ITO Insight
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Latest Edition - August 2010
Contains commentary and insight from NelsonHall analysts on key IT outsourcing industry developments that impacted your sourcing decisions.
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An Update on SQS' Offering and Growth Strategy
German-headquartered software testing pure-play SQS has recently provided an update of its progress in terms of key metrics, strategy, market conditions and service offerings.
SQS, which operates mostly in Europe and in particular in Germany, the U.K., Switzerland and Sweden, is back to growth after a 2009 marked by a 6.3% decline in revenues to €134m. For 2010, revenue growth may rebound by at least 8%. Demand for testing is back and driven by the banking and insurance industries across Europe as well as by logistics firms in Germany. Demand has early this year been driven by managed services contracts including offshoring. The good news is that SQS is also seeing demand for onshore testing as back clients stating to build new applications and need to test those.
One of significant changes that SQS has gone through is its realignment towards recurring revenues coming from managed testing services contracts. The company is expecting that 10% of 2010 revenues (~€14m) will come from such contracts, up from 3% in 2009 (€4m): in the long-term, SQS is targeting 50%. SQS reported €40m in long-term contracts with signed during H1 2010 with an average duration of three years. Those €40m will translate into about €9m in revenues from managed services in 2010. In other words, at end of July, the company had already enough in contracts to achieve its goal of 10% of revenues coming from long-term contracts;
The company highlights it is now bidding for managed testing services contracts involving up to 100 FTEs per annum in the delivery. Within the next two years is planned to bid for much larger bids, requiring up to 300 FTEs.
Together with this realignment towards larger longer-term contracts, SQS has grown its presence in low-cost locations, which currently includes Egypt, India, South Africa and Eastern Germany. The company has 400 personnel in those locations, as at end June, representing 24% of its total headcount. This is up 29% from 310 at end December 2009. Currently, SQS has organized its delivery centers by language capabilities, price range and proximity e.g.
- Middle range: Eastern Germany for German-speaking clients and South Africa for English-speaking clients
- Inexpensive: Egypt for German-speaking clients (20% of the personnel of the site speaks French too), and India for English-speaking ones.
Of those four centers, SQS is highlighting it is the only major software testing vendor that can address German from a location that is also as inexpensive as India. However, the company is expecting growth in personnel to come from India in the mid-term.
SQS is advocating that its offshore-based managed testing services offering does not cannibalize its onshore effort but opens the door for new contracts the company did not after before. This is because managed testing contracts typically target applications on a maintenance phase that require multiple releases a year and therefore several testing cycles a year. SQS is also highlighting that demand for managed testing services is coming from clients are moving away from managing themselves functional tasks such as regression testing from being done internally or through subcontractors to third parties like SQS.
SQS has recently unveiled a new offering, test automation factory offering, for functional testing, which is based on several principles:
- The service includes the creation of the test cases, their execution and their maintenance
- Delivery is done from a low-cost location factory
- Pricing is flexible and is normally output based, i.e. can be test case-based both in terms of test case creation or execution
- The offering is tool-agnostic and will be based on the software testing tools already owned by the client, or based on SQS' own functional testing tools (SQS-TEST).
The offering includes Siemens as a client in both Germany and India for its PLM Software applications.
Increasingly, SQS is aiming to maximize its management consulting unit which represents 10% of revenues. The unit works for German-speaking clients in the banking and insurance sector and has plans to expand into logistics. The management consulting unit is called in by SQS as part of its managed services contracts to provide a strong understanding of business issues and processes to its testing teams. Alternatively, SQS' management consulting unit is also coming to the client facing changes in its business and in its IT with testing in mind, in order to improve the quality of the software developed.
In addition, SQS is also investing in training its testing execution personnel in its various factories. Areas of training range from application-centric e.g. a packaged software and on business processes. In India, SQS is training its personnel on specific topics e.g. online game testing, Siemens PLM applications as well as on SAP. The training initiative is part of an ongoing initiative by SQS to specialize its delivery teams.
Analyst comments:
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Experimentus Elaborates on its JV with Pure in India
U.K.-based TMMi-led testing consultancy Experimentus and Indian testing services provider PureTesting announced in June 2010 the launch of a JV, Purementus. The JV is to offer TMMi assessment and process improvement services focused on Indian and Asian organizations.
Pure Testing is an Indian testing consultancy headquartered in Noida, with 160 consultants which provide testing strategy consulting and ISTQB-based training services. Experimentus and Pure Testing have set up the Joint Venture with TMMi-based consulting in mind. The JV is to provide accreditation services to IT captives based in India of clients as well as to India-headquartered IT services vendors. Purementus is to provide the client an assessment of their maturity against the TMMi maturity level. The JV expects Indian IT service providers will be keen to have their testing practices certified by an external vendor and use it as a marketing tool.
The JV also targets the Australian market.
Barclays, an Experimentus client, announced at the Testing and Finance event in Germany in June that it will use Experimentus and the JV Purementus to assess and possibly accredit its software testing operations, largely located in the U.K. and India, against TMMi .The bank has spent two to three years building its testing organization and wants to have itself assessed both for internal purpose and as a message to competitors. 60% of the accreditation work will be done in the India and the remaining 40% in the UK.
Analyst comments:
Experimentus is one of the two TMMi-accredited vendors in the world by the Tmmi Foundation to assess clients against TMMi. The firm is therefore best positioned to benefit from the increased interest in TMMi, which increasingly is an alternative to the likes of TPI. The fact that TMMi is vendor-neutral may be of interest to IT services vendors that want to accredit their testing organizations.
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An Update on Capgemini's IT Outsourcing 2-Year Renewal Contract Awarded By Maxeda
Capgemini recently announced the renewal of its 2-year IT outsourcing contract with Dutch non-department store Maxeda. The client, Maxeda, had revenues in 2009 of c. €3.1bn. It operates 1,400 stores, of which 50% in the Netherlands. Maxeda is owned by a Private Equity fund, KKR.
The contract is an extension of a December 2007-signed 5-year contract. As part of the 2007 agreement, Capgemini acquired the IT captive of Maxeda and took over 300 personnel who had served various companies of the Maxeda group including do-it-yourself, fashion and restaurants.
The initial contract included servers, desktops (c. 2,000) and PoS terminal management as well as service desk and application maintenance & support for SAP applications. In the infrastructure area, Capgemini consolidated servers, reduced the number of datacenters from 3 to a dual one structure and virtualized servers supporting SAP applications.
In 2009 Maxeda expressed its intention to lower its cost structure further and also make it more variable. The 2-year €44m extension announced in 2010 includes:
- Reductions in the number of personnel involved in managing the applications and IT infrastructure. The extension involves 170 personnel, down from c. 300 personnel in the original deal. While the group has made a number of divestments, Capgemini argues that the lesser number of personnel involved in the delivery reflects the fact it has simplified and consolidated servers and the overall IT infrastructure, making it less labor-intensive to monitor. In the past, the client had organized it service delivery per chain e.g. DYI. Capgemini has regrouped service delivery for managing servers across the company
- A offshore leverage with delivery expanding from locally to India (Kolkata and Mumbai) and Amsterdam
- A further rationalization of the IT servers of the client and deployment of virtualization technologies.
As part of the contract, Capgemini is moving the client's servers on which SAP applications are running from high-end servers to Linux and Windows X86 blades. The move will decrease spending on high-end server maintenance costs and related services. The company has also deployed virtualization technologies in order to maximize the level of CPU power and storage across the different internal clients of Maxeda. Capgemini has also moved the pricing from SAP server management to a SAPS-based (number of order line items per hour in a SAP system) pricing level. Capgemini is allowing high level of usability with variations allowed up to 60% and down 40% from a base line.
Currently, Capgemini estimates that 60% of the price structure of Maxeda's IT infrastructure is variable. The client and Capgemini are planning in January 2011 to introduce a new pricing scheme that will be pay per use and based on the number of users. Both companies are currently analyzing how the move would impact the billing of the client and are working to make it neutral to the client in terms of fees.
In future, Capgemini intends moving the PoS terminal procurement and related services from a Capex to an Opex model.
Analyst comments:
The Maxeda story illustrates how cloud computing is an evolutionary step for IT infrastructure and for servers, rather than a revolution. In the case of Maxeda, the client is adopting both cloud computing and offshore delivery to lower its cost. It is also worth pointing out that the client is moving over time from a technical KPI e.g. SAPS, a technical way of estimating the usage of a server towards more business-oriented KPIs e.g. number of seats.
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Capita Highlights Testing Capabilities In The U.K. Market
Capita has recently briefed NelsonHall on its systems quality assurance and software testing capabilities in the U.K. market.
In 2002, Capita acquired Mission Testing, a private company specializing primarily in providing contract and permanent testing recruitment services. Mission Testing has been re-named Capita Assurance and Testing and is run as an independent practice area within Capita. Since the acquisition, the practice has grown six fold thanks to consulting and managed testing services contracts. The Capita ownership has allowed Capita Assurance and Testing to provide testing services as part of Capita's BPO contracts as well as independently winning larger contracts.
Capita Assurance and Testing highlights that in spite of its integration with Capita, it operates independently of Capita, has its own financials and back office and remains a focused vendor.
Since its acquisition by Capita, the unit has focused on gaining domain knowledge. Historically, Mission Testing relied on a pool of contractors, who had a strong background in testing but were more limited in domains; Capita moved on to build its own employees and use consistent methodologies and a consistent delivery.
Capita Assurance and Testing offers the following services around software testing:
- Consulting/quality assurance and professional services (25% of revenues): this activity includes process and methodology consulting, project management and testing tools selection help as well as test execution services. Pricing is either T&M or fixed price. As part of those contracts, Capita has responsibility for delivery and outcomes. Payment is based on the delivery
- Long-term contracts (60% of revenues): including professional services, managed services and outsourcing contracts which may involve the transfer of people. Pricing can be based on outcomes including guaranteed cashable savings.
- Recruitment services (15% of revenues).
Capita Assurance and Testing has expanded its offerings around various applications/techniques:
- Agile development initially onsite and then from India. The service is popular with investment banking clients in particular
- SAP and Siebel Systems applications: experience includes in particular contracts together with Capita for the U.K. local government. Other contract examples are in the U.K. private sector.
Capita Assurance and Testing has been evolving its delivery organization from being 100% U.K.-based three years ago to more blended on/offshore delivery. Currently, the unit has 1,000 professional testers, of which ~55% are located in India (Mumbai). The company intends to move in the long-term to 70% to 75% offshore delivery for commercial sector clients. Positions remaining in the U.K. include in particular senior project and test managers and functions interfacing between the U.K. and India.
The client base includes Capita BPO clients in life insurance (and in investment banking, retail banking and card processing. The unit is also active with telecom services providers, retail clients, pharmaceuticals, travel and local government but wants to remain focused on key sectors.
Capita Assurance and Testing estimates that 50% of its revenues are delivered alongside with Capita.
Analyst comments:
Capita was the first vendor to start the consolidation of the U.K. software testing market. Since then, SQS (with Cresta), AppLabs (with IS integration) and more recently Sogeti (with Vizuri and Insight Testing in Ireland) have followed Capita. The result is that the U.K. testing market is largely in the hands of the above firms, of mid-sized IT services vendors like Steria and Sopra and of heavy weights whether India or onshore vendors e.g. Wipro, Cognizant, Infosys, IBM, Accenture and Capgemini.
Within this landscape, Capita Assurance & Testing aims to position both on having the financial muscle of a larger group and also on having the flexibility of a software testing pure-play. The growth of the company in the past ten yeas, its high presence in India and its taking part in Capita-led BPO contracts suggests the company has been successful in doing so.
Capita Assurance & Testing's areas of strengths include its high offshore leverage, its focus on financial services and on the pharmaceutical sector. On the down side, Capita's offering is probably less developed than competitors in the areas of SAP testing, SOA testing and in the number of accelerators and tools it has developed.
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Getronics Announces Q2 2010 Revenues Down 10% to €478m
Getronics has announced Q2 2010 revenues down 10% to €478m.
Revenue decline is caused by pressure on prices and clients postponing their investment in ICT projects. The recovery of the Dutch ICT market is lagging behind the rest of Europe.
Q2 2010 revenue breakdown by geography is:
- Netherlands €368m (-12.2%)
- International €115m (0.0% including a positive foreign exchange impact of +6%)
- Other €8m (0.0%)
- Eliminations -€14m (N/R).
Q2 2010 external revenues are down 11.1% to €440m .
Q2 2010 EBITDA is €40m, representing a margin of 8.4%, up from 1.7% in Q2 2009 and up from 6.1% in Q1 2010. The improvement of the EBITDA margin results from the absence of restructuring and reorganization costs (€26m in 2009) and the release of a €5m provision in Q2 2010.
Q2 2010 operating income is €1m, a 0.2% margin compared with a negative 5.3% in Q2 2009.
End of Q2 2010 personnel is 12,221 (down 3.5% sequentially), of which Netherlands 8,231 (-0.8%) and internationally (-9.5%). Getronics reduced 446 personnel in Q2 2010. The company has negotiated a onetime payment of €300 and no structural salary increase in 2010 for its Dutch employees.
Getronics manages 1.7m IT workplaces and 0.6 voice workspaces.
Sales funnel remains stable sequentially.
Getronics is still targeting an EBITDA margin of 8% in 2010. The company is expecting revenue growth to resume in H2 2010.
Analyst comments:
Getronics has pointed a revenue decline in the Netherlands above 10% for two consecutive quarters. The company's business in the Netherlands is centered on desktop services, which are heavily impacted by the downturn. NelsonHall was assuming a negative decline in the revenues of Getronics' Dutch business of around 5%.
In 2008, Getronics made a high number of divestments in application services, document managment, proprietary application software in order to make its business more predictable.
Other key vendors present in the Netherlands are to unveil their performance in the country soon. Atos Origin has announced a 11.2% decline in its Benelux geography and a 9.3% operation margin (before corporate costs, restructuring & rationalization, and impairment losses).
The positive news is the return to profitability, albeit at just 0.2%.
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Steria Details its Infrastructure Cloud Computing Offering
Steria has detailed its April 2010-announced Infrastructure On Command offering. The offering is based on Cisco's unified computing system revolves around server and storage provisioning.
The offering has the following characteristics:
- Provisioning of a virtual server (based on Unix and Windows) including a database (SQL and Oracle). Steria is also using internally a development environment and is planning to open the service to external clients in July 2010
- Provisioning is done through a self-service portal, which includes a service catalogue (CPU type, OS type and storage needs). The portal includes user administration rights and can be integrated with the workflow applications of the client
- Pricing is user-based and includes an entry fee (corresponding to pre-configuration of servers and storage and migration of applications). It is based on a expected capacity with a 20% variation. Pricing will be based on monthly assessments
- Contract duration is expected to be 3 years and more
- Service delivery is integrated in Steria's IT infrastructure management delivery located in Poland and India
- Initially, Steria has deployed in a dual datacenter in France. The company is open to deploying the technology in one datacenter of its main geographies (U.K., Germany and Norway). In addition, Steria is expecting to deploy it as part of private cloud computing contracts, in the datacenters of its client
Steria is expecting two types of clients for this service: those with fluctuating or seasonal needs e.g. retail and those are progressively ramping the usage of new applications.
The company has not signed any contract but claims a healthy pipeline. The offering has triggered interest from procurement functions of the client and business users, and is expanding Steria's traditional base of CIOs. Discussions in particular include both the Infrastructure On Command offering as well new business models around cloud computing. Steria estimates currently that 1/3 of its current discussion around the IOC offering are with new logos and 2/3 with existing Steria clients.
Steria highlights several reasons for selecting Cisco as a hardware partner and in particular the facts that Cisco for its UCS offering and Steria as part of its STARS production service management technology rely on the same tools from BMC Software (BladeLogic) for datacenter automation. In addition, Cisco technology includes both IT hardware and routing/networking capabilities, making it, according to Steria easier to manage and less energy-hungry.
Steria has also offered some further details on the March 2010-announced extension of its offshore RIM activities from Poland (Katowice) to India (Noida). The Noida center was already managing the servers and desktops of the former Xansa as an internal client and will not provide to external clients service desk (English), desktop management services (and in particular around packaging and distribution of applications to desktops) as well as server and network management services (with strong focus on level 2 and more support). It focuses on open systems while Poland has mainframe monitoring capabilities.
Analyst comments:
Steria's announcement comes a bit later than most of its competitors. The company insists that its offering is live and running and not a service roadmap.
One of the differences of Steria's offering is certainly the decision to use Cisco as a partner, rather than a traditional hardware vendor. Steria highlights the use of BladeLogic by both Steria and Cisco and the integration of network and IT computing by Cisco makes it a good fit for the firm. From a client perspective, the reliance on Cisco hardware does probably make a huge difference.
Steria's offering however has several strong points including the fact it is now live, it is done through a self-service portal that is already operational, and the fact that billing has a monthly frequency. The main weakness of the offering is that it does not include a SAP server. SAP server on demand has proved popular recently with T-Systems wining large contracts with SAP private cloud offerings embedded in those contracts. Steria highlights that it wants to further differentiate its offering from a pure SAP offering and will go further with a bundled SaaS and infrastructure cloud offering, possibly around its own proprietary applications. The company has already created one offering around its air traffic command and control application.
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U.K. Home Office Terminates e-Borders Contract with Raytheon
The U.K. government is to terminate its £750m ($1.1bn) border security contract with Raytheon. A press release from the Home Office states that Raytheon had been in breach of the e-borders contract since July 2009. "The Home Secretary has no confidence in the prime supplier of the e-borders contract…With critical parts of the program already running at least 12 months late, we have taken the decision to terminate the e-borders contract with them." The Home Office intends to seek alternative providers to deliver the system, which was due to be operational by 2014.
The initial £650m contract was awarded in November 2007 to the Trusted Borders consortium which included:
- Raytheon (prime contractor), responsible for systems integration, travel services and overall project management
- Serco, responsible for infrastructure and service management
- Accenture, responsible for end-user training and measurement of overall business benefit of the program
- Detica, responsible for intelligence and analytics services
- QinetiQ, responsible for security accreditation and human factors
- Capgemini, responsible for design of business processes, organization structure and primary data flows
- Steria, responsible for development of interfaces into the various government agencies.
An extension was awarded in February 2008. To date the government has spent £188m (~$290m) on the project.
The e-Borders system will vet travelers entering or leaving the country by checking their details against police, security and immigration watch lists. The Home Office claims said that Raytheon has failed to deliver its targets. However, it states that the sub-contractors will continue to work on the project until a new prime contractor is appointed.
Analyst comments:
At the time of the award, the project major timelines were:
- The e-Borders operations center (e-BOC) to be established by mid-2009, providing capture and watch list assessment of passenger data for a limited number of high priority passenger routes
- December 2009: introduction of the e-Borders system with the receipt and processing of Travel Document Information (TDI) for at least 60% of passenger movements, including a range of air, sea and rail carriers
- December 2010: receipt and processing of TDI for at least 95% of passenger movements
- March 2014: receipt and processing of TDI data for 100% of passenger movements.
The language of the Home Office in its press release is unusually strong for U.K government and is directed purely at Raytheon. This is the first major IT project to be publicly atacked by the Efficiency & Reform Group being headed by Francis Maude and Danny Alexander (who both last week met with the top 19 IT services providers to the U.K. governnent to start discussions about ways of achieving cuts in spend).
Trusted Borders had been shortlisted with the BT Emblem consortium, consisting of BT, Lockheed Martin U.K., Logica, Anite, ARINC and HP.
The most likely results, rather than a major expensive retender, is for one of the sub-contractors, such as Accenture or Capgemini, to pick up the prime contractor role.
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Indra and Ericsson Awarded 7-Year IT Outsourcing Contract by Telefonica
Indra and Ericsson have been awarded a 7-year IT outsourcing contract by Telefonica. As part of the agreement, both companies are to take over the pre-paid billing solution (BSS) and the related OSS of the client. 500 employees from Telefonica R&D are to tranfer to Indra and Ericsson. The prepaid billing solution that both vendors are taking over serve 100m customers. The transfer will be effective in October 2010.
Analyst comments:
The contract is estimated to worth €500m over 7 years, of which €300m for Ericsson. Of the 500 transferred employees, 200 are moving to Ericsson and the remaining to Indra. Both Ericsson and Indra are to offer pre-paid billing services to other clients than Telefonica.
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Capgemini Awarded $27.9m Systems Integration Contract by State of Nevada
Capgemini has been awarded a 3-year $27.9m systems integration contract by the State Of Nevada to modernize an unemployment insurance application for the state's Department of Employment Training and Rehabilitation (DETR).
Capgemini, in collaboration with Oracle, will modernize the systems necessary to conduct employer contributions, constituent benefits claims, eligibility determination and benefits payments. The solution includes Oracle's enterprise taxation management software.
Analyst comments:
Capgemini created its Government Solutions division back in 2002, initially targeting opportunities in the federal arena.
- The unit intially focused on small scale opportunities in consulting and systems integration, in particular gaining a foothold in program and project management engagements
- Capgemini Government Solutions has more recently been selected in several major multiple award contract vehicles such as the GSA's IT 70 Schedule and MOBIS Schedule and SeaPort-e
- Capgemini's anchor client at the federal government level is the Department of Homeland Security. Contracts include technical and strategic consulting services for U.S. Immigration and Customs Enforcement
- Capgemini has also been awarded some significant contracts for testing services, including by the U.S. Army and the U.S. Department of Agriculture (USDA).
Capgemini is now also increasing its focus on oppportunities in the the state government segment. The approach includes:
- A partner-centric approach, primarily with Oracle for tax management systems, but also with other partners such as SAP (NYPD Property and Evidence Tracking)
- An internal coordinated approach using Capgemini's public sector experience from various geographies e.g. its contracts with in the UK with HRMC and with Met Police for tax management and public safety. Capgemini received an award for the work it has done for the NYPD around Oracle applications. In addition, Capgemini is using its traditional strengths in ERP and testing
- Supporting clients that are under-served by large IT services vendors and where competition is less active. This includes targeting smaller U.S. States.
Capgemini is in investment mode, hiring experienced sales people and working on bringing the different capabilities of the firm together to support unemployment insurance, tax management, and independent verification and validation efforts. Capgemini highlights its experience working with semi-public entities and unionized workforces e.g. HydroOne in Canada.
NelsonHall estimates that Capgemini derives ~$150m from the U.S. public sector, of which approximately a third each from the Department of Defense, the civilian federal sector, and from state and local government clients.
The high growth of long-term contracts in the revenue mix of SQS is impressive: it is increasing from 4% to 10% of the company's overall revenue in less than a year. This kind of growth signals SQS is able to win large scale contracts (by software testing standards). It puts SQS increasingly in the league of tier-one software testing vendors.
SQS highlights one overlooked feature of its offshoring strategy. Its Egypt center provides services at prices somewhat comparable to those in India. The difference is that its Egypt center can accommodate the German and to a portion French language much easier than India. SQS is finding the language capabilities of the facility to be a differentiating factor.
SQS has offered some insights about its service offering. One of the common criticisms towards onshore-headquartered software testing units is that they put less emphasis on tools; IP and domain knowledge than their Indian peers. Software testing is and remains a human-intensive activity. It is therefore essential that vendors likes SQS automate of functional testing. SQS argues its automation effort is comparable to those of Indian vendors. It is also investing into bringing domain and application knowledge into its delivery teams. We look forward to hearing more about its IP and automation effort.