Industry Insight
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Latest Edition - August 30, 2010
Contains commentary and insight from NelsonHall analysts on key industry developments that impact your sourcing decisions for the week ending August 30, 2010
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Agilisys and Liberata Awarded £85m BPO and ITO Contract by North Somerset Council
Agilisys, in partnership with Liberata, has been named as preferred supplier by North Somerset Council (NSC) for a 10-year IT and BPO contract valued at £85m.
Services to be provided cover:
- Revenues and benefits administration
- Finance & accounting
- HR & payroll
- Facilities management
- Contact center services
- ICT
- Business improvement advisory services.
Agilisys is to implement a new financial management system (£2.7m) and an EDRMS (£1.3m) for the council, a total investment of ~£4m.
Analyst comments:
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Computacenter Announces H1 2010 Revenues Up 5.4% to £1.29bn
Computacenter has announced H1 2010 revenues up 5.4% to £1.29bn. Organic revenue growth was not provided.
H1 2010 revenue breakdown (and revenue growth at actual and constant currency/constant perimeter basis) by line of business is:
- Product ongoing operations £907m (+7.1%, +14.8%)
- Professional services £90m (+5.4%, N/A)
- Support and managed services £291m (+0.6%, N/A).
H1 2010 revenue breakdown (and revenue growth at actual and constant currency/constant perimeter basis) by geography is:
- U.K. £652m (+4.3%, +12.7%)
- Germany £456m (+5.2%, +8%)
- France £164m (+8.7%)
- Benelux £17m -+31%, +35.6%).
Revenues in the U.K. were driven by product sales (up 14.6%) and professional services (up 8.1%). The company has seen strong growth around combined Oracle Sun and Exadata storage contracts and around its repeatable solutions as well as around hardware recycling. The company has now fully integrated Thesaurus, the U.K. reseller of IBM hardware bought last year.
In Germany, product revenue was up 14.9% thanks to demand for high-end security, network and datacenter products while those of services declined. Organically, excluding the acquisition of becom, a datacenter specialist, product revenue growth was 3%. The decline in services results from a large contract ended in 2009. Computacenter has however incurred a return to normal in its utilization rate in its professional services. The pipeline for consulting has improved, suggesting better product and maintenance sales in H2 2010.
In France, product and service revenues were up organically by respectively 12.6% and 7.8%. Professional services were up by 11.6% while contractual services were up 6.0%.
H1 2010 adjusted operating profit is £20.6m, representing a margin of 1.6% compared with 1.5% in H1 2009.
H1 2010 adjusted operating margin by geography (and in H1 2009) is:
- U.K. 2.8% (2.0%)
- Germany 0.8% (+1.7%)
- France -0.7% (-1.0%)
- Benelux -3.2% (-0.1%).
Improvement in the U.K. profitability comes from a better product mix resulting in revenue growth. German profitability was affected by market conditions, resulting in low utilization rates.
Analyst comments:
During a recent event, CEO Mike Norris highlighted that the company's focus on support & managed services did not mean it wanted to exit its product business:
- Computacenter intends to continue growing both its product and service mix and is investing in both activities to continue to grow their profitability
- The company sold its trade business in 2009 to Ingram Micro. The distribution business, of a relative small size, competed with heavyweights such as Ingram Micro and Data Tech
- The company has no debt and expects a positive net cash balance of £100m by year end. It is to invest its cash in organic growth, and in particular funding assets like datacenters as well as considering acquisitions
- Recent acquisitions include hardware reseller vendors in Germany and in the U.K. which complemented the VAR capabilities of the firm around IBM servers. Interestingly, the German acquisition actually slightly lowered the percentage of revenues coming from services
- Acquisitions could actually be done to reinforce areas of concerns including its hardware business in France, which is largely hardware oriented and derives 16% of revenues from services only. The company wants to increase its profitability in datacenter-based hardware and network equipment, where it is suffering the most in the country.
In spite of its commitment to continue selling products, Computacenter is aiming to increase its share coming from contractual services, which include product-related services e.g. field services to IT infrastructure management. The company is largely present in this area in the U.K and Germany. In the U.K, the company is well established in financial services and retail but still misses references in the U.K. public sector. The company believes the long-term trend towards multi-sourcing and the new government's likely intention to award smaller contracts could have a favorable impact on its business.
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ErgoGroup Announces Q2 2010 Revenues Up 2.4% to NOK 1,346m
Norwegian IT services vendor ErgoGroup has announced Q2 2010 revenues up 2.4% to NOK 1,346m. Organic growth is +3.2%.
Q2 2010 revenue breakdown by service line is:
- Solutions & application services NOK 586m (+5%)
- Operations & infrastructure services NOK 865m (+2%)
- Eliminations NOK -105m.
Revenue growth was similar between Norway and Nordics.
Q2 2010 EBITA margin is 4.3%, compared with 3.3% in Q2 2009.
Q2 2010 EBITA margin by service line is:
- Solutions & application services 6.7% (8.4%)
- Operations & infrastructure services 2.8% (0.5%).
Q2 2010 operating margin was 4.2% in Norway and 5.8% in Nordics, up from 3.9% in each region in Q2 2009.
ErgoGroup has resumed growth in IT infrastructure services. However, the profitability is still low and especially in Norway. The company has therefore launched another restructuring program in this unit with the objective of reducing costs by NOK 40m in 2011.
Headcount was 3,754 at end of Q2 2010, compared with 3,818 at end of Q2 2009.
Analyst comments:
ErgoGroup which is due to merger with another Norwegian IT services vendor EDB Business Partner, depicts a Swedish market in recovery while Norwegian spending remains depressed.
In 2009, IT services spending in Sweden decreased by >10% while spending from Norway remained flat to slighly declining. It had been assumed that Norway with its reliance on the oil industry was more immune that the rest of Nordics to the downturn in the worldwide economy. It now appears that Norway entered the crisis later than Sweden and will not exit before 2011.
With this in mind, the to-be-formally-created EDB Ergo is likely to suffer from anemic growth in revenue during the rest of 2010 and in 2011. Management of EDB Ergo is therefore focusing on increasing its EBIT profitability, which in 2009 was ~5.5%.
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Atos Origin Acquires Venture Infotek to Enter Indian Payments Processing Market
Atos Origin has acquired Indian payments processor Venture Infotek, a provider of services including merchant acquiring, card processing, loyalty programs, and government benefits programs on behalf of Indian banks and major retailers. Venture Infotek, established in 1991, has achieved an annual average growth rate of 25% over the last three years with targeted revenue of €30m in 2011. It employs nearly 500 personnel and operates in the major cities of India.
Venture Infotek claims to be the only player in India with multiple payments processing clients, including 6 out of the top 10 Indian banks
The company will be integrated in to Atos Wordline. Atos Origin has been open about about its strategy to grow its HTTS activities and to realize acquisitions in the payments area.Venture Infotek will reinforce the Group offeings for payments processing in Asia.
The transaction is expected to be accretive from the first year.
This acquisition enable Atos Origin to enter the Indian payments market which will continue to show high growth. Growth drivers include:
- A growing economy thus an increasing number of payments transactions
- A large banking system, with 60k bank branches serving 400m people, and low penetration rates for banking cards
- A Government keen to establish card usage
- An increasing number of ATMs and terminals.
Analyst comments:
Atos has a very robust payments business in its Atos Worldline operation, but growth for that business (as currently formed) is limited by national borders and economic growth. Atos is clearly looking to build rapid revenue and profit growth on its payments capabilities by expanding into faster growing markets and faster growing payment modalities (such as merchant acceptance). This acquisition is a first major step in that direction.
For this acquisition to fullfill its promise Atos will need to:
- Sell new logo banking clients within India with high market shares in states where Infotek does not currently have high market share. Infotek claims to have c. 35% marketshare for HTTS payments in India. However, its primary client and sponsor is Bank of Baroda, which has very high marketshare in Vadodara, but not in other Indian states
- Upsell existing clients as new payment services appear in the market. Atos is expecting a significant part of its Indian growth to come from market expansion over the next 15 years as more Indians enter the middle class
- Make acquisitions in contiguous (or nearly contiguous) markets. Payments processors have greatest operating leverage where they have compact markets (which magnify economies of scale, market information, and network effects). Atos will have to find additional acquisition targets in southern Asia to combine into its payments business.
Atos should be able to meet these targets. Infotek is a small acquisition based on existing size, but has the potential to grow very fast over the next 10 years and to provide the base for a major Asia-based payments business.
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TriZetto Acquires Tela Sourcing to Strengthen Healthcare BPO Capability
TriZetto has acquired Tela Sourcing Inc. to strengthen its healthcare BPO capability.
Tela employs c. 500 personnel and offers front end claims processing services including automated PPO routing. The company also offers revenue cycle management including EOB and medical bill processing for healthcare providers and, benefits administration services including FSA claim processing, and member fulfilment services.
Analyst comments:
This acquisition considerably strengthens TriZetto's capabilities in BPO, increasing the company's BPO workforce from 200 to 700 personnel, and adds a mature offshore delivery facility in Pune considerably strengthening the company's ability to offer multishore BPO delivery.
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IBM Awarded Multi-Process Back-Office BPO Contract by Sunoco
IBM has been awarded a contract for multi-process back-office BPO and application management services by Sunoco.
The services to be delivered by IBM include:
- F&A outsourcing
- Indirect procurement
- Application enhancement and maintenance.
Analyst comments:
The energy sector is no stranger to F&A outsourcing, with Accenturre establishing an early lead in F&A outsourcing within this sector during the 1990s.
However, this contract strengthens IBM's presence in the sector, making the company an appealing alternative for those energy companies now seeking to combine indirect procurement outsourcing with F&A outsourcing, a trend that is expected to become increasingly commonplace as the major F&A outsourcers, led by IBM, begin to develop more mature procurement BPO capability.
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Xchanging Provide Supplementary Financial Information
In response to requests from a number of investors, Xchanging has given a supplementary analyst call and presentation to clarify certain aspects of the company's financial status. Investor concerns are about Xchanging's accounting for its acquisition of Cambridge Solutions, the subsequent restructuring costs, provision and cash conversion.
Analyst comments:
This is a highly unusual step from Xchanging and is an attempt to halt the 40% slide in share prices seen over the last month. The problems stemming from the former Cambridge operations are a combination of structural inefficiency and the general market situation in the U.S.
The integration of such as fragmented organization as Cambridge with 45 service delivery centers across the U.S. was never going to be straightforward or inexpensive. Xchanging have restructured the organisation down to 16 sites, but as a result has been saddled with unwanted leases that will have a significant impact on cash flow (c. £3m in H1 2010 alone) until 2012. All of the unwanted leases will not terminate until 2017. In addition, unrealistic profit recognition by the former management team, the majority of whom have been replaced, means that some contracts are being run-off at nil margin. The cost of restructuring will eliminate most of Xchanging's free cash flow for this fiscal year.
To compound the situation, Xchanging's ability to generate revenues in the U.S. has been limited by its significant exposure to the ITO sector which has been very slow for the last 12 months. The claims BPO unit has also suffered as result of its exposure to the workers compensation market which has seen overall claims volume falling 17% year-on-year as the U.S. unemployment levels remain at an historic high.
Whilst the issues in the U.S. operations will take some time to fully resolve, the necessary corrective actions have been taken and with this supplementary announcement, all the bad news is out. Across Xchanging as a whole, the bid pipeline looks very strong with 43 opportunities of over £20m of annual contract value. Converting a number of these prospects to profitable clients is the best way to drive up the share price. However, with Xchanging's credibility at its lowest since flotation in 2007, the market will take some persuading.
In a tacit admission that perhaps Xchanging has not communicated its equity story as well as it could have, the management announced a program of briefings and sites visits for investors and analysts beginning in October.
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Capita Acquires National Dental Plan to Extend Capabilities in Health Insurance
Capita has acquired corporate dental plan group National Dental Plan ('NDP') for £30m in cash. In its fiscal year ended March 31, 2010, NDP made a consolidated operating profit of £4.1m on turnover of £13.4m.
NDP distributes, arranges underwriting for and administers dental insurance policies for >300 clients, representing 120,000 members. Clients include Lloyds Banking Group, HSBC and BT.
NDP has c. 20 staff, all based in London.Analyst comments:
This acquisition extends Capita's corporate insurance administration capabilities to include health insurance BPO services around dental plans. It also brings in a very high margin business.
Although Capita is looking to expand its capabilities in the healthcare sector (for example its acquisition of Premier Medical Group for £60m in June, and its award last September of a 7-year, £100m contract by NHS Business Services Authority to process NHS dental claims), this acquisition is not a health sector play. Capita expects to complete several more acquisitions before the end of the year: at least one of these is likely to enhance its capabilities in the healthcare sector.
(NelsonHall recently completed a comprehensive 75 page Key Vendor Assessment on Capita: for details contact paul.connolly@nelson-hall.com)
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CSC Announces Enterprise Print Services Offering in Partnership with Xerox
CSC has launched CSC Enterprise Print Solutions (EPS), a new managed print services (MPS) offering, in partnership with Xerox, and with Fuji Xerox in Asia Pacific. CSC's new offering leverages Xerox's Enterprise Print Services capabilities.
CSC EPS offers usage-based billing. CSC claims the offering can help clients reduce their print and document management costs by up to 30% and enable new features such as scan to e-mail, secure release pull printing and paperless media conversion. In addition it can help contribute towards clients' Green agenda through improvements in power consumption and cutting paper/toner usage by 50-75%.
CSC claims that it has developed CSC EPS in response to customer demand.
Analyst comments:
Key priorities for organizations adopting MPS include:
- Cost reduction
- Improved document security
- Global consistency of process and service delivery
- Access to up-to-date technology
- Contributions to their sustainability objectives.
Today's annnouncement follows that of Computacenter last week (see separate article).
- In terms of scale and also regional coverage the CSC-Xerox alliance is global, whereas the Computacenter-Xerox partnership is initally targeting just the U.K.
- Xerox is a CSC client for IT infrastructure management services (CSC ousting EDS following EDS' acquisition by HP), so the relationship is likely to be particularly close.
Xerox's closest competitor for MPS is HP. IT infrastructure management services providers who are HP competitors are more likely to partner with Xerox for MPS, where HP is more likely to rely on resellers for channel partners for its MPS offering.
Liberata has been providing revenues and benefits administration services to the council since 1995: the last award by NSC was a 7-year, £23m contract from 2002 which was renewed for two years in 2008. Services, apart from revenues and benefits, will transfer on October 1, 2010, with the revenues and benefits services transferring to the new contract on May 1, 2011.
The financial objectives of this outsource include:
Agilisys has also proposed the following savings:
The overall project is forecast to achieve £13.6m of savings against existing budgets by 2014/15.
In addition, Agilisys and Liberata have committed to creating 200 new jobs within the area over the next four years.
Agilisys and Liberata beat Steria in securing this deal. While Liberata's performance at NSC for claims processing has improved in recent years, it is facing the prospect of having to pay the council for lost business rates for 2002 to 2007 from 3 property owners, including Honda and Chevrolet, following a recent High Court ruling over the late billing, also for the legal costs.
Nevertheless, this will send a message to the market of a vote of confidence in Liberata by a longstanding client and of the company's ability to be a key partner in a largescale, long-term outsource, helping fade the memory of being ousted at Sheffield.