its joint venture, EnterpriseMouchel, a UK-based infrastructure support services company.

The company reported:

• Order book of £2bn up from £1.7bn at the year-end matches 2008 level, the highest in Mouchel’s 125-year history.
• Strong pipeline of opportunities worth £2.1bn
• Leads and prospects amount to over £5bn.

Mouchel’s finances have bounced back well since its restructuring in August 2012. The infrastructure business has seen the bigger share of growth, unsurprisingly, with an uptick in the construction and infrastructure markets.

Mouchel continues to face tough conditions in its local government business. It sees growth opportunities in other sectors; in particular it will be targeting the universities sector with its established brand in the outsourcing market and its BPO expertise. It is also looking to leveradge its pensions administration expertise in the private sector.

• Revenue was $1,331m, up 26.8% as stated.
• Operating income was $188.2m, a margin of 14.1%, up 200 bps.

FY 2013 revenue (and growth) by segment was:

• Health Services $862.9m (+28.6%)
• Human Services $468.4m (+23.6%).

FY 2013 operating income and margin by segment was:

• Health Services $129.8m, 15%, up 300 bps
• Human Services $58.1, 12.4% down 60 bps

On the face of it, Maximus' results tell a tale of two halves with the healthcare business substantially outperforming the human services business in revenue and profitability. Maximus puts the decline in Human Services' operating income down to a windfall which bumped up revenue and income in Q2 but which has been excluded from the full year results. Excluding this terminated contract, full year revenue grew 19% to $452.4m compared to the fiscal 2012, principally thanks to the U.K. Work Programme, the U.K, Saudi Arabia government employment services contract and the PSI acquisition.

In the Health Segment, Maximus expects some revenue attrition, coming from:

• The initial surge of work related to ACA contracts is likely to level off and
• The Minnesota HIX contract is currently winding down
• The California Healthy Families CHIP program ended in fiscal 2013.

However, some other contracts are ramping up:

• The federal eligibility appeals contract
• Maximus is also working on enrollment as a subcontractor to General Dynamics in the federal health marketplace, operating two of the 17 customer contact centers under that contract.

Another major contract award in this period by the U.S. Department of Education, Office of Federal Student Aid is currently under protest from a competitor.

While continuing to do well in the U.S, Maximus is also eying growth in the U.K. The acquisition of Health Management Ltd  in July positions Maximus well for opportunities coming from the expansion of the DWP's work capability assessments contracts as well as primary care opportunities in the NHS market, including: physiotherapy, chiropractic, osteopathy and podiatry specialists, as well as counselling and psychology services, dental care and travel vaccinations and immunizations.

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

Its aims are:

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

Axelos is looking to achieve these objectives by:

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

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

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

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

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

Since the acquisition completed on July 8, SoftLayer is being transitioned into the new IBM Cloud Services division headed by Jim Comfort, to offer a portfolio of services to IBM and SoftLayer clients, ISVs, and channel and technology partners.

With the combined offerings IBM is targeting the two cloud worlds that it believes best define the current market:

• The cloud-enabled world: with traditional applications, middleware and system of record environments e.g. ERP, where the number of existing and legacy applications that a company has can run into tens of thousands.  Here, cloud can help generate cost savings and transformation through measures such as hosting in a mixed environment of on-premise /hybrid cloud and virtualization
• The cloud-centric or cloud-native world - dominated by newer systems of engagements such as collaboration, social media interfaces and composable applications e.g. interactive dashboards. Applications in this world were developed to operate in a cloud environment from scratch.

Client requirements and solutions can span the two worlds. This is leading to different cloud conversations on the demand side of the market. A lot of CIO conversations are still about cloud enablement through measures such as consolidation and virtualization, focused on cost reduction. At the same time, business users want to see faster deployments and agile IT to increase speed to market. There are also different conversations to have with clients at the different cloud levels:

• Cost reduction, agility and faster deployment at the IaaS level
• Speed to market and deployment agility at the PaaS level
• How to compose multiple solutions together at the SaaS level.

With SoftLayer IBM is looking to enhance/complement its existing SmartCloud capabilities, allowing it to have these different conversations with its clients and to offer services that span the private and public cloud spectrum, the cloud-enabled and cloud-centric worlds as well as the different layers of cloud IaaS, PaaS and SaaS. With SoftLayer, IBM is looking to tap into the Internet-centric IaaS, designed for web native, performance-intensive applications particularly focused in the areas of mobile, social, gaming and analytics.

Overall, IBM has an embarrassment of riches when it comes to cloud capabilities. Prior to its acquisition of SoftLayer, which reportedly cost ~ $2bn, the company had already spent ~ $3bn on its cloud portfolio. This level of investment is not particularly a surprise: IBM has experience of evolving its portfolio to remain competitive. Over its 100 year lifetime, the company has proactively spotted emerging trends and morphed into new business areas when the time was right. Examples include:

• The disposal of its PC business years before the smartphone & device market derailed the laptop market
• The scrapping of its strategy not to sell software applications, in the mid-noughties, that led to it becoming a major global supplier of analytics applications through a series of acquisitions.

A current example is the imminent disposal of its CRM-related BPO services to Synnex.

With its acquisition of SoftLayer IBM, is increasing focus on the higher margin automated cloud provisioning business. It is leaping to next generation cloud technology with the intention of reverse engineering its capabilities into SoftLayer’s advanced automation. With this move, it is leaving behind traditional IT infrastructure outsourcing with a heavy dependence on labor arbitrage, an activity which has seen margins decline with the rise of Indian-centric vendors and their RIM offerings. The same vendors are also targeting the datacenter outsourcing renewals market in Europe and U.S. The expansion of IBM’s cloud capabilities increases its competitive edge.

The capability to more or less offer every cloud option to every type of client can complicate go-to-market strategies and requires clarification around priorities and messaging. IBM needs to:

1. Educate its salesforce about the differences between, and the relative merits of SmartCloud offerings and SoftLayer’s, and a coherent and aligned go-to-market strategy for both
2. Talk to clients about choices and options and the diversity of its offerings without confusing them.

Another step in the integration of SoftLayer and its global footprint is to convert or consolidate exiting IBM SmartCloud data centers to take advantage of SoftLayer technology. As they are, the two sets of data centers are not compatible. While the addition of SoftLayer's automation to some IBM datacenters is on the cards, changes to SoftLayer's are likely to include support for AIX and Linux, OpenStack and different types of storage. The changes are likely to take 18-24 months.

The restructuring of NPS division last year, to focus more on services, combined with a number of contracts starting in 2012 helped improve NPS revenue. Contracts that started in 2012 include:

• The Blue Badge Improvement Scheme
• Athena - the managed service for data sharing by Essex Police and six other forces

NPS is also more agressively marketing its housing software internationally, reporting expansion in New Zealand, Australia and Canada, though no growth data was provided.

NPS' £170m contract with C2k to provide an Education Cloud for all schools in Northern Ireland was a major win for the company. Other contributors to the division's revenue improvements include managed services contracts with mid-market customers in the UK, including Christian Aid, Almac, Doosan, Wolseley, AAH Pharmaceuticals and the Driver and Vehicle Agency in Northern Ireland.

Capita's selection as a preferred supplier for a £175m, 12-year deal by the Department of Energy and Climate Change (DECC) to provide Smart Meter Infrastructure Management came as a surprise. "Smart metering will be the biggest step change in the retail energy sector since the industry was privatized, more than 25 years ago” Capita’s chief executive, commented Paul Pindar. That goes for Capita's presence in the utility sector too.

The company did not have a presence in the utility sector until it acquired Northgate Managed Services (NMS) in February 2013. Furthermore, Capita is not known for large scale IT infrastructure services. Capita talked to NelsonHall about Northgate Managed Services (NMS) having clients in the utility sector at the time of the acquisition and no doubt NMS has enhanced Capita’s ability to manage the infrastructure. Capita is still very likely to work with partners extensively to manage the national scale of requirements.

Preferred suppliers for DECC's other smart metering supporting contracts were also announced today:

• CGI (formerly Logica) for the Data Service Provider (DSP) contract to manage the volumes of transactional data, in an 8-years deal worth ~£75 million.
• Telefonica for the Communications Service Provider (CSP) for the central and southern regions, in a contract worth ~ £1.5bn over 15 years.
• Arqiva for CSP the northern region, a contract worth ~ £625m over 15 years.

NelsonHall will cover the awards in more detail when the contracts have been finalized.

NelsonHall's analysis of NMS' acquisition published in February 2013: http://www.nelson-hall.com/research-programs/tracking-service/industry-insight-database/?avpage-views=article&id=77391&fv=2