NelsonHall recently visited the TCS Pace Port innovation center in Amsterdam, the first Pace Port opened by TCS in Europe in May 2021 following a delay caused by the pandemic. 

TCS is not unique in having opened facilities designed to foster collaboration and innovation to address clients' business challenges and new requirements. In itself, the broad concept of the Pace Port can be seen in all the leading IT services majors that have opened innovation centers. But not all these facilities have been well designed. Furthermore, the extent to which some are able to support their company's underpinning capabilities or broader positioning can vary. At their very worst, some of the earlier innovation centers visited by NelsonHall have been reminiscent of lipstick on a pig.

TCS Pace Ports Used to Gain Commitment from Key CXO Stakeholders

For TCS, the Pace Port is a key asset. In an approach that is characteristic of the company, expansion of the network has been considered rather than hasty: a second Pace Port in Europe opened last year in Paris, and before the end of this year, TCS will be opening one in London: this will be the eighth globally.

TCS' latest annual report has the slogan ‘Innovate.Adapt.Thrive’, a clear response to the current volatile economic and political environment.

Where a few years ago, TCS was primarily targeting what it called 'Growth and Transformation' (G&T) initiatives by large enterprises (typically large scale and multi-service line opportunities including advisory services, application migration and modernization and data-driven analytics), today there is also a focus on being well positioned for securing work where the client's discretionary budgets are curtailed or uncertain, engagements where the focus is on shorter-term cost and optimization propositions, typically improving business efficiencies. Accordingly, while supporting its clients' growth and transformation initiatives remains very important to TCS, the company increasingly positions itself as an ‘all-weather’ partner, with Pace Ports supporting both types of opportunity.

Potentially more valuable to service providers for sustaining long-term and expanding relationships are short, discrete engagements where they can deliver a demonstrable value add to the client's business – transforming perhaps, but not a full-blown enterprise-wide G&T initiative. Being close to the client, having a detailed understanding of their business environment, possessing broad industry domain knowledge, and having access to stakeholders outside the CIO office are all critical to this. To be seen by your major clients as a full-service partner capable of supporting them in their digital transformation journeys requires both CIO and CXO access. And the TCS Pace Port is a key element in this. See our blog on the TCS Pace Port in New York: TCS Pace: Integrating Capabilities to Drive Innovation - NelsonHall (nelson-hall.com).

Amsterdam Pace Port Key to Driving Continental European Revenue Growth

TCS is today a significant player in Europe, generating nearly $4.2bn in revenues in the region in FY23, and its business in Europe is now roughly the size of its longer-established U.K. business. Perhaps surprisingly, TCS is only slightly larger than Infosys in Europe, although globally it generated nearly $10bn more in revenue in FY23 than Infosys. And recent CC growth in Europe has been trailing even the U.S., which is currently sluggish for everyone. Expect to see TCS Europe catch up over the next two years, getting closer to the strong growth the company has been enjoying in the U.K. And, in TCS fashion, this will not be achieved by acquisition activity, neither for scale nor for expertise, though captive carve-outs are always a possibility.

Within Europe, key regions for TCS are France, Germany, the Nordics, and more recently the Netherlands, where TCS aspires to be the largest systems integrator by revenue. The Amsterdam Pace Port is an important asset for this, as is TCS's role as the lead sponsor of the Amsterdam Marathon. In addition, its PACE Internship Program in Amsterdam has a batch of students pursuing Masters in Innovation & Digitalization.

TCS has ~300 clients in Europe, having doubled the number of new clients yearly since 2020. It has a nearshore presence in seven European countries, with major hubs in Hungary and Poland.

Key sectors in Europe for TCS include the obvious suspects of banking & financial services, insurance, and pharma/chemicals, also retail and postal services. TCS is also becoming more active in the transportation sector. Recent major deals include ones with Athora Netherlands, Bayer, Tryg, bPost, PostNord, and Versuni (formerly Philips Domestic Appliances). Recent new logo wins include Bane NOR, Outokumpu, Equans, Sandvik, SKF, TaP, and Airbus.

In the U.K., TCS has 23K FTEs and works with 48 FTSE companies. The company is looking to develop greater presence in currently underserved sectors including general insurance, the public sector, education, wealth & asset management, and media.

Contextualization is a Key Pace Port Success Factor

TCS refers, like Accenture, to its Innovation Architecture, which comprises its:

• Foundational research, in areas such as deep learning & AI, robotics & autonomous systems, behavioral and social sciences, and data & decision sciences
• COIN (co-innovation network), includes 100+ academic partners and 2.5k start-ups
• TCS PACE philosophy and the Problem to Value (P2V) innovation value proposition
• The Pace Port facilities, which serve as physical manifestations of the PACE philosophy.

TCS Pace Port Amsterdam is a hub where TCS teams are able to co-innovate with European clients, guiding them through the discovery, definition, refinement, and delivery phases of innovation, leveraging rapid prototyping techniques. TCS describes its Pace Ports as ‘platforms to identify business triggers, drive innovation at speed and scale, and accelerate the problem-to-value journey’.

TCS works with the client to develop a portfolio of MVPs as demonstrable innovation examples that the client can use to harness wider commitment from within their organization, with MVPs delivered in 30/60/90 day cycles.

Models used by TCS in the Pace Ports include:

• The Agile Innovation Cloud (AIC), brings together consulting, design thinking, and TCS' ecosystem and technology capabilities. A team from the client organization and TCS work together in proceeding from business problem definition to ideation, taking a strong outcome/business value orientation and then selected agile development builds, using rapid sprints
• TCS and client teams periodically review AIC innovation outcomes to deliberate on and fund identified MVPs for production deployment. The model helps clients gain visibility and momentum
• The Clay Map, an innovation portfolio model based on thinking from Clayton Christensen (who was a board member of TCS). It serves as a guide for creating a balanced portfolio of innovation ideas.

Workshops at TCS Pace Ports always involve a senior business stakeholder who can influence the company's direction, not just the CIO. The aim is to help clients find consensus on common innovation objectives and harness attention from, and involvement by, senior execs to the innovation agenda. TCS recognizes that it needs to continue to do more to increase its levels of relationship with non-technical CXOs.

A key Pace Port success factor is contextualization, with TCS typically carrying out 6-7 weeks of preparation to prepare the ground with other members of the client organization prior to the session with the key stakeholders. Inclusion of cross-industry knowledge is important.

The TCS Pace Port in Amsterdam currently hosts ~2 clients per week.

Beginning to Use GenAI for Initial Idea Generation

Overall, there is a very clear focus on helping clients exploit emerging technologies like AI/ML, AR/VR, IoT, blockchain, and robotics in building rapid prototypes. At TCS Rapid Labs, niche technologies like AI/ML, AR/VR, IoT, blockchain, and robotics help build rapid prototypes, cutting down on the cost and time to innovate.

TCS provided sessions demonstrating its thinking and related IP in four areas: the future of retail, intelligent banking, railsense, and smart city. The future of retail demonstrated a vision for the creation of a retail store digital twin, done in aggregate across stores. At the same time, the rail demonstration provided a vision for an intelligent railway station, combining indoor and outdoor navigation, and an enhanced onboard traveler experience, including directing passengers to vacant seats.

TCS also demonstrated using GenAI for idea generation to stimulate discussions with executives. Senior executives can be reluctant to brainstorm in public. So GenAI is starting to be used to overcome any initial social difficulties, act as an alternative to the use of focus groups, and facilitate brainstorming conversations with stakeholders. TCS demonstrated the use of GenAI for idea generation for innovative approaches to chronic pain management. This used multiple personas to generate ideas for three scenarios: logical/low risk, creative, and disruptive/challenging the status quo.

Driving Client Innovation and Pace Usage with Innovation Funds

Innovation funds are a key mechanism for driving client innovation and Pace adoption, and TCS is now including these as addenda to MSAs, typically with a value of 1% of the overall contract. TCS typically contributes 2-5 personnel who create a backlog of ideas and create swim lines of projects.

TCS is also embedding TCS Pace into proposals to new clients.

However, TCS prefers to charge for every Pace project to ensure clients take these sessions seriously.

IBM Consulting recently held a two-day analyst event for its European business (a significant region for IBM Consulting). Against an ongoing backdrop of uncertainty for client organizations in many sectors, the tone overall is quietly confident, buoyed by recent client wins and progress in a number of internal initiatives.

At a similar event seven months ago, there were clear emphases on IBM Consulting’s partnership ecosystem and on underlying capabilities in consulting-led, garage-style engagements and industry knowledge in support of verticalized offerings. We noted at the time the obvious advantages in being part of the IBM group, including having access to a client base of large enterprises who are incumbents in their markets (and thus pushing for digital transformation), and of course the ease of collaborating with IBM Technology for its cloud and AI assets (see IBM Consulting Strengthening Partnerships to Drive Cognitive & Cloud Consulting Growth - NelsonHall (nelson-hall.com).

Unsurprisingly, the overarching message today is exactly the same. IBM Consulting continues to be a growth vector for IBM Group, delivering topline growth, both at the global level and in Europe, and margin improvement in 2022. Full-year IBM Consulting revenues of $19.1bn were up 14.9% in CC (up 7.1% as reported), with all three business areas (Business Transformation, Application Operations, Technology Consulting,) delivering double digit CC growth.

Recurring themes throughout the analyst event included:

• Macro offerings that look at organizations’ key priorities
• Ongoing development of strategic partnerships
• Key findings from the latest CEO study (under embargo at the time, now published).

Macro offerings around four themes that span the portfolio

At the recent IBM Think customer event, IBM Group launched its ‘Seven Bets’: recommended actions to take in response to seven trends (GenAI, sustainability, profit, digital products, CX, metaverse, the new social contract). Expect to see marketing across the group focus on these.

Meanwhile, IBM Consulting in EMEA has launched four macro campaigns, with various offerings bundled into broad themes that are high among clients’ current priorities:

• Cost and productivity
• Future proofing
• Customer and product transformation
• Sustainability.

Both business-led offerings (e.g., BPS, Talent & Transformation) and technology-led are covered within these four themes. There appears to be an increasing coherence in the value propositions across the company’s broad portfolio; a coherence that historically was not always the case.

Our note on the November 2022 event commented on a bigger push for large deals; a recent win which illustrates IBM Consulting competing against best-in-class opposition is a S/4HANA migration deal at Diageo, won against a well-established incumbent. Among other winning attributes, IBM Consulting highlighted its experience in SAP S/4HANA implementations in the CPG industry.

Strategic partnerships

IBM Consulting’s partnerships have become much richer in the last five years (when there was essentially just one strategic partnership: with SAP). In particular, the Kyndril spin-off has helped IBM Consulting to open up to hyperscalers, in particular with Microsoft Azure and AWS (each of which accounts for ~$1bn in revenues). In aggregate, IBM Consulting’s strategic partnership bookings were up over 50% in 2022, with Azure and AWS more than doubling. This emphasis on developing the partnership ecosystem is evident across all of IBM Group (for instance, in Q4 2022, a series of new IBM Software offerings were made available as-a-Service in the AWS marketplace, and Red Hat continued the expansion of its offerings in hyperscaler marketplaces). But the loosening of the strings to other IBM divisions introduced by Arvind Krishna has greatly benefited IBM Consulting.

We expect to see more types of partnership announcement in 2023/4, including those focused on industry solutions and those expanding its capabilities in generative AI. Indeed, the week after the analyst event, IBM Consulting announced an expansion of its partnership with Adobe, launching a portfolio of Adobe consulting services to help clients navigate the generative AI landscape, leveraging Adobe’s AI-accelerated Content Supply Chain solution. IBM Consulting recently announced its Center of Excellence for generative AI, part of IBM Consulting's much larger global AI and Automation practice, stating that the CoE has around 1,000 consultants with generative AI expertise. IBM Consulting emphasizes assets such as the IBM Garage for Generative AI, IBM’s agile approach to co-creating with clients, to help them fast-track innovation in foundation models for generative AI.

IBM 2023 CEO Study: Cost Take-Out Top Priority; GenAI Top of Mind

Several discussions over the two days of the event referred to key findings from IBM’s 2023 CEO study, under embargo until now, about their top priorities and challenges over the next two to three years.

This latest study finds that the highest priority of the CEOs surveyed is improved productivity or profitability. Product and service innovation has also jumped up in importance, to second place. Customer experience has been pushed down to third place. No great surprises there given current macroeconomic conditions. We noted that, reflecting the current demand by many organizations for their IT service providers to be able to deliver in-year cost savings, a number of presentations featured case studies illustrating IBM Consulting achieving this in different areas of their offerings portfolio, not just in obvious areas of cost take-out.

Another key finding of the study looks at the current pressures on organizations, across nearly all sectors, to adopt generative AI models. It highlights that where the majority of the CEOs surveyed express a high degree of confidence in their organizations’ capabilities to incorporate generative AI into processes and products, this confidence is not shared by other senior execs. This level of disconnect is arguably not surprising: it certainly plays to the need to work with external consultants.

One session at the analyst event briefly referred to potential GenAI use cases that IBM is exploring with clients. The most advanced work to date appears to be in the U.S. health sciences and health payer sectors. For one CPG major, IBM is helping set up a GenAI CoE which will develop use cases for internal processes. In the short term, this is likely to become a common type of engagement for the IT services majors, at least until clients’ organizational functions become more familiar with how they might leverage the GenAI core capabilities of semantic search, summarization and content creation in their operations.

The quality of the client presentations talking of their experience of working with IBM was uniformly high, something that we feel is increasingly rare in these events.

There has been one organizational change since November, one that comes as no surprise: cybersecurity consulting now sits in IBM Consulting (see also our note from last week: IBM Converging Risk Scores to Optimize Cybersecurity Offering - NelsonHall (nelson-hall.com)

So what next for IBM Consulting in EMEA? The company’s recent M&A activity has centered on the U.S. – Europe and the U.K., both more buoyant markets, have not really featured. We expect this to change in the next 12 months.

We recently attended Infosys’ EMEA CONFLUENCE flagship client event and found the company quietly bullish about recent and projected performance in the region.

Europe remains a growth market for Infosys

Salil Parekh made it clear some years ago that he wanted to grow Infosys’ business in Europe, and the results are there to see.

Europe now accounts for 25% of Infosys’ global revenues and continues to be a growth market for the company, delivering substantially higher CC growth than North America:

N.B. Softness of European currencies against the U.S. dollar has meant that this has not translated into higher reported growth than N. America.

Sectorially, the business mix is significantly different from North America. Over two-thirds of revenues in Europe come from three vertical groups:

• Manufacturing: by far the largest, accounting for 28% of the region’s revenues (compared with under 13% globally). To take one sector, automotive, clients include Daimler (a top 3 account globally), Volvo Cars, and Mercedes Benz
• Financial services: at 21%, significantly less than the U.S. Clients include BNP Paribas and Deutsche Bank
• E&U, Resources and Services: 19% (compared with 12% globally). Clients include E.ON and Uniper.

Recent expansion of localization

The region is served by 19.4k personnel, of whom 71% (nearly 13.8k) are based locally (including those on visas). While it was mentioned as a priority when Salil Parekh arrived as CEO nearly four years ago, momentum to increase localization in key European geographies has been more recent.

In France, for example, the proportion of personnel who are local hires has increased from just 25% in FY20 to 47% in FY22 and should hit 50% this year. In support of this, Infosys has introduced new internship programs in France and grad recruitment programs in selected universities.

Infosys is now looking for new growth opportunities in Europe in 2023 to come from:

• Expansion in the Nordics
• Expansion in the region of its creative, branding, and experience design business, leveraging the recent acquisition of oddity
• Large deals, account expansion, and new account openings.

The Nordics

Infosys already has some marquee clients headquartered in the Nordics, for example, KONE, Telenet, and Posti, and is looking for faster growth in the region.

In Sweden, it has just opened a new proximity center in Gothenburg, its sixth in Europe.

Its recent acquisition of BASE life science, a LS sector technology consultancy headquartered in Denmark, brings expertise in medical, digital marketing, clinical, regulatory, and quality and data science (focused on data and AI in clinical trials and drug development). Infosys intends for BASE to expand its expertise into the consumer health, animal health, MedTech, and genomics segments. BASE has partnerships with Veeva, IQVIA, and Salesforce and enjoyed strong growth in recent years. The acquisition, for around €110m including earnouts, augments Infosys’ life sciences expertise, a sector where it has arguably been under represented and which continues to enjoy strong growth.

Its acquisition four years ago of Fluido brought in substantial local Salesforce capabilities: as well as a Platinum consulting partner, Fluido is a Salesforce training delivery partner in the Nordics. Fluido brought in ~240 employees and offices across Finland (Espoo); Sweden (Stockholm & Gothenburg); Norway (Oslo); Denmark (Copenhagen); and Slovakia (Banská Bystrica).

Expect to see more bolt-on acquisition activity by Infosys of specialists in the region, and some larger-scale personnel transfer outsourcing deals.

Internationalizing oddity

Infosys’ recent acquisition (for up to €50m including earnouts, etc.) of oddity, a Germany-based digital marketing, experience, and commerce agency, strengthens its creative, branding, and experience design capabilities in central Europe. As part of Infosys’ digital experience and design offering, oddity will become part of WONGDOODY. This is a sizeable acquisition by Infosys to expand WONGDOODY into Central Europe. oddity, which will rebrand as WONGDOODY, comprises four specialist units in Germany (plus a 40-person operation in Taipei and Shanghai and a software development team). As well as bringing an onshore presence in Germany to WONGDOODY, it beefs up WONGDOODY’s capabilities in branding, and the oddity waves unit adds some 3D/CGI production capabilities.

While WONGDOODY in Europe has worked for Infosys IT services clients such as Telenet and BPost, there remain significant opportunities for Infosys to leverage WONGDOODY to expand its relationships with clients outside the CIO function in supporting their digital transformation initiatives.

Sales: large deals/account expansion/new account openings

Large deal wins have played a major part in fuelling Infosys’ topline growth since 2018, with Europe having some significant recent deal wins with the likes of Telenor, Deutsche Bank, Volvo Cars, and Curry’s. Infosys claims its current pipeline for large deals in Europe is particularly strong.  

Infosys’ TITAN account expansion program has yielded results in the increased number of $50-100m accounts globally, from 26 at end FY22 to 38 at end H1 FY23 (the number of $100m+ accounts staying stable at 39). With enterprises being more cautious in awarding huge multi-year transformational contracts, the focus is now on expansion within high-potential accounts in the $10-50m revenue range and getting them closer to that $50m area.

With sales hunting initiatives, there has been considerable success in winning new marquee accounts in Europe: of the 52 new clients landed over the last 18 months that each have revenues of $10bn+, Europe accounts for 21 (over 40%). Many of these are $10m+ TCV deals. Infosys claims its pipeline of $10m+ deals from new accounts remains strong. Some of these are potential vendor consolidation initiatives: initiatives that we expect to see more of as attrition levels continue to fall.

Unsurprisingly, current demand is dominated by cost take-out themes such as infrastructure modernization and Tech & Ops deals. Looking ahead, Infosys is interested in captive acquisitions and is also likely to benefit when vendor consolidation initiatives increase.

Planned technology investments in Europe reflect the focus on manufacturing sectors; areas of interest include private 5G for IIoT use cases and smart factories. At the moment, Infosys has two innovation centers in Europe (in Dusseldorf and Bucharest, which is also a cyber defense center) and two design studios (Dusseldorf again and London). Expect to see a few more opening over the next 24 months, with perhaps more of an industry emphasis in some of these.

IBM Consulting recently held its first analyst and advisor event in Europe since IBM’s spin-off of its Global Technology Services infrastructure business (now Kyndryl) and the renaming of the former IBM Global Business Services division to IBM Consulting just over a year ago.

When IBM had announced its intended spin-off of the GTS division in October 2020, new CEO Arvind Krishna declared this would free up the rest of IBM to focus on the higher margin, higher growth hybrid cloud market (notably the RedHat OpenShift business) and its cognitive computing businesses. IBM Consulting has also benefited from other recent developments, and the business now looks more relevant as a major IT services business, and less of an add-on to IBM Technology businesses.

Partnership Ecosystem

A key priority across the group has been expanding IBM’s partnership ecosystem. An example of this is Infosys BPM’s recent opening of a Center of AI and Automation in Poland, in collaboration with IBM, following several years of joint work in identifying new use cases and building solutions to enable clients to innovate in hybrid cloud environments.

For IBM Consulting, this increased emphasis on developing the partnership ecosystem includes a particular focus on AWS and Microsoft Azure and increasing the number of certifications (reaching 17k certifications in AWS, 33k in Azure by end FY22); and of course, IBM Cloud (7k certifications). The Kyndryl split and the ecosystem play have broadened opportunities for IBM Consulting to work with the likes of AWS: that is now a $1bn business, and IBM Consulting’s alliance program is aiming to make each of its strategic partnerships $1bn businesses like AWS. IBM Consulting emphasizes that it no longer promotes IBM Technology as a priority. Nevertheless, Red Hat remains an important revenue driver, with IBM Consulting claiming the #1 Red Hat service partner position.

As well as partnerships with hyperscalers and the major ISVs, IBM Consulting’s relationship with KPMG is notable: this has been important in providing access to line of business heads such as CFOs for business transformation discussions; expect to hear more about this relationship.

IBM Consulting claims its partnership relationships have evolved from 1:1 deal-specific relationships that was the norm just 18 months ago and that today, 60% of its engagements involve technology solutions from several partners. In a somewhat ambitious claim, IBM Consulting says that moving into 2023 it is aiming to develop its role as a partnership ‘orchestrator’ in deals involving multi-vendor solutions, responsible for managing T&C complexities.

Managing Recent Growth, including Increased Acquisition Activity

IBM Consulting has been a growth vector for IBM, delivering topline growth of around 16% in the last four quarters, of which around 14% is organic. Hybrid cloud is clearly the growth vector, delivering 28% topline growth, led by activity in Technology Consulting around application modernization on the hybrid cloud with Red Hat OpenShift.

IBM Consulting is benefiting from a dramatic expansion in acquisition activity since the arrival of Arvind Krishna as CEO. Notably:  

• Some transactions have brought in specific skills such as Microsoft Azure specialist NeuDesic (1500+ personnel) and Nordcloud (cloud advisory and cloud management with 430+ certifications across AWS and Azure)
• Others have increased IBM Consulting’s scale in geographies where it is light, including France and Spain in Europe; for example, Bluetab Solutions Group, which has brought in ~700 employees, many of them based in Spain.

Expect to see more acquisition activity of both types. While the recent downturn in company valuations is likely to spur inorganic growth, IBM Consulting is unlikely to pursue any very large transactions but continue to focus on companies with a few hundred rather than thousands of employees.

In terms of the underlying organic growth, the change of name from GBS to IBM Consulting has been helpful with recruitment, making the company a more attractive prospect for personnel attracted by the notion of ‘consulting’ and working with clients.

IBM Consulting has grown from 120k to 160k employees over the last 18 months. Across the workforce, there is a strong focus on skills development with an emphasis on badging/certifications. We heard of 40k cloud certifications recently, 23k Microsoft Azure badges, 15k AWS and 30k SAP. In support of this drive, compensation is now linked to skills rather than to performance – which of course demands accurate workforce planning. We are seeing a growing trend by IT services providers to increase the level of bonus attached to skills competencies: IBM Consulting appears to be pushing this hard.

Looking for More $50m+ Deals

IBM Consulting is taking a vertical, rather than geography-based GTM approach, and is looking for larger deals ($50m+). In support of this, there is a strong emphasis on assets such as:

• IBM Garage: IBM Consulting claims it is now being used in two-thirds of engagements. While there are broad similarities to approaches that have been developed by other leading large systems integrators in recent years, IBM Consulting is finding its Garage methodology a differentiator in its pursuit of larger deals

• IBM Consulting Cloud Accelerator, which it describes as a ‘cloud acceleration platform designed to orchestrate a collection of expert rules, tools, technical assets and industry solution starter kits to drive rapid planning and low-touch execution for hybrid cloud journeys’. The platform houses a repository of assets and tools across home-grown catalogs and IBM products, open-source and third-party vendors. Expect to hear more about how IBM Consulting has used this with clients.

IBM Consulting’s emphases on consulting-led, garage-style engagements, its partnership ecosystem, and industry knowledge in support of verticalized offerings are not massively dissimilar from other large leading services providers. There are obvious advantages in being part of the IBM group, including having access to a client base of large enterprises who are incumbents in their markets (and thus pushing for digital transformation), and of course the ease of collaborating with IBM Technology for its cloud and AI assets.

But overall, IBM Consulting was at pains to emphasize how much it has changed its technology ecosystem priorities in the past two years. We welcome this: the past few decades show that IBM’s conglomerate approach to IT has not particularly led the growth of its services activities, whereas now IBM Consulting is able to benefit from the momentum in AWS and Microsoft Azure. Kyndryl of course remains an important partner, not least because of the shared client base and its status as a tier-one managed mainframe service vendor. However, the Kyndryl partnership will possibly become more transactional as IBM Consulting relies more heavily on its own investments in AIOps.

We believe that IBM Consulting is beginning to distinguish itself more clearly from IBM Software and Infrastructure. Its expanded partnership ecosystem, assets such as IBM Consulting Cloud Accelerator, the development of more industry-specific playbooks, and a more organized approach to winning large deals will all help fuel future growth. That is not to say there are pockets of the portfolio that are in the shadows. With the exception of Talent and Transformation, there is perhaps more work to be done in messaging around some of the ‘Business Transformation’ offerings.

In its Q3 FY22, TCS delivered its sixth consecutive quarter of organic growth around the 15% mark. Despite the uncertain macroeconomic background, TCS has a strong pipeline for at least the next two quarters and has yet to see any softening in the market. For example, it was expecting some softening in Europe in the September quarter but instead achieved both increased revenue growth and a strong order book.

Nonetheless, enterprises are typically starting to focus more on execution rather than envisioning and on programs with a clear, well-defined set of outcomes. TCS perceives that some enterprises might be becoming more realistic about some of their more fanciful projects with long-term RoI. This perception ties in well with recent NelsonHall research, which shows a continuing high emphasis and level of intention for short-term transformations with high RoI, but with some longer-term projects with less certain RoI being put on hold.

TCS is not experiencing widespread vendor consolidation within accounts but is seeing some increase in share within some of its major clients as they push incremental business towards the stronger vendors in their vendor portfolios.

Renewed Travel also Boosting Client Relationships

The normalization of travel is also now working in TCS’ favor. During lockdown and travel restrictions, TCS had to extensively use contractors for minor roles needing personnel onsite at client locations for periods of, say, 3-4 months. Now TCS is reverting to sending visa holders from India, which has the triple benefit of improving both customer and employee satisfaction and delivering cost reduction.

Nevertheless, like its peers, TCS still faces the widespread issue of managing the return to the office. Employees in IT services companies typically became very comfortable working from home during the pandemic, but companies are finding that this has had an impact on company culture and strength of allegiance, among other things. However, managing the return to the office has to be done carefully in order to avoid alienating staff. TCS’ approach is to request middle and senior-level personnel to typically work in the office most days, encouraging attendance by more junior personnel, some of whom now go into the office 2-3 days per week, and others continuing to work primarily from home.

Pursuing Bold Ambitions

In a departure from its traditional reticence, the TCS management is now openly referring to ambitions for the company to reach $50bn in annual revenue – and to do so without diverting from its strategy of never acquiring to gain scale.

TCS is looking to get to $50bn in less time than it took to move from $10bn to $25bn, a period of 10 years. This is an aggressive target, particularly given TCS’ emphasis on organic growth. However, with technology valuations softening, TCS may become more active in acquiring for new capabilities: any such transactions would be bolt-ons. After reaching $5bn in FY08, TCS has typically taken around three years to add each subsequent $5bn to its revenues, reaching $10bn in FY12, $15bn in FY15, $20bn in FY19, and now $25bn in FY22.

Changing the Organizational Structure to Enhance Client Trust and Hasten Account Growth

To achieve its goal of getting to $50bn in less than ten years and facilitate account revenue growth, TCS has made some changes to its organizational structure and adopted a novel, confident and distinctive approach to handling different tiers of accounts.

Firstly, it has taken steps to reduce the delivery uncertainty that enterprises can have when they have modest spend with a new vendor. Previously, TCS’ account management was verticalized, with the potential danger of business unit heads focusing on the higher revenue accounts to the detriment of the lower revenue accounts. All TCS mainstream accounts are typically Global 2000 enterprises, so even the lower revenue accounts have massive potential.

To address this issue and make smaller accounts feel they are important to TCS, it has created a new business group, Relationship Incubation Group. This group works with the ~500 newly acquired clients using a high-touch engagement model to overcome delivery anxiety and build a foundation of trust. The new unit is horizontal rather than vertical and is organized geographically into “small regions” with regional managers. It strongly focuses on delivery and client handholding and avoids cross-selling and up-selling.

Once trust is established, and account revenues are, say, $5m to $10m, the governance of the account transfers to Enterprise Group, which is geared to upselling and cross-selling to facilitate clients consuming a much wider range of TCS services and accelerate revenue growth in each account. This group adopts TCS’ traditional account management approach and is entirely verticalized.

Finally, the largest clients, those with over $100m spend with TCS and who view TCS as a trusted transformation partner, are governed by TCS’ Business Transformation Group. TCS currently has 59 clients that generate at least $100m in annual revenue, an impressive number that will clearly continue to increase.

TCS is not a company that regularly states bold ambitions, but when it does those ambitions are invariably achieved: the only question is when TCS will reach its $50bn target. Will it be as early as FY27?

With a new Chairman appointed 15 months ago and a new CEO in place for the last four, Wipro has seen a significant changing of the guard – much has been made of the fact that Thierry Delaporte is Wipro’s first non-Indian CEO appointment. The announcements made in a recent event for financial analysts (its first such event in five years) reveal some major shifts happening within the company. Some of these are course corrections, others are more radical changes: all are initiatives that we believe will help improve Wipro’s competitiveness over the next few years.

Each of the initiatives discussed below is designed to support what Chairman Rishad Premji highlights as a new ‘obsession for growth’ at Wipro:

• Nurturing new culture
• Change in operating model to improve client proximity: structure, the GAE
• Prioritizing (and de-prioritizing) target markets
• Formalizing approach to large deals
• Increasing M&A.

Culture Change

Admitting publicly that you are looking to drive a major shift in culture, while of course retaining core values (the ‘spirit of Wipro’) is brave, as it acknowledges that changes need to be made. It is not appropriate to comment here on perceptions of the legacy culture at Wipro, but the success of this new drive to nurture a culture that has more of a growth mindset is arguably critical to Wipro’s future success. In its attempts to drive cultural transformation across the company, Wipro has elected to adopt a top-down approach, appointing a Chief Culture Officer at SVP level, and encouraging its leaders to be advocates by exhibiting five ‘habits’ in action.

The five habits to be espoused by all Wipro employees are:

1) Being respectful

2) Being responsive

3) Always communicating

4) Demonstrating stewardship of the company (rather than focusing on individual priorities)

5) Building trust.

In sum, the application of these attributes should have clear benefits. For example, internally, it should lead to less of a hierarchical feel within teams and units, more consistency in work practices across the organization, stronger communications and teamwork, and also help with global diversity. And in relationships with clients, it should support Wipro’s ambition to be regarded more as a champion challenger by them, rather than being judged just on its abilities in execution.  

Like all the major IT services players, Wipro has been assiduously rolling out talent re-skilling programs for some years now. These efforts will continue and be intensified. In addition, and reinforcing the ambitious culture change, we should also expect to see much more diversity at Wipro, including (and presumably not limited to) nationality and gender. Having a more diverse workforce, which will require changes in hiring practices and HR policies, will be a critical element in Wipro’s efforts to improve client proximity and reinforce portfolio development, and, importantly, become an employer of choice.

Change in Operating Model: ‘Simplicity over Perfection’

In short, Wipro is introducing a much simpler operating model, with effect from January 1.

The primary P&L will be four strategic market units (SMUs):

• Americas 1, organized by sector and covering all of Wipro’s major target verticals. Headed by Srini Pallia (was President, Consumer business vertical)
• Americas 2, also organized by sector, including BFSI, manufacturing, hi-tech, E&U. Headed by Angan Guha (was head BFSI vertical)
• Europe, organized by region: UK & Ireland, Switzerland, Germany, Benelux, Nordics, Southern Europe. Head to be announced
• Asia Pacific, Middle East & Africa (APMEA), also organized by region: Australia/ New Zealand, India, West Asia, South East Asia, Japan, South Africa. Headed by NS Bala (was President E&U vertical).

So, what is Wipro looking to achieve by moving away from a vertical-led operating model to a geography-led one, just as Accenture has done recently (also following the arrival of a new CEO)?

Firstly, the move to this model is intended to improve client proximity, particularly outside the U.S. Delaporte acknowledges that one challenge Wipro is facing (one that we have noted for years in our Key Vendor Assessments on the company) is that its revenue growth has remained largely dependent on the U.S. market: apart from the U.K., which accounted for around 10% of global revenues last FY, Wipro has lagged most of its peers in scaling in other key growth markets. In FY20, for example, just 8% of its global revenues (~$660m) came from Eurozone countries, led by Germany and France. Even excluding the impact of COVID-19, Wipro has underperformed in Europe in recent years: looking ahead, Delaporte is looking for Europe and APMEA to contribute around 50% of Wipro’s incremental revenues globally over the next few years.

Secondly, the new model is much simpler than the one it is replacing. A less centralized model with fewer P&Ls should mean more accountability at the local level, faster decision making, for example in deal pursuits, and more agility generally.

Thirdly, Wipro intends to be more selective in prioritizing specific sectors within its identified target markets. Delaporte cites as an example Switzerland, where Wipro’s focus will be Life Sciences, BFSI, Heavy Industries and Consumer. The SMU leads having oversight of industry sector coverage within their regions should enable a more focused approach in prioritizing specific markets at a regional and even country level. This is a move from an approach that has typically looked at sectors through U.S.-centric lenses; Europe and APMEA in particular are expected to benefit from a more regional approach to target sectors and a more intimate grasp of local markets.

The four SMUs are supported by just two global business lines (GBLs):

• Integrated Digital, Engineering & Application Services (iDEAS), includes domain and consulting, applications & data, engineering and R&D and Wipro Digital. Headed by Rajan Kohli (was president, Wipro Digital)
• iCORE, includes Cloud & Infrastructure Services (CIS), Wipro Digital Operations & Platforms (DOP) and Cybersecurity & Risk Services (CRS). Headed by Nagendra Bandaru (was President cloud, IT infrastructure services, and DOP).

The GBLs house Wipro’s industry domain capabilities in addition to the service line practices and delivery.

As with the go-to-market, Delaporte is introducing simplicity into portfolio management and the delivery model. (Wipro has been reporting along six industry groups and five practices).

One obvious benefit is improved economies of scale.

Moving to just two GBLs should also help in prioritizing portfolio investments, with a focus on developing integrated offerings that span different practices and are designed to address clients’ business challenges or help them in creating new digital business models: ones that are what he calls ‘at the intersection of strategy, design and technology’. This will be an important move for Wipro: our perception is that Wipro Digital was not well integrated with the rest of the company, limiting the company’s ability to position strongly to clients looking for innovation or transformation partners. Similarly, the new model should also assist efforts to target business stakeholders beyond the CIO.

Unsurprisingly, some Wipro execs are leaving, including Milan Rao and Bill Stith at the end of the year, and Bhanumurthy BM and Anand Padmanabhan over the next few months – but so far, the number is relatively low for a change of CEO and a strategic refresh. As well as new roles such as the Chief Growth Officer, we do expect to see much greater diversity in the regional leadership soon.

Formalizing Approach to Strategic Clients & Large Deal Pursuits

A move to strengthen large account management was to be expected, as Wipro has for many years been lagging its Indian-oriented peers in the number of very large accounts. While FY18 saw a big jump in the number of $100m+ accounts (up from 10 to 15, since slipped back to 13), there has essentially been no movement in the number of $75m+ p.a. or $50m+ accounts since FY18. At end Q1 FY21 (the last quarter before the pandemic began to hit), Wipro had 39 $50m+ accounts (exactly the same number as in FY18), compared with 100 for TCS` and 61 for Infosys.

Wipro’s MEGA and GAMMA accounts currently contribute around 70% of its revenue. Delaporte is looking to accelerate growth in these accounts by more formally centering the organization around the client through a new role. The Global Account Executive (GAE) not just represents Wipro in the account but, importantly, manages that account, supported by industry and technology specialists and delivery managers. Delaporte claims this to be the ‘most important pillar’ for accelerating growth at Wipro, and the GAE the most important role in the new organization. A reflection of its influence and accountability, it is just two layers below the exec committee. His target is for GAEs to constitute 25% of Wipro’s top 200 leaders within a few years.

In addition to strengthening key account management, Delaporte is looking to improve Wipro’s ability to target and land new transformational opportunities. He has acknowledged Wipro has had ‘mixed results’ in winning large deals in recent years; he hopes to improve this by setting up a large deals team that has expertise in deal structuring, including financial and commercial modelling, as well as solution development. We think this is likely to involve external hires of people with relevant experience.

Overseeing the roll out of the GAEs and the build out of the large deals team is the Chief Growth Officer, a new role, and one that is also likely to be an external hire. She or he will also have oversight of strategic alliances; unsurprisingly, there will be a push to deepen and scale existing partnerships with the likes of AWS, Microsoft, Google, Salesforce, SAP and ServiceNow. Expect to see an increase in the number of partner-centric CoEs in support of this.

M&A

Until the last few quarters, Wipro had been relatively quiet on the M&A front for a few years, since Appirio in 2016 and DesignIt in 2015. Expect to see an acceleration in M&A as Wipro looks to expand local capabilities in its target regions in platforms such as Salesforce and ServiceNow and, like Eximius Design, in engineering services in the areas of IoT, Industry 4.0, edge computing, and 5G.

Some of Wipro’s historic acquisitions had not exactly been success stories and here again there appears to be an awareness that a more structured approach is called for: it is setting up a new post-merger integration team which should help in driving synergies and in presenting a joined up face to clients and in its go-to-market.

Of the initiatives that Delaporte is introducing, some might seem on first consideration a little bold, but there is a clear design that seeks to address a range of company-specific challenges that have impeded Wipro’s growth in recent years and boost its abilities to position for the newer types of opportunities that it, and its peers, are targeting.

2021 could mark the commencement of a much stronger performance at Wipro.

Infosys BPM has reached its 18^th birthday, in many cultures the age of maturity, achieving a major milestone of $1bn in annual revenues. Infosys BPM today is a very different company from its birth in 2002 when it was set up as a JV in India with Citibank, and there have been some significant developments in the last couple of years.

We recently caught up with Infosys BPM CEO Anantha Radhakrishnan, and while he is intensely conscious that it not a time for celebrations when a pandemic is raging, there is a clear confidence about Infosys BPM’s future trajectory. While not quite celebrating, there is a quiet pride about what the company has been doing to help fight the spread of the infection in the state of Karnataka.

Delivering effective COVID-19 programs

What has been achieved in Karnataka (population 64m+) in a contact, inform and track program in a very short time is quietly remarkable (it certainly appears so to me; my own government, a nation with a similar sized population, has yet to introduce any such program). Karnataka is vulnerable to the virus coming into the state via international travellers flying into Bangalore and Mangalore airports. Its state government turned to Infosys BPM to help launch and manage a program to respond to this specific threat, also a second broader program focusing on citizens across the state.

In the first program, Infosys BPM designed and managed a program to reach out digitally to all travellers coming into Karnataka from March 1 onwards, capture their relevant health data via an app, monitor their health for 14 days, provide a help number should they develop any COVID-19 type symptoms, and also advise on quarantine procedures.

In the second larger program, citizens have been encouraged via an extensive multimedia outreach program to log relevant health and non-health information on an app or helpline number. On the basis of the data they provide, they are given advice on appropriate action to take, with help being arranged in exceptional circumstances. The system integrates with the state’s own hospital and ambulance systems. And in the event of any infection hotspots, it can be used to send localized messages to citizens living in a particular cell phone tower or village. Infosys BPM helped define the outreach strategy, designed the ‘Apthamitra’ app (‘close friend’ in the local language), and assembled a consortium of nine BPS companies that have operations in the state to operate the inbound and outreach program. This activity illustrates the maturity of Infosys BPM in its ability to design and launch a major program from scratch.

In terms of transforming its service delivery operations during the pandemic, Infosys BPM has equipped all its centers outside India to reach 95% WFH enablement. China has returned to a hybrid model with about 70% office-based employees, 30% WFH. The India BPM operations are 75% WFH enabled (the 25% including personnel not yet in production). Radha referred to having received 300 emails from clients expressing their appreciation of Infosys going above and beyond to maintain service delivery.

$1bn milestone & beyond

Against the backdrop of COVID-19, Infosys got to the end of its fiscal year achieving its 1$bn revenue target. This has been done through a combination of market-leading organic growth (nearly 17% CC growth in its FY20) and two interesting JVs set up in 2019, in both of which Infosys has a majority stake.

In Japan, Infosys has an 81% stake in Hitachi Procurement Service Co., Ltd. (HIPUS), which handles indirect materials purchasing functions for some Hitachi Group businesses in Japan. Also part of the JV are Panasonic and staffing company Pasona. Normally with JVs such as this, the primary focus is to commercialize and expand the operation. The size of the unit operated by Infosys is already significant and the immediate focus is slightly different. The initial priorities include:

• Transforming the operations by bringing in modern thinking about procurement processing, including the application of RPA, AI and analytics to streamline operations and improve the UX of buyers
• Expanding its coverage within the Hitachi Group, as well as offering indirect procurement services to Japanese-owned corporations, serving both their domestic and international needs.

The CPOs of Hitachi and of Panasonic are on the board of HIPUS, which will help in driving both of these priorities.

And in Europe, Infosys has a 75% stake in Stater, a mortgage administration services provider headquartered in the Netherlands; ABN AMRO, its largest client, retains a minority stake. As with HIPUS, there is an emphasis on digital transformation of the service (in this case, transformation of the whole mortgage and loan experience by leveraging dynamic workflow, API layers, RPA, analytics and AI), and of course Infosys will also continue to enhance Stater’s mortgage platform. In addition to developing a next-gen mortgage offering, the opportunities for growth in the JV lie in:

• Further expansion of its service offerings, for example beyond those around mortgages to adjacent unsecured loan types, also in expanding its activities in supplementary services such as risk models for fraud prevention, leveraging Infosys’ analytics capabilities
• Expansion of the client base. An obvious opportunity is expansion in Germany (though this remains a market where home ownership is relatively uncommon): for example, Deutsche Bank, with whom Infosys has a strong relationship, is a relatively small account for Stater.

These JVs are a significant expansion of Infosys BPM, one in back-office enterprise services, the other in an industry-specific offering. Infosys BPM has reached a point where its revenue mix is 60% from enterprise services and 40% from industry-specific services. Radhakrishnan’s ambition is for Infosys BPM to reach a roughly 50/50 split, with at least 30% of this being platform-, or quasi-platform, based. In the U.S. Infosys BPM has a longstanding insurance platform business with McCamish, and it is also providing mortgage services to clients including one of the largest U.S. regional banks.

As well as these JVs, Infosys acquired last year a 1,400 person contact center in Northern Ireland that has clients in the telecoms, social media, healthcare, ed-tech and fintech sectors. Its largest client is BT, also an Infosys client: here, BT benefits from the investment that Infosys BPM can make to transform this onshore service by applying digital technologies.

The year ahead for Infosys BPM

So, what might we expect from Infosys BPM over the next year? Every crisis presents its own opportunities; and while its scale is larger than anything we have seen in our lives, COVID-19 is no different. For example, there are going to be lots of BPS captives up for sale as enterprises look to raise cash: but interested vendors should be careful to select those ones that will enhance their capabilities. Infosys BPM is proactively pitching for opportunities for targeted captives of clients in the wider Infosys Group (there is plenty of scope: Radhakrishnan points out that Infosys Group has around 1,200 clients, mostly large enterprises, of whom just 200 are also Infosys BPM clients). It is possible, therefore, that Infosys BPM might be completing more structured deals in 2020, where it will look to modernize, simplify and digitally transform the operation, possibly extending its capabilities into more sectors and/or expanding its capabilities in certain back-office areas.

As it reaches its $1bn revenue milestone, the mood at Infosys BPM is more appreciative than jubilant, but there is a quiet confidence and sense of purpose as it looks to take advantage of new opportunities.

Unisys recently held an analyst/adviser meet in New York; shortly before, it had reported another set of very encouraging quarterly results, with its Services business delivering its sixth consecutive quarter of organic (CS/CC) topline growth. The double-digit organic growth Unisys has achieved in Services this year is market leading (its much smaller Technology business is lumpy by nature) and this topline growth has been supported by steadily improving operating margins. This is a very different Unisys from a few years back. The company recently raised its full year revenue guidance, and has solid medium-term growth expectations of low single-digit growth.

The engine driving the company’s topline growth in Services this year is its U.S. Federal unit, which has recently been delivering hyper growth, notably for its Cloud & Infrastructure Services (CIS), on the back of four large deals secured over the last year, including in the State sector at Virginia (VITA), Georgia (GTA), and Kansas. Some of these new logo wins are requiring significant CapEx in the first year or two (e.g. Kansas is transferring ownership of its aging IT hardware to Unisys) and they are impacting cash flow in 2019, but these are large, long-term deals where margins improve over time.

Unisys has been investing in a few key enabling assets that are underpinning a drive to productize its services; these have helped drive the recent double-digit growth in CIS and should also position it well for new opportunities, and the strong emphasis on security throughout the portfolio, something that is part of its heritage is, of course, highly relevant.

The first is Unisys CloudForte, a policy-based managed service solution for automating and managing the migration to and use of, initially, public cloud environments, specifically AWS (launched June 2018), with a solution launched in February this year for Microsoft Azure (expect to see a template for GCP in 2021), followed in May by a release for hybrid cloud environments. Development of the platform continues: November saw the announcement of additional features for CloudForte for Microsoft Azure (Cloud Architecture Navigator, and Cloud Compliance Director for cloud security posture management), and also of the availability of CloudForte for ServiceNow, for modernizing ITSM.

2020 will see further enhancements including ones using AI. Cloud Forte was developed with the federal and state sectors as the initial primary target markets, and there is a very strong emphasis on automating operations around governance, preventing cloud sprawl, and strengthening cloud security. While there has also been some early commercial sector success, for example a win with a major bank headquartered in the Middle East (an existing client for Elevate), most traction to date is in the U.S. government and public sector, where Unisys is well positioned to help organizations move away from ageing datacenter assets.

CloudForte includes products in Unisys’ Stealth software suite. Key features of Stealth include its use of identity-based microsegmentation, cryptographic cloaking and encryption of data in motion, and its ‘Zero Trust’ architecture extending from endpoints to cloud infrastructure and a “never trust always verify” approach to monitoring users, devices, data, storage, and network traffic. A recent enhancement to Stealth is its use of identity-based dynamic isolation of a bad actor or device, enabling the non-affected part of an network to remain operational. Having the NSA’s certification for its Commercial Solutions for Classified (CSfC) program enables Unisys to offer Stealth to U.S. federal agencies for protecting classified data and systems, and this has opened doors: a significant win earlier this year is for a U.S. defense agency's virtual data center, for a worldwide deployment of Unisys Stealth across several DoD organizations.

And in the commercial sector world, one client who presented at the event, a Fortune 200 company that has grown through a series of acquisitions, implementing Unisys Stealth was the first global standardization initiative in ICT. This is evidently a satisfied client; it is now also looking at Unisys digital workplace services offerings. Unisys is looking to expand its Stealth channel partnerships and has bold ambitions for the proportion of revenues coming through the channel.

A third asset which has been further developed over the last two years is InteliServe, an AIOps platform for workplace services with a focus on resolving the self-service adoption challenges. InteliServe began as Unisys’ transformation of the service desk function deployed alongside ServiceNow. The platform guides users through the fastest means of issue resolution, whether automated or live, based on the premise of achieving self-service through a conversational interaction. Elements of InteliServe for Service Desk include a cloud contact center that enables omnichannel personalized support where both virtual and live agents provide context aligned support derived from the individual’s support usage history, an Enterprise Personal Assistant/Virtual Agent (IPsoft’s Amelia) across all support channels that determines intent of an individual’s needs through human interaction, Machine Learning that dynamically triages ticket assignments, automated resolution opportunities, or where self-help can be presented to the user, and Robotic Process Automation for automation of business processes.

Arguably, Unisys has been somewhat in catch-up mode, but it has been moving fast to enhance  InteliServe, for example utilizing IPsoft’s Amelia to support more complex use cases (e.g. a lost/stolen laptop, provisioning a BYO device), UiPath to automate resolutions based on decisions made by Amelia, and also bringing in Automation Anywhere and NICE. And development of the platform continues: new features in 2020 will include AI and smart glasses for field technicians, and integration with Remedy as well as ServiceNow and integration of InteliServe with end user experience monitoring toolsets such as Nexthink to enable true proactive response to issues affecting users.

InteliServe is helping Unisys win some major service desk awards, including one in Q4 with a TCV of $214m to optimize and consolidate service desk and field services for 19 DoD Fourth Estate organizations, and one in Q2 worth $150m to support DISA's Joint Service Provider program for the management and maintenance of the DoD IT infrastructure. And InteliServe is also helping expand some commercial sector relationships including in Q3 with Nutreco and Bancolombia.

InteliServe is a significant component in Unisys’ suite of digital workplace service offerings and positions it more strongly in a market where some other major providers have been underperforming, with one major player recently announcing its intention to potentially divest this part of its portfolio.

Back in early 2018, we noted an ambition by Unisys to be seen by prospective clients as being easy to do business with, including in responsiveness and affordability, and there was a clear desire to achieve topline growth after many years of decline. Having achieved that, there is now less of an emphasis on the ‘affordability’ element and more of a play on Unisys capabilities in security.

Talent management features as a topic in every IT services provider analyst event we attend these days, and Unisys was no exception. Usually the emphases are on reskilling initiatives, resourcing and/or pyramid management. Unisys referred also to a drive to nurture a slightly different culture, shifting from one where the mindset of employees commonly featured accountability and order taking, to one where there is a stronger focus on  continuous learning and on curiosity, and where accountability is supplemented with a strong sense of collaboration. We are aware that a number of major IT services companies are contending with behaviors in their company that are not particularly well aligned with newer ways of working, newer technologies, or shifts in market expectations. Few acknowledge this, and very few discuss how they are seeking to address this.

We note there has been a slight shift in direction over the last year or so, the primary emphasis shifting from industry software IP such as Elevate, LineSight, and Digistics to the key assets discussed above, and Unisys has been moving at pace to develop these. 2020 will see further enhancements, and the drive to reduce cost of delivery in Services, including through automation, will continue. In the short term, large C&IS deals in Unisys Federal will continue to be the principal contributor to top-line growth. Unisys is more competitive in its C&IS business than it has been for many years and does not need to chase topline growth at the expense of margins; there has also been a refresh of the sales force. We expect to see additional significant C&IS wins in other sectors in 2020.

Genpact has signed a procurement BPS contract with a multinational conglomerate to manage a spend of $10bn covering all major categories of indirect spend (except IT) including logistics, FM, MRO, professional services, travel, and contingent labor, globally.

The contract is of strategic importance to Genpact in that it involves the transfer of 130 category management and sourcing personnel, approximately doubling the scale of Genpact’s existing sourcing & procurement practice. Before the deal, Genpact had ~100 personnel in its sourcing & procurement practice, with an additional 50 S&P personnel elsewhere within the company.

The deal provides Genpact with nearshore sourcing category management delivery centers in Budapest and Monterrey together with additional capability in Bangalore (where Genpact already has a sourcing & procurement team) and a small center near Shanghai.

So it will have a major impact on the scale and level of expertise within Genpact procurement services. Genpact expects this new capability will enable it to maintain 20%+ growth over the next few years, and be instrumental in underpinning its new procurement BPS strategy consisting of:

• Integrated P2P
• Consulting in support of procurement optimization
• Sourcing & category management for leveraged indirect spend categories.

Taking Advantage of Accounts Payable Delivery to Target End-to-End P2P

Genpact has a major and longstanding presence in accounts payable, with ~14,000 personnel deployed on transactional P2P processing. While the majority of Genpact’s accounts payable clients do not currently purchase end-to-end P2P, the opportunities are increasing. Large enterprises with GBS operations have commonly appointed global process owners for P2P and these process owners are frequently looking to achieve “zero-touch” AP – and this can only be achieved by an end-to-end approach to P2P and ensuring that all purchases are digitized and coded and approved in error-free fashion at the procurement stage.

Accordingly, there is a major potential opportunity for Genpact to add procurement to at least some of these clients and provide end-to-end integrated procure-to-pay services.

Consultancy Services in Support of Procurement Optimization

Genpact recognizes that few major organizations will want to change their existing procurement platforms while at the same time frequently recognizing that their procurement capabilities require optimization. Here, Genpact expects its recent partnership with Celonis to be important, with digital twinning being used to show CPOs the “fact-based” reality of their operations.

Key tools then include micro-solutions such as dynamic workflow and elements of Cora, along with third-party point solutions.

Genpact has seven procurement consultancy offerings:

• Developing procurement target operating models
• Blueprinting, developing the execution plan to get to the target operating model
• Systems, small implementations around Coupa with the business growing organically and by word of mouth. Genpact is unlikely to acquire further implementation capability inorganically but has relationships with Coupa and Ariba and may look to add additional platform partnerships
• System optimization, firstly helping organizations optimize what they have bought and secondly helping them do procurement better. The latter could be around tail spend using solutions such as Tradeshift or using Cora dynamic workflow
• P2P optimization via process modifications and change management
• Sourcing diagnostics, using category expertise to identify possible opportunities
• Executing on the resulting short-term sourcing programs.

In addition to process analytics, sourcing analytics is also key, with Genpact’s F&A practice potentially a major source of category benchmark data.

Targeting Leveraged Indirect Sourcing & Procurement

Where the acquisition of these personnel is expected to have the greatest impact is in fundamentally facilitating Genpact in changing its offerings and delivery model for sourcing and category management.

Genpact will focus solely on sourcing indirect spend, and is aiming to own the execution and the delivery of sourcing & category management work by offering leveraged indirect sourcing and procurement services with a one-to-many model.

Genpact will not target high value, high-risk categories but will position as offering greater scale, repeatability, and savings in sourcing in the “leverage” category and in assisting organizations in eliminating, automating, and simplifying sourcing & procurement in very low risk, low-value categories. Genpact will target companies looking for a combination of “taking the noise out of the system” to improve the UX, potentially releasing some personnel to concentrate on more important categories, alongside achieving realized savings.

The contract with the conglomerate assists Genpact in acquiring centers “optimized for procurement with the right skill sets at the right price.” Clients will be offered a choice of delivery location, including onshore, nearshore for regional dependencies and language support, and offshore, with Bangalore being used for back-office support and for sourcing analytics. Genpact will look to use front-end category managers to serve multiple clients in a one-to-many model with resources in Bangalore and Budapest used to magnify their capacity and capability. Approximately 40% of Genpact sourcing & category management personnel are center-based with the remainder, including onshore personnel, more widely distributed.

Genpact will focus on the high-tech, manufacturing, & services, consumer goods, retail, life sciences, and healthcare sectors where it has gained experience of F&A BPS, and will aim to take prospective clients to “visual factories” based in their delivery centers where they can be walked through the sourcing & procurement process and also meet the category managers.

Sourcing & procurement BPS has traditionally been a difficult nut for vendors to crack; challenges have included its high geographic and category diversity, lack of talent (scaling category managers in this environment), lack of realistic offerings for tail spend management, and buy-side slowness to embrace S&P BPS, the latter partly because of limited choice in the vendor landscape. Genpact’s pragmatic approach to extending its business beyond transactional accounts payable to focus on S2P for low-risk indirect spend categories addresses some of these challenges. This approach, its newly expanded category management capabilities, and the fact that it has an extensive F&A client base to mine, position it well for future growth in a market where competition remains scarce.

What a difference a year makes.

Atos recently held its second North America business event in Dallas, just under a year since completing its acquisition of Syntel. Last year’s event focused on the newly formed Atos-Syntel organization in North America, and also on how, with a new CEO in place, North America was starting to address some legacy problems and to manage a situation where a chunk of business had gone away with some contract non-renewals: we felt that Atos North America was on a more positive trajectory than it had been in 2017, also that the integration with Syntel was being done less hastily than some of its previous large-scale IT services acquisitions (see our blog on the 2018 event here). This year, some major strides appear to have been made in North America in GTM, account management, portfolio and positioning – and there are some areas of good practice that Atos North America could export to other regions in time.

One priority has been to improve service delivery; if a very considerable improvement in NPS is anything to go by, this has been addressed. And issues in one problematic contract (going back to the acquisition of the IT services business of Xerox) have now been resolved.

In terms of portfolio, there has been a significant hiring of new talent, including a North America Digital Transformation Officer and a new head for its SAP practice, both with a mandate for offering development and innovation.

The new Digital Transformation Office is working on simplifying and packaging offerings from across the portfolio so that these resonate more closely with clients’ digitalization priorities, which it categorizes as:

• Being cloud ready
• Enhancing CX
• Improving innovation and agility
• Securing the business
• Using all their data
• Scaling their business
• Automating business processes.

That these are typically major priorities for enterprises today is undeniable. Overall, the messaging has come a long way from the product centricity of the Digital Transformation Factory; it is becoming more centered around use cases and on potential client benefits, though in some areas it remains a work in progress. Overall, there is an increasing emphasis on more flexible modular solutions from across the portfolio, and on flexible consumption models (the latter very different from some legacy infrastructure deals).

With SAP, Atos’ capabilities in North America have not historically been anywhere near as extensive as they are in geographies such as Germany and even the U.K., and they have focused on SAP BASIS ops. Initiatives in the last six months include setting up a small SAP consulting team as part of an ambition to target SAP transformation opportunities such as S/4HANA implementation/migration services; also, offering SAP HEC as a managed service on GCP. There are clearly strong ambitions here.

The fact that the global head of B&PS, Sean Narayanan, is based in New York indicates the importance being attached to Syntel. Benefits from the offshore delivery capabilities, the intelligent automation tools (the Syntbots platform) and agile delivery capabilities that Syntel has brought in should become apparent fairly quickly. Atos has completed the reverse integration of its larger B&PS contracts in other English-speaking geographies in a timely manner. Taking certain Syntel portfolio capabilities and exporting and expanding these across the group will take longer, as will developing more industry-specific offers for sectors such as healthcare payer and financial services.

While the Business & Platforms Solutions (B&PS) division in North America has been transformed with the addition of Syntel, the region’s legacy Atos Information & Data Management (IDM) division has also been busy, including working on adapting its GTM strategy. There has been a shift from the former pursuit of large managed services deals: the focus now is getting in front of clients earlier in their cloud journey and targeting smaller deal sizes such as cloud assessment engagements through which it can develop the relationship with the client to become a partner of choice for cloud design, migration and operations services.

Atos has said all year that North America would be back to organic growth by the end of 2019: in fact, it has achieved this in Q3. Something that perhaps would not have been expected a year ago is that the growth has come from IDM, which has done well to catch up the lost business from last year so quickly, rather than B&PS, which saw negative growth in its two priority sectors of healthcare and financial services

So, what next for North America? Of course, the ambition is to cross-sell the portfolio: this is likely to take time for a number of reasons, including little sector overlap in the region between legacy Atos and Syntel and lack of brand awareness. As we noted last year, in the short to mid-term, Atos North America is more likely to win broad-scope (infrastructure plus applications services) deals with mid-sized enterprises.

We expect to see an increasing focus in 2020 on vertical-specific offerings, most obviously healthcare, financial services and insurance.

And Atos North America might be exporting messaging about certain areas of the portfolio to the broader group; for example, the concept of ‘Singular IT’ mentioned a few times at the event – watch this space.

NelsonHall recently published an updated Key Vendor Assessment on Atos that includes its Q3 2019 results: for details, please contact [email protected]

The tone at the recent Infosys Confluence Americas event in Arizona was, unsurprisingly, quietly confident: Infosys has delivered five straight quarters of strong CC growth, with its largest sector Financial Services delivering improving topline growth (having been affected by market softness in some areas), Digital now representing over 38% of total revenues, and the order book looking strong. It is now over two years since the abrupt resignation of Vishal Sikka; under the auspices of interim CEO Pravin Rao and then Salil Parekh (with Rao resuming his former COO role) Infosys has enjoyed a period of relative stability.

In NelsonHall’s Key Vendor Assessment of Infosys published just before Confluence, we noted that the company is generally executing well on its strategic priorities to increase its relevance with clients, which it has summarized in terms of four pillars:

• Expanding localization
• Scaling its agile digital business
• Energizing the core
• Reskilling its people.

The main emphasis at Confluence Americas was what Infosys is calling its ‘Live Enterprise Suite’, comprised of tools and approaches it has used internally launched the same week: we expect to see Live Enterprise Suite assets increasingly feature throughout the company’s portfolio.

U.S. localization targets ahead of plan, expanded

Many of Infosys’ strategic priorities are evolved from ones first outlined under Dr Sikka’s time as CEO. One of these is a much greater emphasis on localization (in place of using visas; the proportion of offshore delivery is not reducing), initially focusing on the U.S.

Back in May 2017, Infosys outlined its ambition to open four Innovation and Technology Hubs in the U.S. and to hire 10,000 American workers by end 2020. This July, just over two years later, Infosys declared it had already achieved this 10k target, ahead of plan. And it has expanded its initial ambition from four hubs to six, the newest a center in Phoenix, AZ inaugurated during the week of Confluence, focusing on autonomous technologies, IoT, full-stack engineering, data science and cybersecurity. Currently in a temporary site, the hub will move to a permanent 60k sq. ft. facility next year.

Articulation around ‘Navigate your Next’ has developed

Last year, as part of a stronger corporate focus on digital, Infosys launched its ‘Navigate your Next’ tagline – i.e. positioning on its abilities to help enterprises navigate their digital transformation. Concomitant to this was its concept of an underlying digital services architecture: a ‘digital pentagon’ of Experience, Insight, Innovate, Accelerate, Assure. At the time, we felt there was some work to be done in fine-tuning the articulation of what this might mean for clients. Progress in this respect is now evident; for example, the marketing messaging for most industries now incorporates the agile digital services architecture, and all the digital offerings are aligned within it. We note also that most large clients are now familiar with the tagline. Furthermore, the image of the digital services architecture pentagon is now surrounded by another pentagon, describing an operating model that includes Agile, Design, Automation, Learning and Proximity.

This year, Infosys’ messaging around ‘Navigate your Next’ has evolved to the concept of the ‘Live Enterprise’, which it describes in terms of being ‘connected, observable, responsive, sentient, and always learning’ – attributes required to be able to adapt nimbly and frequently and continuously evolve and innovate: quite a challenge for large enterprises with complex legacy landscapes. This also reflects Infosys’ ambitions to increase its relationships with key clients outside the IT function – in his short keynote at Confluence Americas, Salil Parekh highlighted that the client panels featured personnel from functions such as finance, HR and operations.

And Infosys is emphasizing how it has internalized the concept of ‘navigate your next’ to become more of a knowledge- and data-driven, continuously evolving organization. It is now commercializing some of the assets it is using internally in its own transformation.

Introducing the Live Enterprise Suite

Infosys posits that the Live Enterprise places the employee at the center of its operating model, with features including eliminating non-productive work (automation); networking and easy collaboration, rapid access to relevant data for knowledge sharing, and AI-driven guided self-service and self-learning.

Last year, Infosys introduced Wingspan, an IT skills training platform it had developed for internal use (as Lex) now being offered commercially. Several organizations we spoke to during and shortly after its introduction at Confluence 2018 expressed interest in Wingspan, though questioning the pricing. A year later, and Wingspan has already been bought by several large clients.

Infosys has now combined Wingspan with various other assets it is using internally, mostly proprietary, to launch a platform which sits on top of existing SORs it is calling the Infosys Live Enterprise Suite.

The current emphasis is on tools that support HR processes around recruitment, onboarding (Launchpad) and initial training, and ones that help employee productivity (Infyme). Infosys highlights that it has reimagined processes to significantly improve the UX; for example, onboarding activities are now covered in just three mobile apps.

Expect to see an increasing emphasis by Infosys on the intelligence layer of the architecture of the Live Enterprise platform and on how it helps reimagine business processes by applying sentient design principles and hyper automation. Key components include the Infosys enterprise-wide knowledge graph, that maps and links information from silos such as transactional data, information content, and from mapping interactions between employees and devices, and the ‘Digital Brain’, that provides a layer of intelligence on top to provide personalized recommendations to a user or nudges them to complete a process or transaction in a particular way, one, of course, that is designed to be user friendly.

Further work needs to be done in articulating clearly all the components within the Live Enterprise suite, also to where they can apply to a client organization (for example, the onboarding app is applicable to a range of job functions, whereas other elements are specific to an organization’s IT function).

Infosys claims that its ambitions to become a ‘Live Enterprise’ is already changing mindsets internally, for example sharpening its focus on process simplification, knowledge sharing and continuous learning.

While the overarching emphasis that these tools can help incumbent enterprises (as opposed to the digital disruptors) is likely to resonate with some large enterprise clients, the messaging currently emphasizes “we have done it to ourselves and are now offering it to clients” – and this kind of messaging has not always worked well for certain competitors: organizations generally prefer to hear how a vendor’s solution or service has worked in other client organizations. There are a few examples of components of the platform being used by clients: Infosys cites examples at a consumer goods firm and fashion retailer (personalized recommendations in customer engagement platforms) and chocolate manufacturer (centered on improving supply chain visibility); expect to see case studies being produced. We also expect to see messaging around the concept of how Infosys is leveraging components of the Live Enterprise Suite become prevalent across its portfolio and also across its vertical propositions.

The big news this week has been the announcement late on Wednesday of the appointment of Mike Salvino as CEO of DXC Technology, with immediate effect. Mike Lawrie stays as Chairman until the end of the year, whereupon he will retire. Apparently, Lawrie and the board began discussions about a planned retirement about a year ago; Salvino has been on the DXC board since May 23, so he has some knowledge of the company.

Warning to readers: this note does not contain any lame jokes about Mikes; but it does contain plenty of mixed metaphors.

Without doubt, loss of market confidence has been a contributory factor to Lawrie’s abrupt departure: DXC’s share price has taken a hammering since the company posted disappointing Q1 FY20 results.

But the company that Salvino is now taking the helm of is in better shape than when it was created in April 2017 by the merger of CSC and HPE ES. All the major IT services companies have been going through fairly major transformations in recent years as they seek to adapt to the disruptive forces of Digital – and indeed continue to do so.  For some vendors, the drive to adapt has been about ensuring their very survival. If we go back in time a few decades to the early 1990s, CSC and EDS were at the vanguard of huge monolithic outsourcing deals with the likes of Du Pont and GM. But that is history: they were like dinosaurs striding the planet before the cosmic impact of cloud and other digital technologies.

Lawrie’s tenure is commonly acknowledged to have been brutal in style - but it was effective in many ways in pushing through massive change. Gross and operating margins have improved. The problematic North American public sector business has been successfully carved off and he has created shareholder value. The portfolio has been further streamlined and standardized. The organization has been streamlined and delayered. The company has been catching up with automation through the Bionix initiative and now scaling out Platform DXC. He was quick to take corrective action with any area of underperformance (for example, in centralizing the hiring of digital talent). The series of acquisitions under his leadership at CSC and then at DXC have brought in new specialist capabilities: for example, DXC now has very sizable ServiceNow, Microsoft Dynamics and Salesforce practices; Molina Medicaid Solutions reinforces DXC’s dominance as a Medicaid fiscal agent; and Luxoft has made a major difference to its agile capabilities. But topline growth, even in the acquired businesses, has proved elusive.

It is, arguably, more difficult than it has ever been in this sector for a single leader to oversee all the phases of a global turnaround, and Salvino brings in the kind of fresh approach needed for the next phase (managing the return to growth), honed by his experiences in leading Accenture Operations and then by three years at Carrick Capital Partners. We spoke briefly with Salvino the day after the announcement: he had already communicated his intention to use a ‘playbook’ of 1) employees, 2) clients, and 3) business that he has successfully deployed in the past.

Promoting a People Culture

Salvino’s placing of employees at the front of this list communicates clearly his recognition that employee morale needs urgent attention (and we have noted in our recent Key Vendor Assessment the company faces several challenges in being seen as an employer of choice for the very best digital talent). He intends to hold a series of Town Halls and emphasizes his desire for the company to become more people focused. Whether this translates into more attractive employee policies and bonus structures remains to be seen, but there may be a bigger focus on retraining on digital skills, rather than replacing existing talent than there has been. Certainly, there will be a stronger emphasis on career progression, and incentivizing people to embrace desired behaviors than possibly there has been. Salvino has a strong track record of building, enthusing and motivating teams. He is also is very well connected and is likely to bring in fresh talent to augment specific areas. He thinks the Build/Sell/Deliver structure is sound, so it is likely to remain.

Salvino will be racking up the airmiles as he also, unsurprisingly, intends to visit major clients. His expertise in pressing the flesh will be critical both in providing reassurance, and also in spearheading a push for DXC account managers to become what he calls “customer curious”, becoming more closely familiar with clients’ specific business challenges and priorities.

“I want (us) to sell solutions, not individual widgets”

DXC (as did CSC and HPE ES) has found it challenging to cross- and up-sell, something at which Accenture excels. Without doubt, Salvino brings in experience of account mining; DXC has already started work on this with the creation last year of Digital Account Managers, but Salvino will be looking for the salesforce to progress from a mindset that has essentially been one of a product led sales approach focusing on discreet offerings from within the nine ‘families’ (reflecting a strong background in IT infrastructure outsourcing), to one of solution selling, something that Salvino claims has not been done to date by DXC. Certainly this is in line with market demand for integrated services, often platform-based, that have a clear focus on desired business outcomes.

Leveraging and integrating recently acquired assets such as Luxoft, also the expanding DXC Eclipse units, will be critical to this. Luxoft CEO Dmitry Loschinin is on the Exec Committee and there is already a drive to aggressively cross-sell Luxoft’s offerings to DXC clients. But Salvino is looking to drive something that goes beyond previous ambitions of selling Luxoft’s services as an add-on, for example cross-selling its product engineering capabilities into North American and Asian automotive clients. DXC has a large enterprise client base for IT infrastructure services of around 200 accounts, and it has been building a broader set of capabilities. Salvino’s ambition, to move up the digital stack with large accounts, is to be expected, though easier said than done. He has a track record of doing this effectively at Accenture Operations, taking capabilities from across the business, including cloud, analytics and BPS, and selling these into diamond accounts as an integrated value proposition. Salvino acknowledges that client referenceability needs to improve, and referenceability is likely to be strongest in this kind of relationship: he will be measuring how many of the blue-chip clients are being taken through the digital journey playbook. Drawing together various capabilities from across its ECA, Luxoft, analytics and Industry IP businesses will be key to this. As will the PwC relationship (one nurtured a few years ago by HPE ES), but it will be augmented increasingly by DXC’s own consulting capabilities. And Salvino is likely to want to be able to increase the investment in opening more digital transformation centers and digital innovation centers.

Several newer areas of the DXC portfolio have been underperforming, including its Industry and BPS businesses. Given his experience, Salvino should find it relatively easy to oversee a tweaking of this part of the portfolio. Expect to see a stronger push into expanding Industry IP (DXC already has major assets in insurance, travel and Medicaid), in targeting cross-functional BPS opportunities, and also to strengthen and broaden the reach through acquisitions.

Will there be further changes to the portfolio? There will be more tuck-ins, the priorities perhaps shifting from the Enterprise & Cloud Apps business to expanding capabilities in analytics, cyber and probably adding to argo design, also perhaps in newer target sectors. Salvino says he will be taking a fresh look at the portfolio, so we might see some small-scale divestitures (perhaps of small-scale units acquired with the likes of Xchanging), but these will be tweaks. We should not expect any more dramatic carve-outs from the core ITO business.

Operational excellence in delivery

Salvino has deep understanding of operations management and the application of intelligent automation to transform service delivery from his time at Accenture, and at Carrick he continued to develop his knowledge of ML/AI. We believe DXC has some catch up to do in industrializing the use of AI, analytics, automation and Lean methodology in the delivery of managed services. And DXC is presumably looking to Luxoft for new approaches, including in dynamic resourcing for projects.

Reset of the Three-Year Plan?

Last November, DXC shared some three-year financial targets for FYs 20-22. The revenue model assumed a 4-7% annual decline in the mainstream business, but DXC has subsquently seen a much steeper rate of decline than anticipated. Salvino is not able to say yet whether there will be a reset of the model; nevertheless, achieving the targeted growth in the Industry & BPS and Digital businesses becomes even more pressing. We think the 4-6% targeted CAGR for Industry and BPS could be stretched. 

In short, Salvino cannot directly repeat the Accenture story at DXC – the companies have very different capabilities - but he is particularly well equipped to oversee the next phase of the company’s history, one which will be marked by an accelerated shift to digital, with a concomitant move in client interactions from MIPS to business-based discussions.

NelsonHall recently published a Key Vendor Assessment on DXC that includes a detailed look at the three-year plan, also of the company’s key offerings. For details, please contact Guy Saunders.

Atos’ global analyst event in Boston in April came just a few weeks after its launch of a new 3-year plan ‘Advance 2021’ (Atos Digital Value Advancing Customer Excellence) about which we have written here.

Key to Atos’ mid-term and longer-term growth is the effectiveness of its drive to align its operating model to be more industry and client focused. As such, we were keen to know a little more about recent developments and current plans to verticalize the go-to-market. It became evident to us that a lot has been achieved in the last few months; equally, there is an interesting journey ahead for Atos for it to convincingly position as a trusted partner with a coherent end-to-end services and solutions portfolio of business outcome-based, industry-based offers for enterprises in each of its target sectors and across all its target geographies. 

In his opening address, Atos’ Group Chief Commercial Officer Robert Vassoyan highlighted that his was a number of new/newish faces in the Atos exec line-up, and in various conversations with execs we noted a recurring emphasis on ‘reinvention’ at Atos.

Atos’ Business & Platform Solutions (B&PS) division, expanded and enhanced with the capabilities of Atos-Syntel, is critical to the increased focus in the Advance 2021 plan on verticalizing the go-to-market. And B&PS is already changing how it does business with clients.

Syntel was already organized into five vertical P&Ls (shown here together with the percentage of overall revenue in 2017):

• Banking & Financial Services (45%)
• Retail, Logistics & Telecoms (18%)
• Healthcare & Life Sciences (18%)
• Insurance (15%)
• Manufacturing (4%).

The B&PS division, in which Atos-Syntel now sits, is essentially now organized along these five verticals plus two more – Public Sector, and Energy & Utilities – where Syntel was not present and where Atos has significant capabilities outside North America. The largest accounts have been moved into this structure, with smaller legacy Atos regional clients remaining outside this scope.

As well as its “Customers for Life” ethos, Syntel positioned quite strongly on its industry domain knowledge of its main target sectors. And this is clearly something that Atos is looking to leverage.

Around 200 partners from Atos Consulting (out of a total of ~1,500 personnel in the unit) have now been aligned with these seven vertical units and attached to specific accounts.

The B&PS division has heads running each of the seven verticals, plus delivery leads for each.

So, what about the B&PS portfolio? Here too, there is some element of verticalization taking place. Practice heads with responsibility for vertically-aligned products and solutions are being appointed.

And of the four former horizontal consulting practices, there is now just one that remains horizontal: digital transformation.

But this is the B&PS division. A complete realignment of the operating model would probably involve a more radical level of reorganization across the company – there will not be a change to the current organizational structure this year, but we would be surprised if it stays in place over the next three years.

The messaging is clear that there will be an increased investment on verticalization across the portfolio, even in IDM. There are some obvious areas where Atos could potentially go to market with industry-specific propositions that leverage its capabilities across infrastructure, applications, analytics and even BPS – these include propositions in healthcare, in L&P insurance, and in manufacturing, to name just three. But our observation is that this is still some way off. The thinking tends to start with the technology rather than on business outcome-based value propositions.

To take IoT as an example, where Atos is advantaged by its relationship with Siemens AG, the value proposition appears to be focused on management of infrastructures and cost reduction therein. The real opportunity for Atos is to develop a business value-based proposition, leveraging Codex, that centers on the value to clients of being able to make sense of the information coming from sensors. This requires an offering that leverages capabilities from the IDM, B&PS and BDS divisions – and we think there is some way to go here. Syntel brings in industry expertise primarily in B2C environments and it is more likely that we will see strong industry plays that leverage capabilities from across Atos (and that also have an underlying platform component) coming first in sectors such as insurance or healthcare.

In cybersecurity, Atos is adding more industry expertise into its sales teams, and is developing more verticalized case studies, with an initial focus on North America. With its cyber offerings, Atos is following a Pareto model, with ~80% standardized and ~20% adapted for, or developed specifically for, target verticals. Atos’ growth in cybersecurity in recent years has been mainly from providing some form of cyber-related service as part of a wider digital transformation project. While its 'cybersecurity everywhere' approach remains an important element in all IDM deals, Atos is also seeing very strong growth from providing standalone security services. A major win is that with Virginia Information Technology Agency (VITA) – a $120m contract signed in May 2018 which went live in January 2019 is Atos’ largest standalone cybersecurity contract for three years, and represents headway in the U.S.

While there will not be any further large-scale M&A activity for a while, we do expect to see some tuck-ins for B&PS, most probably in these areas:

• Design and creative agencies. Atos is also starting to move and rebrand some of its Labs as Digital Studios, focusing on areas such as AI, analytics, and CX where it can showcase relevant assets such as Codex and Syntbots. Will a few agency tuck-ins be enough to improve Atos’ ease of access to the CXO suite?

• Software engineering, where there is some ground to be made, for example in Agile
• Specific SaaS capabilities, possibly, given Atos’ relationship with SAP, in the SAP ecosystem
• Specific areas of cyber.

Strategic focus areas for IDM include:

• Extending the cloud portfolio with offerings for native cloud developers. A recent development has been a partnership with CloudBees (like Atos, a Google Cloud partner) to integrate the CloudBees DevOps platform with Google Cloud in a managed service for enterprise software development
• Significant expansion of its insurance BPO business, which, in our opinion, needs to be closer to B&PS if Atos is to be able to leverage platform-based opportunities in Europe or North America.

A lot has been happening at Atos since it acquired Syntel and began to get to grips with some specific challenges in North America. We do not doubt that the company will achieve the financial targets it has shared in Advance 2021: they are not audacious. But we also expect over the next few years to see quite a radical overhaul of the vertical-specific offerings portfolio with a concomitant stronger emphasis on specific business benefits that clients can expect to achieve.

It is a decade since Thierry Breton assumed the mantle of CEO and Chairman at Atos, his arrival marking the end of a troubled period for the company. In that time, the company has improved its profitability (when he arrived, its operating margin was just 4.8% and all service lines were experiencing a deterioration in profitability, so his ambition of a double-digit margin seemed ambitious). Also in that time, the company has grown in scale and geographic presence through a series of fairly significant acquisitions in both the Atos and Worldline businesses. These acquisitions have also led to some dramatic changes to its portfolio.

Atos recently posted its Q4 and full year 2018 results. These have been discussed in NelsonHall’s Quarterly Update on Atos, and a more comprehensive Key Vendor Assessment on the company will be published in the next few days.

But the real news had already happened two weeks before, at its Investor Day: this featured several major announcements, including the intended deconsolidation of Worldline, the next three-year plan for Atos, and also succession planning in place for Breton.

So why has Atos embarked on its next three-year plan one year before the current three-year plan is due to complete? In short, the time is right: two acquisitions, both completed in the last quarter, have provided heft and scale to both Atos and Worldline. With the additions of Syntel and SIX Payment Services, each business is now in a stronger position to pursue its own ambitions.

Five years after its carve out, Worldline becomes a standalone company

The first major announcement at the Investor Day was Atos’ intention to reduce its stake in Worldline from 50.8% to 27.4% through a proposed distribution of 23.4% of Worldline shares to Atos shareholders (who will receive 2 Worldline shares for every 5 Atos shares held), thereby deconsolidating Worldline from the Atos Group from early May 2019 (assuming approval at the AGM on April 30). Atos will remain the largest shareholder, followed by SIX Group with 26.9%.

We were not surprised to hear of this development, coming as it does five years after the 2014 IPO of Worldline and at a time of newly expanded scale: there are clear benefits to Atos shareholders, and to both companies, in becoming standalone. Both Atos and Worldlines’ board of directors have unanimously supported the proposal.

If we include a full year’s contribution from SIX Payment Services, which has expanded Worldline’s revenues from merchant services by 65%, and its geographic presence in the DACH region (primarily Switzerland), Worldline generated €2.2bn pro forma revenues in 2018. It is now a major player in Europe.

Worldline has been very clear about its ambition to become the dominant consolidator in the European payment processing market. And here it is succeeding, despite the disappointment of its failed attempt to acquire Gemalto: since its IPO, revenues have doubled, through a combination of inorganic and organic growth, and adjusted operating margin has expanded from 18.7% to 21.2% (again, pro forma, including SIX PS).

As a standalone company, Worldline will have an enlarged free float (45.7% post transaction, which we think might increase) with increased stock market visibility and be in a stronger position to use stock for acquiring: its ambitions as a payment processing consolidator are if anything even stronger, with the focus moving next to potential opportunities in some of the larger European economies. Separation from Atos might also be helpful in discussions with some banking consortia over potential new outsourcing opportunities; Worldline CEO Gilles Grapinet alluded to some large deals on the horizon.

Worldline shared its 3-year financial targets ambitions for 2019 to 2021. We believe the topline targets to be modest in ambition, given the M&A and large outsourcing deal aspirations.

Atos and Worldline will maintain commercial, industrial and GTM relationships via arm’s length contracts between the entities. This will include joint R&D programs and purchasing agreements.

ADVANCE 2021: the road ahead for Atos

So, what about Atos on a standalone basis?

Firstly, scale: including a 12-month contribution from Syntel, Atos generated €11.3bn pro forma revenue in 2018, with an adjusted operating margin of 10.0%. It remains a double-digit margin business without Worldline.

Secondly, profile: as we have discussed before, Syntel has changed the profile of Atos in terms of both geography and portfolio. With Syntel, Atos becomes less dependent on IT infrastructure services and becomes more balanced both at a global level and in its North America business. The reverse integration of much of Atos’ global B&PS business into Syntel continues in 2019. In its next three-year plan, entitled ‘ADVANCE 2021’, B&PS becomes a more important pillar of Atos’ growth plans for the next three years.

As part of ADVANCE 2021, Atos has introduced a new initiative, RACE (Road to Agile Competitiveness & Excellence), essentially the successor to various TOP plans, with a stronger focus on reducing direct costs, rather than optimizing G&A, to achieve further margin expansion. RACE has 12 pillars. We feel that some of these, such as the Global Optimization through Automation & Lean (GOAL) initiative (which started in H2 2018 and includes leveraging Syntel IP, increasing near/offshore delivery, and setting up shared service centers for indirect functions), indicate Atos is in catch-up compared to some of its peers. In terms of divisional margin targets, the division targeting the greatest expansion is B&PS, primarily from leveraging Syntel to achieve a 60% off/nearshore rate by 2021.

The three-year plan includes just 1-2% targeted organic growth in 2019, while North America and Germany (its two largest regions) recover.

IDM will remain a flat business for the next three years

With its Information & Data Management (IDM) division, a key priority is to get back to growth following declines in 2018 in Germany and North America (primarily the U.S.), where, under its new management, the outlook for 2019 appears much better than it was a year ago.

At a global level, IDM is now back under the leadership of Eric Grall, who is also Atos’ COO. The focus over the next three years will be on hybrid cloud orchestration, and IoT/edge computing, these areas balancing revenue stagnation in other units and the ramp-down of its traditional data center service business.

IDM has more growth ambitions for its U.K. BPO unit and wants to expand its financial services BPO business into Europe. Again, we feel the targeted growth over the next three years, which we estimate at around 8% CAGR, is a modest ambition given the healthy growth in many areas of BPO.

Overall, IDM is set to remain stable at around €6.3bn.

B&PS to benefit from market momentum in digital

The Business & Platform Solutions (B&PS) division enjoyed an improved performance in 2018, benefiting from repositioning around Digital Factory offerings. Syntel brings a business growing at ~10% (NelsonHall estimate), provides vertical expertise in the U.S. banking and healthcare industry, and will help capture project and digital transformation services growth in the U.S. There is (at last, we feel), an increasing focus on developing industry-specific propositions in each of its seven targeted verticals, potentially also pulling through IDM in some opportunities. This will be an important element in the next stage of Atos’ evolution. We will be looking with interest at how Atos will harness the industry-specific capabilities it has gained in different regions and develop a stronger cross-regional industry play. Strengthening the GTM approach is a key part of this, but on its own will not suffice.

Overall, B&PS is targeting a 5% CAGR for 2019 to 2021, which, assuming no major changes in the macro-economic conditions, is in line with our predictions for overall market growth in these services.

Atos looking to replicate the growth model of Worldline at BDS

Perhaps one surprise at the Investor Day came from Breton’s comments as to possible intentions regarding the BDS unit. BDS comprises a range of businesses, e.g. security products and services, HPC and high-end servers, mission-critical systems for the defense industry, and secure communication devices and software. The positioned commonality across these different activities is security, AI, and big data/analytics. The division continues to enjoy double-digit organic growth (12.0% organic in 2018) and is nicely profitable (divisional operating margin was 15.4% in 2018). But Atos is unusual as an IT services company in having businesses like these.

It appears that Atos may look to replicate what it has done with Worldline at BDS. Breton alluded to the need for BDS to be listed if it is to be a consolidator in the cybersecurity market and afford the high valuation multiples currently used in security M&As. He did not indicate a time line; however, we would not be surprised to see a listing before end 2020. Again, this would make obvious sense.

Atos has been an active acquirer in the last decade; significant M&A activity appears to be over for a while at least, with Atos focusing primarily on organic growth. Atos in 2021 may not be a significantly larger business, but we think it will have evolved in its profile and positioning.

By Dominique Raviart and Rachael Stormonth

Details of Atos Q4 and full-year results and financial targets in the new ‘ADVANCE 2021’ three-year program are provided in NelsonHall’s Tracking Service, Quarterly Update and Key Vendor Assessment programs. To find out more, contact Guy Saunders.

NelsonHall recently attended BearingPoint’s analyst event in Lisbon. As it starts its second decade with a new Managing Partner (Kiumars ‘Kiu’ Hamidian, only the second in the company’s history), the strategy that has served BearingPoint well in its first ten years is now evolving in ways that reflect significant developments in the nature of the consulting market.

In its first decade as a company since the 2009 MBO, BearingPoint has been something of a success story in the European management and IT consulting market, achieving sustained topline growth supported by geographic expansion, and steady improvement of its EBIT margin. 2017 revenues were up 13% to €712m, with growth in all geographies and service lines, and the firm is well on its way to achieve its targeted €1bn revenues by 2020.

Key elements of strategy

Elements of BearingPoint’s strategy in recent years that remain key pillars going forward include:

• The ‘One Firm’ mindset, with a common set of offerings and consistency of delivery methodologies across geographies
• The focus on clients headquartered in Europe, achieving a ‘global reach’ to be able to support them in projects outside Europe through an alliance ecosystem (West Monroe Partners in the U.S., ABeam Consulting in Asia, Grupo ASSA in LATAM)
• The business model, comprising:
  • Strategy, made up of four service lines: digital & strategy, finance & regulatory, operations, IT advisory
  • Solutions: the Solutions unit, launched in 2015, has three product lines: IP in regulatory technology, in particular fintech (e.g. its Abacus suite); advanced analytics; and digital platform solutions for the CSP and entertainment sectors (based on Infonova R6, now offered on AWS)
  • Ventures, a more recent capability; e.g. an investment in Norwegian insure-tech start-up Tribe in April 2017. Also includes employee ventures, typically coming from its ‘Be an Innovator’ initiative, and client ventures, emanating from consulting projects with start-ups
• Selective acquisitions, for example in 2017 of retail supply-chain specialist LCP Consulting in the U.K., and an automotive consulting unit in Italy
• An increasing emphasis in recent years on innovation, e.g. the introduction of the ‘Be an Innovator’ process and of shark tank events.

Forward-looking priorities

While BearingPoint’s next five-year plan has yet to be finalized, Hamidian outlined four priorities in the following dimensions:

• Markets
• Portfolio
• People
• Culture.

Markets

BearingPoint is looking to build up capabilities in several European countries, including the U.K. (where the practice is relatively small, focusing on sectors such as financial services) and the Netherlands. In terms of headcount, BearingPoint remains very focused on Germany and France, and has product units in Austria (ex-Infonova) and Switzerland (Abacus): the ambition is to have a minimum of 300 people in each of the major European markets. Outside Europe, BearingPoint is also looking to work with its partners to expand its presence in the U.S. and China, including Singapore, where it has a joint hub with ABeam Consulting in Asia focusing on IP-based reg-tech projects.

Portfolio

There is a very clear drive to shift from the classic process redesign work of traditional consultancy services and focus much more strongly with clients on projects that leverage IP assets, and are more transformational in nature (for example, looking at new business models). The role of the Solutions unit is critical in this. Since January, the unit has had its own P&L and regional managers, encouraging, inter alia, entrepreneurialism in both product development and GTM.

In addition to some well-established assets around reg-tech (for which it is best known), the unit has also developed IP such as its Factory Navigator, which simulates production and logistics processes; LOG 360 vehicle emissions calculation, built on SAP HANA; and Active Manager, used for coaching and training front-line managers, e.g. in call centers, to be more active/effective. All are SaaS-based offerings. One of the clients presenting to whom we spoke is a very strong advocate of Active Manager, having implemented it at a major telco and subsequently introduced it in his next role in a different sector.

Expect to see further developments to the portfolio, including industry-specific solutions. But the strategic element lies in the intersection between Solutions and Consulting – the aim is for consulting projects and also managed services increasingly to have embedded IP. 

As well as its own IP, BearingPoint is looking to increasingly position around its abilities to orchestrate an ecosystem of technology partner alliances: having started with Salesforce (now a Platinum partner), the emphasis has expanded to RPA and AI and emerging technologies such as blockchain. The last two years have seen a large increase in the number of technology partnerships, and more are to be expected.

The role of the Ventures unit is also important here. While BearingPoint also refers to employee ventures, most coming from its ‘Be an Innovator’ initiative, and to client ventures, emanating from consulting projects with start-ups, the primary focus is on market ventures. It is working with incubators such as LeVillage in Paris and weXelerate in Vienna (see our 2017 blog here) and hosting events like the BearingPoint Insurance Dialog in Cologne that offer speed dating opportunities for early stage start-ups. A recent investment was in Insignary, a South Korean startup with a binary level open source software (OSS) security and compliance scanning solution, BearingPoint’s first investment in an Asian start-up. BearingPoint is leveraging Insignary’s Clarity solution to offer a managed SAST (static apps security testing) binary scanning service in Europe.

The expansion of IP-based services is a key element of BearingPoint’s Digital & Strategy (D&S) offering, which we note has new leadership.

People

BearingPoint’s new Managing Partner has spoken repeatedly about his desire for the firm to provide a very positive employee experience, an important element in both the recruitment and retention of younger talent. Other priorities he has expressed include increasing the firm’s diversity, of generation as well as of gender (one target is 20% female Partners by 2020), and talent development. We do not know the age or experience profile of BearingPoint personnel, but we do detect a desire to have a workforce that is perhaps more balanced in terms of age and experience, and a slight shift away from a traditional consultancy profile.

We also note an evolution in leadership style with a stronger emphasis in transparency and communication: several personnel mentioned in conversation that Hamidian encourages colleagues to email him and is responsive when they do.

Culture

As part of its ambition to change the nature of much of its consulting work beyond operating model improvement to projects that have more radical transformation in mind, BearingPoint is looking (like many consulting and IT services firms) to nurture a culture where entrepreneurialism and innovation are encouraged (for example through initiatives such as shark tank events), and overall to become a more agile organization.

Hamidian is also looking to develop partners’ management and team leadership skills through initiatives such as new partner training programs.

Summary

In its first decade since the MBO, BearingPoint has succeeded in putting in place a strong foundation of an integrated European consulting firm that can claim, through its strategic partnerships, to have a more global reach. The next five years will be marked, not by global expansion, but by an evolution in positioning, with an increasing emphasis on services that leverage its own and partners’ IP to assist clients in their digital transformation, potentially also boosting margins. Expect to see more partnership announcements around IP-based offerings; shortly after the event, for example, BearingPoint announced its regtech product unit and IBM is partnering to offer a BPO service around regulatory reporting to smaller institutions in the DACH region.

Expect also to see an increase in tuck-in acquisitions of small firms operating in its target geographies (including the U.K.) that bring in industry domain and or specialist capabilities. Again, shortly after the event, BearingPoint announced its acquisition of Inpuls, which brings in capabilities in data governance and analytics and also doubles its headcount in Belgium.

As a final note, there were several aspects of the analyst day that stood out from other vendor events we have attended recently:

• The total absence of PowerPoint presentations, with a heavy focus instead on clients telling their stories and describing how BearingPoint has supported them
• The level of female representation (roughly 50% of the speakers) – an all-too common experience is that the only female speakers at analyst and advisory events are those from clients. Large organizations in Europe and the U.S. are increasingly demanding a level of female representation from suppliers bidding for work in certain areas of professional services; for a variety of reasons, lack of gender diversity in the talent mix will increasingly be an impediment in IT and consulting services). The level of female representation was doubtless a deliberate move; gender diversity is clearly a high priority.

L to R: NelsonHall's David McIntire, Rachael Stormonth, Andy Efstathiou, and Dave Mayer 

NelsonHall recently attended an Atos North America event in Dallas which focused on the newly formed Atos-Syntel organization in North America. Earlier this year we noted that Atos in the U.S. was still a work in progress (see here). The event was held just days after its acquisition of Syntel had closed and we were keen to learn about the integration plans and the strategy for future growth in North America.

We came away assured that, with a new CEO in place, several problem contracts no longer an issue, and an enlarged set of capabilities, Atos North America is in a very different position from what it was at the beginning of the year. And looking more widely, Atos can now position as offering scale end-to-end services across infrastructure and applications in all its key geographies. We also note that this is an integration that is being done with perhaps less speed than some of its previous large-scale IT services acquisitions.

The significance of the Syntel acquisition

The event was held in Atos' regional U.S. HQ in Irving. Opened last year, the facility is also its first Business & Technology Innovation Center (BTIC) in North America. A clear emphasis throughout was that Atos in North America is now in a stronger position in terms of resourcing for a broad range of application services, including developing cloud-ready applications, as well as being able to support enterprises with reducing their infrastructure spend to invest in digital. It was also apparent that, in the short term at least, the growth opportunities are in mining Syntel’s client base rather than with acquiring new logos.

In July we wrote a short piece on the significance of the Syntel acquisition both to Atos North America and to its Business & Platforms Solutions (B&PS) business globally (see here). As a reminder, among other things, Syntel brings to Atos:

• Increased presence in North America (adding 4.5k employees and ~$825m in regional revenue, expanding it by around a third, and means that Atos North America has a broader set of capabilities it can offer to clients in the region
• A business that will be margin accretive to Atos
• Three large accounts: Amex, State Street and Fedex (which were ~45% of Syntel total revenues)
• A boost to its BFS and Insurance sector businesses (approaching $420m and $140m in revenue in 2017 respectively), also a significant U.S. application services practice in the Healthcare/Life Sciences vertical
• A large Indian delivery capability, augmented by its SyntBots Intelligent Automation platform
• Capabilities in apps development, testing and application modernization services (‘digital’ areas of application services)
• Its 'Customer for Life' ethos, which has been a significant factor in client loyalty.

We also noted that, given the level of reverse integration that is happening in B&PS, and the fact that Syntel had a larger presence than Atos in the U.S., the role of Syntel senior management is critical to the success of the integration. And the transition so far has been seamless: former Syntel CEO Rakesh Khanna, for example, remains as CEO of Atos-Syntel, which now operates as a unit within the B&PS division, and is on Atos’ Executive Committee. He presented alongside Sean Narayan, who heads B&PS globally, and Simon Walsh, the new head of Atos North America (an external appointment) about the capabilities of the combined entities.

Portfolio: with applications plus infrastructure services capabilities in North America, Atos can now position in the region around digital transformation

Atos freely acknowledges that until now, the only examples it could provide where its services were evidently supporting clients in their digital transformation were from Europe. It was not by accident that the event opened with Rakesh Khanna providing some case study examples of recent Atos-Syntel projects with clients outside its top 3 (AmEx, State Street, FedEx) where its services have helped the client play catch up with large digital disruptors in their respective industries. Other examples included a blockchain initiative and supporting an online insurer impacted by a high level of significant technical debt by migrating ~880k lines of code from COBOL to Java.

Three insurance sector clients presented: all are mid-sized organizations and have been clients of Syntel for many years. Common strands were consistency of (quality) delivery and proactivity, e.g. in one case approaching the client with a proposition around the transformation of its underwriting process. One of the three is also a new Atos IT infrastructure services client from earlier this year, having switched from an incumbent provider after 15 years: this client referred to the relative ease and speed of sourcing, appreciating having fresh eyes looking for new opportunities, and an outcome-based pricing model (based on net new premiums) that had been agreed.

Delivery: integration of B&PS into Syntel delivery model already in progress

While little was said about the reverse integration of Atos’ large B&PS accounts into the Syntel delivery model, or of Atos’ India delivery centers into Syntel’s, work on this has already started. The integration includes:

• Transfer of Atos’ North America and large global India-delivered B&PS contracts to Syntel, representing around $1.25bn, roughly one third of Atos’ overall B&PS business, of which $160m is from legacy Atos
• Alignment of Atos’ B&PS India-based delivery with Syntel
• Folding of some Atos delivery operations in Pune, Chennai and Mumbai into the larger Syntel facilities.

Any new B&PS deals incorporating global delivery will be pursued under the Syntel model.

The use of the Syntbots platform is expected to play a significant part in the ongoing delivery transformation in the RISE 2.0 program of the B&PS unit (which in our opinion had been in catch-up mode in the application of automation and AI). Atos is also assessing how and where Syntbots can play a part in its Infrastructure services business, e.g. in applying ML to incident management.

Improving sales execution & delivery performance in I&DM in North America

Three former problem contracts were terminated or expired earlier this year. The remaining few have been or are being addressed; one large problem contract has been reset and the new North America CEO holds a major incident review call every morning: there is evidently close attention being paid to improving delivery execution, also in staying close to other I&DM clients.

Following a period of disappointing sales performance, Atos is refreshing its I&DM pre-sales and sales personnel and architects in North America. There have been some new wins recently and the net new business is apparently strong.

Syntel clients happy with the larger scale of Atos

In the two weeks following the acquisition, Atos CXOs (Thierry Breton, Sean Narayanan, Eric Grall) managed to visit all Syntel’s key clients, representing ~70% of its total revenues; most were positive in that, as part of Atos, they can potentially look to Atos-Syntel for support in other geographical operations or in other services.

Future growth: farming rather than hunting; mid-market the primary focus

Among the attributes of Syntel emphasized by clients at the event were its effectiveness in forging deep relationships with them over the years and its consistency of delivery. Nearly all of Syntel’s revenue was through its existing client base and it brings to Atos strong account management and significant presales and solution architecture capabilities in North America, albeit for relatively (for Atos) small engagements.

Atos North America intends to leverage Syntel’s model and look primarily for smaller deals to grow wallet share in existing accounts. This is a significant change in emphasis in the GTM: both cross-selling and targeting smaller engagements are new areas of emphasis for Atos. An integrated approach into the Syntel client base has already commenced. Syntel’s 'Customer for Life' ethos brings in a new and improved approach to managing customer relationships; at the event there was a clear emphasis on client-centricity and on selling to specific client needs with a strong awareness that their appetite for the pace of change may differ significantly.

We note that in North America there is little sector overlap between Atos and Syntel: for example, Atos will have few local client references in financial services that it can draw on, though for smaller opportunities this will not be as critical a factor in vendor selection as it is in large deals.

Expect to see more vertical-specific offerings mid-term

Before Syntel, Atos’ portfolio in North America was primarily horizontal IT infrastructure services, though its earlier acquisitions of Anthelio Healthcare and three small healthcare consulting firms (two from Conduent) had indicated an intention to expand its presence in the U.S. healthcare sector. Syntel now brings in some application services business in the payer sector. Developing an integrated end-to-end portfolio for targeted segments of the healthcare sector remains an ambition.

We also expect to see a stronger play in the longer term in specific sectors within FS&I, also in manufacturing & retail.

Outside its top three clients, Syntel’s client base is typically drawn from mid-sized organizations, which is not where Atos has typically played.

Summary

The integration of Syntel immediately improves Atos North America’s ability to speedily resource B&PS deals without having to use resources from other regions, something which has at times been a competitive impediment. A large deal team remains in place and the legacy Atos North America focus on larger-sized enterprises for I&DM services remains. The ambition is also to cross-sell legacy Atos services into Syntel clients and to make a broader move overall into the mid-size market, and it is here that Atos is more likely to win broad-scope (infrastructure plus applications services) deals in the short to mid-term.

The increased emphasis on client intimacy in North America is also becoming more evident in the larger I&DM business in the region, where, with a new CEO in place, we also note a stronger focus on improving delivery reliability.

As well as having an immediate impact on Atos North America's offerings portfolio, Syntel is also a powerful boost to the B&PS RISE 2.0 initiative.

Rachael Stormonth presents her key takeaways from the recent Infosys Confluence event in Rome, which was themed 'Navigate Your Next'. In particular, she looks at the five value accelerators of Infosys' digital navigation framework. 

A year ago, following a TCS analyst event in Boston, the theme of which was Business 4.0: Intelligent, Agile, Automated, and on the Cloud, we wrote about how TCS’ new service line structure has been designed to support the company’s emphasis and positioning around Business 4.0 (see the blog here)

Underpinning its positioning around Business 4.0, over the past year TCS has been emphasizing two key capabilities:

• Location-independent agile
• Machine first delivery model (MFDM).

These two provided the core themes at the company’s recent analyst event in London. In our discussions with TCS execs, we were impressed by the speed and determination with which the company is moving to achieve the bold ambition it shared in 2017 to become 100% “enterprise agile” by 2020, also by its consciousness of how the nature of software engineering services will transform in the longer term.

Location-independent agile

With its stated target to be “enterprise agile” by 2020, TCS firmly placed a stake in the ground: to the best of our knowledge, no other IT services vendor has made a similar claim. TCS seems to be well on the way to achieving this objective with an estimated 250k of its 410k+ strong workforce already ‘agile ready’.

So, what is TCS doing to make this happen?

Unsurprisingly, there has been a massive retraining drive, accompanied by various efforts to nurture a culture where employees expect to continually learn (“making learning addictive”), something that becomes increasingly important as more roles become inter-disciplinary. A key asset underpinning its micro-learning platforms is its Karma gamification framework which has analytics and event-driven digital ‘nudging’ capability, used when an employee has been inactive.

Another core belief is that an employee’s contextual knowledge is more important than any specific technology skills – the aim is to train employees to become generalists rather specialists, particularly from roles that are next to be automated, by broadening the bar in their T-shaped skills profile to a V-shaped profile, e.g. training database managers on Hadoop, machine learning, and/or cloud systems administration. TCS estimates that its associates have on average four skills.

In line with this, performance management has moved from yearly assessments to micro targets.

Enabling tools that TCS has developed include:

• Jile, a cloud-based agile DevOps framework-agnostic product designed to help scale agile at the enterprise level. TCS launched Jile as a commercial product back in January (priced at $9 PU/PM)
• An Agile maturity model, an ‘agility debt’ framework with 27 characteristics codified from its experience with 300 clients, which it is now using to assess an organization’s agile readiness levels across the dimensions of structure, workforce, technology, and culture.

But enterprise agile also demands a transformation of the workplace: Krishnan Ramanujam told us that TCS is indeed transforming some of its larger delivery centers in India, including consolidating six campuses in Mumbai; removing cubicles in existing centers and installing large screens for interacting with team members based in other locations. We were assured that there is a “significant” investment in thus workspace transformation, but that there is no pressure on margins.

TCS’ emphasis on its capabilities in location independent agile is unsurprising: distributed agile is obviously important for large enterprises, and for many, their agile teams remain pockets of excellence. But getting distributed agile to work effectively is absolutely critical for those application services providers (by far the majority) that have an off/nearshore-centric global delivery model. Offshore delivery is not going away.

Machine first delivery model (MFDM)

As we have noted before in our Quarterly Updates on TCS, MFDM is not (just) using automation and AI for operations optimization. It is about giving technology the “first right of refusal” to sense, understand, decide, and act within a networked environment equipped with analytics and AI. The human interface is used for exception handling, training the machine to reduce exceptions, and for the application of contextual (often industry) knowledge.

The emphasis in the ‘Machine-first’ philosophy in the interplay between people and technology is how augmenting human capability can help unlock exponential value. The positioning is that MFDM can enable transformation in the client’s businesses (and, thereby, growth) for example through STP, new business models, increased speed to market, transformed CX, etc.

MFDM is thus a key element in TCS’ efforts to gain mindshare with stakeholders outside the CIO. We think there is more to be done in the articulation of the philosophy, as some clients (and, we noted, analysts) are honing on the automation aspect rather than the more disruptive business transformation play.

Ignio: in or out of TCS?

TCS describes its intelligent automation platform ignio as “the intelligent machine” behind MFDM. As with last year, most activity to date has been around IT operations (we estimate around 75%) though there is beginning to be increasing use of ignio to support applications development activities. The application of ignio in TCS’ Cognitive Business Operations business is in its infancy: obvious use cases include working on increasing the level of STP in activities such as finance, and accounting, supply chain, claims or mortgage processing. So, there are still considerable opportunities to leverage ignio across the portfolio.

At the same time, there is increasing traction for ignio as a commercial product, sold at times by other systems integrators. TCS highlighted that in FY18, its third year of operation as a commercial product, ignio achieved revenues of $31m, substantially more than many other SaaS enterprise products and also commented that it is looking to achieve >$100m in annual revenues in the next two years.

There is some tension between these priorities, and in discussions with execs, we noted some uncertainty as to the optimum model for ignio: as one of several product units within TCS, a separate subsidiary, or a standalone ISV which can sell more easily to other IT services providers.

The service portfolio revamp is helping drive digital; work to be done on full stakeholder play

In the last 12 months, TCS’ revenues from ‘digital’ services and solutions have increased by 49% to nearly $5bn. And the rate of growth has been accelerating: in Q2 FY19 revenue from digital services and solutions was up nearly 60% and accounted for >28% of the quarter’s total revenues (see TCS Quarterly Updates for more information). Moreover, this is organic growth. There is, of course, the caveat that there is neither commonality nor clarity as to different vendors’ determinations as to what classifies as digital, and in TCS case it has won some very large platform-based outsourcing wins that it would classify as digital. Notwithstanding, we are not aware of any other IT services vendor enjoying this level of organic growth at this scale, in what is primarily a services, rather than solutions, business. All IT services providers are undergoing a process of reinvention. Among the larger players, TCS is unusual in succeeding so far in achieving this through internal transformation.

Among the new standalone practices within the Digital Transformation Services (DTS) group, IoT and the larger Analytics & Insights unit are enjoying very strong growth. Taking longer to take off is Blockchain, with most activity still at PoC stage, a reflection of where the market is currently, but the pipeline is building up.

Among other things, the new service delivery structure has worked in helping advance TCS’ full services play and support its ambitions for its offerings to be more business outcome focused, and “to address issues of board-level significance”. However, this is not quite the same as having direct access to CxOs. While we appreciate that TCS does have direct access in some service areas and in some clients to stakeholders such as the CFO, we think there is more work to be done around the full stakeholder play and in elevating the TCS brand from technology to business partner, both in increasing thought leadership and also in the portfolio.

What next at TCS?

We have been aware that TCS’ messaging around Business 4.0 is resonating well with clients, but, as noted above, feel that the business transformation potential of the MFDM philosophy is less well understood. Expect to see more messaging in 2019 which provides specific client examples demonstrating the benefits realized from MFDM, and how the value proposition coming from the MFDM approach supports the delivery of specific services.

While TCS has focused on organic growth in recent years, we were keen to know whether there might be any tuck-in acquisitions to augment, for example, the design capabilities of TCS Interactive (and increase TCS’ access to client’s marketing budget stakeholders), or perhaps its managed security services capabilities. In short, we think that there is a possibility of both, that the recent acquisition of a design studio in the U.K. will be followed by other tuck-ins in other geographies, also that a cyber specialist asset, perhaps in the U.S. is attractive.

In terms of target markets, also expect to see an increasing focus on the U.S. public sector, for example, that builds on its experience in state Unemployment Insurance platform modernization.

Summary

A major focus of the event was to show why and how TCS has been redesigning and adapting organizational structures, facilities, processes and policies, and also its workforce culture to align with location-independent agile and with the MFDM. In our discussions with execs, we also picked up that the thinking is looking further ahead, to a time when there is virtually no coding and computer science skills become less relevant, and a primary key skill is data science.

One presentation referred to the great Wayne Gretzky's (dad Walter’s) advice to “skate to where the puck is going” (rather than where it is). This may have become an over-used aphorism in the corporate world, but, like all good aphorisms, is effective in neatly capturing a concept or principle. In our discussions with execs, we were convinced that TCS has a clear vision of the future of information technology, and it is investing to make sure that it will remain relevant even when the nature of IT services has changed dramatically from what it is today.

We have delayed the publication of this event note until after Capgemini’s Capital Markets Day this week, when Capgemini confirmed its mid-term ambitions of 5-7% organic growth and an operating margin of 12.5-13%.

“In Shape and On the Move” were among the first few words of COO Thierry Delaporte’s closing address at Capgemini’s global analyst and advisor meet in NYC, and this claim nicely sums up what is happening at Capgemini in 2018. Let’s take a closer look.

Examining the claim

In shape

The company is in relatively good shape. In 2017 Capgemini achieved a recovery in its North American operations and delivered organic topline growth of 3.6%, an adjusted operating margin of 11.7% (its third consecutive year at over 10%) and FCF of €1,080m. Guidance for 2018 includes >7.5% CC growth, of which ~1.8% inorganic, and an adjusted operating margin of 12.5-13%. This is solid execution, especially for a European headquartered IT services major.

On the move

Having celebrated its 50^th anniversary last October, Capgemini is also very evidently on the move: it has been expanding its capabilities in Digital and Cloud, including making several acquisitions around experience design, as well as making progress in renovating some of its traditional services (e.g. around agile development). It is also getting to grips with long-term challenges in presenting a unified face to the client and in gaining access to CXOs other than the CIO to position for opportunities in supporting clients with their digital transformation (where any growth in IT spend is coming from). The reorganization taking place at Capgemini today, impacting both go-to-market and portfolio management, is perhaps the most radical and most significant in its history. Certainly, it is one that is required for Capgemini to be able to position on its slogan of ‘A Leader for Leaders’.

Overview of organizational changes

In attending the event, we were keen to check whether the new group organization that had been publicly announced a few days before is as fundamental a reengineering, particularly around portfolio, as it sounds (or perhaps just an application of lipstick). After many conversations with Capgemini folk, we came away convinced. So, here’s a brief overview of the organizational changes.

Firstly, around go-to-market

Historically, Capgemini’s decentralized structure meant on occasions a lack of coordination at the account level outside the very largest strategic accounts (which have been covered for some years via dedicated account managers or country boards); the group has been seeking to address this for some years. Back in 2016, it looked as if Capgemini might start replicating the success of its Financial Services SBU – which has expanded from application services to selling the full Capgemini portfolio – to other verticals. And with the development of the portfolio around Digital Manufacturing, it looked as if this might be the case with manufacturing, rather than, as we expected in 2016, retail.

What Capgemini has opted for is more realistic for the group. There is more sector relevance, without a wholescale group-wide verticalization. FS remains a purely vertical SBU. Elsewhere, each major geographical SBU (North America & APAC; EMEA) is now aligned by sector in the go-to-market. This means the taxonomy of sector offerings is now globally standardized; also, Capgemini’s model has moved from parallel P&L structures to a more unified GTM at the account level. For smaller accounts, the GTM is by vertical within a service line.

So, there is both increased account centricity and some increased sectorial focus.

Secondly, around portfolio management

This is perhaps the more remarkable aspect of Capgemini’s restructuring. There are seven current priorities across the portfolio, which Capgemini classifies in three groups:

• ‘Rejuvenating core IT’ (still a major part of the business; Capgemini claims ~45% of its business is in Digital and Cloud):
  • Next gen AMS
  • Digital core (S/4 HANA, ERP to cloud, intelligent process automation in BPO)
• ‘Reinforcing high growth offers’ (with an increasing sectorial dimension around some of these):
  • Digital CX
  • Cloud
  • Cyber (will be boosted in Q4 by the Leidos commercial sector acquisition)
• ‘The New’:
  • Digital manufacturing
  • AI & analytics.

We assume emerging technologies such as blockchain and AR/VR are either being subsumed within areas such as Digital Manufacturing or will in time appear as separate priorities within ‘The New’.

Capgemini is changing the way it is working. There are now five global business lines, with effect from July 1:

• Capgemini Invent, comprised of Capgemini Consulting and a series of recent acquisitions: LiquidHub, Fahrenheit 212, Idean, Adaptive Lab (also Backelite, acquired back in 2011)
• Engineering & Manufacturing Services, comprised of different units, including Sogeti in France and the U.S., IGATE’S engineering services unit, and Digital Manufacturing Services
• Business Services
• Cloud & Infrastructure Services
• Insights & Data.

We would expect the service line reporting to change to reflect this in 2019.

The first two of the five global business lines are brand new practices.

The two geographical application services capabilities held within APPS.1 and APPS.2 remain as local practices – clearly this was too big a pill to swallow currently.          

Across all of these, Capgemini is, unsurprisingly, looking to inject an innovation agenda, e.g. injecting automation/AI tools and analytics into traditional IT services and BPO, and building scale and reusable solutions in the newer areas.

One minor distinction is that there is not a central unit with responsibility for developing AI models: the approach, that AI is infused everywhere, prevents the potential siloed approach to developing uses cases across service lines that we have noted with some other services providers

The big change: Capgemini Invent

The priority in terms of portfolio development is with Capgemini Invent, launched externally in September, and covering consulting, transformation, and invention activities. It has six practices:

• Innovation and strategy, led by Fahrenheit 212, focusing on new products and services and business models
• Customer engagement, focusing on CX to handle complexity (e.g. channels) and IT modernization. It competes with digital agencies
• Future of technology, using emerging technologies such as AI, robotics, and blockchain
• Insight-driven enterprise, data analytics and AI
• Operations transformation, with a focus on industrial operations
• People and organization.

If we are to believe what we have been told, Capgemini Consulting ceases to exist.

Speed of integration of LiquidHub shows momentum

Where Fahrenheit 212 may have helped changed the mindset of the group, LiquidHub has added scale and is the heart of Capgemini Invent in the U.S. The intended level of integration of the various units that make up Capgemini Invent is evident in the immediate retirement of the LiquidHub brand name. This is a significant difference from what we see happening in some other major service providers, where their Digital practices include acquired entities that have retained their brand names – thereby distinguishing them from the core IT services practices. There are a number of advantages if Capgemini Consulting – and the other acquired assets that make up the practice – all operate under the Capgemini ‘Invent’ brand. For example, the Invent brand could be helpful in attracting younger talent.

Conclusion

The creation of Capgemini Invent (and the concomitant retirement of Capgemini Consulting) is a bold move by Capgemini in helping it position much more strongly around business innovation. The new organization structure should also be instrumental in driving change across the group.

We were expecting to see some tuck-in acquisitions in Europe to help build a full set of Capgemini Invent capabilities across geographies, and indeed Capgemini has just announced its acquisitions of June 21 in France and of Doing in Italy; we expect there will be others, perhaps in Germany or the Nordics.

There is some progress in terms of sectoral dimension, and the fact that there is a practice in Capgemini Invent focusing on industrial operations is significant (it is not just looking at digital marketing and UX). But we think Capgemini has some way to go in certain key target sectors, and we expect sector-specific offerings to feature more prominently in the next few years.

The joint COO structure is unusual, but as well as providing a clear indication of CEO succession planning it also provides a clear dual focus for corporate developments, for example with Thierry Delaporte driving the sector plays.

During the event, Capgemini cited an example of a client where the relationship has evolved from being a volume partner (a large application maintenance contract), to a value partner (Capgemini is now their main digital partner). This illustrates neatly the ambition of the group.

This week started with the announcement by Atos of its intended acquisition of Syntel for $41 a share, a total consideration of around $3.57bn including Syntel’s net debt of $201m, in an all-cash deal.

Syntel being acquired is not a total surprise: the company has faced some challenges recently, and in the previous four weeks its share price had been going up strongly (from $31.61 a share on June 27 to $39.13 at the end of last Friday, a jump of 24%). And Atos making a significant acquisition in the U.S. was very much on the cards. In fact, the companies said that they have had discussions about a possible tie-up going back to 2014, predating Atos’ previous major acquisition expanding its North American presence, that of Xerox ITO in 2015.

At nearly 3.7x revenue and 14.5x EBITDA, the purchase price at first glance looks high, but it’s a premium of just 5% on Friday’s close and of 14% on the last 30-day share price average. Assuming regulatory clearance, the acquisition will transact (unlike Worldline’s hostile bid for Gemalto): Syntel’s founders and affiliated entities (who own 51.1% of the company’s shares) have committed to vote their shares in favor, both companies’ boards have unanimously approved the transaction, and we do not expect to see a counter bid. Barring any regulatory challenges, the companies expect the acquisition to close by the end of the calendar year.

So why is Syntel attractive to Atos? In short, Syntel will provide:

• A boost to Atos' North America business ($823m revenues in 2017, representing 89% of its total revenue), in particular for application services – filling in the Business & Platform Solutions (B&PS) gap in Atos’ North American business we have commented on previously (see here for example)
• Three large clients: Amex, State Street and FedEx, which together accounted for just under 45% of Syntel’s revenues in 2017 (~$415m)
• A boost to its BFS and Insurance sector businesses (approaching $420m and $140m in revenue in 2017 respectively), also a significant U.S. application services practice in the Healthcare/Life Sciences vertical to complement Atos’ recent healthcare sector acquisitions
• A large Indian delivery capability: Syntel has ~18k (mostly delivery) personnel based in India with some large campuses in Mumbai, Pune, Chennai and Gurugram (previously known as Gurgaon) and has developed an effective resource planning model enabling fast deployment in new projects
• And, unlike some recent Atos’ acquisitions, it will be immediately margin accretive.

Syntel’s challenges have included its heavy dependence on H-IB visas with little substantive onshore capability, and a lack of discretionary budgets in many of its major accounts, particularly in BFS: the company’s revenues have been declining for some time (2017 revenues were down 4.4%, with BFS sector revenues down over 11%, the primary factor being a 30% decline in revenues from AmEx, following the completion of a large project).

Atos refers to 40% of Syntel’s revenues coming from digital (cloud, social media, mobile, analytics, IoT and ‘automation’). Syntel currently reports that revenue from digital projects accounted for 20.5% of total Q1 2018 revenue (Q4 2017: 19.7%), growing at 21.6% y/y with the other ~19.5% of revenues related to the automation and modernization activities that build the foundation for implementing digital capabilities.

Major initiatives have included:

• A focus on growing some of the top 4 to 50 clients, and here there has been some success: in Q1 2018, this group represented 52.5% of total revenue, growing at around 17% y/y
• Ongoing enhancements to its Syntbots intelligent automation platform, underpinning all its service lines, including additions in machine vision, NLP, ML and virtual assistants
• The Syntel X.0 workforce transformation model launched in 2017, aligning competency building with career planning and performance management to develop a future-ready workforce.

The simple addition of Syntel to Atos will:

• Increase its global revenues from €11.9bn to around €12.7bn
• Boost its operating margin from 10.6% to 11.5%
• Extend its Business & Platforms (B&PS) business from 26% to 31% of its global revenues
• Extend its North American business from 16% to 21% of its global revenues
• More than double its India-based headcount, to 32.5k.

But, of course, Atos is looking for more than a simple addition. In its rationale for the acquisition, Atos declares it is looking for additional revenue synergies, reaching ~$250m by 2021, with half achieved by 2020, from cross-selling opportunities in both the European and U.S. client bases. We think there are significant opportunities from:

• Cross-selling Syntel digital offerings, offshore-delivered apps development, testing and application modernization services into some of Atos’ European clients, particularly in BFSI and retail
• Cross-selling Atos’ infrastructure services into some of Syntel’s larger U.S. accounts
• Developing an integrated end-to-end portfolio for targeted segments of the U.S. healthcare sector.

Atos also expects the increased offshore delivery and revenue synergies will add $50m to the operating margin. To facilitate this, Atos is moving ~$1.2bn of its current B&PS work (~33% of 2017 global B&PS revenues) to operate under the Syntel model upon completion of the acquisition. This includes the entirety of the North American B&PS footprint (~$160m, <5% of global B&PS 2017 revenues), plus select contracts from other regions. Key aspects of Syntel’s delivery model that Atos is looking to utilize include increasing offshore leverage also the use of automation and agile delivery.

Atos is also targeting ~$120m from G&A optimization by end 2021 from the combined scale, including consolidation of facilities in India (Atos expects to move its employees based in Chennai and Pune into available space in Syntel’s larger campuses in these cities), plus the alignment of KPIs in B&PS

Will there be challenges in the integration? Of course. Some of the immediate ones that come to mind include:

• Aligning Syntel’s 'Customer for Life' ethos, with its implied customized approach, with Atos’ more standardized “Digital Transformation Factory” framework
• Managing attrition in India, though we imagine this will be easier now that employees will be working for a larger, more global organization
• Managing the reverse integration of some of Atos’ B&PS larger contracts into the Syntel delivery model
• Up and/or cross-selling larger transformational engagements into Syntel’s top 4-50 client base, which includes a long tail of small accounts; this will require substantive awareness raising.

Given the level of reverse engineering in B&PS, the role played by Syntel senior management will be fundamental. Syntel CEO Rakesh Khanna will join Atos’ Executive Committee and will be key to driving this.

And of course, Atos has a well-honed integration methodology and has successfully integrated some large and some more problematic acquisitions over the last decade.

The addition of Syntel will certainly fill in the B&PS hole in North America, add substantive offshore delivery, bring in IP such as its SyntBots and MIII (manage, migrate, & modernize) framework, and improve B&PS margins.

The acquisition should accelerate the B&PS transformation globally including in the application of intelligent automation to service delivery. It also means Atos globally has a more balanced portfolio in its IT services offerings. We think there are further potential benefits, for example in leveraging some of the IP that Syntel will bring in to develop more industry-specific offers for sectors such as healthcare payer and financial services.

Readers of the NelsonHall Quarterly Updates on Tech Mahindra over the last two years will be aware of initiatives that have taken place to turn around the LCC business it acquired, and also of recent investments such as a minority stake in Altiostar. This blog looks at some of the other sectors in which Tech Mahindra operates, and at some broad developments around service delivery.

Two recurring themes in the presentations at Tech Mahindra’s recent global analyst event in Hyderabad were ‘Future’ (a refreshing change from ‘Digital’) and ‘3-4-3’ – indicating the overarching intent to demonstrate how Tech Mahindra is developing its offerings portfolio to be relevant to clients in each of its target markets.  Also evident was a strong focus on upskilling of personnel and innovating service delivery. Tech Mahindra is well known for its heritage as a specialist IT and engineering R&D services provider in the communications vertical, for engineering services in the auto and aerospace sectors, also for its work in supporting other Mahindra Group companies. To what extent is the company able to leverage these capabilities today to support other types of enterprises in their digital initiatives?

3-4-3 approach informing vertical initiatives

In his keynote, CEO CP Gurnani introduced the ‘3-4-3’ theme informing the portfolio strategy. For each target vertical, the company has picked 3 major trends, which have informed the selection of 4 focus areas in portfolio development (the ‘big bets’), and also the sector positioning in helping clients address 3 core CEO objectives: 'Run Better, Change Faster, Grow Greater'.

To briefly illustrate the application of the ‘3-4-3’ approach to two sectors: Communications, its largest and most mature (while Tech Mahindra’s dependence on this sector group has been reducing, it still represents nearly 43% of revenues) and BFSI, one of its smallest vertical units (13% of revenues).

Communications industry

BFSI sectors

Articulating what 3-4-3 means at sector level appears to be a work-in-progress (the links across the 3 dimensions are not always clear), but it is a neat approach for clarifying investment priorities and for developing a narrative around business outcomes for each target vertical: ‘Run, Change, and Grow’ workshops are likely to have been an important instrument in the very evident recent improvement in client mining (see recent NelsonHall Quarterly Update for details).

Tech Mahindra would be expected to have a strong narrative around the future of the Communications sector, so how does the 3-4-3 strategy translate into its investment priorities in the financial services sectors? Well, the acquisitions since 2015 of:

• BIO Agency brought in capabilities around digital CX (~£12.5m rev)
• Target Group (~£51m rev) brought in a platform BPaaS capability for processing lending and investment products. Target subsequently acquired the mortgage processing platform of Commercial First
• Sofgen in 2015 brought in Temenos and Avaloq core banking capabilities, focusing on German-speaking Switzerland.

BIO and Target Group both operate in the U.K. However, we have not seen cross-fertilization between them to develop more of a transformational story. Tech Mahindra continues to target relevant smaller scale opportunities in the mid-sized banking sector in the U.K. and EMEA.

Manufacturing industry

Let’s look at another broad vertical, one where Tech Mahindra has been enjoying double digit growth recently: Manufacturing. Here, it is benefiting from:

• Existing domain experience around connective devices, its strong heritage in product engineering services, also from supporting other Mahindra Group divisions, and from this, a close understanding of how AI and IoT technologies can be applied to enable new digital business models
• Some recent investments, such as its ‘Factory of the Future’ Lab in Hyderabad, which focuses on the use of technologies such as IoT, cloud, analytics, robotics, and AI in the manufacturing sector
• Its acquisition of Italian automotive product design house Pininfarina
• Partnerships, such as with Toshiba Digital Solutions.

In short, in discrete manufacturing, Tech Mahindra is well positioned for newer types of IT services around IT/IoT convergence and is investing in developing a range of new offerings.  We might possibly see further tuck-in acquisitions, perhaps to help it better leverage Pininfarina for offerings around connected device.

More likely, we think, are additional digital agency tuck-in acquisitions, perhaps folding these into the BIO umbrella, with the U.S. the most obvious geography, to scale its digital agency capabilities and align these more closely to Tech Mahindra’s principal target sectors.

‘New Age Delivery’ for software of the future

As well as the vertical stories, we also got a brief introduction to this initiative to transform how software development is done, essentially to increase the speed (and quality) of code production. Tech Mahindra’s ‘New Age Delivery’ platform (it might be branded differently, but for this blog I’ll refer to it as NAD) combines various approaches and tools the company has been developing in the last few years. Key attributes and related assets (both proprietary IP and third-party) include:

• Automation and AI across the SDLC, leveraging its AQT (Automation, Quality, Time) suite of automation and AI tools, including TACTIx (IT and network ops), FixStream Meridian (IT ops) LitmusT (testing), Entelio (chatbots) and UNO (RPA), and Acumos, an open source platform for building and sharing AI applications
• Enabling the adoption of Agile and DevOps at scale, leveraging the ADOPT framework that it launched back in 2014, based on the CollabNet TeamForge ALM platform. Includes an Agile training kit
• Reusability, leveraging its ‘Blue Marble’ cloud-based business service integration platform for microservices
• Collaboration, using the Xtra Mile crowdsourcing platform
• Upskilling/reskilling capabilities including through gamification
• Co-creation with clients.

Some of these assets have been used by Tech Mahindra for some years; others such as Acumos, launched a few months ago, are much newer. Acumos, co-developed with AT&T and hosted by The Linux Foundation, is a marketplace where users can access AI and ML models packaged into microservices and connect them to data sources to build new AI applications. Self-organized peer groups, e.g. within a company, can share, test and review AI solutions. The initial target sectors (unsurprisingly given it is an AT&T and Tech Mahindra collaboration) are Telecoms, Media & Technology: use cases suggested include development of AI applications for use in video analytics, content curation and AR/VR. Acumos thus supports the key principles of reusability and co-creation noted above. Development of AI models will primarily be on open source; this is a timely move.

Tech Mahindra’s NAD platform also includes ‘Design Thinking as a Service’ (DTaS), 'Capability as a Service' (CaaS) and 'Upskilling as a Service’ (UaaS) which includes online training (takes in a developer’s rankings from the crowdsourcing platform).

The platform is helping Tech Mahindra position as a services aggregator, managing projects in which onboarded ‘capability partners’ can bid for pockets of work (code packages) in projects. The next stage of the initiative appears to be onboarding partners with the requisite skillsets (e.g. mobile) into the platform.

As well as extending Tech Mahindra’s reach in areas where there are skills shortages, the UaaS elements are of critical importance in re- and up-skilling its internal talent for newer technologies and methods of working (it includes a predictive tool for identifying appropriate candidates).

The NAD platform thus aims to address a number of critical success factors in software delivery today. It is clearly particularly useful for complex digital transformation projects. Presumably, Tech Mahinda can also extend its use to managed services engagements.

Tech Mahindra is currently using the platform with four clients in the telecoms and retail sectors.

All tier 1 IT services providers are busily accelerating their use of automation and AI in service delivery, with the focus still primarily in infrastructure operations. Tech Mahindra’s approach with its NAD platform (which focuses on software development) has a broader vision, one that includes harnessing crowdsourcing in a systematic manner, bringing in specialist partners, UaaS, and the Acumos marketplace, all of which are likely to be very attractive to clients.

The NAD initiative will be a key asset in evolving its delivery capability to help it achieve its target of having 50% of revenue from digital services by 2020.

TechMNxt: positioning statement and ecosystem program

‘TechMNxt’ is a term being used by Tech Mahindra as a positioning statement, as it works on becoming a ‘next gen’ IT services company in terms of technologies, business model, and employee capabilities. The company is also using TechMNxt to refer to a global program to engage with tech start-ups, alliance partners and academia to develop offerings in the areas of AI, ML, cybersecurity, next-gen networks, big data, IoT, etc., and also to open CoEs. A recent example of an initiative under this banner is opening a Maker’s Lab in a BT Research Campus in the U.K. Expect to see the brand being used increasingly.

Apart from its acquisition of HCI, the company does not appear to be planning to significantly increase its onshore presence in the U.S. to reduce its (relatively high) dependence on H-1B visas and also improve client proximity for (early stage) digital projects. Its strategy appears to continue to focus on the kind of activity that can be offshored.

Summary

CP Gurnani has been vociferous for some years about the need for the Indian IT industry to reinvent itself and to be capable of innovation, and this ambition is very clear at Tech Mahindra. The company’s heritage and domain expertise in Communications and its strong capabilities in engineering services will continue to be an important facet of its specialization. In addition, in separate conversations with the company, NelsonHall has been impressed by how Tech Mahindra is applying AI in its engineering services business.

The NAD platform is also a well thought-through stitching together of a number of approaches to software development.

While Tech Mahindra is convincing in how it is developing its offerings for the Communications and selected discrete manufacturing sectors, there is more work to be done in developing a coherent narrative about its ability in some of its other target sectors to support companies in major digital transformation initiatives.  The fact that it still refers to its non-Communications units as its ‘Enterprise’ business is telling. We note that although BIO Agency and Pininfarina (both acquired in 2016) got star billing, there was no mention at all of HCI, its large recent acquisition in the U.S. healthcare sector.

A final note… unlike some Indian-oriented service providers (by which I mean those firms with primarily Indian leadership as well as Indian delivery capabilities, not just those headquartered in India), Tech Mahindra remains very proud of its Indian culture and centricity. Most of the client examples provided over the two days were Indian organizations (though 47% of its revenues are from U.S. headquartered organizations), which gave a slightly local feel to this global analyst event.

NelsonHall recently attended NIIT Technologies’ analyst and adviser event in London, and we were keen to get an update on developments at the company since the arrival of Sudhir Singh as CEO. We were aware that the last two quarters have seen a significant increase in the number of large deal signings (five, compared with two in H1 FY18), also that there have been a significant number of new appointments - but generally NIIT Technologies has been rather quiet. It is now apparent that the company has been embarking on a major transformation.

From Geographic to Industry Focus

This transformation is most evident in a radical organizational restructure from the former geography-based P&L to one that is vertical-led. In sales pursuits, there has been a sharper vertical-specific narration and a stronger emphasis on capabilities in digital, data, cloud and automation – and this is likely to have helped in at least some of the recent large deal signings.

NIIT Technologies is now structured primarily around three key industries, in each of which there is a focus on a specific sub-segment where the company would like to have a dominant position:

• Travel & Transportation (26% of total revenue), specifically airlines & airports
• Insurance (we estimate ~24% of total revenue), specifically commercial and reinsurance (primarily London market)
• Banking & Financial Services, (~19%), specifically wealth & asset management.

The importance of this is not to be underestimated: in both IT and business process services, deep industry domain expertise, and ideally IP, is a key factor in vendor selection. Having recognized the need to operate at the intersection of selected verticals and emerging technologies, NIIT Technologies has made a wholesale rejigging that goes from go-to-market right through to delivery.

The former ADM organization (which generated two thirds of the company’s total revenue) has now been folded into these three verticals; each now has a Global Head (who may also have a regional responsibility) and a head of delivery.  The former head of ADM is now wearing a different hat: as NIIT Technologies’ first ever CTO, his responsibilities include accelerating the use by the company of blockchain, IoT and AI.

The other much smaller service lines of Infrastructure Management Services and BPS stay as standalone units, and there are also separate units for Data/Automation and Cloud.

Singh has also introduced:

• A large deals pursuits team, in parallel tweaking salesforce incentivization plans to increase the focus on large deal ($20m+) wins
• A new partnerships and alliances organization.

External Leadership Hires, Center of Gravity Moved from India to the Markets

Since Singh’s arrival, the company has been on a hiring spree: all the three vertical global heads are new recruits, as are the global heads for Data & Automation (a new service line), RPA, and Cloud.

Several things are evident in these recent leadership appointments:

• They are all external hires, and from much larger firms
• They are all based onshore, close to clients: three of the eight are based in Princeton, NJ (where the CEO is also based) and two in London (near the London market client base)
• There is a clear focus to accelerate the use of intelligent automation (IA) in service delivery, also to expand capabilities in data & analytics.

This influx of new senior execs is not part of a turnaround program: NIIT Technologies’ topline growth in recent years has been steady, if not stellar, and EBIT margin has not been under any unusual pressure. What is happening should be seen rather as an evolution, one that builds on assets and capabilities that the company has acquired or been developing over the last few years, including:

• Proprietary IP such as Mona Lisa for the airlines sector and the suite of products (Navigator, Exact and Acumen) for the commercial insurance sector. As we indicated in our blog last year (see here), the recent focus in product development has been adding microservices (10 were launched last week) and cloud-based tools to improve the UX: next month will see the launch of a smart assistant, Aniita, and an analytics tool, Score 
• Capabilities in Pega and Appian, through its acquisitions of Hyderabad-based Incessant Technologies in 2015 and Ruletek in 2017, which expanded Incessant’s delivery presence and client base in the U.S. BPM is a building block in digital process transformation
• Its ‘TRON’ intelligent automation platform. Our perception is that while NIIT Technologies is slightly in catch up mode in the use of IA in its delivery of both application and infrastructure services (e.g., it currently has 4 PoCs in progress using arago’s HIRO), there is a strong push to change this.

“Engage with the Emerging: Innovate, Incubate, Industrialize”

This phrase neatly captures the journey on which NIIT Technologies has embarked: to build on its existing industry knowledge by expanding its capabilities in emerging technologies and by industrializing service delivery through IA. The ambition is clear: for clients in its target sub-verticals to see NIIT Technologies as a partner of choice for large scale digital initiatives, not just as an offshore ADM provider with experience of operating in their vertical.

So, what will we see at NIIT Technologies over the next year? In brief:

• More industry-specific use-case in the use of cognitive, IoT and blockchain (which has obvious relevance in all its target sectors), with concomitant marketing
• Much greater use of IA across service delivery, particularly in infrastructure services,
• Expansion of the existing partnership ecosystem, e.g. around cognitive tools, analytics, fintech
• Expansion of cloud-based offerings and of API capabilities in each of the three key sectors
• NITL (the insurance software unit) growing its client base outside the U.K., with a particular focus on the U.S.
• Double digit CC growth (EBIT margin expansion coming after: the current priority is topline growth)

And what might we see?

• Stronger interaction between Incessant Technologies and the vertical units in building out vertical-specific digital transformation narratives
• Niche acquisition activity, e.g. around data and analytics
• More onshore hiring, e.g. of solution architects, data scientists, vertical domain SMEs, etc.
• The creation (though unlikely in 2018) of a fourth vertical unit, perhaps manufacturing, or possibly media (though the acquisition of key account Morris by Gatehouse is causing a major dent in this business).

Summary

Sudhir Singh was appointed last May as CEO designate, taking over this January from Arvind Thakur, NIIT Technologies’ first-ever CEO, and now Board Vice Chair. In that seven-month period he was able to put in place some of the building blocks for the next phase of the company’s development, one where it can position on possessing capabilities across vertical domain, emerging technologies, and IA: three absolutely critical attributes for staying relevant to clients.

NelsonHall recently attended the Atos global analyst event in Boston, where we were keen to get an update on topics including:

• Atos’ strategy for growth in North America, which has new leadership following a rather disappointing 2017
• Recent developments and short-term priorities for offerings in the Digital Transformation Factory.

It appears to us that, nearly three years after its acquisition of Xerox ITO, Atos’ strategy for North America is a work-in-progress.

Recent developments in North America

As a reminder, in 2017, the first year of its Ambition 2019 three-year plan, Atos’ 2.3% organic topline growth and adjusted operating margin(up 140 bps y/y) were both in line with guidance. The major weakness was North America (which for Atos is essentially the U.S.), which started 2017 as its largest geo), where Atos has been challenged with scope reduction in some IT infrastructure outsourcing contracts, also by ongoing declines at Unify. The appointment of Patrick Adiba, formerly Atos Group Chief Commercial Officer, as CEO North America (he has been based in Dallas since last fall) reflects a drive to invigorate the sales organization in the region, as does the hires of several sector leads.

In the last 18 months, Atos has acquired B&PS capabilities in the U.S. in the healthcare sector: Anthelio, followed by three consulting practices (two of which from Conduent/Xerox). There still appears work to be done to integrate these operations and develop a coherent integrated portfolio that leverages the managed services capabilities brought in with Anthelio (Anthelio’s former CEO, who was meant to head Atos’ healthcare practice in North America, is not around) together with provider consulting capabilities, also to win more Digital Transformation Factory (DTF)-based deals

Opportunities for growth in North America

The short-term opportunities in the U.S. are cross-selling DTF offerings into the legacy IT infrastructure services client base acquired with Xerox ITO, rather than winning new logo business – and there have been expansions with some longstanding clients such as McDonalds and with Texas DIR. The immediate large-scale cross- and up-sell opportunities for Atos would appear to be in cloud migration services. Atos’ alliance with Dell Technologies should be significant in its attempts to expand in Dell’s U.S. homeland, though, perhaps by oversight, a presentation by Dell’s head of corporate strategy about the alliance did not refer to this! 

In order to grow its North American business in orchestrated hybrid cloud, Atos acknowledges that improving CSAT is a priority. To improve delivery management, Atos has introduced a ‘two-in-a-box’ model with its larger accounts, with a delivery lead (who has oversight of all delivery into an account) incentivized by CSAT rather than SLA performance or revenue. Also, Atos did not inherit an account-based sales organization from Xerox ITO - implementing one has taken several years. Since January, the North American sales force has been aligned by vertical. In terms of cross-sell opportunities, the obvious sectors are healthcare (payer and provider) and retail/CG (which was Xerox ITO’s largest vertical).

Although the major emphasis is on account mining, we also expect to see a push in North America for new logo clients in manufacturing, given Atos’ relationship with Siemens – the week before the event Siemens and Atos had announced an extension of their strategic partnership to 2020 with the level of joint investment in their innovation program increasing to €330m. This is an alliance that has legs: the partners claim to have achieved a joint order intake of €2.5bn since the alliance started in 2011. One focus area is IoT, leveraging Siemens MindSphere from its Digital Factor division, and Atos Codex. Atos, one of the first SI partners for MindsSphere, has developed a range of Mindpshere apps, and Siemens is increasing its focus for MindSphere on the North American market – of the initial group of 19 companies in the MindSphere world user group, not one is a U.S. headquartered organization.

Atos North American business remains heavily dependent (>92%) on its I&DM offerings: the Business & Platform Solutions (B&PS) activity remains nascent in the region. Our view is that Atos needs to scale its B&PS offerings in North America, and this requires further acquisition.

We have written before about Atos’ capabilities as an acquirer and integrator. But the pattern has been one of opportunistic acquisitions. Most of the large systems integrators have been/are increasing their industry domain expertise to improve their ability/positioning for supporting clients in the digital transformation of their businesses and business models. Positioning on business value outcomes typically demands a sector-specific articulation, even in digital workplace services. However, Atos will probably continue to be opportunistic, and rather than acquirinh to expand a vertical presence in North America, a large transaction that adds further scale in one of its heartland geographies would not surprise us.

Digital Transformation Factory: two of the pillars growing well​

Atos claims DTF offers accounted for 23% of group revenue in 2017, with growth in line with Ambition 2019 targets, and particularly strong growth in Canopy Orchestrated Hybrid Cloud and Digital Workplace services (with the latter, revenues were boosted by the addition of Circuit) and the securing of several large deals indicates continuing strong growth in 2018. Both of these are areas where Atos is building on a strong heritage of providing more traditional services.

Our takeaways about newer areas in the DTF (and where we are conducting specific market analyses) were more mixed:

Codex

This is the Atos brand for advanced analytics, IoT and cognitive solutions, where key takeaways were:

• With IoT, Atos clearly benefits from its relationship with Siemens. Obvious opportunities include managed services for IoT, cybersecurity for OT/IT and industrial networks. We were given a range of use cases, including one that was new to us: connected rodent traps enabling its client to offer “pest-free warehouses as a service (an interesting example of a new business model!). Another use case is with Bouygyes Telecom, where Atos is one of the bigger partners in the Objenious alliance for the LoRa network. Atos’ partnership with Dell EMC is also relevant here, e.g. in building an IoT service management framework
• With blockchain, Atos appears perhaps less advanced than some competitors: it has a small unit residing in Worldline but working across the Atos group. It currently has 15 use cases, not all of which are in production. In one example, Worldline is currently trialling the use of blockchain with payment terminals.

SAP HANA 

This pillar, that was initially called after a specific product, has been quietly renamed "Atos Business Accelerators"–  the other end of the spectrum of precision in branding terms. Again, this appears to be still a work-in-progress. We will look at this separately.

What we did not hear mentioned (that surprised us):

• The new BTIC in Dallas
•  Priorities for Unify; ambitions with UCC and penetrating the NG 911 market
• Atos’ latest acquisition, Siemens VC
• Achievements (and there have been!) in the deployment of automation technology in I&DM, including in leveraging partner ecosystem technologies
• Priorities in accelerating the use of automation and industrialization in B&PS, which has new leadership.

This month, NelsonHall has attended the IBM Services analyst/adviser events in New York and Paris and we noted a distinct evolution in emphasis, with a much closer alignment between IBM's two services divisions. In recent years, IBM’s Global Business Services (GBS) and GTS businesses have been somewhat in the shadows of its Cognitive Solutions segment, although together they represent around 60% of total IBM revenues. However, 2018 looks to be a year when these two divisions, under the umbrella branding of IBM Services, really come back into the IBM limelight, benefiting from several factors coming to fruition, including:

• An increase in Watson use cases, providing real differentiation around cognitive-based offerings across GTS and GBS portfolios
• Investments in GBS to shift its practices around digital, cognitive, and automation and cloud
• GTS transforming to what it calls a ‘services integrator’, leveraging IBM assets
• A much closer alignment between GBS and GTS.

In this, the first of several blogs on IBM, we will look at some of these overall developments.

GBS aligning around three ‘growth platforms’

While GBS has been focusing on IBM’s strategic imperatives for years now, the influence of Mark Foster, who has headed GBS since September 2016, is very evident. Under his leadership, GBS has aligned and focused its capabilities around three ‘growth platforms’ centered on digital, cognitive and cloud:

• Digital strategy and iX: integrated strategy and design capabilities, extending to road map creation. iX is already at scale: IBM now has 36 iX studios globally, the latest one opening in Washington DC last month. A newer area of focus is building a larger digital strategy practice
• Cognitive process transformation: combining GBS’ business and process change advisory (including RPA design and build), BPO and analytics capabilities into an integrated play. GBS is one of few organizations that has significant capabilities in helping clients both transform their processes internally and also in operations. With BPO, there is a very clear focus on higher value services enabled by AI (embedding Watson), also blockchain
• Cloud application innovation: here, the ongoing emphasis is on reinventing strategic partnerships with the likes of SAP, Apple, Salesforce, and Workday for next gen enterprise application services, also leveraging automation/Watson to bring innovation into application maintenance and cloud application migration services.

Followers of Accenture will recognize that ‘growth platforms’ was a term used by Accenture for many years, then quietly dropped, so I was surprised to see the phrase now being used at GBS. Having coined the term when he was at Accenture, Foster told me, he feels no hesitation in continuing to use it as an apt description of the ambitions for GBS. Foster unveiled the growth platforms at the IBM Investor Day back in March; since then, GBS has aligned its personnel around these three areas. This year, he has brought in a slew of external hires to scale or revitalize certain parts of the portfolio, including digital strategy consulting, automation advisory, and SAP services. Expect to see a further crystallization of core GBS offerings next year.

What else are we likely to see at GBS in 2018? Here are a few suggestions…

• Will there be some niche acquisition activity bringing in digital strategy consulting capabilities?
• Clearly, in the cognitive process transformation growth platform, work will continue on the infusion of Watson capabilities in different use cases
• Perhaps closer interaction between the Cognitive Process Transformation unit and the blockchain practice set up in 2016 and headed by Bridget van Kralingen (who moved there from heading GBS), for example in developing more blockchain-based use cases (that eliminate any need for queries that a transaction, say in supply chain processing, has taken place)
• Possibly a greater emphasis on industry-specific offerings within GBS, again boosted by closer integration with the Industry Solutions practice. Will we also see some inorganic growth?
• As GBS’ business mix continues to transform (and the proportion of its revenues coming from more price sensitive traditional IT services declines further) GBS may at last return to topline growth
• Similarly, margin expansion, both from revenue growth and as increasing efficiencies in delivery and project management begin to outweigh the level of investments in the growth platforms and sales.

GTS: cloud and cognitive now embedded in all offerings, emphasis on ‘services integrator’

GTS, the larger and more profitable division, has also been going through a quiet transformation, also powered by IBM cloud and cognitive assets, with it positioning as a ‘services integrator’ to capture opportunities around large managed hybrid cloud and multivendor tech support services.

Its Technical Support Services unit (a large business, with a current revenue run-rate of $7.2bn) continues to target larger opportunities around multi-vendor support services in complex environments, inside and outside the datacenter, with (no surprises) embedded cognitive and automation components in the service delivery. Our next blog will look at solutions such as Augmented Remote Assist, which is already rolled out to most of its field force.

IBM’s huge infrastructure services business (revenue run rate $22.7bn) is beginning to recover from the market decline in – and its shift away from – traditional services, with cloud and cognitive now embedded in all offerings. IBM has been talking about the application of analytics and automation in GTS for over three years; cognitive is now also a reality, noticeably with the ‘IBM Services Platform with Watson’. Announced in July, the cloud-based IT operations platform, designed for hybrid cloud environments, can identify or predict potential problems and self-heal, and provide visibility via role-based dashboards. There are four key elements:

• IBM’s data lake, containing 30+ years of systems operations data from thousands of engagements, plus other structured and unstructured data, for use in incident analysis
• A broad set of automated capabilities for environment build, system hygiene, and dynamic automation (IPCenter), to support the design, management and optimization of IT environments
• IBM Watson providing insights and recommendations for future automations
• Client insights dashboards, powered by the Watson Insight Engine.

A big emphasis is on the platform’s full lifecycle management capabilities and on its flexibility to compose modular services from IBM and third-party providers. As such, it is another key asset in IBM’s armory (in addition to the nearly 60 IBM cloud data centers globally across 19 countries) in its positioning for large managed hybrid cloud services deals.

What are we likely to see at GTS in 2018?

• TSS start to deliver revenue growth, driven by expansion in multivendor support services, also margin expansion and improved service with more widespread use of predictive analytics and solutions like Augmented Remote Assist and the use of blockchain (for sharing operational data)
• IT infrastructure services also start to return to topline growth, driven by managed hybrid cloud
• An expansion in AI/automation advisory services capabilities, to target the enterprise transformation agenda
• Further developments in the use of Watson in support of infrastructure and endpoint security. We blogged in July about IBM's work to date in training Watson in the 'language' of cybersecurity (see here).

​Closer alignment between and GBS and GTS

A few years ago, the migration of IBM’s BPO business from the GTS division to GBS appeared to be a lengthy and difficult process. In contrast, this year has seen more branding around a single ‘IBM Services’ capability. Noticeable at both the New York and Paris analyst events was the number of sessions, both plenary and roundtables, which were co-hosted by people from GTS and GBS. The positioning now centers on their combined capabilities, powered by IBM assets, to support clients in addressing five ‘core needs’, which IBM classifies as:

• Finding growth in a low-growth, digitally disrupted world
• Innovation and data leverage as a basis for new growth
• Taking out structural costs, for competitiveness and to fund investment in growth
• Winning the war for talent, to access intelligence and automation
• Transforming enterprise processes and systems, to enable growth and competitiveness.

But how far does this alignment go in terms of the sales organization? Historically, collaboration has tended to be client-specific, for example in large multi-tower outsourcing pursuits. This is now changing. Apparently, in Europe alone this year IBM has invested over $7m in retraining on the new portfolios, with $30m earmarked for next year. There have also been appropriate changes to incentivization metrics and to internal processes.

In short, 2017 appears to have been a foundation year in the transformation of GBS and GTS; the prospects for both in 2018 look better than they have done for some years, with Watson, at last, really beginning to make an impact in the delivery of core and next-gen IT services.

In the next blog in this series, we will look at examples of where IBM is deploying cognitive and automation assets across its services portfolio.

NelsonHall recently attended a TCS analyst event in Boston, the theme of which was Business 4.0: Intelligent, Agile, Automated, and on the Cloud. A few months ago, soon after Rajesh Gopinathan took over as CEO, TCS undertook its first major service line revamp for many years (we provided details of this in our Quarterly Update on TCS – see here). As such we were keen to learn more about how the reorganization is progressing and what this means in terms of investment priorities and any changes in market proposition. While the rationale for the new service line structure is convincing, we were left with some questions about whether TCS is in danger of creating new silos, silos moreover which have the potential to leave its large Cognitive Business Operations unit looking like a legacy business.

The opening keynote focused on what Business 4.0 enables, namely the ability to:

• Achieve mass customization (availability of data to target every interaction within a segment of one)
• Create exponential (business) value
• Leverage ecosystems (an increasing differentiator)
• Embrace risk.

As a generic positioning statement, this is an attractive cross-industry proposition by TCS, one that is a business-centric evolution from the notion that TCS has been promoting over the last year or two of the Digital Enterprise. It is positive in tone: the ‘disruption’ word doesn’t appear; also, one messaging statement is about ‘harnessing abundance’.

Major regroup and revamp of service portfolio

The importance of the new service line structure should not be underestimated: we were reminded that this is the first time TCS has undertaken such a restructure for 15 years.

The ambitions behind the revamp, as described, include wanting, inter alia:

• For all service lines to be business outcome focused, and their offerings to address issues of board-level significance
• To be able to deliver seamless service integration (full services play)
• For the new set of offerings to address CXO priorities (full stakeholder)
• To be able to offer new engagement types and non-linear pricing models (new models)
• To go to market offering a combination of domain and digital capabilities (contextual thought leadership).

The overall emphasis is on evolving from an old model of 'Consult/ Build/Operate' to a ‘Broker/Integrate/Orchestrate’ model.

To summarize, TCS’ new Business and Technology Services (BTS) organization comprises three groups:

• Digital Transformation Services (DTS), which has new standalone practices for areas such as IoT, Cyber, Analytics & Insights. Applications services are now broken down into smaller units such as EAS, Cloud Applications, Micro-services and APIfication
• Cognitive Business Operations (CBO), which includes BPS, infrastructure services, applications support services, former ‘run the business’ services
• Consulting and Systems Integration (C&SI).

Simultaneously, other established service practices that have reached scale (including some industry-specific BPS businesses and the Engineering Services unit) have been carved out and merged into the Industry Solution unit structure, enabling these vertical units to have a more integrated portfolio.

When TCS makes a big play in a new area, it invariably succeeds: its BPS and IT infrastructure services businesses, for example, have grown in not that many years to contribute nearly 28% ($5bn) of TCS’ total revenues in FY17 – and this has been achieved through organic growth.

The priorities now are clearly with:

• The new digital practices. The importance being attached to these is reflected in the appointments of some very experienced execs to lead these; for example, Dinanth Kholkar, formerly head of TCS’ large BPS business, is now heading the much smaller Analytics & Insight practice. Investments will focus on these new practices (this is unlikely to include any significant M&A activity: unlike most of its peers, TCS has succeeded very well so far on essentially organic growth, and the messaging is that this will not change)
• The ignio subsidiary. What will happen to ignio ultimately is not yet clear: one ambition is that ignio will be used by third parties – indeed, in discussions with ignio head Harrick Vin we heard of an organization that has asked two other systems integrators to deploy ignio. There is, of course, the possibility that ignio might eventually be spun off, though we do not see this as likely in the foreseeable future.

TCS has, to date, been highly successful in cross- and up-selling into major accounts: its ability to ‘penetrate and radiate’ is reflected in the ongoing expansion in the number of high-value accounts. And the company has been promoting its full services play for many years now.

Nevertheless, following discussions with several execs, we are left with some questions as to the potential effectiveness of the new service line structure in facilitating the development of new digital-led offerings, and this is why...

• A new Enterprise Intelligent Automation (EAI) unit, sitting within C&SI, offers deployment of third party RPA and AI tools, as well, of course, as ignio. These are customized solutions for client-specific environments
• Meanwhile, ignio, a standalone company, is essentially going alone to develop new use cases for ignio, for example in working out new process models within supply chain management
• And then there is the Cognitive Business Operations unit. While the focus is on enriching the offerings with Intelligent, Agile, Automation, and Cloud, it does not appear to be spearheading TCS’ development of the kinds of new digital process models that are the hallmark of next generation managed services.   

A key challenge for TCS is harnessing both EAI and ignio to be able to develop and go to market with innovative and replicable new digital process models that will be delivered by CBO. This means a level of collaboration that is difficult to achieve across organizational boundaries. The risks include duplication of efforts and tardiness of innovation. I must emphasize at this point that this is not a challenge that is unique to TCS; we see it also in some other very large IT services/BPS providers that, like TCS have an extensive portfolio of service offerings and their own cognitive platforms. Finding ways to enable collaboration across organizational boundaries in the development of new cognitve-based offerings that benefit managed services businesses will be critical to future differentiation.

Two postscripts

• Marketing: TCS has a new group CMO, and we were told that marketing will get a big boost in terms of promoting TCS’ services strategy
• Innovation: one highlight of the event was CTO Ananth Krishnan providing an update on Research & Innovation at TCS. This merits a separate blog.

Genpact announced another acquisition today, that of TandemSeven, a design thinking (DT)-led CX /UX innovation consultancy based in Boston, with offices also in New York and Chicago. This is Genpact’s fourth acquisition in the U.S. this year; all four clearly supporting the company's drive to radically evolve its portfolio from traditional BPS to a coherent set of offerings designed to help enterprises in their operational digital transformation. What distinguishes TandemSeven from other recent acquisitions is that the primary capability it brings in is not software nor domain-specific BPS, but consulting & methodology.

Quick Overview of TandemSeven

Firstly, let’s take a quick look at TandemSeven, then how its capabilities will align with Genpact’s ‘Lean Digital’ positioning:

• Size: the firm has 65 associates, located between Boston and New York
• Client base: large U.S. enterprises, with many engagements in BFS sectors, particularly capital markets. Client references include LeggMason, Risk Management Solutions (RMS), APAX Partners. It has also worked in B2C sectors such as utilities, air travel, automotive
• The work: TandemSeven’s focus areas cover B2E and B2B as well as B2C process areas, with quite a lot of its engagements having looked at support functions. For example, for Legg Mason, TandemSeven designed a new global Intranet for its employees; and in an engagement with an investment banking firm, the focus was on the reimagination of the UX of staff in the middle office supporting the traders in the front office. This aligns with Genpact’s focus on transforming enterprises’ middle and back office activities
• The IP: TandemSeven’s consultants are supported by a platform for standardizing human-centered design. TandemSeven’s ‘UX360’ platform is a key differentiator for the company relative to other design agencies which formalizes the collection of research with customer journey mapping & modeling, and integrates these with task modeling and alignment with developers in an agile environment. It consists of a set of tools for persona modeling, customer journey mapping and task modeling with a research repository for KM which creates a System of Record for each project as well as providing linkages with agile development platforms.

Genpact’s ‘Lean Digital’ framework combines the operations view of Lean processing, DT, and digital tools to fundamentally re-architect business processes. TandemSeven provides a key building block here by enhancing Genpact’s consulting capabilities and frameworks in human-centered design, an essential element in digitalizing processes across the organization.   

TandemSeven Becomes Part of and Enhances Genpact’s Digital Solutions Unit

Genpact’s Board is fully aware that TandemSeven will be culturally different from Genpact’s BPS core operations and is accordingly adopting a careful approach to its integration. The firm’s head of consulting and head of sales will report to the head of Genpact’s Digital Solutions practice, who is also based on the U.S. East Coast; the practice will also act as a kind of family group for TandemSeven within Genpact’s larger Digital Unit, which has1k people).

Integration plans:

• In the first instance, TandemSeven’s UX360 tool will be leveraged by ~80 Genpact DT workshop facilitators. It will provide a very strong framework and mechanism for incorporating human-centered design into the interfaces associated with redesign of industry-specific and back-office processes
• Secondly, some TandemSeven staff will act as coaches to Genpact employees, and help create protocols for DT sessions. Genpact has been providing extensive employee training on DT for over two years; TandemSeven, and UX360, will help sharpen up the methodology
• Thirdly, some TandemSeven staff will become involved, within multi-functional groups, in Genpact sales pursuits. As with any consultancy acquisition, a key success factor will be in the extent to which the acquirer leverages the new capabilities across its broader portfolio and client base.

First stage of a Buy and Build strategy

Rather than following with similar, possibly smaller, acquisitions in other target geographies, Genpact’s intention is to transplant a few resources from TandemSeven into the U.K and Australia and then hire locally to build local regional units.

Genpact Building Digital Hubs in Boston, NY

TandemSeven’s model to date has been to work primarily on client sites; it does not bring in a studio environment for Genpact to leverage. However, Genpact will complement this on-site capability by creating UX studios in Boston, where it has inherited space from the Rage acquisition, and also NY, where it will redesign some existing office space. And of course, OnSource is also based near Boston.

In term of cross-fertilization with West Coast capabilities, there is also some interaction with the  ‘Innovation by Design’ software engineering capabilities based in Genpact’s Palo Alto Lean Digital innovation center.

TandemSeven Strategically Important in Incorporating Human-Centered Design in Genpact Digital

This is a strategic acquisition for Genpact in its journey to evolve from traditional BPS, where it has been an eminent pureplay, to become a wider digital operations transformation partner for organizations. The TandemSeven acquisition complements Genpact’s existing DT and operations transformation capability by providing a distinctive methodology and nicely visual tool for applying human-centered design in support of digitalized middle and back-office functional areas.

NelsonHall recently caught up with Genpact to discuss their recent acquisition of OnSource and their plans to integrate it with BrightClaim – we were not surprised to hear that the two acquisitions are indeed connected, and part of Genpact’s strategy to introduce new digital process models in P&C insurance.

To set the scene:

• Earlier this month, on the day of its Q2 earnings results, Genpact announced it had acquired OnSource, a small software house based in Boston, MA. On its own, OnSource will not make a meaningful contribution to revenues
• In May, Genpact announced it had acquired BrightClaim, a U.S. domestic P&C insurance BPS provider with centers in Atlanta, GA and Austin, TX and its associated company National Vendor that provides content evaluations, through its large field force, and content fulfilment services.

Genpact has an active M&A strategy currently; the priorities include adding

• Digital and analytics capabilities to help accelerate the build out and deployment of digital assets, as OnSource does
• Domain capabilities in targeted verticals and services, as BrightClaim does.

BrightClaim brings in a new client base of Tier 2 carriers for Genpact to cross-sell its services - and indeed the short-term opportunities include adding global delivery options for some of its services offerings. But the strategic opportunities are in applying disruptive technologies to some of the touchpoints and currently manual interventions within the claims process. And OnSource provides an opportunity to do this in certain areas.

Applying digital solutions from auto FNOL to improve the inspection and appraisal processes in property claims

Now BrightClaim’s client base is around 85% property/15% auto insurance, whereas OnSource has essentially the reverse ratio with its client base - so what are Genpact’s plans in integrating these two companies, based in different regions, and serving different segments?

Quite simply, they center on applying Onsource’s ‘Inspection-as-a-Service’ solution, developed initially for the auto insurance market, to the loss estimating process in property claims. The solution uses either mobile devices or drones to obtain photos and videos (also written evidence) that are used to assess damage and generate loss estimates for claims payouts. Carriers can use the solution to offer customers, when making a claim, a choice of:

• A self-service approach to the FNOL process, using the OnSource ‘Instant Inspection’ mobile app to connect to a Virtual Appraiser’s desktop for a claim submission. The photographic evidence provided can be downloaded directly to the insurer’s appraisal software. The app can also be used by motor repair shops for any supplement approvals
• An assisted solution using a network of 17k ‘Uber-like’ field photo inspectors who can walk the customer through the claim submission process using an iPad.

The benefits of Onsource’s ‘Inspection-as-a-Service’ solution for carriers and also their customers are obvious:

• In terms of the customer experience, either method (self-service or assisted) offers ease of use and a significant reduction on the traditional cycle time – Genpact claims by around 30%
• And for the carrier, there are major cost reductions in loss adjustment expenses (LAE) from eliminating the traditional field inspection process and from more efficient workflows - Genpact claims by 50% plus – and the visual MOI can also mean more accurate indemnity.

In short, digitizaling this process can help in improving three priorities which carriers have to balance: customer satisfaction, expense control and loss control.

The use of mobiles in submitting photographic and video evidence of damage in auto claims is now very well established, and the use of drones as a Method of Inspection (MOI) for high value/ hard to access property claims assessments has also been gaining traction in many Tier 1 carriers over the past few years – but both methods remain fairly new for Tier 2 carriers in their personal property lines. Video technology will become increasingly important across the P&C insurance sector over the next few years. The FAA has taken some time in sorting out regulations for the commercial use of drones which slowed things down slightly: OnSource brings with it a nationwide network of certified drone operators; this capability has the potential to transform the independent property appraisal services offered by BrightClaim. The ‘Instant Inspection’ app could also be applied to some of the contents evaluation services provided by National Vendor, enabling some activities to be done remotely.

Genpact’s integration streams for OnSource and BrightClaim are moving at pace.

With its P&C BPS services, Genpact has positioned on its domain knowledge combined with expertise in lean process mapping, intelligent automation, and workflows for straight-through processing, analytics, as well as offshore delivery. With OnSource, Genpact has another digital solution it can offer to BrightClaim’s carrier client base.

Further Acquisition Activity in Support of New Digital Process Models by Genpact Highly Likely

Genpact is one of a number of BPS specialists that have in the last few years been energetically reinventing their portfolios to embrace the sometimes dramatic shifts afforded by Digital in enterprise operations and develop new digital business process models (NDPMs).

Genpact’s other acquisition this year was that of Rage Frameworks, whose NLG software has enhanced its AI capabilities. We expect to see more investments by Genpact soon, including possibly acquisitions that bring more cognitive tools into the Cora platform, and/or more consulting-rich domain expertise to help clients in the digital transformation of their middle and back offices.

NelsonHall recently attended the Infosys Confluence customer event. Last year the theme was covered in the interlinked motifs of Automation, Innovation, and Education (see here). This year, the theme evolved to ‘Unlimit’, which on the surface is more outward facing. We were not looking so much for an update on developments at Infosys over the last year (we cover these in our Quarterly Updates and Key Vendor Assessments on Infosys) as for updates on, among other things:

• Talent development in the services business/onshore U.S. hiring
• Developments in the products business, including with Nia
• New approaches to delivering innovation on behalf of clients.

This blog looks briefly at each.

The talent model

Onshore U.S. hiring: April’s NelsonHall QU on Infosys, covering its Q4 FY17 (see here), mentioned plans to increase onshore U.S. hiring: Infosys intends to hire 10k local employees over the next two years, and is setting up four development centers, the first in Indianapolis.

The intention is to co-locate innovation hubs in each of these delivery centers. While this makes sense from an internal perspective, we are surprised that there are no plans to set up small innovation showcase studies in key locations such as NYC that are closer to key clients.

Out of the 2,000 hiring plans for the Indianapolis center in FY18, Infosys has already hired around 800, of whom ~300 are campus hires. Infosys intends to leverage the local university system to do much of the initial training - last year its U.S. new hires had to travel to Mysore for training, and that is clearly not a realistic option as the U.S. delivery capability scales. Infosys will benefit from a major incentive package from the Indiana Economic Development Board, which will offset the investment required (around $8.7m) to set up a new facility.

Is this solely a defensive move in response to increased protectionism? Well, not quite: we noted in a former blog over a year ago that Infosys was intending to increase onshore recruitment at graduate level. It is of course also about being seen to be closer to the client in engagements that center on helping them in their digital transformation.

As well as grad recruitment, Infosys is also interested in personnel transfers from clients as part of outsourcing deals - what it somewhat clumsily calls “talent refactoring” - the type of transaction that other vendors have been doing for many years but one that has now gone out of favor with many. While this is one way of scaling up a local talent pool quickly, it also means an older, more expensive workforce (often with pension obligations) that will also need retraining in new technologies. Furthermore, Infosys has little experience in this.

There appears to have been solid progress in cultural transformation at the grass roots level through initiatives such as Zero Distance and Zero Bench. The latter has been a particularly innovative way to speed up development and experience for people on the bench and has also led to some useful s/w development activity. There has also been some level of delayering, with the focus for career development being on content leadership rather than on management advancement through span of control.

Putting all the software units under one head to drive Products business strategy and accelerate development

In our latest QU on Infosys, we noted two recent hires to its Products units:

• New CEO of the EdgeVerve subsidiary, Pervinder Johar (formerly CEO of Steelwedge Software. He is tasked with developing a channel route-to-market to be able to sell the software to a larger client base
• New leadership at Panaya, Jake Klein, whose key remit is to go after higher value opportunities.

These appointments follow that last year of Sudhir Jha (ex Google) as Head of Product Management and Strategy, and now also overseeing Nia. Like Johar, he is based in Silicon Valley.

Although his title at Confluence remains Head of EdgeVerve, it now appears that Pervinder Johar’s responsibility spans all of Infosys’ software units:

• EdgeVerve, which itself comprises two units:
  ​- Edge: when first set up as a subsidiary three years ago, the purpose was to collect software from Infosys projects which had repeatable uses and productize those assets. These assets form the core of the Edge suite of software assets, now overseen by Andy Dey (ex SAP)
  ​- Finacle: last year, its software and development assets were transferred to the EdgeVerve subsidiary, increasing its headcount from 650 to 6,500 at a stroke
• Nia (formerly MANA), we will discuss below
• Skava, the customer loyalty management s/w acquired two years ago
• Panaya, acquired last year

All in all, there has been a series of external hires for Infosys’ products businesses in the last two years, as Sikka looks to accelerate growth: last quarter these units contributed 5.5% of total revenues, a level that has not changed significantly, in spite of acquisitions such as Panaya and Skava.

The Products business is currently undertaking a product strategy, and development coordination & creation exercise, which started last month. The main goals include to:

• Create a software business strategy and development roadmap
• Rationalize development to eliminate duplication of effort, facilitate asset reuse, and coordinate interoperability of broad functionality
• Rationalize its organizational structure, while retaining independence of units where appropriate
• Identify cross-sell opportunities.

Development centers for (also leadership of) these units are located across three continents:

• Edge and Finacle products: Bangalore and Pune
• Nia: San Francisco Bay area and Bangalore
• Skava: Bay area and Coimbatore
• Panaya: Israel

Co-ordination is thus not going to be straightforward, although the unit leaders are meeting weekly until the end of June. The exercise is consuming a lot of exec time, including their entire seven days prior to Confluence, so this is evidently a very high priority.

There is a clear ambition to drive third-party commercialization of Infosys software assets. This will require building a channel network, including other SIs, something which would be much easier if it had more of an arm’s length relationship from Infosys. We think there will be other developments in Infosys Products business in the near future, and not just an ongoing acceleration in product development that we have noted recently.

Recent product development announcements have included those of:

• A blockchain-based solution from Finacle
• OECloud (Open Enterprise Cloud) an open source framework for rapid development of cloud-native enterprise applications, originally developed for EdgeVerve
• From Panaya, a SAP testing tool launched earlier this month, then, announced at Confluence, a new cloud-based ALM platform Panaya Release Dynamix (RDx), expanding the Panaya suite beyond tools that support work on ERP environments to ones that enable agile development environments

Looking under the hood of Nia

In a session with Vishal Sikka called “Under the Hood of AI”, he revealed that there were now 160 use cases for elements in the Nia platform: an impressive number, in our opinion. While the early use cases were for IT, the more recent growth has been in the number of business use cases.

How Infosys could potentially use Nia:

1. To improve internal service delivery within its IT infrastructure and applications businesses, what Infosys has for some time referred to as “renew the core”
2. Within its consulting and SI units to help clients improve their business processes
3. By combining the consulting capability with its BPS domain expertise to pre-build new digital-first business process models and then go to market with a managed services wrapper around these.

The first of these currently appears to be the primary focus. It is essentially a journey of automation being pursued by all services providers, and as such we question to what extent it will be a major differentiator in the long term.

The second of these requires strong consulting and industry domain capabilities in the GTM: and this does not appear to be a major focus for Infosys. In this respect, Infosys appears to be plowing a different furrow from many peers who are focusing on enhancing these capabilities.

However, there was a AI workshop on both Day 2 and Day 3 which were extremely well attended by clients. In these workshops, people identified, for their own organization, key areas for the application of AI, also the potential obstacles to implementing these (e.g. feasibility and change management). These workshops could, potentially, create significant new opportunities for Infosys downstream, providing their Products business links with the C&SI business.

So, let’s look at the third potential type of opportunity in leveraging Nia. We think this is the area where Infosys has the potential to come up with completely new software-led managed services offerings that could support clients in the kind of paradigm-shift innovation (business model and operational) that many organizations are now starting to ask for. But it would also make the BPS business more central to Infosys – and here we feel the current drive from the top is to focus on elimination of manual effort in existing business processes rather than on innovative process models that involve platforms (cloud-based) as well as analytics and AI and RPA. As such, we think this is an opportunity that Infosys is missing/choosing to ignore. There is a current drive to develop propositions to clients to help them progress from Walk to Crawl to Run to Fly (with the emphasis, of course, being on Fly proposals), but the thinking again does appear to be Technology first, Business Outcome second.

In this video blog, Rachael Stormonth, NelsonHall's EVP Research, discusses the birth of DXC Technology.

Financial information on the combined company can be found here.

NelsonHall's reaction to the news of the acquisition at its announcement can be found here.

On March 15, WNS announced its intended acquisition of HealthHelp, in what, at $95m, will be its largest acquisition to date. HealthHelp, founded in 1999 and headquartered in Houston, TX is a 400-FTE strong healthcare utilization management specialist.

In many ways, the HealthHelp acquisition has much in common with WNS’ Value Edge acquisition. HealthHelp, like Value Edge, will become part of WNS’ healthcare business unit and is rooted in research & analytics. While WNS’ healthcare unit has a traditional “administrative” BPS business, around claims, billing, & collections, serving healthcare payers, the bulk of WNS’ healthcare revenues are derived from the pharmaceuticals sector. This acquisition is intended to assist WNS’ healthcare unit in achieving a more balanced revenue mix between healthcare payer and pharmaceuticals.

Targeting Direct Care Costs in Addition to Administrative Costs

The acquisition gives WNS’ healthcare payer capability a major boost and enables WNS to position on reducing the direct cost of care for healthcare payers, and not just on reducing their administrative costs. Post-acquisition, WNS is now going to market in the healthcare payer sector with a combination of administrative BPS services, analytics, and the collaborative care management services from HealthHelp. WNS was already targeting its existing healthcare payer BPS clients with analytics services, though mostly on a project basis; this acquisition provides it with an opportunity to enhance its existing healthcare analytics capability with a high value-add service to assist payers in establishing improved treatment rules and guidelines in collaboration with providers. WNS is already in conversation with several large national payors regarding its new combined offering and will be targeting both national payors and regional payors.

And, of course, in addition to targeting existing WNS healthcare payer clients and prospects with its HealthHelp capabilities, WNS will target existing HealthHelp clients with its complementary established claims management and analytics capabilities.

Cross-Fertilizing into Workers’ Compensation

Because of the complementary nature of HealthHelp’s services and WNS’ existing healthcare payer offerings, the integration of HealthHelp into WNS should be relatively straightforward leaving the delivery organizations of the existing entities largely unchanged. The principal integration activities involve creating a joint go-to-market and integrating WNS’ existing technology with HealthHelp’s Consult software.

In addition, WNS has evaluated using HealthHelp’s Consult pre-authorization tool in support of workers’ compensation utilization, which uses similar data sets to healthcare payer, and pharmaceuticals utilization, and is likely to enhance Consult to support workers’ compensation in the near future.

Supporting an Under-Penetrated Market

HealthHelp began life supporting Humana and was initially centered on supporting Medicaid and Medicare claims. Indeed, Humana still accounts for over 60% of HealthHelp’s revenues; it now also has contracts with a number of smaller payors. So WNS and HealthHelp have an under-penetrated market with considerable potential opportunity.

The areas currently supported by HealthHelp’s collaborative care management are cardiology, radiology, oncology, pain & orthopaedic, sleep care, and emergency medicine. For each of these areas, HealthHelp has established “evidence-based guidelines to directly help providers order the most appropriate tests and procedures for their patients”. The service works on a non-denial basis and aims to reduce the cost of treatment to payers by educating providers on the most appropriate procedures and avoid unnecessary or inappropriate tests and treatment.

This knowledge is encoded in HealthHelp’s Consult clinical decision support platform which provides healthcare providers with guidance for performing the most appropriate tests and procedures and typically approves 75% of provider recommendations automatically, with the remaining 25% being subject to HealthHelp’s nurse review. Here, HealthHelp nurses collaborate with physicians to discuss alternative treatments and propose clinical guidelines more relevant to the patient’s condition. HealthHelp has ~400 FTEs with the majority based onshore in the U.S. principally in Houston. Other U.S. locations include a contact center in Albany, New York, and an office in Annapolis, Maryland from where it serves the radiology community. In addition, HealthHelp has customer service personnel based in the Philippines. The company also collaborates with ~100 MDs and 11 university medical systems, that are involved in guidance in ~6% of more challenging cases, with HealthHelp supporting the physician seeking guidance with a specialist in their field.

HealthHelp estimates that removing the threat of denial and providing “collaborative consultation and education between providers and payors’ utilization management organizations” has resulted, for example, in 15%-30% savings for radiation oncology and 12%-25% for medical oncology.

At the same time, HealthHelp’s utilization management process aims to reduce the overuse of screening and diagnostic tests by detecting redundant testing, sequential testing, and physicians billing for unauthorized procedures.

A further benefit to payers is that many of HealthHelp’s services qualify as “activities that improve healthcare quality” within the MLR requirement and so do not count as an administrative cost to payer organizations.

Pricing for HealthHelp is currently based on a standard PMPM (per member per month) model. WNS may look to evolve this to outcome-based pricing models as it looks to assist healthcare payers in driving down the overall cost of medical care.

Opening the Door to Regional Payers and Healthcare Systems Outside the U.S.

In summary, the acquisition of HealthHelp lifts WNS’ healthcare payer proposition beyond the legacy and mature area of administrative cost reduction into direct care cost reduction and provides WNS with an onshore “door-opener” for both national payors who have traditionally been receptive to offshore-centric administrative services and for regional payors, who have not.

The new capability also potentially has applicability to other areas of the wider healthcare-related industry where organizations need to reduce direct treatment costs, including workers’ compensation, pharmaceutical spend, and even potentially healthcare systems outside the U.S. Here, WNS could potentially target the NHS in the U.K., a country where WNS has an existing strong presence.

Atos’ recent analyst and advisor day in Boston provided further details around the company’s three-year (2017-2019) growth ambitions that the company unveiled in November 2016. In a nutshell, Atos is targeting:

• CC/CS revenue growth of 2%-3% per annum (2016: +1.8%)
• An adjusted operating margin in the range of 10.5%-11.0% by 2019 (up from in 9.4% 2016).

More here about Atos’ 2017-2019 financial plans. NelsonHall covers Atos extensively in both its Quarterly Vendor Update program and also in its Key Vendor Assessment program.

Atos described several levers that it is pulling to achieve these financial objectives. These include SG&A spending rigor, M&A financial discipline, delivery automation and delivery industrialization (including a recent initiative on application management industrialization).

In addition, Atos unveiled several initiatives in support of its financial objectives including those focusing on:

• Service portfolio management, with a focus on its Digital Transformation Factory (DTF) portfolio, and cyber security, focusing on back office services (as opposed to front office work such as UX, and digital marketing agencies)
• Continued growth in North America (4.5% CC/CS growth in 2016)
• HR and retraining people to digital skills.

Service Portfolio Management

Atos has transformed over the years from a federation of geography-centric (GBUs) operations into a more global organization with global service lines. This is the case of Worldline, of Big Data and Security (mostly hardware and software products), of Infrastructure & Data Management (which groups IT infrastructure services and BPS). Increasing, Business & Platform Solutions (its C&SI businesses) is becoming global, starting with application management services.

With the adoption of a global structure, Atos has launched new global service offerings. Those global service offering also reflect the nature of the portfolio of Atos, which now includes software products (Evidian security), hardware (bullion enterprise servers and HPC), and for now Unify (communication software).

Atos is targeting hyper-growth in its four Digital Transformation Factory pillars (Canopy cloud computing, SAP HANA, Atos Codex, and Digital Workplace), aiming to grow from ~€1.5bn revenues in 2016 to €3.8bn in 2019, with SAP HANA and Digital Workplace expected to achieve a 2016-2019 CAGR of around 90%.

While these objectives are ambitious, they do include the market evolution of IT services e.g. from SAP ERP to the SAP HANA ecosystem and S/4 HANA.

The event provided more insights on various initiatives across the global services lines in support of the targeted growth.

Service portfolio innovation is critical to this: we are starting to see evidence of this with Atos offerings putting increasing emphasis on IP and accelerators. With Atos Codex, for example, the company is developing IP-based use cases.

Cross-selling is also on the agenda with Bull-branded hardware (bullion) optimized for SAP HANA. In the longer-term, Atos is has also positioned its HPC hardware processing high volume of data as the hardware that powers big data, working on expanding its HPC client base from its traditional research and weather company usages towards enterprises, with one French automotive OEM as the early example of this transition.

Innovation through partnerships with start-ups is also one of the routes Atos is experiencing to drive growth. Partners presenting at the event included Apprenda (cloud orchestration), Inventy (SAP processes performance benchmarking and optimization), and Cognicor (AI) (having transitioned from IPSoft’s Amelia).

With end-user computing, Atos is also using its Unify UCC subsidiary to cross sell the recently-developed Circuit into its end-user computing client base. Siemens, the largest client of Atos, and the former parent of Unify, is the largest client of Circuit with almost 400k seats deployed. Atos wants to transition clients from a voice and service desk centric approach to and end-user experience. Transformation in the form of professional services is very much a priority.

Across DTF, Atos is investing into automation, whether through partnerships or through its own IP. This is a work in progress, and Atos is likely to further invest over the coming years. Also, expect Atos to expand its DTF offerings to a wider range of use cases.

Continued Growth in North America

Continuing the positive momentum in North America is a priority. North America is now Atos largest region (€2.1bn revenues in 2016) and it has integrated and stabilized Xerox ITO, turning around several challenging contracts, and improving NPS significantly.

With the recent acquisition of Anthelio, expect to see further inorganic growth, with expansion of capabilities in its Business & Platform Solutions business a priority.

North America will rely on the DTF of the overall Atos, relying also on cyber-security, expanding organically and complemented by tuck-in acquisition (e.g. the recent acquisition of Pivotal services specialist zData, which brought ~30 personnel).

Offering verticalization is another priority: with Anthelio, Atos doubled its presence in healthcare, expanding into the healthcare provider sector. Anthelio was relatively large ($250m in revenues) and Atos in North America would like to replicate this vertical approach to other sectors. Priority sectors include retail and manufacturing.

Looking ahead, North America aspires to serve as the first mover for Atos, bringing new partnerships with the intense start-up ecosystem in the U.S. and with large partners. This is aspirational at this point, we think.

HR Management

Atos also provided some light on its HR policy and its effort at aligning its workforce to digital skills, still in the context of constant pyramid reshaping. The company is combining hiring from tier-one universities (1.5k personnel each year), identifying internally though analytics personnel with high potential, retention programs (with an objective to reach 95%) through career paths (5k) and its well-being at work programs, reskilling through digital certification (4k to 6k personnel each year).

Atos, which hold its event on the International Women’s Day 2017 is also targeting a big uptick in its women labor force. In the past four years, women have represented 26-28% of its headcount and the company wants to accelerate to reach ~40% by 2020. The company will achieve this objective by increasing its women hiring mix to 50%. This is a bold ambition.

Atos Has More Financial Freedom that in the Past

With an adjusted operating margin of 9.4%, and a net cash position of €481m at end of 2016, Atos has significant financial flexibility, while maintaining an annual spend of €300m on R&D. All rosy then? Of course not - Atos’ journey to a 10.5%-11.0% operating margin relies heavily on SG&A reduction through procurement rationalization and other TOP actions. Atos is a firm that impresses with its execution on cost management.

Evolution from European Services Player; Vision Centers on being Digital Leader

With the Digital Transformation Factory play and its gradual adoption of global units, service lines, and offerings, Atos is no longer a federation of European-centric firms and is becoming a more integrated firm. It is also no longer a services pure-play but a vendor that has a unique mixture of services, software and hardware assets that it has worked hard to shape into a coherent portfolio with a central positioning of supporting clients on their digital journey. Finally, we are seeing a much stronger focus by Atos on innovation - including through partnering with start ups - than we have noted in the past.

Dominique Raviart and Rachael Stormonth

In our blog last November (see here) at the time of NTT DATA Inc.’s closure of its acquisition of Dell Services, we summarized that Dell Services was a strategic but expensive acquisition for NTT DATA, and that while the former Perot Systems did not thrive as part of Dell, now it is part of NTT DATA Services it is back to being a services pureplay, also that the applications, IP and BPO businesses are likely to receive more investment.

We recently attended NTT DATA Services’ first analyst and advisor event since the acquisition. We were keen to see how the integration is progressing, learn about the immediate priorities in North America, and identify what we should expect to see in the near to mid-term. It is very early days (the enlarged company has just held its first ever senior leadership meeting, also in Dallas) but we came away impressed on several fronts. There is a palpable sense of positive purpose in the company.

Firstly, the enlarged business

The addition of Dell Services to the $1.7bn NTT DATA Inc. business has formed NTT DATA Services, a $4.3bn business with 48k employees.

In terms of:

• Vertical, Dell Services has brought in a significant presence in the U.S. healthcare and life sciences industry (now a $1.4bn business for NTT DATA Services), also sizeable businesses in BFSI, manufacturing, and select public sector segments
• Portfolio, NTT DATA Services can now position as an end-to-end services provider, with a portfolio extending from consulting through infrastructure/cloud/security (massively expanded with Dell Services), applications, and now also BPS (a capability that John McCain emphasized his pleasure at having).

Supported by a new branding campaign (“we live for this stuff”, “IT rock stars”), NTT DATA Services is looking to raise its brand awareness in the U.S. as a Tier 1 alternative IT services provider. Growth ambitions center in the existing client base and on increasing wallet share; Dell Services brings in experience in landing and delivering large deals.

Immediate priorities

These include:

1. Operational integration
2. Deepening consulting, industry and technology expertise, and promoting innovation
3. Industrializing delivery, standardizing on processes, tools and methodologies, and accelerating automation
4. Packaging the portfolio: a recurrent theme in our one-one-one sessions was a broad drive to package industry-specific (and horizontal) aaS solutions
5. Business continuity (obviously critical): doubling down on delivery quality

Looking briefly at the operational integration, initiatives span (inter alia):

• Go-to-market: NTT DATA Services is adopting Dell Services’ vertical-led go to market approach for four industry groups: Healthcare & Life Sciences; FSI, Manufacturing and Commercial; Public Sector
• Portfolio standardization
• Corporate functions: the acquired entity was a carve out from Dell, so extracting everything from shared corporate functions takes time; the plan is for everything to be merged on April 1
• Integrating IT applications: will take around 18 months. For HR, for example, Dell Services is moving to SuccessFactors
• Standardizing on reporting, e.g. client satisfaction metrics (possibly on NPS), productivity metrics.

We spoke briefly with John McCain about the levers being applied to improve the operating margin of the former Dell Services business, which in its FY16 was around half of NTT DATA Inc. He expressed confidence that significant margin expansion was achievable from pulling four major levers: utilization (including through improving demand forecasting); procurement; usage of sub-contractors, and organizational delayering.

In terms of deepening consulting, industry and technology expertise, NTT DATA Inc. had gained business consulting capabilities in the insurance sector with its 2015 acquisition of Carlisle and Gallagher Consulting Group. And Dell Services brings in domain expertise in sectors including healthcare (provider and payer) and public transportation systems. Further expansion of industry consulting capabilities was referred to several times at the event; will we see some tuck-in acquisitions?

So what about digital and innovation capabilities?

We remain bemused by how some IT services providers are able to signal to the investor and analyst communities what proportion of their revenues are from “digital services” (this is a separate blog!), though we do of course take a close interest in the specific “digital” capabilities that each services provider is developing.

NTT DATA Services does not have a standalone “Digital X” unit -but it does have a nicely articulated description of the value that “digital services” can bring to clients, in:

• Measuring the unmeasurable
• Understanding the inscrutable
• Predicting the unpredictable
• Improving the perfect
• Accelerating beyond maximum speed.

Dell Services brought in a digital experience studio in Plano: we were told that a next-gen version is currently under development.

An approach that went down well with advisers and analysts at the event was the “Customer Friction Factor” (CFF, discussed in a recent NelsonHall vendor profile), a framework which quantifies, from a customer's perspective, any aspect of customer interaction that has a negative impact on their experience. It can be used across interactions which are both internal and external to an organization). A near-cousin to customer journey mapping, CFF provides NTT DATA Services with a compelling narrative for engaging with clients in discussions about where and how it can support them in their digital transformation. As such it is a useful tool to support the drive to position on its industry consulting capabilities and should help in increasing wallet share in target accounts.

Another current development is the CUE2 (Continuous User Experience Engineering) approach to Agile/DevOps; expect to hear more about this.

Will NTT DATA invest in acquiring digital marketing agencies in the near term? Probably not. Is it investing in portfolio development around digital themes in the delivery of IT and business process services? Certainly.

There appears to be an increasing focus on leveraging IP developed by NTT DATA parent’s R&D arm (has a $2bn annual budget). Among the examples mentioned at the event (which included immersive telepresence technology), the one that is likely to gain traction at NTT DATA Services in the short term is ‘hitoe’, a material developed with Toray that can measure bio-med signals: applications include its usage in the public transport (jackets worn by bus/tram drivers to measure fatigue/health), sports and construction sectors.

So what should we expect to see from NTT DATA Services in the near- to mid-term?

Firstly, margin expansion of the former Dell Services business (5.3% in its FY16) is highly likely.

There is a clear drive to identify within the organization:

• IP that can be more widely leveraged
• Opportunities to co-innovate with clients, including leveraging NTT Data parent R&D
• Industry and technology SMEs
• Automation and AI tools on which it can standardize.

We also learnt a little at the event about the broader ambitions of the NTT DATA Group; these include further expansion in Europe.

But for NTT DATA Services: why did we come away impressed when it is still only the honeymoon period for this recently enlarged player in the U.S. IT services vendor landscape?

In short, beyond the narrative, it comes down to gut feel. This is one of those rare integrations where both the acquiring and the acquired entities are palpably very happy with their new union, and where there are clear ambitions for growth.

WNS has just closed its acquisition of Denali Sourcing Services.  An investment of around $40m, funded primarily with long-term debt, this is WNS’ largest acquisition in a decade (since that of Marketics Technologies, which enhanced its ability to offer offshore analytics services in 2007). And it is paying over 2x revenues for Denali Sourcing Services. So this is more than a tuck-in acquisition for WNS.

Who is Denali Sourcing Services?

Denali Sourcing Services was one arm of the Denali Group (other entities such as Denali Advisory and Denali recruitment have not been acquired by WNS).

The majority (~80%) of Denali Sourcing Services’ revenues are derived from largely recurring services within multi-year contracts. Within this, approximately:

• 20% of recurring revenues are derived from enabling services, typically category management enablement, where it provides ongoing spend analytics, training and coaching around category management, including on-demand access to advice from Denali’s specialist category managers. Denali Sourcing Services also owns the Category Strategy Network which enables organizations to tap into a knowledge network for on-demand category expertise
• 80% of recurring revenues are derived from sourcing, contracting & contract management, and, to a lesser extent supplier management services including some transactional procurement.

Around 95% of its revenues are from U.S. based organizations.

Denali Sourcing Services has ~200 personnel. Its delivery structure includes:

• Centers in the U.S. in Seattle, Pittsburgh, and the Bay area, accounting for ~50% of delivery personnel
• A center in Pune, India, providing elements of delivery and support all geos
• A center in Istanbul, providing all delivery to the European market. Personnel from this center visit client sites as required. It also has a few personnel on client site in Amsterdam and Dublin
• A small center in Shanghai.

Denali Sourcing Services’ delivery is supported by its SmarTrak platform which it looks to use to embed its operating model into client companies. SmarTrak is used by procurement in support of stakeholder management, provides elements of workflow around the procurement process and supports:

• Intake and management of procurement requests
• Tracking the progress of request
• Tracking operational parameters such as capacity, productivity and cycle time
• Measuring changes in spend under management.

Denali Sourcing Services also brings in its spend analytics methodology, currently underpinned by Tableau and Excel-based models.

So why?

Well, the immediate and obvious takeaway is that Denali Sourcing Services expands WNS’ existing current capabilities beyond transaction processing within P2P into services that span sourcing through to pay.

Denali Sourcing Services brings in a specialist capability which remains in short supply.

And WNS and Denali Sourcing Services have worked together already.

WNS had been under increasing pressure from some of its P2P clients to expand its services upstream and began working with Denali Sourcing Services about three years ago. In one example, the companies jointly bid on, and won a source-to-pay BPS contract in the U.S. The client was previously using another BPS provider for accounts payable, with source-to-contract activities being kept 100% in-house. Within this contract, Denali Sourcing Services provides category management, sourcing, and contracting with WNS providing procure-to-pay services. The contract started with all indirect categories, including professional services, construction, travel, IT, and marketing covering spend of ~$2.5bn; over an 18-month period this has expanded to include direct spend around some raw materials, including logistics and MRO, taking the spend under management to ~$5bn.

F&A has been one of WNS’ fastest growing areas recently and now represents over 21% of its total revenues: this is a logical expansion of the portfolio.

Like Value Edge has been doing, Denali Sourcing Services will immediately boost WNS’ revenues in the U.S., which is fast becoming as significant a revenue producer for WNS as the U.K. And it brings in access to clients in sectors such as E&U and high-tech and FS.

So as well as being a significant expansion of WNS’ portfolio into a service that generates recurring revenues, Denali Sourcing Services will bring in a new client base, in a new geography, and in new sectors, in line with WNS’ ambition to reduce its dependence on the U.K. and the insurance sector.

And what next?

WNS is setting up an independent horizontal procurement business unit, based on Denali Sourcing Services, headed up by Denali Sourcing Services founder Alpar Kamber. We may thus see WNS start reporting revenues for procurement services separately from F&A.

While the short-term badging of the acquired entity remains undecided, Denali Sourcing Services will retain the Denali name (Denali Advisory is undergoing a rebranding exercise).

WNS is looking to grow the Denali Sourcing Services business by >20% per annum, with strong emphases on

• Doing “large” deals combining S2P and P2P services
• Expanding the Denali Sourcing Services footprint in Europe and APAC. At present, ~95% of Denali Sourcing Services business is derived from the U.S. Significantly, Alpar Kamber has moved to London
• Cross-selling S2P upstream into WNS accounts initially and subsequently selling WNS’ P2P downstream into Denali accounts.

WNS and Denali Sourcing Services are currently in discussion with a number of prospects across the insurance, travel & hospitality, banking, and manufacturing sectors. Whereas with F&A, WN has been taking an industry-specific approach, WNS is viewing procurement more as a horizontal capability, certainly initially while the bulk of the activity lies in indirect procurement.

WNS is looking enhance Denali Sourcing Services’ analytics capability and may develop its own tool or partner.

Significantly – and sensibly we feel - WNS has no immediate plans to offer a wider platform-based procurement service. Instead, the company will increasingly provide enablement services and bolt-on solutions around the main procurement platforms such as Ariba and Coupa which client organizations are already likely to have.

Elsewhere, a key focus is on building “communities of practice” around categories including marketing, facilities, IT, construction, and professional services.

Denali Sourcing Services will continue with its existing delivery centers, and is looking to scale particularly in support of the European and Asian markets.

Conclusions

Procurement BPS is a market where growth has not quite lived up to expectations in recent years. One of the factors hampering its growth has been a lack of choice of vendors possessing real source-to-pay capabilities. WNS is tackling this head on.

At first glance, this appears an audacious move by WNS: its largest acquisition in a decade, and bringing in a new capability where the client bases and sector strengths are complementary rather than overlapping.

But the selection of Denali Sourcing Services and the approach being taken to its integration indicates this is a move that has been extremely well thought through by WNS, one that will immediately expand its portfolio, extending the value chain for existing F&A clients, in a service where specialist expertise is in short supply, and for which it already has strong client demand.

We continue to keep abreast of unfolding developments in RPA and cognitive intelligence. In October and November, John Willmott wrote a sequence of three handy blogs on RPA Operating Model Guidelines:

• Laying the Foundations for Successful RPA
• How to Identify High-Impact RPA Opportunities
• From Pilot to Production & Beyond – The Keys to Successful RPA Deployment

Turning to Andy Efstathiou and some of his musings on FinTech and RPA developments in the Banking sector:

• Having discussed in February How Banks Can Develop a FinTech Roadmap to Drive Performance Improvement, in December he looked at FinTech in the Commercial Banking Sector: From Mass Market to Custom Processing Efficiency
• And in July, Andy looked at How RPA is Helping Banks to Enter New Markets & Diversify Offerings

Regarding developments in Customer Management Services:

• In April, Ivan Kotzev declared that Chatbots Are Back & Here to Stay
• In June, Vicki Jenkins looked at Alorica’s growth story: Alorica Acquires EGS to Become Global Top 3 CMS Vendor: Healthcare Business Key to Growth
• In September, Ivan looked at the changing role of analytics in CMS: Analytics are the Key to Disruptive Customer Experience

Fiona Cox and Panos Filippides have been keeping an eye on BPS in the Insurance sector. Two of their blogs looked at imminent vendor M&A activity:

• In February, Panos considered the significance of Wipro planning to acquire HealthPlan Services: Wipro Makes Fresh Start in U.S. Healthcare Payer BPS
• In July, Fiona looked at EXL’s planned acquisition of LISS: EXL Enhances LA&P Platform Digital Front-End Capabilities

Blogs in the HR Outsourcing domain have included innovation in RPO, and in employee engagement, learning at the beginning of the employee life cycle, talent advisory and analytics services, employer branding, improving the candidate experience, benefits administration and global benefits coverage, cloud-based HR BPS, and more! Here’s a couple on payroll services, so often an overlooked topic, that you might have missed:

• In April, Amy Gurchensky took a One Year Check-In with Excelity Global: Diversifying APAC Business to Address Demand for Cloud Payroll
• In November, Gary Bragar wrote Payroll Services Vendors Need to Redouble Efforts to Introduce New Digital Models

Dominique Raviart continues to keep a close eye on developments in Software Testing Services. For example:

• In October, he looked at Testing Platforms – The Emerging Opportunity to Commercialize Vendor Testing IP
• In August, he wrote about crowdsourcing: Passbrains Expands Crowdtesting Offering to UX

Dominique also keeps abreast of unfolding developments in the IT Services vendor landscape. For example, in November he wrote about Dell Services: the Glue for "One NTT DATA" In North America.

Staying with IT Services, David McIntire:

• In July, described 3 Key Ways IT Service Vendors Are Enabling Clients’ Cloud Journeys
• And, following a visit to Ukraine in July, wrote about Luxoft Diversifying Offerings, Clients & Delivery as it Eyes $1Bn Revenues by 2018

Meanwhile, Mike Smart has been blogging about IoT. Here are two of his earlier ones:

• In February, he reported that IoT Connected Vehicle Market Driving Towards $1.5Bn by 2020
• In March, he wrote: IoT in Manufacturing: It’s Not Just About Efficiency

And Rachael Stormonth continues to consider the significance of unfolding developments in the larger and more interesting IT Services and BPS vendors:

• In writing about HCL Technologies – Automotive, Autonomics & Partnerships Key Elements of its Future Growth, she posited that HCL would be an engineering services consolidator, a month before the announcement of the acquisition of a business from Butler Aerospace
• In May, she described Capgemini as Looking to U.S. for Makeover as it Prepares for 50th
• In June, she wrote about a BPS specialist opening an innovation center in Silicon Valley: Genpact Combining Design Thinking & Digital Technologies to Generate Digital Asset Utilities
• And in October, she described Atos Getting Into Health in the U.S. with Anthelio

That’s just a small sample of the wide-ranging themes and hot topics covered by NelsonHall blog articles in our trademark fact-based, highly insightful style.

Keep up with the latest blogs from these and other NelsonHall analysts throughout 2017 here, and sign up to receive blog and other alerts by topic area, or update your preferences, here. 

“We connect the physical and the digital worlds”

This current slogan for the Swiss Post Group is very relevant for its Swiss Post Solutions (SPS) subsidiary as it looks to fundamentally change the nature of its business from paper-based document management to digital workflow management.

SPS is one of the larger companies globally offering both inbound document management and outbound document production and also some multi-channel management services. To give a sense of scale, on the inbound side, it scans over 1bn documents and prints around 1.2bn transactional documents (e.g. invoices, bank statements) per annum.

In the last two years, since Joerg Vollmer started as CEO, there has been a major shift in positioning at SPS, with less of an emphasis on the company’s legacy capabilities in inbound and outbound document management services, and a very strong focus on ‘Intelligent Automation’, combining existing SPS capabilities such as scanning, OCR, data capture & extraction with RPA and AI, to support clients in benefiting from the digital revolution in document management. Far from being threatened by digitization, SPS is approaching it as an opportunity to be grasped to help it evolve both its market positioning, and its portfolio. In particular, SPS is extending its capability along the value chain from standalone document management into digital workflow management and processing.

So much for the positioning – where is SPS on this journey?

The first evidence of a transformation at SPS is in its financials. Document processing and document output services are both based on activities that traditionally have had wafer thin margins. SPS’ own margin had been improving, but slowly. Since Vollmer’s arrival in January 2015, there has been a major improvement. Operating profit (the company’s primary financial target set by Swiss Post Group) has grown, with a 50% y/y increase in Q1-Q3 2016, and operating margin has increased from 1.8% in 2014 to 3.6% in Q1-Q3 2016.

And while Intelligent Automation is yet to make a major impact on company financials, SPS already has ~20 clients where it has applied RPA and AI technology, principally using UiPath . In addition, SPS has been an early adopter in using Celaton inSTREAM software on unstructured documents, for example for email categorization and key data extraction, and is the first BPS provider to take Celaton out of the U.K., and install inSTREAM in its Document Processing Center and Shared Service Center Banking.

Continuing this journey, SPS is evaluating technologies such as IBM Watson to refine its ability to extract key information from large documents. It is also potentially interested in using platforms such as IPSoft's Amelia to enable users to request and find key information within a large range of documents.

Importance of Vietnam – offshore, plus continuous improvement and intelligent automation

NelsonHall recently attended an SPS event in Vietnam, where we had the opportunity to visit a flagship center in Ho Chi Minh City. While the major theme of the visit was how SPS has started to introduce RPA (primarily UIPath) to automate tasks like scanning, data capture, and data extraction, and also simple AI (Celaton) to extract data from unstructured documents, SPS’ Vietnam centers have initially made an impact in terms of labor arbitrage and continuous improvement.

Vietnam offers, inter alia, relatively low labor costs, a sizeable (nearly 55m), literate, labor force, good physical infrastructure in the major cities, government tax exemptions, and a stable macro-economic environment. SPS has just over 1,000 employees based in the country, which appears to have played an important part in the margin improvement. SPS shared some stats which revealed that since 2014 the average number of documents processed per employee has increased by 124%, with slightly fewer people processing twice as many documents, fewer people deployed on basic data entry and document processing, and more on more complex BPS tasks. So far, this has been largely achieved through continuous improvement rather than RPA/AI. Vietnam will clearly continue to be important to the future of SPS; plans for 2017 will nearly double the number of employees in this delivery hub. 

As well as being a major offshore delivery capability for SPS, the Ho Chi Minh City location has a Network Operations Center which also operates as a customer experience center for showing clients and prospects a future vision of what they could achieve with digitized, closed-loop document management. The importance of this positioning should not be underestimated – it is central to SPS’ future as a BPS provider.

Extending beyond document management into wider workflow management

As well as looking to use RPA and AI to further enhance its management of unstructured and semi-structured data within inbound document management, SPS is also looking to use RPA and AI technologies to extend downstream into workflow management, focusing on back-office and industry-specific processes. For example:

• Within F&A, in accounts payable activities, extending beyond invoice scanning and data capture/indexing into end-to-end invoice processing
• In the insurance sector, using RPA to upload structured data on complex claims generated by SPS' OCR and document management software onto client systems. If all the necessary data and documents are present, bots start processing claims. In this case, the combined benefits from OCR and RPA plus an element of process redesign have already included a 60% reduction in manual processing and a 50% reduction in average processing time
• In the Banking sector, supporting credit card collections by using a bot to check the current accounts of credit card debtors and block them to enable the credit card debt to be cleared.

Unsurprisingly, the verticals on which SPS is focusing are B2C sectors that have to manage very large volumes of documents, including insurance, retail banking, utilities and healthcare. Moving further into workflows requires closer industry and process knowledge than a traditional document management BPS provider might arguably need, and SPS has been working on this.

Building intelligent e-delivery platform for outbound document management

While a main focus of the event was on applying Intelligent Automation in inbound document processing, in SPS’ target sectors, outbound communications are also a key component in organizations’ digital transformation strategies.

Accordingly, SPS is developing capability to apply RPA and AI technologies to outbound document management, and is building an e-delivery platform to handle both print and digital output channels that formats data for each channel and sends printed and/or electronic communications as appropriate; current offerings include e-billing.

The Future – digitized closed-loop document management

In short, SPS has an ambitious roadmap to build a new digitized closed-loop document management capability incorporating third-party RPA and AI technologies, enabling it to move beyond traditional data capture and document output services, and become a more important player downstream in workflow management and processing. This means it can potentially capture components of work (that previously would otherwise have been heavily manual) in some middle- and back-office process areas that can now be automated. Moving into areas such as invoice and claims processing to address work that historically was not often accessible to document management BPS vendors is clearly a major opportunity for SPS.

So with these capabilities, will SPS move into full-scope industry-specific or back-office BPS? This is highly unlikely in the near term. While it can offer some level of multi-channel, SPS has no contact center capabilities, and voice remains a key component of industry-specific or back-office BPS. What is important for SPS in the next few years is that its clients regard its services as important to their digital initiatives, and that it can use automation to retain and extend the scope of existing document management engagements.

In summary, SPS is moving beyond traditional document management into wider digital workflow management and processing, and ultimately will provide digitized closed-loop document management services. This will  support clients in their digital transformation agendas by applying a powerful combination of global delivery, plus continuous improvement, plus industry-specific process knowledge, plus intelligent automation.

Further details on SPS initiatives in RPA and AI

In 2015, Frontica generated revenues of NOK 4,919m (~$610m), down 14.5% y/y. 2016 has seen further market softening and Q2 2016 revenues were down 30% y/y, though EBIT margin was up to 0.5 pts to 3.0%.

So why is Cognizant buying a captive with plummeting revenues and low margins in an industry which is likely to continue to be very soft (to put it gently) for a while?

The Nordics is an important region for Cognizant, for both IT services and BPS. Cognizant has quietly been developing a BPO business in the region for some years. F&A clients in Norway include Norway Post and Tryg (the latter won in partnership with Visma).

And earlier this year Cognizant acquired a 66% stake in insurance and pension fund management firm Storebrand’s BPS captive Storebrand Baltic UAB in Vilnius (~370 employees) for ~NOK 50m (~$6m).  As part of the transaction, Cognizant secured a multi-year IT services and BPS contract with the Storebrand Group. Cognizant is modernizing Storebrand’s IT systems, re-engineering business processes across the customer life-cycle and moving to a BpaaS model, and developing digital platforms.

That deal provided Cognizant with a nearshore delivery capability in the Baltics. Cognizant is clearly looking to commercialize the Vilnius center (which now has >400 employees), targeting primarily banking and insurance firms in the Baltics.

So what will Frontica bring in? It has ~800 employees and offers:

• Back-office business process services spanning HR and payroll, transactional F&A, sourcing and category management, and transactional procurement - mostly serving Akastor portfolio companies and Akastor sister company Aker Solutions, also providing payroll services for Statoil staff working in the U.K.
• IT infrastructure and application services, including SAP and engineering and document control systems - serving Aker Solutions, Kværner and the Akastor group.

At end Q2, Frontica had an order backlog - to 2021 - of NOK 5.2bn (~$620m), following 5-year renewals with Aker Solutions and Akastor portfolio company MH Wirth. So Cognizant gains a sizeable business, even if it does not manage to commercialize the operation very quickly. There are bound to be enough cost levers to pull to improve margins significantly. Frontica has been looking to improve its profitability through both process efficiencies and increasing offshore leverage (from Malaysia): Cognizant will be able to accelerate that journey and also apply automation.

But the larger opportunity is to continue the efforts that Frontica has been pursuing to diversify its client base to industries adjacent to the oil & gas sector. In January it appointed a new SVP of strategy and business development with this remit, though given his recent experience included the EVRY outsource to IBM, this option was clearly on the cards.

The combination of the Vilnius center, focusing on financial services, and now the Frontica operations, means that Cognizant will be able to offer multi-lingual offshore/nearshore/offshore BPO and related IT services to organizations  in the Nordics in a range of sectors. And of course, smaller oil services companies are likely to be more interested than ever in outsourcing to a third party-owned SSC with expertise in their industry.

Atos (which some years ago was at risk of itself being consolidated), is today one of the more effective consolidators in the IT services industry, with impressive experience of taking on challenging low-margin (or loss-making) businesses and turning them around in super quick time.

Last week, just 14 months after its acquisition of the IT outsourcing business of Xerox Corp, Atos completed its acquisition of another company in the U.S. Unlike some of Atos’ other acquisitions in recent years, Anthelio Healthcare is a business that is both profitable and growing (8% in 2015). We spoke with Michel-Alain Proch, CEO of Atos’ North American Operations, to learn more about his plans for Atos’ newly formed healthcare practice in the U.S.

Immediate priorities following the acquisition of Xerox ITO were clearly realizing the anticipated revenue and cost synergies. Then earlier this year, with North America back to organic growth (following ramp downs at McGraw-Hill Education and MetLife), Atos began a new work stream to further expand its profile in the U.S., targeting specific verticals: healthcare, retail/consumer goods, hospitality, and manufacturing.

With Xerox ITO, Atos had gained a $250m U.S. healthcare business, primarily in the provider segment, serving clients like Queens Medical Center and the Rehabilitation Hospital of the Pacific in Hawaii, UMass Memorial Healthcare, and Harden Healthcare. Anthelio adds $200m in annual revenue, and a healthcare payer client base. Its largest client McLaren (~50% of its revenues) signed a five-year renewal before the acquisition. Other key clients include LHP Hospital Group. The revenue split is roughly $130m ITO and $70m revenue cycle management services (RCM, boosted by its 2015 acquisition of Pyramid Healthcare Solutions).

Atos has committed that its U.S. healthcare practice, headed by former Anthelio CEO Asif Ahmad and with 2016 revenues of ~$450m, will be delivering double-digit growth within 24 months - a target of ~$50m incremental revenue by 2018. The immediate opportunities over this period will be cross-selling (infrastructure) managed services into the Anthelio client base, and Anthelio RCM offerings to legacy Xerox ITO clients. Atos also intends to invest in automation in revenue cycle services, in particular in further automating medical coding, which remains heavily manual.

Over the next three months, Atos will be formalizing its strategy for further expansion in the U.S. healthcare sector: the clear opportunities include supporting healthcare providers in their infrastructure transformation to hybrid cloud environments: see our blog about Atos’ ‘Digital EDGE’ (Engineer, Design, Gather, Enhance) approach in its MS business here. Significant client references in the U.S. are Monsanto and Texas DIR (with another win being announced in the next few weeks). Will we also see a ‘Digital Edge’ infrastructure transformation client reference in the healthcare provider industry in the next two years?

Atos currently has ~9k employees in the U.S. Anthelio will add a further 1.3k (plus 400 employees in Hyderabad). In December, Atos is opening a new site in Irving, near Dallas, which will become a regional headquarters. As well as providing office facilities for ~1,000 locally-based employees (around 100 from Anthelio and 900 from Atos), the 100,000 sq. ft. site will also open as a BTIC (Business Technology and Innovation Center) showcase in 2017.

Atos’ ambitions to further grow its business in the U.S. are likely to be supported by further inorganic investments, including possibly ones that strengthen its SI capabilities in its target industries: a healthcare specialist would seem to be likely. Demand for IT and BPO services will continue to enjoy healthy growth in the U.S. healthcare provider sector, and it is a sector where the supplier landscape remains fragmented.

We will know more about Atos next three-year strategic plan after its analyst day in November. We would expect something akin to the MS articulation of the  'EDGE' approach to transforming clients’ application landscapes feature highly in the strategic vision for its C&SI business. We also expect to see targeted improvements to C&SI topline growth and operating margin be a major contributor to overall group targets in the plan.

And will we at some point see partnerships with Conduent (the new name for the Xerox Services business) targeted at this sector?

We heard from many clients at the event, all of whom expressed strong satisfaction with HCL: its “relationship beyond the contract” messaging is resonating well with clients.

Mode 1, 2, 3

New COO, C Vijay Kumar, started by discussing HCL’s ‘Mode 1, 2, 3’ growth strategy for its portfolio:

• Mode 1 - ‘Agile & Lean and service-oriented’: this describes HCL’s existing core services portfolio (applications services, R&D services, BPO) which are increasingly being layered with DRYiCE tools. HCL expects Mode 1 activities will shift from 85% (we believe closer to 90%) of its current revenues to around 60% over the next few years
• Mode 2 - ‘experience-centric and outcome-oriented’: units including BEYONDigital, IoTWorks, cloud and cyber. These are high (20-30%) growth opportunity businesses, and will be high priorities for organic and inorganic growth investments. Mode 2 also covers newer delivery models such as Agile and DevOps
• Mode 3 - ‘ecosystem driven’: products & platforms, where growth is most likely to come from IP partnerships. Mode 3 also includes partnership constructs such as JVs and commercializing client captives.

This is an apparently simple way of describing a journey that all IT services providers are having to undertake as they evolve to remain competitive to the new world of IT. HCL's approach includes building independent teams for Mode 2 propositions which are taken to market through the Mode 1 businesses.

As well as highlighting progress it is making in some of its Mode 2 areas, HCL has also made some major investments recently that span two ‘Mode 1’ businesses where it has particular strengths - infrastructure services and engineering services - and where it is now applying Mode 3 partnership constructs such as the deal with Volvo.

Volvo deal brings in mainframe capabilities, is also part of a broader push in the automotive sector

I got to drive the Volvo V90!

Gothenburg was an obvious choice of location for the event given the award to HCL earlier this year of a major IT infrastructure management services contract by Volvo Group involving an IT captive acquisition that serves 40 clients in the Nordics and France, and the transfer of ~2,500 personnel in 11 countries. The captive acquisition adds mainframe capabilities, local delivery presence and a pre-existing external client base, all of whom have migrated (Volvo estimates the transferred captive generates annual external revenues of ~$190m). We heard from Volvo CIO Olle Hogblom; the transition (a walk-in takeover in April) appears to have gone smoothly. Driving a major transformation in Volvo’s IT infrastructure was a key priority and Hogblom highlighted that 52 transformation projects are already up and running.

Since HCL started targeting the Nordics in earnest in 2011, the company has been very successful in the region in winning IT infrastructure services rebids, with the likes of Statoil and DNB in Norway and UPM in Finland. The Volvo deal was a big investment (media reports are of $130m) by HCL, who is now pushing for sector, portfolio and market expansion in Continental Europe.

In terms of target sectors and services, HCL is setting up an automotive CoE in Gothenburg on the back of the Volvo win. Other initiatives will enhance its capabilities in engineering services in the automotive sector. HCL is acquiring Geometrics (not including Geometrics’ 3DPLM JV with Dassault Systemes) in a share-swap deal worth around $190m. Excluding 3DPLM, the automotive sector accounts for ~47% of Geometrics revenue. Geometric generates nearly 60% of its revenues from the U.S. and ~25% from Europe (where it acquired German automotive specialist 3cap technologies GmbH in 2013). Geometrics will be HCL’s largest acquisition to date in engineering services and as such its importance should not be overlooked. HCL has also formed partnerships with the likes of sector specialists Movimento (over-the-air software updates) and Rightware (UI design software). We expect to hear much more from HCL over the next few years about its work around connected vehicles.

Will HCL Technologies be an engineering services consolidator, with additional acquisitions, perhaps specialists in other sectors?

Other obvious areas of potential interest for inorganic growth include

• Cyber, to enhance its IT infrastructure services offerings.
• In terms of markets, perhaps  Germany again, or possibly France.

DRYiCE autonomics portfolio continues to expand, newer AI components

DRYiCE, HCL’s brand for its orchestration, operations analytics, automation and AI suite of modular components, has been expanding and now comprises 40 micro apps (both third party and proprietary) that between them support all of its service lines. DRYiCE includes well-established IT operations tools and newer RPA, AI, NLP, machine learning and analytics technologies. It has six layers:

1. Sense and act, e.g. monitoring tools
2. Prevent & heal, e.g. automated patch management
3. Ideate & create, e.g. to support automated testing, smart releases etc.
4. Engage and collaborate, e.g. Satori, an open source KI collaboration platform
5. Visualize and insight e.g. MyxAlytics predictive analytics
6. Orchestrate and choreograph.

HCL highlights its approach with developing and implementing DRYiCE modules as being one of “pragmatic automation”, namely real world, use-case driven (and thereby clearly outcome-focused).

The latest addition to DRYiCE is ‘Lucy’, a Watson-powered Level 0 service desk cognitive agent launched last quarter (also uses ServiceNow), and currently in pilots with four clients. Early uses are in chat; voice will surely follow as other use cases are found.

HCL claims that some elements of DRYiCE (we never found out if it is an acronym) are in use in over 50% of its accounts, not surprising given that some of the modules are well established. Its current push is to increase the level of automation in software and product testing services, very much in line with market trends (see NelsonHall's research on software testing).

HCL articulates the attributes of DRYiCE clearly, and is also ahead of many vendors in indicating what lies under the hood. Doubtless the suite will continue to expand, including in analytics and cognitive applications.

IoT, Small but Growing Practice, Leveraging Engineering Services

At the beginning of the year HCL launched a standalone IoT practice with ~100 people. The unit is now being augmented with the smart product development capabilities from its large engineering services practice. HCL’s current client credentials in IoT are mainly longstanding engineering services clients such as ABB and Xerox. Obvious sectors for expansion for HCL are automotive and aerospace.

Partnerships Key to Mode 3

HCL is looking to develop a products and platforms business through what it calls innovative IP partnerships.

The first of these was with CSC. It is over two years since HCL and CSC struck up an innovative partnership with the Celeriti Fintech JV, whose primary remit is to modernize CSC’s financial services software (see our blog here). We were not given an update on progress at the event, even though HCL has increased its investment in the JV. Given the CSC/HPES merger, the relationship will not now expand beyond the actual JV, and a go-to-market push is likely to be less than initially envisaged.

HCL’s newest significant partnership was alluded to in its last quarterly earnings call when it referred to making a $350m investment over two years in a 15-year partnership with a “global technology vendor”. HCL could not publicly comment on this partnership at the event, but it has since become evident that the partner is IBM (with whom HCL is also collaborating on IoT, setting up an IoT incubation center in Noida). In short HCL appears to be buying IBM Tivoli systems management tools and the Rational software modelling and development middleware in a deal that also involves personnel transfer – so in many respects it looks like a straight outsource (IBM is doing something similar with Persistent Systems). While HCL and IBM will work together on future product roadmaps for Tivoli and Rational, HCL will be responsible for ongoing product development and support. Clearly, the deal plays to HCL’s strengths in software engineering. Beyond this, further details, for example of the go-to-market arrangements, are not yet clear. In the short term, HCL will earn annual revenues of $30-40m from the deal. Longer term, there could also be broader opportunities for HCL in going to market directly with Tivoli and Rational products.

Notable by their absence: BPO and SaaS

• HCL’s BPO business (now under 5% of revenues and declining) is looking increasingly non-core. The only way that HCL is going to build a new BPO business is through acquisition: outside a captive buy, this does not seem likely in the short term
• Another area where HCL does not appear to have strong credentials is services around the major SaaS products. As it seeks to mitigate the cannibalization of cloud on traditional ADM activities and the reduction in large ERP projects, HCL does not seem to be looking building up large enterprise apps SaaS practices.

Playing to its Strengths

In short, as it works on evolving its portfolio to align to new and emerging market opportunities, HCL is being bold but also playing to its core strengths in engineering services and IT infrastructure services. This is a story of renovation, rather than one of radical reinvention.

Note: in the NelsonHall Vendor Intelligence Program:

• HCL Technologies is one of ~20 vendors individially profiled each quarter in the Quarterly Vendor Update Program
• In future, HCL Technologies will also be included in the Key Vendor Assessment Program.
• ​For details, contact [email protected]

Genpact recently hosted an advisor/analyst session at its new Innovation Center in Palo Alto. So why is a BPO specialist opening a center in Silicon Valley? Genpact is using the center as a hub for the development (and showcasing) of platform-based digital assets aimed at mimicking the industry disruptors by being based on standardized, simplified operating models and distributed technology that can be deployed at web scale as utilities. The center is also being used to house design thinking (DT) workshops, and as a co-innovation Lab.

Genpact views its role as bringing domain knowledge and understanding of process and then leveraging DT and digital technologies, and emphasizes it is prepared to destroy existing BPO revenues in the process. It recognizes that operating to traditional upper quartile and best-in-class standards is no longer adequate as organizations look to compete with new forms of digitally-based competition. The emphasis in Genpact’s digital strategy is to continue to focus on middle- and back-office processes but to reorganize these processes with greater emphasis on straight through processing (STP) and on real time insights. So, while Genpact continues to put process before technology, the company is focusing on the application of 12 key technologies, specifically cloud/SaaS, mobility, dynamic workflow, advanced visualization, RPA, machine learning, cognitive computing, NLP, NLG, IoT, data analytics, and autonomic computing.

In general, Genpact is partnering with, rather than acquiring, companies with these technologies, though it has acquired PNMsoft due to the critical importance of dynamic workflow technology as a backbone for new digital processes, and it also continues to invest in IT services companies with expertise in applying these technologies, hence its acquisition of Endeavour Technologies to strengthen its mobile capability. Key technology partners who attended the session are:

• PNMsoft, an Israel-headquartered provider of workflow, BPM and case management (HotOperations) software and Microsoft Gold partner, recently acquired by Genpact.  Though Genpact does not yet have experience of using PNMsoft solutions with a client, it will have been attracted by the ability of software such as PNMsoft Sequence to enable organization to establish multiple versions of workflows for a particular process, e.g. loan origination, and judge the impact of moving work between each of these workflows in terms of process SLAs and cost. This approach also means organizes can test multiple workflows and change/optimize processes without service interruption
• Automation Anywhere, combining cognitive, analytics, and RPA technology
• Rage Frameworks, developing “intelligent machines” for a platform-based approach to knowledge work. Seven of the current 16 “intelligent machine” platforms being developed by Rage Frameworks are being developed in conjunction with Genpact
• Arria, a small U.K. based Natural Language Generation specialist.

Genpact is increasingly emphasizing its role in assisting organizations in creating new digital business models, and is looking to build digital assets based on combinations of the 12 technologies. Pilots and live examples demonstrated at the Innovation Center included:

• Insurance policy servicing automation. Here the utility service on offer takes policy change feeds from a variety of channels, potentially including portals, emails, contact centers via use of voice-to-text technology, and uses NLP technology to identify appropriate data and update the policy administration system (PAS). Where exceptions occur, it can send details to an agent or request more information automatically, generating a NLG response to the originator. This utility is currently live at two Genpact insurance BPS clients
• Using neural chat in support of opening corporate banking accounts. This incorporates use of OCR technology to extract data from images of documents taken via smartphone, using neural chat to present details of missing information to both the agent and the customer simultaneously for validation
• Wind turbine predictive maintenance. In this example, live since Q3 2015, sensor data is being used to monitor a fleet of 5,000 wind turbines to identify the failure rate of parts including the likelihood of part failure in a particular location and month (taking into account the age of parts, the location of the part, and the impact of the weather). This data is then combined with information from the ERP system to identify the potential cost in terms of lost production and wider damage of a part failure, together with the cost of holding individual parts to optimize the number of parts held by individual location. It has enabled the client to move away from scheduled seasonal maintenance to a more predictive response to maintenance. The client has benefited from increased uptime (more revenues) and a significant reduction in maintenance costs. This approach is clearly applicable in areas such as cable network management and aircraft maintenance
• Use of NLG in support of management reporting to produce a commentary on the underlying data and charts, aiming to produce one version of the truth and focusing the interpretation of the data and graphs onto the most salient points, thereby avoiding individual managers coming to differing conclusions from the same data
• Reimagination of the quotes process for an electrical distributor. In the current process, the distributor receives electrical blueprints from which it manually extracts SKU-based orders to enter into its order management system. This is typically taking 3-hours per blueprint. Genpact has developed a pilot incorporating computer vision to input the blueprint, NLP to identify table data within the image, and machine learning to enhance the identification and interpretation of table data, which can then be input into the order management system. In this instance, the supervised learning exercise in support of the machine learning involved ~12 personnel over a 6-week period. This example, which is not yet live, illustrates Genpact looking at areas of a client’s operations that could be completely digitized; its proposed solution eliminates all manual processing.

Some of these examples are not yet in production, but all are evidently transformational. Clearly, Genpact is at an early stage in its development of digital assets, and the technologies and the technology vendors with which it works will evolve considerably. But it is clearly investing in Lean Digital Innovation in earnest: with examples such as the reimagination of the quotes process for an electrical distributor, Genpact has come up with an offering that is very different from its legacy in BPO services: presumably the commercial model, which I was told has yet to be finalized, will be transaction-based.

Among the strengths of Genpact’s approach with Lean Digital are its:

• Emphasis on using combinations of emerging technologies rather than on single technologies to create point-based digital assets
• Domain knowledge and understanding of process (its heritage): the approach starts with a focus on transforming a business process rather than with the application of automation/AI
• Evident understanding that emerging technology companies just want to try some pilots with real clients rather than spend time on contractual arrangements and joint marketing.

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See also Genpact Assists Client in Targeting 10x Process Improvement, Applying Design Thinking to Order Management by John Willmott, published this week here.

As a consolidator, CGI positions on taking a long-term strategic view (it does not provide financial guidance), and indeed long-term shareholders have clearly benefited. When it announced its intended acquisition of Logica in May 2012, its market cap stood at ~$5.3bn; at the time of writing, its market cap is over $14bn. Share price has nearly trebled in the last four years. As we were reminded, CGI remains the only company to have acquired a CDN$6bn IT services company effectively.

At CGI’s recent industry analyst event in the U.S., its first for some years, we were keen to find out more about how CGI’s operating model works (their model is very different from its peers, which tend to be more vertically focused), and about its near to mid-term ambitions. Several weeks after this event we also caught up with Colin Holgate (heads CGI’s global delivery capability, as well as the APAC region) and Doug McCuaig (EVP Global Client Transformation Services) in London.

What is the CGI Management Foundation – and what does it enable?

CGI refers to its Management Foundation as the secret sauce behind the effectiveness of its acquisitions, and being central to CGI’s continuing success. Former Logica clients also tell us they have noticed a difference since CGI took over.

The CGI Management Foundation is more of a bible than a secret sauce, covering every aspect of managing a business unit. First seeing light in 1992, it continues to serve as the backbone for the company’s management frameworks, policies, and guidelines. It covers every area of an organization, from corporate and BU processes through to clients, shareholders and employees (members). The Client Partnership Management Framework, for example, provides a guide for every phase, from the proposal through to delivery and deal closing for each type of service (outsourcing, projects, consulting).

The Management Foundation is extremely strong on financial processes; for example, it prohibits the signing of contracts with unlimited liability. And the fact that CGI has one accounting system globally (Logica, in contrast, had 22) makes it easier to have financial controls. For example, one aspect of the Management Foundation looks at how much time it takes to invoice a client and the milestones for payment, to make these as short as possible. Collections are scrutinized closely. When late payment is apparently delivery-based, CGI will look at KPIs such as the CSAT and project health-check report to understand if there is an issue behind non-payment. CGI charges BUs interest for significantly overdue payments. Red contracts (e.g. margin leakage from plan) are reviewed monthly, with the CEO involved, and the BU presenting on action plans. This means, inter alia, very early contract issue identification and a focus on profitable business (what CGI calls “quality revenue”), and alignment of management incentives with financial goals. In contrast, Logica struggled to get to grips with its problem contracts. CGI claims that it has elected to exit unprofitable former Logica business that has impacted revenues by over $400m over the last four years.

So, the Management Foundation makes for a rigorous environment, and a company that operates with a common global set of operational KPIs. It speeds up the integration and alignment of acquired capabilities. Its transparency means that non-adherence at local level is not possible.

It has enabled CGI to operate successfully an operating model that is probably unique for an IT services company of its scale and geographic presence, one that is based on a series of locally facing BUs (some of these are metropolitan areas in the U.S., a few are client-specific), with accountability pushed right down to the BU. This is a level of accountability and client proximity that other vendors aspire to. Along with local accountability, the Management Foundation also brings local empowerment, as long as it is followed; among other things this means shorter decision making.

So how does the Management Foundation support and encourage the sharing of best practice, of industry domain expertise, or the development of leading-edge solutions, global delivery, etc.? Clearly it does, otherwise CGI would very quickly be losing relevance and competitiveness and the evidence is otherwise. Our forthcoming Key Vendor Assessment on CGI will look at all of these. Considering the use of global delivery, there appears to have been an evolution in the last couple of years from CGI’s offshore capability (primarily in India) acting as a delivery organization waiting to be fed. Resources from India are being increasingly used in strategic deal pursuits, including as solution architects. India is now also being used for the maintenance and development of CGI’s own IP (more of which below). And, unsurprisingly, the offshore unit in APAC is driving the use of IT process automation and of distributed agile. Rather than a scaling of the offshore organization, expect to see an increasing focus on automation for improved efficiency speed, also on analytics and AI.

CGI’s Build & Buy Strategy

CGI management frequently refers to the Build & Buy strategy which it has successfully followed in profitably doubling its revenues every five to seven years. Logica is now integrated and CGI is on the path to profitable organic growth with the former Logica operations, having achieved margin improvement in all those regions and now delivering constant currency growth in France and the U.K.

So what next? Its messaging about current focus areas is clear. Let’s look at the twin components of ‘Build’ and ‘Buy’ in a little more detail.

Build strategy: IP30 ambition is central

CGI highlights three key focus areas in its ‘Build’ strategy:

• Building consulting capabilities in DCX, agile, big data and analytics, and cyber
• Its IP30 ambition, for IP-related business (which tends to be higher margin) to grow from 18% (~CDN$1.8bn) of FY15 revenues to 30% of FY19 revenues
• Large outsourcing deals.

With IP30, CGI has unusually shared a financial goal, one that is very ambitious, and as such it is one that has attracted a lot of interest. CGI estimates it has a portfolio of around 175 IP solutions, of which ~85 are commercial software with a formal GTM strategy (the others are frameworks, toolsets, etc.). Around 10 of these account for ~50% (~CDN$900m) of FY15 IP revenues, and five, including Payments 360 and Advantage, are dominating recent bookings.

Simple math shows that, given CGI’s ambition to double revenues every five to seven years, this could mean a target as high as CDN$6bn, one that is only achievable through a mix of organic and inorganic growth.

For organic growth, CGI is relying on four main levers for its IP:

• Bringing IP-based offerings  to new geos: CGI claims its migration of IP solutions across geographies is now accelerating, and points to recent successes with Payments 360 in the U.K. and with Collections360 in Australia, as examples of platforms that have transferred from the U.S.
• Enhancing the functionality of the existing IP portfolio, sometimes with partnerships
• Launching and accelerating new solutions
• Expanding SaaS and BPaaS models.

The largest revenue opportunities for IP-related revenues will be those where the platform is part of an outsourcing engagement. CGI has a track record for this in services such as Managed Advantage, less so in BPS. But it is not yet clear the extent to which CGI is looking to grow a more substantial BPaaS business based on some of its IP.

A second pillar of CGI’s organic growth strategy remains large, long-term IT outsourcing deals. While these are fewer on the ground, it has been awarded two such deals this year, with SNC-Lavalin ($500m over 12 years) and Sears Canada ($200m over 10 years). CGI is one of a decreasing number of vendors that is interested, where appropriate, in deals that involve personnel transfer. It also highlights its ability to both run clients’ legacy environments, reducing the ‘run’ spend, and also support them in their change agendas.

Buy strategy: acquiring for IP/industry presence

CGI has indicated clearly for some time its ambition to acquire in the U.S. (or U.K.) commercial sector, most probably in utilities or financial services, both sectors where it already has IP. While the market waits for CGI’s next large acquisition, it has been highlighting how active it has been in its identification and assessment of appropriate targets, and also, naturally, how rigorous is its M&A management process as laid down by the Management Foundation. In the U.S., for example, CGI has identified nearly 400 niche and over 60 ‘transformational’ targets. Meanwhile, it has made a couple of niche acquisitions this year in Canada and France, both of which extend its presence in the retail banking sector. These two have combined annual revenues of ~CDN$50m.

But clearly, CGI’s primary focus is a large acquisition, ideally one (or ones) bringing in IP as well as scale. The indications are that it will have acquired ‘the right company, in the right location, at the right price’ within the next 12 months. Where the primary focus with Logica was gaining a scale presence in Europe, the primary focus with the next acquisition is more likely to be IP – and this could also have an impact on other service lines. There are also likely to be further niche acquisitions, probably including in cyber consulting.

Summary

CGI positions on:

• Reliable delivery, achieved by leveraging the Management Foundation
• Client proximity, co-location and domain knowledge
• End-to-end services, and its suitability for larger long-term engagements
• Its enabling IP.

And the emphasis on the last of these is becoming more pronounced. CGI’s stated IP30 ambition may be bold, but it is useful in reflecting a shift in positioning, one that emphasizes digital transformation, industry and innovation.

Will CGI achieve organic growth by FY17? Will it double its revenues in the next few years? And will IP-related business represent 30% of FY19 revenues? These questions are arguably less important than its ongoing ability to drive profitable growth, even if that growth is primarily inorganic. And of that there is little doubt.

NelsonHall will very shortly be producing its first ever comprehensive Key Vendor Assessment on CGI. For details, please contact Guy Saunders.

Firstly, here are a few of the details of the transaction, which is targeted to be completed by March 31, 2017 (the end of CSC’s FY17). The expectations include:

• The transaction will have ~$8.5bn after-tax value for HPE shareholders (details below), who will own ~50% of the new company’s shares
• The merger will produce first-year synergies of ~$1bn, with a run rate of $1.5bn by the end of Year 1
• The newco will have Year 1 revenues of ~$26bn (of which ~$18bn ex HPE ES)
• CSC’s Mike Lawrie will become chairman, president and CEO of the new company and Paul Saleh its CFO
• HPE CEO Meg Whitman will join the new company’s board of directors
• HPE ES’ Mike Nefkens will report to Lawrie and “become a key part of the new company’s executive team”.

The last few years have been dramatic for both CSC and HPE ES (not to overlook Xchanging, now also part of the mix), featuring break-ups, divestments, problematic mega deals that nearly broke the back of each, and also from CSC some ambitious partnership announcements. Hence, the newco, whose name will be announced at a later date, will be like a jigsaw puzzle created from parts of several other jigsaw puzzles, all of which have lost large chunks of their original layouts.

Let’s start with the largest company in the newco: HPE ES

HPE ES is primarily based on EDS, acquired by HP for $13.9bn in 2008. Just as a reminder of its former size, HP Services and EDS had combined revenue in 2007 of over $38bn. There has been a lot of water under the bridge since then, including the loss of its top three clients (which between them accounted for ~65% of its operating income). In 2012, HP removed $8bn of goodwill from its balance sheet relating to the EDS acquisition, and the restructuring costs have run into billions. Then in September 2012, Whitman unveiled a multi-year restructuring program for the Services division. In its FY15, HP ES generated revenues of $19.8bn and a divisional operating margin of 5.3%.

This transaction is happening at a time when HPE ES is performing well against what it has been asked to do, essentially to stabilize and get to a market-competitive cost structure. In its Q2 FY16, it delivered a second consecutive quarter of y/y topline growth in CC, the Applications & Business Services business for the third consecutive quarter, the ITO business (60% of revenues) for the first time in four years. And operating margin (excluding corporate costs) was up 314 bps y/y to 6.7%, its eighth consecutive quarter of y/y margin expansion.

So, given that the division appeared to have been meeting its remit, why the spin off – was it a complete surprise? In some respects no; it certainly would not have been a few years ago. But in the last year or so there appears to have been a more effective integration of the various divisions within HPE. The very name HPE Enterprise Services does, however, provide a clue that HPE never really got to grips with the services capabilities that it acquired with EDS. Spelt out in full, the moniker “HPE Enterprise Services” becomes “Hewlett Packard Enterprise Enterprise Services”. When the “Hewlett Packard Enterprise” brand was announced, I enquired what would be the precise name of the former Services division, pointing out the oddity of adding “Enterprise Services” to “Hewlett Packard Enterprise”. The fact that HPE never bothered to get clean its branding for its $19.8bn ES division is indicative of something about priorities.

HPE’s Whitman calls this a “spin-merger”; I’d call it a spin-off by HPE and a reverse takeover by CSC.

And now CSC

If we go back to its FY09, CSC reported global revenues of $16.74bn and was declaring its ambition to become the second largest IT services provider globally. Again, there has been a lot of water under the bridge since then, including massive write downs and substantial charges relating to the U.K. NHS contract, accounting irregularities and restatements, and in 2014 a $190m penalty from the SEC and an requirement to restate results for FYs 2010 to 2012. In 2011 there was “Plan 2014” and in 2012, with the arrival of Mike Lawrie as CEO, a new turnaround program. There followed a spate of divestments, some profitable but small, others much larger businesses, for example its U.S. Credit Services unit for $1bn in December 2012, also its Applied Technology Division (FY13 revenues of $760m) for $175m.

And then in 2013, CSC resumed acquisition activity. Those that will be very relevant to the newco include ServiceMesh; Fixtnetix; UXC, nearly doubling its presence in Australia, and most recently, Xchanging. There is a clear deepening industry focus.

CSC also announced its results yesterday: its Q4 FY16 revenues were down 5.5%, down 2.4% in CC to $1.81bn, this including $30-40m from UXC. GIS (42% of revenues) was down 7% (down 3.7% in CC). Operating margin, excluding one-off costs, was 7.6%, down 270 bps y/y.

On a separate note, CSC will not be picking up a stake in Mphasis: last month, HPE announced it was selling its stake in Mphasis to Blackstone in a deal pricing HPE’s stake at ~$825m (in FY15, HPE recognized ~$650m of revenue and $110m of operating profit from Mphasis). HPE did state it plans to renew the current MSA with Mphasis for another five years in connection with this transaction.

CSC and HPE ES have a lot in common; they both used to be global heavyweights in the IT infrastructure management services market of the old, pre-cloud world; started major turnaround programs in H2 2012; have stepped back from the brink (as has, indeed Xchanging), and went through a break-up last year (completed within a month of each other).

Lawrie and Whitman declare the merger as a “logical next step” for both companies… one that will “build on their progress to date and significantly accelerate their transformation” (Whitman).

So looking ahead, what might we expect?

The clear beneficiaries are the shareholders (share prices have surged in both CSC and HPE since the announcement). Lawrie has proven experience of taking out costs: HPE ES was already making progress in its own cost take out program. There is little question that the $1bn cost synergies will be achieved, with additional opportunities from real estate rationalization.

Lawrie spelled out five positive attributes of the combined entity. Looking at the first two:

• Firstly, he referred to increased scale. With $26bn of annual revenue, the new company will be one of the largest IT services business in the world, or what Lawrie referred to as “the upper echelon of global IT services players”. But having scale is no longer the critical success factor it was in the era of mega outsourcing deals. Size isn't everything: organizations are looking for a different set of attributes today: at a TCS client event yesterday for example, two financial services clients gave glowing comments, completely unprompted, on qualities such as partnership, co-creation, agility, and providing guidance and support in a digital transformation. In the old world, EDS and CSC were the global heavyweights, fighting each other. Today the competition is smaller, faster, offshore-oriented, getting closer to the client’s business, and investing heavily in automation and AI
• Secondly he referred to “complementary industry leadership”, with CSC and HPE Enterprise Services, both having “strong vertical expertise”. While CSC has been beefing up its insurance and financial services IP recently, HPE ES does not bring to the table any strong industry-specific assets or presence outside some IP in the air travel sector and its Medicaid business (which, although profitable, is looking increasingly non-core). But the comment does indicate something about his thinking. Will the establishment of the newco provide a vehicle for a major reshuffle of go-to-market structures?

Lawrie claims the newco will be a “world-class agile and versatile global technology services firm... (able) to lead the digital transformations for our clients”.

• But around 43% of its business will still be infrastructure services, a lot of which in legacy deals and in services which continue to face pressures on margins. Also, the stances taken of technology independence (CSC), and by HPE ES of the value of being part of “one HPE” have been diametrically opposite. There will need to be a major adjustment from both companies when joining the newco
• What Lawrie call “next gen offerings” (cloud, cyber, apps, next-gen workplace, big data & analytics) will represent just 12% of revenues of the newco. There need to be other capabilities in this “next gen offerings” stable if CSC is really to position on its ability to “lead the digital transformations for our clients”
• On a more positive note, for HPE ES, its applications and BPS businesses may find in the newco a more congenial atmosphere to thrive. These businesses, where it can be easy to articulate to clients the delivery of business value, will be as critical to any future organic growth as its "next gen offerings" stable. Neither CSC nor HPE ES has been very good (outside BPS) at developing relationships inside client organizations outside the CIO office: this will need to change.

There is the question of the U.S. federal business that HPE ES will bring in, a market that CSC has only just exited. Will it play a part in the newco? Overall U.S. public sector would account for around 11% of the newco, way below CSC’s non-compete threshold. When asked about this in the earnings call, Lawrie declared “post-close, all options and I underscore the word ‘all options’ would be on the table”. A further divestment may well be on the cards.

And for CSC, what will happen to the CSC/AT&T partnership, also to the relationship with HCL Technologies?

And what about the HQ of the newco? Virginia reflects the old CSC's presence in the federal sector and will have little relevance to the newco. Or will there be a shift, perhaps to the HP heartland of California, closer to Silicon Valley?

Employees from both companies (and many have worked for both) will be facing yet more large scale layoffs. Beyond managing the rightsizing, management will need to work as hard on employee morale, on training and reskilling of existing staff, and on nurturing a different corporate culture, as much as on efforts to be an employer of choice to attract bright new talent.

Last year, we had a spate of break-up announcements. And now we have three product companies (Xerox, Dell, HPE) that, having acquired outsourcing businesses to build a services business, have decided to let them go, having failed to integrate and leverage the different types of capabilities and client relationships these businesses brought in. Many of the HPE ES employees who transfer to the newco are likely to be pleased to work in a pure services environment once again.

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More details of the transaction and the $8.5bn value to HPE shareholders:

• HPE shareholders will get an equity stake of ~50% for ~$4.5bn (for tax exemption, a RMT requires that the former subsidiary being spun off buys the target company, so HPE shareholders have to own a majority of the merged company at the time of the spin-off)
• HPE will get a cash dividend of $1.5bn from CSC
• $1.9bn of HPE debt will either be retired or assumed by CSC, and ~$0.6n of net pension liabilities will transfer to CSC

The importance of the U.S. to Capgemini’s reinvention was reflected by the decision to locate its annual global analyst event in San Francisco, where it showcased its latest Applied Innovation Exchange (AIE), opened four months ago. It is evident that the recently integrated iGate, also the much smaller recent acquisition (~60 employees) of Fahrenheit 212 are central to the future evolution of Capgemini on a global basis.

Top Priority: Integrating iGate

The fact that post IGATE, North America has become Capgemini’s largest geography and its headcount in India has reached 90k has been well publicized by the group.

When Hermelin shared the new strategic priorities for the group, as determined in the latest rencontre, integrating iGate was at the top. Hermelin was referring not so much to the types of cost synergies that are to be expected in a post-merger integration scenario of this scale, but to revenue synergies, in particular from having Capgemini gain from the IGATE approach to account development. Hermelin has publicly commented for some years that client intimacy was an area that needed strengthening, and leveraging the IGATE account management model, starting in iGate’s core U.S. market will be a major development in this respect.

As part of this focus on strengthening client intimacy, Capgemini intends to move to a vertical-led go-to-market structure, spanning all its service lines. The natural starting point is Financial Services, leveraging both iGate and the former APP.S 1 super-regional applications service unit (based on the former Kanbay, which had itself brought in offshore delivery capabilities and strong account management), and expanding the APP.S 1 go-to-market to cover all service lines, including IT infrastructure services (which has new leadership). This vertical-led go to market is also starting in Retail/Consumer Products with a cluster of around 10 global accounts. The intention is to develop and leverage best practice across the accounts and use the cluster as a platform for innovation and collaboration. This will be a major evolution for a group which has for years sought to move beyond its background of country-based fiefdoms with a series of global initiatives.

Another capability brought in by IGATE is its ITOPS platforms, in particular its IBAS TPA administration platform. Expect to see further investment in the next few years by Capgemini’s Business Services unit on BPaaS, in particular in selected BFSI sectors. It is also looking to leverage the Odigo multi-channel contact center platform, brought in with the Prosodie acquisition, in some of its BPO delivery.

Portfolio Development Priorities: Cloud, Digital, Business Services

The second on the list of strategic priorities for Capgemini Group as laid out by Hermelin relates to the portfolio, and he mentioned three areas: Cloud, Digital, and Business Services, all to be expected Capgemini estimates that cloud and digital services accounted for ~22% of its total revenues in 2016, and grew at over 23%.

This blog does not have the space to look at the offerings and developments in Capgemini’s cloud services portfolio, which enjoys the umbrella brand of “cloud choices” (we will be looking at this in our next Key Vendor Assessment on Capgemini).

Looking instead at Capgemini’s positioning today around Digital (to which more attention was paid at the event) it is evident that some progress has been made recently and that there will be continuing investment, again with the U.S. being at the heart of this.

Capgemini describes its offerings around digital transformation in four areas:

• Digital Customer Experience (DCX), launched in 2014, recently enhanced with the acquisition of German Salesforce specialist Oinio
• Insights and Data, launched 2015 (data collection; data conversion; also creation of platforms to manage insights and data)
• Digital Manufacturing: a new set of global offerings being launched around IT/OT, e.g. for preventative and proactive maintenance, for shorter, more agile product development. GE Digital presented at the event, and Capgemini is one of the early SI partners for GE Predix – expect to hear more about Digital Manufacturing in 2016
• Digital Innovation (Fahrenheit 212, see below).

It is developing and scaling capabilities in each of these four areas, and also intends to develop industry-specific focuses to each, starting with insurance and consumer products/retail. Capgemini is establishing digital leaders in each major geography, appearing to be starting with the U.S., and building teams in specific sectors

Innovation: AIE and Fahrenheit 212

Also key to building its market positioning around Digital and innovation is the concept of the AIE, first introduced last year. Capgemini currently has a network of nine AIEs, some of which have an industry focus (e.g. Lille and retail). San Francisco, which forms Capgemini’s basis for joint innovation with Silicon Valley start-ups, is the flagship. Most, if not all, of the larger IT services providers are building their own versions of innovation centers, and these can fulfil a variety of purposes. So what is distinct about Capgemini’s approach? The clues are in the first and third words of the AIE name: Applied and Exchange. Capgemini highlights, that the AIE approach comprises five elements, including the following three:

• A framework providing discipline to the design principles of “Applied Innovation” (speed, scale, safety, certainty)
• The AIEs being networked (rather than acting as individual labs), thus able to harness group capabilities, again breaking down any historic geo silos
• A global ecosystem (including 3rd party R&D, academia, tech start-ups via venture funds and PE partners, alliance partners, client co-creation)

Capgemini is placing considerable emphasis on building its AIE network. In general, innovation centers being opened by IT services providers are primarily intended to act as door openers, usually for new opportunities within existing accounts, and provide a format for partnering with tech start-ups. As well as the concept of “applied innovation as a service”, Capgemini is also looking for its AIEs to both extract innovation from and push innovation back into the group. This is part of the wider push to be more integrated in leveraging Capgemini’s assets globally, across both geographic and service line structures.

We also learned more at the event about the capabilities brought in to Capgemini by Fahrenheit212, acquired this February, an innovation strategy and consumer-centric design firm headquartered in NYC, with a smaller office in London, with ~60 employees. Fahrenheit 212 brings in a model it has developed for the development of innovative products and services for a client base that has included Coca Cola, Samsung and Marriott; also an entrepreneurial approach, often agreeing with clients a performance-based compensation model for projects. Now part of Capgemini Consulting, the expectation is that it will help strengthen Capgemini’s ability to position on innovation when assisting clients in their digital transformation. Capgemini claims that, rather than embark on a series of local acquisitions, it is looking to replicate Fahrenheit capabilities in other geos.

“Attract and develop the best talent”

This was third on the list of strategic priorities shared by Hermelin. Capgemini has shared for some years now various initiatives to flatten its pyramid structure and increase the way it uses India capabilities. Among the focus areas for 2016 that were shared were increased recruitments of digital technology specialists, and a reskilling plan in Europe, targeting ~1.5k employees.

Capgemini also anticipates that AIEs and other new types of workplace environment will add to its attractiveness as an employer of digital talent

Competitiveness: Push on automation at Group level

Every IT and BP services provider is on some form of automation journey; some are articulating more clearly than others what vendors and tools they have applied, are applying or considering applying for monitoring, to automate, to orchestrate, and also for cognitive automation.

At the event, Capgemini highlighted that

• Automation is a strategic priority for the group, led by the group Competitiveness function, and covering all its service lines, in particular operations
• Its approach to automation is disciplined and integrated, with a framework for “Intelligent Business Automation” that spans its operations services

We were shown some client examples and the benefits achieved, e.g.:

• In faster release cycle times through DevOps
• Incident reduction through application portfolio management
• In reducing cycle time and cost of quality and improving first pass rate through test automation
• In efficiency improvements through applying RPA to order processing

And using itself as a reference point for HR departments, Capgemini is also using IBM Watson internally for resource planning and fulfilment.

The reality is that at the moment, Capgemini (and this is true of every other IT service vendor that we have spoken to) cannot predict when that all important inflexion point at which the efficiency savings (ignoring the other benefits) from automation in its delivery of a managed service outweigh any committed price reductions.

Some 19th century literature (e.g. Henry James) looks at the push and pull tensions between the old world of Europe and the “new world” of the U.S. What is happening at Capgemini is reminiscent of this: Europe is where large skill reskilling is taking place and where the vestige of some old fiefdoms are still being removed; the U.S. is spear-heading developments that will lead to a rejuvenated and the new revitalized Capgemini Group that, aged 60, will look and feel less French, and at a time that, symbolically follows the passing of its founder Serge Kampf.

NelsonHall will be publishing an updated Key Vendor Assessment on Capgemini shortly, which will look in more detail at the group's priorities. For details, contact [email protected].

Twenty one months after his appointment, Infosys is on an upwards trajectory:

• The company finished FY16 with a strong Q4 (ended March 31), 15% y/y constant currency revenue growth, higher than TCS for the first time in many years. Full FY16 revenues were up 13.3% in CC, ahead of initial guidance; and the number of large deal signings continues to grow
• In terms of shareholder value, the introduction to Dr Sikka’s keynote address in this year’s Confluence user event in San Francisco reminded us that the market cap of Infosys has increased by over 40% (to $44bn) during this period
• Behind these headline figures, there is a palpable improvement in employee morale, and our perception is that client confidence is restored.

As such, the tone at Infosys Confluence this year was celebratory as well as visionary.

Using the interlinked motifs of Automation, Innovation, and Education, Dr. Sikka discussed some of the key initiatives started since his arrival, distinguishing between:

• Breakthrough innovation, e.g. the Aikido services launched last summer (which, at the time, we felt to be style over substance), and...
• Grass roots innovation, e.g. Zero Distance projects (where the aspiration in every project is to innovate from the bottom up) launched March 2015, and Design Thinking (DT) training. Both of these have scaled, with a rate of adoption that Sikka describes as ‘astounding’. Around 90k employees have now gone through a one-day DT workshop, and 8.5k Zero Distance (ZD) master projects are currently under way, with 500 client testimonials for ZD projects already gathered. Clients we spoke to who have experience of ZD projects were appreciative of what was described by some as a ‘free service’, while those with no ZD experience yet were keen.

The big new announcement at Confluence 2016 was the launch of a ‘breakthrough innovation’ like Aikdo: the Infosys MANA AI portfolio. MANA (which includes the Infosys Automation Platform), is not a platform, more a toolset of technologies and techniques such as ontologies, probabilistic networks & inference, NLP, machine learning & neural networks, rule-based automation, process mining & forecasting, discrete event simulation, and so on. MANA, we heard, is a Polynesian word meaning a pervasive supernatural power that flows through all things. As with the branding of ‘Aikido’, the spiritual interests of Infosys’ CEO are evident.

A key differentiator in Infosys’ approach to AI with MANA is that it starts by targeting L3 activities and identifying bugs in code (with some level of self-healing), rather than the conventional approach of starting by automating L1 and working up to identifying eligible areas in L2. Infosys proclaims MANA as ‘reinventing the reinvention of IT landscapes’.

MANA is already live with five organizations (including Infosys internally) and Infosys is aiming to have 25 use cases within a year. At Confluence, we heard about two use cases.

The first use case is in order management processing at an Australian telco client. Multiple systems are involved in order processing. MANA:

• Predicts when orders are at risk of being delayed/not fulfilled, identifying where a particular order is stuck within the  systems, and does some automatic code fixing (so preventing tickets). It also analyzes order pathways  to expose process inefficiencies
• Where it is not able to do self-healing, MANA consolidates sources of information (source code, system logs, run-time logs, defect logs, user interactions, etc.) and uses probabilistic models to localize the bug and indicate where a code fix is needed, showing the source code components and providing associated test plans.

Beyond the cost benefits, the client noted the benefits could include improved customer experience and increased speed to cash from faster order activations (self-healing orders getting a special mention), also the near real-time information on customer order status.

The second use case is Johnson Controls Inc. (JCI) facilities equipment (chillers, generators, etc.) on Infosys campuses. MANA is being used for predictive maintenance. Again, JCI noted that MANA offers advantages beyond cost, such as sustainability and reliability, etc.

Infosys is also applying Mana internally for travel & expense management.

With automation, Infosys clearly wants to be an early adopter, not a fast follower. It is still early days: Infosys’ revenue per capita declined in FY16, with committed pricing reductions still outstripping any cost benefits from automation. We asked COO Pravin Rao when Infosys expects its investments in automation and AI will begin to have an impact on productivity. Apparently, this may start in H2 FY17, and become more evident in FY18, as Infosys makes progress against its targeted $80k revenue per capita by 2020.

Another theme at Confluence was a focus on nurturing a mind set of ‘being improving’, a nice reflection of the fact that continuous improvement is critical to success in IT services and BPS. This was certainly apparent in our conversations with BPS execs.

Among our conversations with execs, we also discussed:

• Workforce plans: The move to automation and increased productivity is having a major impact on Infosys’ hiring strategy. While other BPS vendors are continuing to enhance their price-competitiveness via shifts in personnel to tier-2 locations in India, Infosys intends to largely retain its current delivery footprint in India and is not looking to add lower cost delivery locations there. Indeed, the company is also reducing the number of H-IB visa applications, intending to increase onshore recruitment at graduate level. The company is increasingly seeking benefits from client proximity and problem-solving backed up by automation rather than competing on people costs
• Infosys’ acquisition strategy: This appears to be fundamentally different from most other IT service providers currently. While nearly all say their acquisition strategy is IP-led, they are typically targeting IP at the enterprise application level within a target vertical. Infosys’ focus is on ‘horizontal’ enabling software and capabilities that can be applied to augment delivery across service lines and domains, much as it is doing with Panaya, now being used for testing services as well as ERP upgrades.

Infosys’ Zero Distance approach (and the detailed focus on the client’s business by delivery personnel that it demands) and MANA are both potentially significant differentiators for a company that two years ago appeared to have been in danger of losing its mojo. MANA could also potentially be a major differentiator in BPS services where Infosys is also managing the associated applications, though client acceptance of full-stack IT and BPO services remains limited outside of new initiatives such as BPaaS. This is the sort of initiative that Dr Sikka envisioned when he talked about making Infosys a ‘a next generation services company’. Infosys is in a hurry: there will be more.

With over half of its revenues coming from Managed Services (mostly IT infrastructure management), and Bull and Unify (the former Siemens Enterprise Communications) adding hardware, security, and middleware to its portfolio, it is particularly important for Atos to have a clear and distinct positioning within the global IT infrastructure managed services vendor landscape. This has not been the case recently.

Financially it has proven credentials. But in an environment where enterprises are contending with the huge disruption of digital, they are looking for more from service providers than delivery reliability, and management and financial stability.

In response, as summarized by its tagline “Trusted Partner for your Digital Journey”, Atos is now looking to position as a digital leader, in being one of the few IT services companies with the end-to-end IT services capabilities to support clients on their entire “digital journey”.

This positioning and breadth of capability is a particularly strong focus in the Managed Services (MS) business. The relish of MS head Eric Grall in having achieved organic (CP/CC) growth in 2015 was apparent (not many onshore-headquartered IT services providers are enjoying organic growth in MS at the moment).

MS has been busy, firstly with investments in automation and robotics in 2015:

• Having decided several years ago to standardize on ServiceNow for service orchestration for hybrid cloud management and ITSM, the investment kicked off in earnest in 2015
• Atos also embarked on initiatives to leverage autonomics solutions from Arago and IPsoft. It is currently doing three POCs putting Amelia in shadow of L1 operators for three months, aiming to use Amelia as a virtual agent for all L1 support and then to reinforce L2 support. The ambition is to achieve efficiency gains of up 50% in incident management and of 25-30% in service requests within two years.

Secondly, MS launched what it calls a hybrid “digital data center” with virtualized compute, network and storage, leveraging VMware. Atos is now offering clients a SDDC option for private cloud, with Siemens one of several early adopters. The SDDC approach shifts the emphasis from the infrastructure to the application workloads, which has several clear benefits to clients.

Thirdly, we heard for the first time about a newly coined acronym “EDGE” (Engineer, Design, Gather Enhance), Atos’ articulation of its approach to helping clients in their digital transformation.

So what does the EDGE approach mean as it applies to Atos MS?

• Engineer: having a common framework for the orchestration and management of the complexity of clients’ landscapes of legacy infrastructure, private and public clouds.
• Design (delivering a consumer-like experience to IT):  Atos’ ‘OneSource’ CIO cockpit, accessible on laptop and mobile devices, apparently includes project status and satisfaction metrics. Also the OneContact mobile app
• Gather: applying analytics for insights into automation of IT infrastructure management; we heard about a new three-year apparently exclusive arrangement with U.S. firm ClickFox around applying its CEA customer journey analytics platform to identify process areas for automation in end user help desk. This should both reduce costs and improve the user experience. While some of its competitors are showing less interest in EUC services, Atos sees  it as an opportunity for growth, with the addition of Unify adding to its offerings in UCC 
• Enhance: improving productivity/speed and delivering a consistent user experience across channels while reducing costs, e.g. shift left in helpdesk, the use of Amelia,

Atos has emphasized its capabilities in cloud orchestration across legacy and new environments for several years. EDGE goes beyond this; it should be helpful for Atos in going to market in providing a coherent overview of the breadth of its capabilities in MS.

In conclusion, deciding to standardize on ServiceNow is not in itself a differentiator, nor is leveraging IPSoft - using tools such as these will soon become “must-have” capabilities for any vendor to remain price competitive. The ClickFox platform (which to date has been used for customer journey analytics in sectors such as retail banking) is an interesting choice to apply to IT helpdesk processes. One Atos client I spoke to was particularly interested in it.

Furthermore, having an easy to navigate CIO cockpit providing real-time, drillable-down information is becoming a “must-have” for IT infrastructure management services providers; these are likely to have more bells and whistles added. Atos current version sounds relatively advanced, although we have not seen it. And there are some other MS providers able to offer an enterprise private cloud service (in addition to a virtual private cloud).

So the components are not unique in themselves, but applying all of them is distinct. When you tally up all these capabilities, plus the increasing global scale of Atos, it becomes increasingly apparent that Atos is one of a very small cohort of IT infrastructure services providers able to offer a full-service management across legacy and cloud environments, while assisting organizations in moving to cloud environments. Most of Atos’ client base was not “born in the cloud”; the EDGE approach appears to take a realistic approach to helping bricks and mortar enterprises in the digital transformation of their IT infrastructure.

Atos will formally unveil its “2020 Ambition” in Q4 of this year, but we were provided with a snapshot of its ambitions for MS. These included

• The introduction of new MS services, particularly around IoT
• Achieving 50% of its revenue from hybrid cloud and platform transformation by 2020 (currently <20%)
• Achieving a $1bn book of transformation services business.

A number of factors will make achieving organic growth in IT infrastructure management services ever more difficult over the coming years. Only the larger Indian oriented services providers are currently enjoying (very) healthy growth, but their capabilities do not generally include end-to-end management of hybrid environments with a private cloud offering. Atos’ MS business has been on a journey of transformation for several years; it is now articulating a clear roadmap for being at the forefront of next gen IT infrastructure management services in the years ahead.

While EDGE appears to have been coined by its MS business, expect to hear more about EDGE across other Atos global service lines.

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We also heard at the event, inter alia, about:

• Some workforce transformation initiatives (both recruitment and reskilling)
• New developments in other parts of Atos, such as the Atos Codex analytics platform
• The massive transformation program currently underway at Siemens AG (being done at speed: it started May 2015 and should be completed in December 2016). As well as the sheer scale of the transformation, there are new features such as Atos Resource Islands (ARI), a security offering for highly confidential systems
• Atos C&SI business. Expect to see the EDGE appear more prominently here too
• Developments in Worldline.

These all merit separate articles and will be discussed in the next NelsonHall Key Vendor Assessment on Atos.

If we look at Q4 2015 revenue performance in Cognizant’s two largest vertical groups:

• Financial Services, was up 16.6% to $1,308m, with the strongest growth in insurance
• Healthcare (includes payer, pharma, biotech and medical devices) was up 23.2% y/y  to $952m, with the strongest growth in life sciences

These two vertical groups accounted for 70% of Cognizant’s total revenues in Q4, and for 74.5% ($366m) of the company’s overall y/y topline growth.

So why did Cognizant’s share price take a bit of a dive following these results, and furthermore drag down some other stocks with it, before showing some recovery on Friday?

The fact that sequential growth, at 1.4%, was below that reported by Accenture and Infosys may have had something to do with it. At NelsonHall we largely ignore sequential growth, as it ignores seasonality impacts, which may vary slightly from vendor to vendor, depending on their client base.

But the main concern was over Cognizant’s soft guidance for Q1 and full year 2016. Revenue guidance for:

• Q1 2016 is in the range of $3.18bn - $3.24bn, y/y growth in the range of 9.2% to 11.3%
• Full year 2016 is in the range of $13.65bn - $14.20bn, or growth in the range of 9.9% to 14.3%: the expectation is for back-ended growth.

In providing some color on guidance, management highlighted softness in both major vertical groups:

• Financial services, in banking more than insurance, where some of its banking clients are “taking a cautious approach”, putting some projects on hold
• Healthcare, where the major consolidation that is playing out in the payer industry means that some of its larger payer clients are delaying IT plans until their merger plans are clear.

In financial services Cognizant expects to see some level of growth, but given some current project delays in banking, says it is adopting a “wait and see” approach, and until then being conservative in its forecast

In contrast, in healthcare CEO Francisco D’Souza claims to be feeling “very, very good” about the pipeline of large deals Cognizant has for 2016, many of these leveraging TriZetto. The expectation is that healthcare will have a slow start in 2016, with strong growth from H2 and into 2017.

Indian financial and business media was more alarmed by Cognizant’s references to softness in the financial services industry. At one point D’Souza commented “our expectation is that we continue to grow faster than (the) industry… certainly others in the industry I think will probably have some of the same outcomes in financial services that we do”.

In a pointed response to this, TCS issued an investor alert on the Tuesday referring to its own performance in financial services in 2015, pointing out that revenues from the Banking and Financial Services industry vertical in CY 2015 grew by 15% in CC terms, compared with 13.5% CC growth for the company overall, and that, on an organic basis, TCS' CC revenue addition of $1.85bn in CY 15 was “the highest in the industry”. In an interview with India’s Economic Times, TCS CEO N Chandrasekaran claimed “we have not seen anything negative with any client” and that “for financial services as a whole, it is going to be an excellent year for us.”

So why does one major vendor call out softness in BFSI and another major vendor make such positive comments? Has one of them got it badly wrong? Well, clearly not: they are obviously talking to their clients! But a vendor can refer only to its own client base, and to the services they themselves are delivering to that client base. As an indicator of the differences this can mean, where TCS has been suffering headwinds in recent quarters in its insurance business because of its Diligenta BPO unit, for Cognizant, insurance has been the growth engine in its BFSI business recently.

Every vendor today is emphasizing its capabilities in various areas of digital - but it is in the discretionary spend of their clients’ budgets that some vendors are now feeling the pinch. Having a strong outsourcing business delivering recurring revenues is clearly advantageous – and we note that Cognizant’s outsourcing services businesses have been lagging its consulting and technology services businesses, delivering just 7.6% y/y growth this quarter.

This leads us to the other area of softness called out by Cognizant: its healthcare business, which includes payer, pharma, biotech and medical devices. Recent growth has been driven primarily by continued strength in life sciences (which we estimate accounts for about a third of its healthcare revenues) but it is the payer sector that Cognizant has placed its bets, looking to leverage TriZetto to build a BpaaS utility. Cognizant continues to highlight that it is in advanced stages of discussions for some very large deals, that current issues are related specifically to M&A activity, and that it expects some of these deals to close from the second half of this year. To an extent, the consolidation happening in the sector makes a platform-based BPO offering more attractive to buyers. But will Cognizant build a true utility with TriZetto? NelsonHall research shows that while healthcare payers may be amenable to a BpaaS model for some industry-specific activities, as in other sectors, appetite for a true utility service (i.e. a multi-tenant platform model) tends to be low.

Finally, the company continues to generate lots of cash, nearly $700m in Q4, and now has over $4.5bn in cash and equivalents. As well as share repurchase, we may well see further acquisition activity this year, which is, of course, one way of returning to “above industry average” topline growth. It is in the public domain that Cognizant has walked away from negotiations for Dell Services (essentially the former Perot Systems, which has a sizeable healthcare business) because of price. A few weeks ago, Cognizant announced its acquisition of KBACE Technologies; will we see another acquisition announcement in the next few months?

NelsonHall will be updating its Key Vendor Assessment of Cognizant in the next few weeks. This is the most comprehensive profile of Cognizant available on the market. For details, contact [email protected]

Today’s announcement was not a huge surprise; Neemuchwala’s arrival from TCS in March 2015 as COO was perhaps more unexpected in that he was an external appointment, as Wipro has historically favored home-grown talent. (When T K Kurien was appointed as CEO of its IT Services business exactly five years ago, he was already a Wipro veteran, having formerly led Wipro BPO, also its telecoms service provider business, which began to secure large outsourcing deals during his tenure, and had also set up Wipro's consulting unit). Indeed, one of the closing comments in NelsonHall’s latest Key Vendor Assessment on Wipro, in referring to his appointment, several more recent departures and promotions of senior execs, and says “There may be other moves at the top”.

Neemuchwala will have had nearly a year to get his feet under the table when he formally assumes the CEO role; he will have a clear idea of what he wants to do.

Firstly, it should be highlighted that he is taking over a company that in many respects is in good shape and has been working hard on its evolution and transformation. Wipro has enjoyed constant currency y/y revenue growth of above 8% for over a year, with revenues that are well balanced across geographies, service lines and verticals. And he inherits a strategy that is clearly articulated as being based on two themes:

• ‘Turbocharge the Existing Business’ (Run Strategy): focusing on a defined set of accounts and core markets
• ‘Dominate the Future’ (Change Strategy): themes include Digital, open-source computing, AI, cognitive computing and automation.

Furthermore, he will benefit from three strategic acquisitions announced so far in FY16, for a combined investment of ~$300m:

• In support of the Change strategy, the acquisition of DesignIT, while not a major investment in itself, is significant in Wipro’s evolution from software engineering and traditional IT services to being able to offer human-centered experience-driven design services.  Wipro is one of the first Indian oriented service providers to invest in acquiring this kind of capability. Another investment in the Digital space has been the opening of Digital Pods in Bangalore, London and San Francisco
• The December announcements of cellent AG (which will increase Wipro’s presence in Germany) and Viteos (which services the alternative investment management sector) both support the Run strategy.

(This is an acceleration in M&A activity; Wipro did not make the level of acquisition that Premji indicated back in May 2012 - $1bn by end 2013).

And Wipro has also been investing for some time in IP such as Wipro HOLMES, an AI platform built on open source technologies, to drive automation in service delivery. Wipro HOLMES leverages semantics, machine learning, pattern recognition and knowledge modeling technologies.

Nevertheless, the fact remains, that, in spite of the clarity of its strategy and various new initiatives in the last few years, Wipro has continued to trail the other large Indian Oriented Service Providers in both topline growth and margin expansion.

So what are the challenges that he faces – and what should we expect to see?

One obvious comparative weakness has been gaining wallet share in the largest accounts: there has been little expansion in the last four and a half years in the numbers of $20m+, $50m+, $75m+ and $10m+ accounts. Conversely, hunting appears to be stronger: Wipro has succeeded in winning some large new logo infrastructure services deals, aided by its ServiceNXT operations framework.  We would like to see an increased investment in sales & marketing, which, as a % of revenues, trails TCS and Cognizant; we are certainly likely to see a renewed focus on account mining, particularly in the Mega and Gamma accounts.

Looking at some of the other challenges he faces:

In the geos, growth in the U.S. has slowed down in the last two years. And the $195m spent in H2 2014 to buy the Atco I-Tek captive in Canada was unlucky in its timing (see below). In Europe, Wipro surpasses Infosys in terms of revenue, and cellent will boost its presence in Germany in 2016 - although its on-and nearshore delivery capabilities lag those of TCS and Cognizant

Looking at the portfolio, Wipro remains dependent for growth on its Global Infrastructure Services unit, where the pressure to maintain margins in an environment of price sensitivity is strong, and on Business Application Services. Lack of growth in its traditional Applications Services business is impacting overall revenue growth by about 1% (conversely, for TCS ADM activity continues to be a major revenue engine). Wipro Digital is still a very small unit and is likely to require further inorganic investment. And Wipro Analytics needs some investment

Looking at the industries, Wipro’s Energy, Natural Resources & Utilities group has been a big revenue engine for Wipro since its acquisition of some units from SAIC, and until recently continued to be so with the captive acquisition from Atco. But with collapsing oil prices, the Energy sector is currently very soft, with discretionary budgets slashed. However, Wipro is well positioned for new outsourcing opportunities driven by energy companies looking to strip out costs.

The $130m acquisition of Viteos Group will bring in a proprietary platform for post-trade operations which Wipro could – and will be looking to - leverage to launch BPaaS offerings to other capital market segments. Viteos’ background is in the buy-side; Wipro intends to expand its BPaS business into the larger asset management industry, so there is the potential for substantive growth of this business - however, this will require a lot of attention. Wipro does not appear to have leveraged its acquisition two years ago of Opus CMC to build a significantly larger scale technology-enabled loan BPS business.

A lack of local client-facing personnel in international locations has to some extent impeded Wipro’s positioning as a global vendor: while Wipro has a good profile in some emerging markets (in the Middle East and parts of Africa), the company is regarded by some as more Indian in mindset than other Tier I Indian headquartered vendors. This can work to its advantage at times, but enterprises today are expecting a lot more from their large IT services providers.

One thing that may be a contributory factor to Wipro having been outpaced in recent years by some of its peers may be associated with its ownership and the organization’s strong culture. Nearly 75% of its shares are still held by the Promoter Group - and if we look at the Board, there is just one non-Indian national. An external appointment may be what is needed to shake things up internally, with regards to attributes such as innovation and initiative. Perhaps the board is looking to Abid Neemuchwala to sprinkle some of the fairy dust from TCS.

So what else might we see at Wipro?

• Will there be a greater willingness to invest?
  • There are very likely to be more mid-sized acquisitions in the near future, including further investments to expand Wipro Digital or that, like Viteos, will bring in IP that can be leveraged for an industry-specific BPaaS offering in a target sector, perhaps in U.S. healthcare
  • The $100m Wipro Ventures fund looks measly compared to Infosys’ $500m fund - will this be increased?
• The automation drive will certainly continue, and at pace
• We may see more IoT offerings coming out of the engineering services business
• There might be more senior local hires in the U.S. and Europe.

We will certainly continue to follow Wipro with interest.

NelsonHall published a comprehensive (90 page) Key Vendor Assessment on Wipro on December 23, 2015, accompanied by a shorter Exec Summary for busy execs. The KVA looks at Wipro’s Strategy, Financials, Target Markets, Key Offerings, Strengths and Challenges and Outlook. It will be updated in February following the release of its Q3 FY16 results later this month. For details, contact [email protected]

Or will Capita progress with a bidding war?

CSC has sent a letter to the Xchanging board outlining its interest in making a cash offer of 170p per share for Xchanging stock. This would constitute a premium of 6.3% over Capita’s October 14 offer of 160p per share. CSC’s offer is dependent on Xchanging not deciding to pay a dividend to shareholders. It has until December 9 to announce if it intends to make a firm offer for Xchanging.

CSC is late in joining what had looked to become a one-horse race. Apollo, who had also expressed its interest in making a 170p per share bid, bowed out on November 4th.

So why is CSC interested in Xchanging?
(We are talking about the “new CSC”, its global commercial business, once the CSRA U.S. federal business is spun off)

Xchanging’s H115:

• Net revenues were £199.4m (~$305m), down 2.8% y/y; it expects CY15 revenues will be similar to CY14, or ~£406m
• Adjusted operating profit was £20.4m, a margin of 10.2% (up 4 pts y/y); CY15 adjusted operating profit is likely to be slightly below that of CY14 (£55.8m, a 13.7% margin).

CSC's offer, which values Xchanging at £421m (~$640m), is thus a bit over 1x revenue and an estimated 7.5 -8x adjusted operating margin.

If acquired, Xchanging would represent ~7.5% of CSC's FY15 $8.1bn revenue. And it is, in spite of its troubles in recent years, a more profitable business than CSC (who had a 10% adjusted margin in FY15).

Xchanging generates approximately:

• 45% of its revenue from technology-enabled BPS in the insurance sector. This is by far the most profitable business currently, with an adjusted operating margin of 29.2% in H115
• 23% from “Technology”, primarily insurance sector software, also some Application Services, and unit in Malaysia. H115 adjusted margin was just 7.8%
• 25% from technology-enabled BPS in the financial services sector
• 6.5% from procurement BPS.

Insurance is a key sector for CSC (accounting for ~22% of its FY15 revenues):

• CSC will be particularly interested in Xchanging's presence in the London market, where Xchanging has a leading market share for its own and now also AgencyPort software products (CSC, which has its own SICS suite, was one of the companies interviewed by the CMA during its investigation into the Agencyport Europe acquisition). Xchanging would provide CSC with the opportunity to support Lloyd’s in its ‘Market Modernisation program’, also the potential for aaS offerings
• More broadly across the insurance sector, Xchanging has invested a total of over $200m since 2011 in software, both in platform development of the Xuber suite and in acquisitions: in 2014 alone, Xchanging invested £75.6m in acquiring Total Objects, whose binder software is now integrated into the Xuber suite, and Agencyport Europe, plus a further £11.7m on development of Xuber. Xchanging has found converting interest in the U.S.in Xuber to sales more challenging than anticipated - and CSC has a longstanding presence in the U.S. insurance sector with its proprietary software. Xchanging’s first attempt to enter the U.S. market, through the Cambridge acquisition, was disastrous, and the U.S. today accounts for just 8% of its global revenues (not all of which from Xuber). Once Xuber gains traction, this business will become much more profitable - for anyone who can succeed in taking Xuber to marker, the timing is opportune
• Xchanging’s highly profitable insurance BPS business will expand CSC’s own non-life BPS coverage
• And Xchanging’s £100m per annum financial services BPS business would bring in a BPS capability in the capital markets sector, a new target market for CSC (see below).

In contrast, Xchanging’s unprofitable procurement business is unlikely to be of interest to CSC, who might choose to sell it off.

This would be CSC’s second targeted sector-led acquisition in BFSI: in September it completed its acquisition of Fixnetix (also London-headquartered), a much smaller provider (120 employees) of front-office managed trading solutions. Fixnetix provides an entry point for CSC into the capital markets sector. (See our blog here)

CSC has also been acquiring in other areas:

• In September, it closed its acquisition of Fruition Partners, a global integration partner for ServiceNow
• And in October, it announced its intended acquisition for ~$300m of UXC, and is coming to the end of a five-week exclusive due diligence process (see our commentary here.) The rationale for UXC is not about sector IP, but about scale in Australia, with UXC's Microsoft Dynamics and ServiceNow units and its burgeoning cybersecurity capabilities being particularly attractive.

If both UXC and Xchanging are transacted, CSC will have made a total investment of $1,170m (or more, if there is a bidding war for Xchanging) on four acquisitions in a very short timescale. Earlier this month, it indicated its capital allocation intentions for the next three years, including ~15% on acquisitions. The company is clearly in a hurry to boost its portfolio in BFSI sector IP and BPS, hotter areas of IT services, and to increase its market share in the U.K. and Australia.

And what about Capita?

At the time of Capita's offer, NelsonHall published a blog (Capita’s Offer to Xchanging: How it Makes Sense, see here).

There are very strong complementarities between Capita's business and Xchanging – but Capita has never before been in a situation where it has had to enter a bidding war to make an acquisition and this would go against the company's previous approach to M&A. But then again, Capita has never made an acquisition of this size. Capita started its discussions with Xchanging over three months ago, and had clearly been interested in the company for some time (we had indeed expected an offer might be forthcoming). So will it now make a counter offer? We think yes.

CSC's offer is below Xchanging's current share price (171p at the time of writing), and  this is unlikely to be the end of the story. And a third bidder could very well enter the fray.

Post Script

We were prescient. A few days after writing this, eBix stated its interest in a possible 175p per share offer. eBix (2014 revenues $214.3m) operates insurance data exchanges, which connect multiple entities within the insurance markets:

• The company is acquisitive: in 2014 alone it made five acquisitions, the largest of which were Vertex Inc, for $27.25m plus an earnout of $2m, and Oakstone Publishing, for $23.7m ($31.37m less a closing net WC adjustment of $7.65m).
• Again, it is Xchanging’s insurance software that is the main – and in this case the sole – attraction. eBix has a stated goal "to be the largest insurance software services player in the world".

However, we don't imagine eBix will be the final victor in this instance.

Capita states it believes the acquisition would:

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

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

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

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

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

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

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

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

And less attractive to Capita?

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

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

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

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

We are now approaching the end of the pool stages of the Rugby World Cup, which has 20 teams from across the world competing in this glorious sport. Teams from nations such as the U.S., Canada, Argentina, Japan, as well as established Tier 1 rugby nations such as Australia, New Zealand, South Africa, France, Ireland and Wales (poor England; for the first time in the history of the Rugby World Cup, the host nation will not survive the pool stage).

Rugby provides a great exemplar of what is needed for agile-enabled DevOps to succeed. I have outlined the analogy to a number of CIOs: all have been in agreement, if initially somewhat bemused.

So what can rugby teach the IT services market about an agile, continuous delivery approach to product development?

Let me count the ways….

1. A great coach: in rugby, the driving force behind the team’s motivation and behaviors, as well as identifying and making sure that all necessary training and skills development is provided to team members. A great coach and scrum master will always have a short, mid and long term strategy in mind and a specific game plan for each match. They also take the heat off the players when there is pressure
2. Multi-function, multi-skilled team: take a look at the height and weight of some of the players in the World Cup teams and you will see huge variations: some teams have players ranging from 1.75m to 2.08m in height, and from under 80kg up to 126kgs in weight. This diversity reflects the very different skill sets possessed: for example, by a flanker and the fly half, or a wing and the hooker (just to be clear, the hooker is the guy who “hooks” the ball when it enters a scrum!)
3. A great captain, who demonstrates leadership on and off the field, combined with a self-organized team that has been empowered through training and cultural affiliation
4. Collaboration, communication and sharing: essential for a team to succeed in rugby. Rugby tries are usually scored after a number of brilliantly executed (and oft-practiced) moves involving multiple players. The World Cup has featured some memorable tries where one player, having made a huge effort and nearly on the try line, passes the ball to a team-mate to ensure that the try is secured. There is no room in rugby for players looking for personal glory - success is very much a team effort. In the same way, collaboration, communication and sharing is also the bedrock of Agile development, in the analysis, design, development, and QA functions, and in DevOps, between development, QA, and IT operations.
5. Passion/common mindset/alignment to the game plan, with a clear view of the match (business) requirements: also essential for a team to succeed
6. Discipline and professionalism in approach: as well as passion, rigor and discipline are as key in agile development and in DevOps environments as they are in rugby
7. Scrums (which is where my analogy was born). Rugby law requires players in the scrum to drive straight-forward and square, a focused, disciplined approach that is also best practice for Agile. A successful scrum in rugby makes progress; an unsuccessful scrum collapses
8. Short sprints: often in rugby (not always) coming after a set piece such as a scrum 
9. Incremental progress/move fast: most of the time, a rugby player will advance just a few meters before they must pass or offload the ball. The team’s progress to the opposing try-line tends to be incremental and iterative in nature (the intercept and glorious long run to the try-line is a rare thing)
10. Fail fast/learn fast/recover fast: events during a match may require a slight adjustment to the planned game tactics. The best teams learn quickly, recover and adapt when planned tactics are not working. Teams that stick rigidly in these circumstances to planned tactics fail. Communication between team members (which may include new suggestions from the coach, relayed by a replacement coming onto the field) is critical for this level of adaptability
11. Post-mortems/continuous improvement: key to ongoing improvement, by identifying areas in need of improvement. Some teams have turned up at this World Cup clearly better in specific areas than they were even six months ago. And some teams have made progress from match to match
12. Automation: obviously key in DevOps environments, which heavily use tools, e.g. for release management, provisioning, configuration management, monitoring, and testing, But what about rugby? Well, each of the players is monitored closely during matches (each carries a sensor on their back). And the coach depends heavily on analytics (from training, of matches, of individual player performance, of competitors, etc.) when developing a game plan. Any other ideas for automation in rugby?

So there we are: the Rugby World Cup provides us with a template for agile and for thinking about moving to a DevOps environment. What do you think? Any more we can squeeze out of this analogy (perhaps on Transparency, or minimizing hand-offs, or the concept of the minimum viable product?)

I am, sadly, not too familiar with American Football, but there are some obvious similarities, and I imagine this might also be an exemplar. And with distributed agile often involving delivery from India, perhaps India should consider taking up rugby as a national sport!

P.S. In case you're interested, the team I am supporting is through to the quarter finals, but who will win the World Cup this time? Well, just to hedge my bets, I’ve got some Kiwi accessories and can claim family there.

UXC is one of Australia’s largest independent publicly-owned IT services vendors. The news of its imminent acquisition is not in itself a surprise, as it has for some time been seen as a potential target by a global provider. And the decline of the AU$ against the US$ in the last couple of years will have made it a more affordable target. Our interest is what acquiring UXC will mean for CSC, assuming the deal goes through?  UXC would nearly double CSC’s revenues in the region to ~AU$1.34bn, making it one of the largest IT services vendors operating in Australia. But is CSC acquiring a coherent business in Australia?

Some clues are evident in UXC recent financials. Its FY15 (to end June 15) revenues were $686.4m, up 6.7% as reported. EBIT margin was 4.8% up 93 bps y/y, the margin improvement coming from a product to services shift and improved utilization.

Looking at FY15 performance by service type:

• Consulting & advisory. Revenue AU$109m, up 29%. Margin 7.8% (target 9% - 10%)
• Enterprise applications. Revenue AU$355m, up 10.1%. Margin 9.7% (target 11% - 12%)
• IT infrastructure. Revenue AU$223m, down 5.8%. Margin 4.9% (target 4.5% - 5.5%)

Over 50% of the business is Enterprise applications services: Microsoft Dynamics (UXC Eclipse, with a growing U.S. business), Oracle (UXC Red Rock), SAP, Cloud Solutions, ServiceNow, UXC Keystone acquired November 2013) 

FY15 revenue mix by activity type was:

• Services AU$371.4m (+7%)
• Annuity revenues AU$196.7m (+13%)
• Product and licences AU$123.1 (-2.3%), reflecting a strategic shift in revenue mix from these lower margin activities

UXC has grown through a series of acquisitions, the most recent being

• Saltbush, Oct 14 (66 staff), bringing in capabilities in cybersecurity
• Contiigo, May 15 (26 staff), bringing in SAP hybris capabilities

The newly minted CSC Global Commercial will be attracted by the Microsoft Dynamics and ServiceNow units and its burgeoning cybersecurity capabilities. But UXC does not bring any significant commercial sector expertise: the client base is too diverse: FY 15 revenue mix by sector is:

• Government 24% (~AU$164m, state government 13%, federal 11%)
• Capital goods and commercial services 12% (~AU$82m)
• Consumer goods and services 12%
• IT and Communications 12%
• Healthcare 11%
• E&U 9%; Resources 6%
• Also Financial services 4%, Education 4%, Retailing 2%

There are no very large accounts: the top 50 contribute 47% of revenues (~AU$323m). And, partly reflecting the product and licence business, there is a very long tail (the next 50 clients account for just 13% of revenue, ~AU$90m). A current drive, with a “large deal” team is to add new >$5m clients. And there is progress here: in July, UXC announced several new significant wins with a combined TCV of over AU$100m:

• Transpower New Zealand: 3-yr deal: DB, Oracle middleware and mid-range server support
• Beverage company: Oracle-based SaaS deal
• Australian construction firm: Oracle ERP implementation, then 5 year managed services
• Ixom (water treatment chemical distribution, formerly part of the Orica group): migrating from the Orica hosted IT environment
• NSW government agency: multi-year contract for service desk and end user computing support.

UXC has ~3,000 employees, of which ~2,500 in Australia. It has been expanding outside Australia, with FY15 revenues from

• U.S. (where it acquired Tectura) of AU$68m. 216 employees
• New Zealand/Fiji of AU$40m (NZ 179 employees. Fiji 25)
• Vietnam/India (where it acquired Convergence Group in late 14 to build an offshore presence) of AU$8m.  (108 employees)

In comparison, CSC Australia has ~ 2,100 employees and generated revenues of AU$724m in its FY15 (ended April 2) -  so a larger business than UXV,with fewer employees. But CSC Australia revenues were down 15% on FY14. Profitability also fell, with EBT margin down 2.8 pts to 5.3%.

CSC’s acquisition of ServiceMesh in November 2013 brought in operations in Australia as well as the U.S. and U.K. However, following the allegation that ServiceMesh’s ex CEO had bribed CBA employees, CSC started legal proceedings against him in May this year. It has also had to contend with accounting irregularities in the region, and some troubled contracts.

As CSC breaks into two companies (see here), the new CSC Global Commercial $8.1bn company is acquiring in its efforts to reinvent itself, lookng wth interest at SaaS services and industry specialization In August, for example, it announced its intended acquisitions of

• Fixnetix, which will expand its presence in the capital markets sector (see here)
• Fruition Partners, (now completed), bringing in ServiceNow integration capabilities.

And in some regions, CSC Global Commercial (which includes non-US public sector) is building a consulting capability in some regions, increasing its industry and digital capabilities. Areas of interest that will have attracted CSC would have included UXC’s enterprise applications practice, in particular Microsoft Dynamics, its cybersecurity capabilities, also its state government business, where CSC is already active,

Australia is a mature IT services market, where CSC has been a major player for years (alongside Accenture, Fujitsu, HP, IBM et al) for large traditional deals. And it is an important market to CSC, which in June, CSC opened a SOC in Macquarie Park, Sydney, one of five that it operates around the world. CSC cannot afford to lose ground in what remains an important market, one which has been attracting interest from some of the larger IOSPs, and which, like the rest of the world, is being disrupted by digital.  UXC is more active in the mid-market than CSC. It is higher margin than CSC and, importantly, may help CSC position as more of a local player in Australia while also becoming one of the largest providers in the country, just behind Accenture.

UXC goes to market via several brands (although recently it has been talking about becoming more integrated, including a shared services rationalization starting in FY16). Integrating these into a CSC brand could prove challenging. Expect to see CSC make more acquisitions like Fruition Partners and then seek on the back of these to build global practices for ServiceNow, Microsoft, etc.