Industry Insight
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Latest Edition - January 23, 2012
Contains commentary and insight from NelsonHall analysts on key industry developments that impact your sourcing decisions for the week ending January 23, 2012
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IBM Global Services Announces Q4 2011 Revenues up 2.7% to $15.3Bn
IBM Global Services has announced Q4 2011 revenues, for the period ending December 31, 2011 , of $15.3bn up 2.7% year-over-year (up 2% in constant currency).
Q4 2011 revenues (and revenue growth) by division were:
- Global Technology Services $10.5Bn (+2.8% ) (+3% in CC)
- Global Business Services $4.9Bn (+2.5% ) (+2% in CC).
Overall the breakdown of IBM Global Services' Q4 2011 revenues (with reported and constant currency revenue growth) by activity was:
- GTS Outsourcing 40% ~$6,132m ( +3%, +3% CC)
- Integrated Technology services 16% ~$2,453m ( +5%, +4% CC)
- Maintenance 12% ~$1,839m ( -1%, -1% CC)
- GBS Outsourcing (AMS) 7% ~$1,073m ( +5%, +4% CC)
- GBS Consulting & SI 25% ~$3,832m ( +2%, +1% CC).
Overall outsourcing revenue (i.e. across GTS and GBS) was up 4% (3% CC), while "transactional" revenue was up 3% (2% CC).
IBM Global Services Q4 2011 pre-tax margin by division was:
- GTS 18% , up 2.3% pts yoy
- GBS 16.6% , up 1.8% pts yoy .
Q4 2011 IBM Global Services new signings were down 8% (-8% in CC) to $20.4bn, of which:
- Outsourcing $11.6bn (-16%, -15% CC)
- Transactional $8.8bn (+5%, +4% CC).
IBM Global Services' total backlog was $141bn (down 2% YoY, flat in CC). The outsourcing backlog was $93bn (down 4% yoy, down 3% in CC).
IBM Group overall Q4 2011 revenues were $29486m, up 1.6% (+1% CC)
IBM Group overall Q4 2011 revenues (with reported and CC revenue growth) by geography were:
- Americas $12.5Bn, up 3% (+3% CC)
- EMEA $9.6Bn, up 1% (+1% CC)
- UK +8% (+9% CC)
- Spain +8% (+9% CC)
- Germany +3% (+4% CC) - Asia Pacific $6.7Bn, up 2% (-1% CC)
- Japan -3% (-9% CC).
IBM Group's overall Q4 2011 revenues in "growth markets" were up 16% (+11% in CC) and contributed 22% of revenues, with the BRIC countries reporting revenue growth of 19% (+16% in CC). IBM's services revenue in "growth markets" grew +11% (+13% CC).
IBM Group overall Q4 2011 revenues (with reported and CC revenue growth) by industry sector were:
- Financial services $8.9Bn, flat (-1% CC)
- Public sector $4.4Bn, flat (0% CC)
- Industrial $2.9Bn, up 3% (+2% CC)
- Distribution $2.9Bn, up 6% (+6% CC)
- Communications $2.8Bn, up 5% (+6% CC)
- General Business $6.1Bn, up 7% (+7% CC)
IBM Global Services full-year 2011 revenues were up 6.6% (+2% in CC) to $60,163m. 2011 services revenues (and revenue growth) were:
- Global Technology Services $40,879 (+7.0%) (+3% in CC)
- Global Business Services $19,284 (+5.8%) (+1% in CC)
IBM Global Services full-year 2011 pre-tax margin by division was:
- GTS 14.9% , up 1.0% pts yoy
- GBS 15.0% , up 1.6% pts yoy
Analyst comments:
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Wipro Announces Fiscal Q3 2012 Revenue Up 12% to $1,505m
Wipro Technologies has announced results under IFRS for fiscal Q3 2012, the period ended December 31, 2011. Revenue was $1505.5m, up 12.0% YoY (up 13.7% in CC), and up 2.2% sequentially (up 4.5% sequentially in CC).
Operating margin was 20.8%, down from a margin of 22.2% in fiscal Q3 2011.
Fiscal Q3 2012 revenue share (with estimated $ revenue and YoY growth) by practice was:
- ADM 24% ($361m, +7.1%)
- Technology Infrastructure Services 21.7% ($327m, +13.6%)
- Analytics and Information Management 6.6% ($99m, +25.3%)
- Business Application Services 30.8% ($464m, +15.8%)
- BPO 8.5% ($128m, +2.4%)
- Product Engineering & Mobility 8.4% ($126m, +10.7%).
Fiscal Q3 2012 revenue share (with estimated $ revenue and YoY growth) by vertical was:
- Global Media & Telecom 15.4% ($232m, +1.5%)
- Financial Solutions 27.3% ($411m, +12%)
- Manufacturing and Hi-Tech 19% ($286m, +6.4%)
- Healthcare, Life Sciences & Services 10% ($151m, +7.7%)
- Retail & Transportation 14.9% ($224m, +8.4%)
- Energy & Utilities 13.4% ($202m, +51.6%).
Fiscal Q3 2012 revenue share by region (with estimated $ revenue and YoY growth) was:
- Americas 52.5% ($790m, +8.5%, +8.5% in CC)
- Europe 28.2% ($425m, +11.6%, +12.2% in CC)
- Japan 1.3% ($20m, -2.9%, -2.1% in CC)
- India/Middle East 9.1% ($137m, +14.6%, +31.4% in CC)
- APAC and Other Emerging Markets 8.9% ($134m, +40.4%, +41% in CC).
Client distribution by size of annual revenues (trailing 12 months) was:
- $1m+: 462 (end Q3 FY 2011: 433)
- $5m+: 197 (end Q3 FY 2011: 176)
- $10m+: 121 (end Q3 FY 2011: 113)
- $20m+: 73 (end Q3 FY 2011: 64)
- $50m+: 25 (end Q3 FY 2011: 21)
- $75m+: 14 (end Q3 FY 2011: 10)
- $100m+: 6 (end Q3 FY 2011: 1).
Client contribution to total revenues was:
- Top 1: 3.9% (FY 2011: 3%)
- Top 5: 11.8% (FY 2011: 10.9%)
- Top 10: 19.9% (FY 2011: 19.5%).
Excluding Infocrossing, India/Middle East and BPO:
- Revenue contribution from FPP was 45.5% (compared with 46.3% in the prior year's equivalent quarter)
- The offshore/onsite revenue mix was 45.6%/54.4% (compared with 48.2%/51.8% in the prior year's equivalent quarter).
Headcount at the end of the quarter was 136,734, a net addition during the quarter of 5,004.
Wipro has provided guidance for fiscal Q4 2012 of revenue in the range of $1,520m to $1,550m.
Analyst comments:
It is no surprise that Wipro saw an ongoing softening in revenue growth in the December quarter, a trend we expect to see reported by nearly all service providers. While Wipro continues to trail the other Indian headquartered Tier 1s, the rate of YoY revenue decline it has experienced in the last two quarters has been slightly less than it has been for either TCS (from 34.4% growth in fiscal Q1 2012 to 20.6% in fiscal Q3) or Infosys (from 23.0% growth in fiscal Q1 2012 to 13.9% in fiscal Q3) (Cognizant reports next week). This indicates some early progress in the new strategy being implemented under new CEO TK Kurien.
Among the positives are:
- The 4.5% constant currency revenue growth was slightly above prior guidance
- The increase in contribution from very high value accounts, in particular the number of clients contributing revenues of at least $100m per annum has shot up from in the last year from just one to six. (though this is still far fewer than Infosys' 13 $100m+ clients, or the 14 of TCS). Wipro is seeing strong revenue growth in its top client, which generated an estimated $59m last quarter (compared with $40m in fiscal Q3 2011).
- Within the service lines, R&D has had its strongest quarter for YoY growth (in US$) for a year. However, all other service lines saw a softening in revenue growth
- Ongoing strong growth in emerging economies, which contribute 18% to global revenues
- A significant improvement in attrition rates in IT services: voluntary TTM attrition of 19.0% is down from 21.6% in the prior year quarter
- A marked improvement in DSO, from 76 in the previous quarter to 71.
Nevertheless, Wipro continues to trail TCS, Infosys, and Cognizant. Apart from E&U, where growth is fuelled by the June 2011 acquisition of the SAIC oil & gas practice, and the 12% growth seen in financial services, all its verticals are now down to single digit growth.
Looking ahead, Wipro has reorganized its management and go-to-market along vertical SBUs: this ought to have led to greater clarity, improved accountability and more integrated offerings. There has also been a significant increase in sales & marketing: from 5.2% of global revenue in fiscal Q3 2011 to 5.7% this last quarter. We would expect to see these initiatives bearing fruit by fiscal H2 2013.
(NelsonHall will be publishing shortly a detailed comparison of the quarterly performance of the Indian Tier 1s, also an updated Key Vendor Assessment on Wipro).
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Capgemini Awarded Energy and Carbon Data Management BPO Contract by Tesco
Capgemini has been awarded an energy and carbon data management BPO contract by Tesco.
Services to be provided by Capgemini include:
- Collecting, processing, and reporting of energy usage and carbon emission data from Tesco operations worldwide
- Technology systems administration
- Support in matters of sustainability data from Capgemini's Sustainability CoE.
The BPO service, which uses CA Technologies' ecoGovernance software product, is named BPO Sustainability Service and is part of Capgemini's Supply Chain Management BPO portfolio.
The client, Tesco, intends to become a zero carbon emission firm by 2050. The contract with Capgemini will help measuring its current energy usage and carbon emissions.
Tesco is the third largest retailer in the world. It is headquartered in the U.K.
Analyst comments:
This is a small contract in terms of revenue, but interesting in that this new managed service from Capgemini is likely to be highly attractive to many organizations.
Few BPO service providers are currently offering an energy and carbon data management service - another vendor in Europe is Logica - but we expect it will feature more commonly within vendors' broader BPO portfolio over the next few years.
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HCL Technologies Announces Fiscal Q2 2012 Revenues Up 18% to $1,022m
HCL Technologies has announced fiscal Q2 2012 revenues, for the period ending December 31, 2011, of $1021.9m up 18.3% y-o-y, and up 18.7% in constant currency. Sequential growth was 2.0%, 3.7% in constant currency.
Fiscal Q2 2012 EBIT was $161.8m, an EBIT margin of 15.8%, up from a margin of 13.1% in the prior year quarter.
Fiscal Q2 2012 revenue share by region (with estimated revenue and YoY growth) was:
- Americas 58.8% ($601m, +21.8%)
- Europe 26.8% ($274m, +19.2%)
- Rest of World 14.4% ($147m, +4.5%).
Fiscal Q2 2012 revenue (and YoY revenue growth) by business unit was:
- IT services $975.4m (+19.7%)
- Core software services $736.4m (+19.2%)
- Infrastructure services $239.1m (+21.4%) - BPO services $46.4m (-6.3%).
Fiscal Q2 2012 EBIT margin by business unit (with comparable margin for the prior year period) was:
- IT services 17.0% (14.6%)
- Core software services 17.3% (14.6%)
- Infrastructure services 16.0% (14.5%) - BPO -7.5% (-11.0%).
Fiscal Q2 2012 revenue share by service type (with estimated revenue and YoY growth) was:
- Enterprise Application Services 20.3% ($207m, +12.9%)
- Engineering and R&D Services 18.9% ($193m, +21.2%)
- Custom Application Services 32.8% ($336m, +22.1%)
- Infrastructure Services 23.4% ($240, +21.7%)
- BPO 4.5% ($46m, -6.6%).
Fiscal Q2 2012 revenue share by vertical (with estimated revenue and YoY growth) was:
- Financial services 25.3% ($259m, +21.6%)
- High-tech/manufacturing 29.5% ($301m, +28.7%)
- Telecoms 8.0% ($82m, -12.2%)
- Retail & CPG 8.8% ($90m, +13.9%)
- Media, pub'g & entertainment 6.4% ($65m, +10.7%)
- Healthcare 8.6% ($88m, +21.1%)
- E&U, public sector 6.4% ($66m, +5.2%)
- Others 6.9% ($71m, +39.7%).
Client contribution to revenue in the LTMs was:
- No. clients >$1m: 362
- No. clients >$5m: 144
- No. clients >$10m: 84
- No. clients >$20m: 42
- No. clients >$40m: 12
- No. clients >$50m: 9
- No. clients >$100m: 3.
HCL's top 5 clients account for 15.8% of overall revenue, the top 10 for 24.2% and the top 20 for 33.9%.
Fiscal Q2 2012 revenue share by contract type (with revenue share in the prior year period) was:
- Time and material (T&M) 53.9% (58.5%)
- Fixed price 46.1% (41.5%).
The proportion of revenue coming from offshore efforts has slightly decreased sequentially to 42.1%, compared with 42.3% in fiscal Q1. However, revenue coming from offshore efforts slightly increased compared with the prior year period (41.9%).
Total headcount at end December 2011 was 83,076, a net increase during the quarter of 2,556. Headcount by BU (with net increase during the quarter) was:
- IT services 72,055 (+1,734)
- Technical 65,266 (+1,631)
- Support 6,789 (+103) - BPO services 11,021 (+822)
- Technical 10,106 (+728)
- Support 915 (+94).
Attrition (TTM) in IT services was 15.7%, down from 17.2% in the prior year quarter
Offshore attrition (quarterly) in the BPO unit was 6.1%, down from 10.8% in the prior year quarter.
Analyst comments:
HCL Technology continued to experience softening revenue growth in the December quarter, a trend reported by all the Indian majors. On a positive note, its YoY revenue growth for the quarter outperformed both Wipro and Infosys at 18.3%.
The yoy improvement in EBIT margin was due to the 11% depreciation of the rupee during the quarter. HCL continues to trail all the Indian majors in terms of operating margin. Over recent quarters its margins have fluctuated between a high of 17.8% and a low of 11.8%: margin stabilization has to be a priority for the company going forward.
The BPO unit continues to be a problem, with no signs of becoming profitable, though HCL previously guided that BPO revenues will decline until the December quarter. The period that HCL previously publicly stated that it would need to restructure the acquired insurance BPO business from Liberata is coming to an end and HCL needs to demonstrate that it has been turning this around.
The Americas had a slightly stronger quarter , stemming from some key contract wins including a health care organization, a software product organization, a multi-million deal with an industrial manufacturer and a global bank.
Europe, despite it being a strong performance in term of revenue growth, was actually HCL's softest quarter since Q1 FY 2011.
Speaking bullishly, CEO Vineet Nayar anticipates the combination of the tougher market in 2012 and the many global contracts coming up for renewal will work in its favor: the company expects to be able to take advantage of this and pick up new clients during their renewal stage.
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IBM Joins Innovations in Environmental Sustainability Council
IBM has partnered with the World Environment Center (WEC), joining the Innovations in Environmental Sustainability Council to explore sustainability in materials, energy, water, infrastructure and logistics.
Charter members of the council will include Boeing, CH2M HILL, The Coca-Cola Company, The Dow Chemical Company, F. Hoffmann-La Roche AG, General Motors, IBM, Johnson & Johnson Family of Consumer Companies, The Walt Disney Company and WEC.
Analyst comments:
Sustainability continues to be a major theme for IBM and this initiative enables IBM to complement its "smarter city" and "smart planet" initiatives around energy, water, and transportation in the public sector with similar themes in the corporate world.
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TCS Announces Fiscal Q3 2012 Revenues Up 20.6% to $2,586m
TCS has announced fiscal Q3 2012 results, for the period ending September 30, 2011. Revenues were $2585.6m up 20.6% year-over-year and up 2.4% sequentially. Volume growth on a sequential basis was 3.2%.
Operating income was $756.3m, a margin of 29.24%, up from a margin of 28.27% in the prior year quarter.
Q3 fiscal 2012 revenue share (with NelsonHall estimated revenue and YoY growth in $ terms) by region was:
- North America 53.3% ($1,378m, + 20%)
- Latin America 3.1% ($80m, + 21%)
- U.K. 15% ($388m, + 13%)
- Continental Europe 10.5% ($272m, + 36%)
- India 8.4% ($217m, + 10%)
- APAC 7.6% ($197m, + 33%)
- Middle East/Africa 2.1% ($54m, + 27%).
Fiscal Q3 2012 revenue share (with NelsonHall estimated revenue and YoY growth in $ terms) by vertical was:
- Banking, Financial services and Insurance 43.3% ($1,118m, + 17%)
- Telecoms 10% ($259m, + 1%)
- Retail & distribution 12.3% ($318m, + 36%)
- Manufacturing 7.8% ($202m, + 31%)
- High-Tech 5.9% ($153m, + 42%)
- Life sciences & healthcare 5.3% ($137m, + 23%)
- Transportation 3.8% ($98m, + 35%)
- Energy & Utilities 4.1% ($106m, + 12%)
- Media & Entertainment 2.2% ($57m, + 15%)
- Others 5.3% ($137m, + 25%).
Fiscal Q3 2012 non-India revenue share (with our estimated revenue and YoY growth) by service type was:
- Application development/maintenance 44% ($1,138m, + 18%)
- Business intelligence 4.4% ($114m, flat)
- Enterprise solutions 11.4% ($295m, + 43%)
- Assurance services 7.6% ($197m, + 29%)
- Engineering and industrial services 4.6% ($119m, + 16%)
- Infrastructure services 10.6% ($274m, + 22%)
- Global consulting 2.8% ($72m, + 47%)
- Asset leveraged solutions 3.8% ($98m, + 15%)
- BPO 10.8% ($279m, + 14%).
Revenue mix by contract type (with comparative share for fiscal Q2 2012) was:
- 53.6% (53.2%) T&M
- 46.4% (46.8%) FP.
Revenue mix by delivery location (with comparative share for fiscal Q2 2012) was:
- Onsite 45% (45.2%)
- GDC/RDC 4.5% (3.9%)
- Offshore 50.5% (50.9%).
The company secured ten large deals during the quarter, broad-based across geographies and sectors.
Analyst comments:
TCS continues to extend its lead over Infosys and Wipro in both revenue growth and operating margin: among the Indian headquartered majors, only Cognizant(which operates to a lower target margin range) is likely to match or exceed its revenue performance. TCS also continues to enjoy particularly low attrition rates.
With the exception of telecoms, TCS continues to see double digit YoY revenue growth in all verticals:
- The major growth engines continue to be BFSI and retail & distribution, which we estimate contributed respectively 37% and 19% of the YoY growth in US$
- Management expects to see some improvement in its telecoms business by FY 2013.
Similarly, with the exception of BI, TCS continues to see double digit YoY revenue growth in all service lines:
- The major growth engines are ADM and Enterprise Solutions, which we estimate contributed respectively 39% and 20% of the YoY growth in US$
- Like Infosys, TCS saw a softer quarter in its software business; testing has also slowed down from the very strong growth seen in the previous seven quarters.
TCS continues to see very strong growth in APAC (outside India) and Middle East/Africa. While North America continues to be the major growth engine, and Continental Europe had a strong quarter, it should be noted that TCS' APAC business contributed a healthy 11% of the YoY revenue growth in US$.
While management commentary was, as usual, slightly more upbeat than the characteristic cautious tone of Infosys, there was a note of caution about CY 2012. CEO N. Chandrasekaran discussed the results from conversations with the company's top 120 clients: of the 96 who have finalized their budgets for 2012, two-thirds expect them to be flat to up and one-third expect theirs to be down. He also commented that TCS is seeing delays in decision-making in about half of its largest discretionary projects, although as yet no cancellations.This echoes what was said by Infosys management last week.
NelsonHall Industry Insight - October 10, 2011
Contains commentary and insight from NelsonHall analysts on key industry developments that impact your sourcing decisions for the week ending October 10, 2011
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Chief Executive of Mouchel Group Resigns Following Profit Warning
Mouchel Group has announced the resignation of Richard Cuthbert, Chief Executive, with immediate effect. The announcement came after the group issued a profit warning due to an actuarial error that lowered its previously expected one-off gain by £4.3m. As a result the Group's profits for the year to July 31, 2011 will be lower than expected.
In its Interim Management Statement on 15 June 2011, the Group expected significant one-off profit on one of its contracts to offset lower profitability than expected on conclusion of a number of other contracts.
Richard Cuthbert will work with the Group for an orderly handover. Bo Lerenius is to become executive Chairman until a new Chief Executive is appointed.
Analyst comments:
Richard Cuthbert became Mouchel's CE in 2002. Under his leadership the company repositioned itself in the local government services sector and got into the schools business. At one point it hailed a £167m Building Schools for the Future (BSF) deal for schools in Hackney, East London. The government sector was seen to be recession-proof but ironically it is largely the exposure to this sector that has resulted in a decline in Mouchel's revenue. The closure of the BSF program was one of the many austerity measures in the public sector that would have contributed to the company's 15% decline in revenue in 2010. Mouchel, however, managed to maintain its operating margin and reported a dozen or so contracts and renewals. These included a £300m contract awarded by the Highways Agency to EnterpriseMouchel, a JV jointly owned by infrastructure maintenance support services company Enterprise and Mouchel.
At the end of May, Mouchel's order book stood at £1.5bn, compared with £1.9bn a year before. At end July 2011, Mouchel had announced fewer contract wins, ~9, than the previous year. The wins included a £57m Highways Agency contract awarded to Network Information Services Ltd (NIS), a JV between Mouchel and Thales UK to run the National Traffic Information Service (NTIS).
New opportunities are starting to emerge from the government sector, for example, £470m of funding for a new bridge across the Mersey, Lancashire County Council's £14.2m scheme to revamp schools, the £3.3m roads scheme in Ireland and the Leigh Guided Busway in Manchester. Even with debts of £109m, Mouchel should still be attractive to potential buyers. In the past Mouchel has turned down takeover offers from Costains, Interserve and VT Group. A new CEO may well see the sense in selling all or part of the company.
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IBM Awarded CAD$80m Multi-Process HR Outsourcing Contract by Air Canada
IBM has been awarded a CAD$80m multi-process HR outsourcing (MPHRO) contract by Air Canada.
IBM will provide the following services to Air Canada employees and retirees for nearly 8 years:
- HR contact center
- Employee data management
- Employee travel support
- Payroll
- Benefits admin
- Leave management
- Recruiting services
- Software application support for the HR systems used to provide the services.
Services will be delivered from IBM's facilities in Montreal, Quebec, Canada; Saint John, New Brunswick, Canada; and Manila, Philippines to support Air Canada's North American operations.
IBM has been providing IT outsourcing services to Air Canada since 2001.
Analyst comments:
IBM will be providing Air Canada with its core MPHRO offering and additionally travel support, leave management, and recruiting services. The RPO services will be provided with support from one of its strategic partners, Manpower.
This is an important contract award for IBM as it was a competitive win from Aon Hewitt. NelsonHall's recent market report 'Targeting Multi-Process HR Outsourcing' defines four market segments for MPHRO. This is an example of the "client-specific shared service transformation" segment, which represents many of the larger transformative deals that occurred in the early to mid 2000's.
IBM has strong capabilities in the shared service transformation segment and by revenues ranks second in this segment, behind Aon Hewitt.
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IBM Awarded 10-Year Electronic Records Archive System Management Contract by NARA
IBM has been awarded a 10-year contract by the National Archives and Records Administration (NARA) to operate and maintain the Electronic Records Archive (ERA) system, the digital archive of records created by federal agencies, the White House and Congress. The contract has one base year with nine one-year options and a total potential LTV of $243m.
The operations & maintenance (O&M) contract includes responsibility for minor enhancements to the system in response to changing needs or developments in technology and software.
Services will be delivered from IBM's labs in Gaithersburg, Maryland and onsite at the NARA Archives II building in College Park, Maryland.
Analyst comments:
NARA began working on the digital archive back in 2001 and in September 2005 awarded Lockheed Martin a $317m, 6-year contract to incrementally develop the ERA system, following earlier work done by Lockheed Martin and Harris on system analysis and design. The project timeline had five developmental phases with initial operating capability (IOC) scheduled after two years and full operating capability after six years.
However, development has been problematic and the project received a number of critical audits for running over time and over budget:
- It was on the Office of Management & Budget's (OMB's) list of high-risk IT projects, and last year NARA announced that it would end developmental work on ERA by end fiscal 2011 (September 30, 2011)
- The Government Accountability Office (GAO) reported earlier this year that the final cost of ERA would be between $1.2bn & $1.4bn, citing, inter alia, weaknesses in NARA's project management abilities.
The ERA system is huge and complex. It has to receive, manage and preserve a wide range of e-records coming from multiple federal government agencies, and also provide public access (where appropriate) to these records
Factors that will have helped the selection of IBM for the O&M phase of ERA include its information lifecycle management solutions assets. Assets such as IBM Content Analytics and its Unstructured Information Management Architecture (UIMA) helped 'Watson', IBM's Question Answering (QA) computing system, win the Jeopardy challenge earlier this year. A team of 20 researchers had input around 200 million pages of structured and unstructured data into Watson.
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ACS Acquires Symcor's U.S. Operations to Expand Financial Services Offerings
ACS is to acquire Symcor's U.S. operations to expand its financial services offerings into check processing. Symcor was set up in 2005 by a consortium of Canadian banks to process checks. Symcor's U.S. operations support the Canadian banks' check processing in the U.S.
Analyst comments:
Xerox is aggressively pushing into various services that are dependent on document processing. Check processing is such a services activity. Over time check processing is anticipated to go away (or at least to go entirely to electronic format). Banks are willing to sell or dispose of these businesses because they are perceived as sunset businesses. ACS' challenge is to convert this physical paper based document processing business into a virtual electronic document processing business.
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CSC Pays Back Advance Payment of £170m to NHS; Continues Discussion with U.K. Government on MoU
CSC has provided an update on its discussion on the Local Service Provider (LSP) contract awarded by the NHS in the U.K. The company and the NHS and Cabinet officials have arranged a series of meetings over the next few weeks with a view to agreeing a Memorandum of Understanding (MoU).
This announcement comes after several high-profile events, as reported by CSC. On September 22, 2011:
- The U.K Major Projects Authority, a joint U.K. Cabinet Office/Treasury body, unveiled its Programme Assessment Review of the National Programme for IT (NPfIT). The Major Projects Authority validated a number of project objectives e.g. connectivity and validity and suggested a number of items including putting the Local Service Provider under the responsibility of each individual trust and moving away from having one single systems integrator for coordinating all services
- The same day, the Cabinet Office ministers and NHS officials expressed they would continue working with existing IT services vendors including CSC to support the involvement of local trusts.
CSC highlights it has incorporated the recommendations of the Major Projects Authority within the MoU terms it is currently negotiating with the client.
CSC has also announced it is to repay £170m (~$265m) to the NHS on September 30, 2011.
- On April 1, 2011, the NHS had made an advance payment to CSC for the Local Service Provider contract of £200m (~$312m). The payment was based on the assumption that the MoU would be completed (and contract amendments underway) by September 30, 2011. It was based on the scope and deployment schedule expected. The advance payment included the option for the NHS to require repayment
- CSC and the NHS have entered into a £24m (~$37m) extended advance payment agreement based on forecast charges for CSC's fiscal 2012. The agreement recognizes that the MoU between NHS and CSC is still ongoing.
Finally, CSC has announced it is continuing developing and deploying projects. The Humber NHS Foundation Trust will now be the early adopter for mental health functionality. It replaces the Pennine Care Mental Health Trust, which withdrew in April 2011 as an early adopter.
Analyst comments:
This announcement comes just after Canadian investor Ontario Teachers' Pension Plan announced it has filed a class action in the U.S. against CSC. (See separate article).
CSC's NHS Local Service Provider contract is the subject of much attention, especially in the U.K. and the U.S., from the financial community:
- In the U.K., CSC, and to a lesser extent BT, are being blamed for the difficulties and cost of the LSP contracts. Under government and media pressure, CSC has become a symbol of the excesses in the U.K. public sector large IT contracts. CSC, along BT, Accenture and Fujitsu is being blamed for overpromising. However, the situation is far more complex. Accenture, BT, CSC and Fujitsu have all lost money on these contracts
- The financial community has focused very much on the financial consequences of this contract to CSC, which represents ~3% of its overall revenues. The continued difficulties with the NHS contract come at a bad time:
- Its former revenue growth engine North American Public Sector organization (~38% of revenues) is affected by the difficulties in the civilian sector
- Its large outsourcing contract unit, MSS, representing 42% of revenues, is seeing only low single-digit growth (+2.1% CC in fiscal 2011)
- The continued losses deriving from accounting irregularities in Denmark, strikes in Nordics and additional issues including high start-up costs for outsourcing contracts.
Uncertainty remains however about the impact of the MoU on the company's revenue guidance. It is unclear whether the new MoU will impact the projected revenues and profitability of the company for fiscal 2012. Currently, the guidance is based on a TCV for £2.1bn (versus £2.9bn initially) with a contract extension expected to June 2017. CSC has mentioned that under the current terms, it was still expecting its contract to be profitable.
Terms of the MoU will therefore determine whether CSC lowers its profitability again this year.
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EXL Acquires Trumbull Services to Enhance Subrogation Capabilities
ExlService Holdings, Inc. has acquired Trumbull Services from the Hartford Financial Service Group for an undisclosed sum. Trumbull provides a number of services to the U.S. P&C insurance industry including policy administration and subrogation BPO; arbitration services; IT and hosting services and has developed a number of specialist propriety software platforms.
Trumbull was originally founded by the Hartford in 1997 and has offices in Hartford, CT and Columbia, SC with a total of ~80 staff. Trumbull Services has a total of 10 insurance clients.
The sale of Trumbull is consistent with The Hartford's strategy of focusing on its core insurance and wealth management sectors.
Analyst comments:
This acquisition makes a lot of sense for EXL:
- Trumbull will add significant depth to EXL's P&C insurance capabilities particularly around the complex and potentially higher margin services like subrogation where fees are charged as percentage of recovered claims value
- It will also provide EXL with onshore insurance-specific service delivery capability. This will offer a strong blended delivery proposition when integrated with EXL's offshore capabilities. The complexity of subrogation services does require an onshore presence but EXL will be migrating some administrative activities offshore
- It will provide EXL with a strong proposition around a typically fragmented and costly process that will be attractive to their 60 existing P&C insurance clients
- EXL will gain IP on Trumbull's well received platforms such as its subrosource, KnowledgeCenter and sourc-it vm products. This will mirror what EXL has done in the life insurance sector with the acquisition of PDMA in May 2010 and offer an integrated propriety platform-based BPO offering
- EXL already has a strong relationship with the Hartford particularly supporting them in complex areas such as actuarial analytics. This acquisition will secure EXL another service area with the Hartford
- Trumbull will also bring new clients to EXL, a number of which use Trumbull's platforms as an ASP solution currently. These are likely to be attracted by the blended delivery, full-BPO offering that EXL can now offer.
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MedQuist and Anthelio Announce Partnership to Cross-Sell Service Offerings
MedQuist and Anthelio Healthcare Solutions have announced a partnership in which the two companies will cross-sell each other's products and services.
Anthelio provides IT and business process services to small to mid-size hospitals and physician groups in the U.S. Anthelio offers revenue cycle management, Health Information Management (HIM), EMR, IT infrastructure services and consultancy. Anethlio is headquartered in Texas and has 2,000 employee based in the U.S. and India.
Anthelio will offer MedQuist's technology and services within its client base including MedQuist's voice-enabled EHR, front-end speech recognition (FESR) and natural language understanding (NLU), computer-assisted coding (CAC) and computer assisted abstracting (CAA) solutions. Currently Anthelio uses MedQuist's documentation technology in 11 client facilities but will expand to an additional 13 sites. MedQuist will include Anthelio's ICD-10 transition services, A/R management, patient access and business office management services within its portfolio.
Analyst comments:
Physician practises and small hospitals do not have the resources to implement and manage complex healthcare IT systems or have sufficient staff to chase every dollar billed, particularly when many invoices are for under $100.
2012 will see a very significant increase in the adoption of EHR and RCM outsourced services within the physician and smaller hospital segment as they prepare for the ICD-10 and the emerging environment of quality linked reimbursements, increasing self-pay and more complex secondary payer arrangements. To date, these sectors have generally been slow to adopt IT and have not been a target for large healthcare service providers such as Dell Services (Perot Systems) or Xerox (ACS). Providers offering SaaS-based healthcare systems and the related back-office services, such as Anthelio and anthenahealth, will see significant growth from these sectors over the next 36 months at least, usually at the expense of local healthcare billing companies.
(NelsonHall will shortly be publishing a market analysis of revenue cycle management BPO: for details, contact paul.connolly@nelson-hall.com)
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NorthgateArinso Adds Workday as its Second Partner for Its euHReka Inclusion Framework
NorthgateArinso (NGA) has added Workday as its second partner for its euHReka Inclusion Framework, which facilities the setup of bidirectional connections. Through the partnership, NGA will integrate its global payroll solution through a connector that it will set up and manage, allowing Workday 16 clients access to payroll capabilities in 51 countries.
Currently, Workday has ~210 U.S.-based clients using its payroll solution, and it will add delivery to Canada in December. Workday 14 is currently available in the market.
Analyst comments:
NGA is beginning to build its network of partners utilizing its euHReka Inclusion Framework, which was just announced last week. Its other partner is with e-learning provider SkillSoft.
Workday, launched in 2006, is one of the first and largest start-ups to provide a SaaS-only HR ERP. Its revenues are estimated to be ~$150m for 2011 and it is targeting 100% growth in revenues for 2012. Workday has ~210 clients with most in the mid-market, but has some large market clients with 55k to 100k employees. Clients include Thomson Reuters, Chiquita, and Flextronics. While still U.S.-centric in revenues and clients, the company is expanding into the U.K. and Canada and has plans to move into more European areas in 2012.
While Workday is continuing to develop plans to offer a full suite of HR and financial ERP services, it is growing its partner network for the provision of global and best of breed solutions. NGA is its newest partner in payroll, joining others including ADP, Patersons, and SafeGuard World International.
This partnership will enhance Workday's portfolio by allowing it to easily expand its payroll offering beyond the U.S., giving it the opportunity to compete for SaaS-based multi-country payroll contracts. According to NelsonHall's latest HR Outsourcing Confidence Index, the average proportion of multi-country contracts signed last quarter increased to 34%, up from 27% reported in Q1. Service providers also indicated that regional multi-country payroll contracts are showing increased levels of acceptance among buyers.
NelsonHall Industry Insight - September 5, 2011
Contains commentary and insight from NelsonHall analysts on key industry developments that impact your sourcing decisions for the week ending September 5, 2011
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CSC Acquires Maricom Systems to Enhance Healthcare Analytics Capabilities
CSC has acquired healthcare data management and analytics company, Maricom Systems. Maricom is based in Baltimore and has ~200 personnel. NelsonHall estimates Maricom's revenues at ~$30m in 2010.
Maricom provides a range of services including:
- Data management
- Software engineering
- Business intelligence & analytics
- Contact center services
Maricom has a well-established presence in the federal government healthcare sector and has provided services to the Center for Medicare & Medicaid (CMS) since 1996. A consortium led by Maricom was awarded a $43m, 2-year task order in December 2010 by CMS to provide BI and extract, transform and load (BI/ETL) services. Maricom was also awarded a $10m contract by the U.S. Department for Health and Human Services (HHS) in December 2010 to provide call center services in support of the Early Retiree Reinsurance Program (ERRP).
Maricom will be integrated with CSC's Health Services unit.
Analyst comments:
This acquisition will enhance CSC healthcare analytics capabilities, an area that is becoming increasingly critical to achieving cost effective, coordinated healthcare envisioned within the Patient Protection and Affordable Care Act (PPACA).
The U.S. healthcare sector has seen a significant increase in the number of acquisitions in the last 12 months as the requirements of healthcare reform becomes clearer. To date, the majority of these acquisitions have been amongst the specialist service providers (e.g. Aetna's acquisition of Medicity, OptumInsight's acquisition of Axolotl and Verisk's acquisition of Bloodhound Technologies) rather than the tier-1 IT service providers.
However, as healthcare data becomes increasingly interconnected through the use of electronic health record (HER), health information exchanges (HIE), clinical decision support systems and patient portals there will be a growing need for embedded analytics and functionality within these platforms. NH anticipates that IT service providers with a strong presence in the U.S. healthcare sector such as Accenture, CSC, Dell Services and HP will increasingly acquire specialist healthcare analytics capability to enhance their proposition and defend against being relegated to providers of generic IT infrastructure services.
The difficulty of integrating specialist healthcare capability into an offshore service delivery model mitigates against acquisition by offshore service providers. Offshore service providers are increasingly developing niche capabilities, such as payment integrity analytics, organically to target the commercial healthcare payer sector.
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IBM to Acquire i2 to Augment its "Big Data" Analytics Capability
IBM has announced an agreement to acquire intelligence analytics firm i2. i2 is based in Cambridge, UK and currently has ~350 personnel. Although financial details of the deal were not disclosed, NelsonHall estimates the deal is ~$500-$600m.
i2 provides intelligence and investigation management software to law enforcement, defence, national security and private sector organisations, particularly in banking, insurance and retail firms. i2's software is designed to make sense of "big data" taking feeds from disparate and unstructured sources such as social media, biometrics and criminal databases.
The acquisition is expected to close in the fourth quarter of 2011.
Analyst comments:
This acquisition is one of more than 20 business analytics firms IBM has acquired since 2005, spending ~$14B. This announcement is closely followed by a further analytics acquisition: Algorithmics, a financial services risk analytics firm which is subject of another post.
This acquisition gives IBM the capability to provide a broader offering to its defence and public sector clients. It is expected that IBM will be able to combine its data management/warehouse capabilities with i2's analytics to help clients spot suspicious behaviour within large amounts of data, hopefully in real time or as close to real time as possible.
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SAIC Announces Fiscal Q2 2012 Revenues Down 6% to $2,596m
SAIC has announced its fiscal Q2 2012 revenues, for the quarter ending July 31, 2011, down 6% to $2,596m, down 7% organic. Fiscal Q2 2012 operating income is $209m, a margin of 8.1%, down from a margin of 9.9% in the prior year period.
Revenue and operating income for the prior year quarter included a $56m Virnetx royalty payment receipt, which accounted for
- 2% of the revenue contraction
- A 210 bps reduction in operating margin.
Fiscal Q2 2012 revenue breakdown (and revenue growth on an actual and organic basis) by segment is:
- Defense Solutions $1,085m (-6%, -7%)
- Health, Energy & Civil Solutions $667m (-2%, -7%), with a delay in the timing of deliveries of security product sales
- Intelligence & Cybersecurity Solutions $843m (-1%, -1%).
Fiscal H1 2012 revenue breakdown (and revenue growth on an actual and organic basis) by segment is:
- Defense Solutions $2,222m (-2%, -2%)
- Health, Energy & Civil Solutions $1,336m (-3%, -7%).
- Intelligence & Cybersecurity Solutions $1,727m (+3%, +3%).
Fiscal Q2 2012 operating income and margin (prior year's period) by segment is:
- Defense Solutions $88m, 8.1% (8.0%)
- Health, Energy and Civil Solutions $61m, 9.1% (9.1%)
- Intelligence and Cybersecurity Solutions $75m, 8.9% (8.1%)
- Corporate and Other -$15m.
Fiscal H1 2012 revenue was down 1.7% to $5,284m.
Fiscal H1 2012 operating income is $439m, a margin of 8.3%, compared with 8.9% in the prior year period. Operating income and margin (prior year's period) by segment is:
- Defense Solutions $178m, 8.0% (7.8%)
- Health, Energy and Civil Solutions $117m, 8.8% (9.2%)
- Intelligence and Cybersecurity Solutions $159m, 9.2% (7.8%)
- Corporate and Other -$15m.
Fiscal Q2 2012 bookings were $2.3bn. The number does not include recently-won IDIQ contracts. Backlog by segment is:
- Defense Solutions $6,973m, of which:
- Funded $2,025m
- Unfunded $4,948m - Health, Energy and Civil Solutions $5,006m, of which:
- Funded $1,742m
- Unfunded $3,264m - Intelligence and Cybersecurity Solutions $5,745m, of which:
- Funded $1,511m
- Unfunded $4,234m - Total SAIC $17,724m, of which:
- Funded $5,278m
- Unfunded $12,446m.
SAIC has revised downwards full year fiscal 2012 guidance which now includes:
- Revenue in the range of $10.6 -11.0bn (down from $11.0 -11.5bn);this adjusts prior guidance of 0% to 4% positive organic growth to 1% to 4% negative organic growth
- Cash flow from continuing operations of at least $600m.
Analyst comments:
CEO Walt Havenstein referred to the quarter as disappointing. The downwards revision in revenue guidance reflects ongoing federal slowness in budget spending, with contract awards not converting to revenues. Spending levels since the April federal government FY 2011 budget resolutions were enacted have been below expectations, particularly in the civilian sector.
Looking beyond FY 2012, Havenstein highlighted
- An increasing pipeline of new opportunities
- SAIC's 65% win rate in fiscal H1 2012
- A $29.2bn record level (over $10bn higher than a year ago) of outstanding proposals awaiting decision, including $20.3bn in ID/IQ bids and $8.9bn in definite delivery bids. This should produce growth when the procurement and funding environment stabilizes.
Nevertheless, management tone remains cautious, given that federal government spending is expected to be flat for the next couple of years with then several years' of low single-digit declines.
SAIC saw revenue growth in some areas: its energy business grew by about 11% and the health business grew by nearly 4%.
The company continues to focus on:
- Areas in defense and national security where budgets will not be cut, e,g, cybersecurity, C4ISR
- Larger $100m+ opportunities, winning 6 such deals in fiscal Q2 and 12 in fiscal Q1
- Health IT, in both the federal and commercial health markets, recently acquiring Vitalize Consulting to enhance its capabilities in EHR
- Energy (though during the quarter SAIC completed the sale to Wipro of its operations providing IT services to oil & gas companies for $170m.
For SAIC to grow its health IT and energy business, it needs to make further acquisitions to enhance capabilities. The will most likely be of niche to mid-sized businesses: the company points to the premium valuations in the U.S. market for businesses in its areas of interest as an inhibitor to a larger acquisition, but it does need to demonstrate an appetite for inorganic growth.
Meanwhile, the investigation over the fraud in the New York $600m CityTime contract continues: management could not comment when it expects this dispute might be resolved.
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Atos Awarded 5-Year IT Infrastructure Management Contract by HSH Nordbank AG
Atos has been awarded a major 5-year IT infrastructure management services contract by HSH Nordbank AG.
Services to be provided by Atos include management of the entire IT infrastructure and telecoms at the client's locations worldwide, including desktop and service desk management, managed servers, network solutions, back office and trader workplaces.
Analyst comments:
Atos is taking over from IBM Global Services, who in 2004 acquired the IT and software services division of HSH Nordbank as part of €100m+ 5-year outsource. HSH Nordbank, a bank that was bailed out in the financial crisis, is looking for major cost savings in this new arrangement.
This is a nice early win for the Atos in Germany following its acquisition of SIS
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Computacenter Announces H1 2011 Revenues Up 5.9% to £1,365m
Computacenter has announced H1 2011 revenues up 5.9% to £1,365.3m
H1 2011 revenue breakdown (and revenue growth) by source of business is:
- Products £963.3m (+6.2%, +6.3% CC). Revenue growth was strongest in Germany and France, with clients resuming their spending on infrastructure refresh; France also aided by the acquisition of Top Info
- Services £402m (+5.3%, +5.4% CC) of which:
- Professional services £99.4m (+10.1%)
- Support and managed services £303m (+3.8%)
Computacenter continues to grow its services backlog with £570.1m in H1 2011 up 5.8% from £539.0m in H1 2010. Wins during H12 include a 5-year managed services deal with Yorkshire Bank and a 5-year desktop lifecycle management contract with BskyB.
2010 revenue breakdown by geography is (and revenue growth) is:
- U.K. £547.3m (-16.0%)
- Product revenues down 22.6%. Computacenter cites a change in the spending profiles of some large clients and a strong comparative H1 2010 as reasons for the decline
- Services business revenue up 0.7% - Germany £580.4m (+26.9%)
- Product revenue up 36.8% in constant currency
- Services revenue growth up 9.9%. Clients in Germany are making infrastructure upgrades prompted by Windows 7 deployments - France £219.7m (+33.8%), with 34.7 product sales added by the acquisition of Top Info, resulting in a CC growth of 39.4% for its French product business. Excluding contribution from Top Info:
- Product business revenue was up 16.8%
- Services business up 2.4%.
- The growth driven by new business with French Government, DCNS and Credit Agricole - Benelux £17.9m (+15.5%), with the growth driven by expansion by a third of its sales force in the region and wins with a global cosmetics firm and TomTom. The services business won a significant deal for storage infrastructure deployment with broadcaster VRT.
H1 2011 operating profit is £26.2m, a margin of 1.9%, up from a margin of 1.6% in the prior year period.
Analyst comments:
The H1 2011 results demonstrate the resilience of Computacenter's business in spite of an uncertain market. Falling product sales of 16% in the U.K. were offset by organic and inorganic growth in its German, French and Benelux business, growing revenue at a respectable 5.9%.
The long term issue Computacenter still struggles with is margin. At 1.9%, margin remains low and the company has not managed to use its diversification in services to increase margin as its large infrastructure management deals have not delivered high margins.
The company continues to look to drive margin growth through cost savings, but it is still too early to see whether investments in SAP and service delivery rationalization will deliver significant improvements.
Although HP's intended exit from the PC market may ultimately be an opportunity for Computacenter, it will act as another unwelcome uncertainty in the market and may further destabilize product lifecycles in the short term.
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HCL Technology Partners with Basware to Enhance P2P Offerings
HCL Technology has partnered with Basware to enhance its Purchase-to-Pay (P2P) offerings. Through the partnership HCL will leverage Basware's software for invoice automation, travel & expense management, procurement and connectivity services.
Analyst comments:
With this partnership with Basware, HCL states that it has now completed its F&A BPO strategy to be able to offer end-to-end services across P2P processes.
In addition, HCL partnered with Trintech in June 2011 in support of its record-to-report BPO services and with Cforia in May 2011 in support of its O2C services. Accordingly, HCL has now caught up with the leading F&A outsourcing vendors by incorporating platform IP in support of each of the major F&A towers of P2P, O2C, and R2R.
The tier 2 vendors have been very active in enhancing their F&A outsourcing capabilities over the past year, with a further example of such activity being EXL's acquisition of OPI, acquiring OPI's P2P platform and strengthening its R2R capability. In particular, tier 2 F&A BPO providers, like the Tier 1 vendors before them, have typically initially focused on P2P rather than O2C. To do this, they are busily partnering with solution vendors to support their offerings within P2P and also procurement processes.
IBM Global Services strong margin gains in Q4 2011 are testament to the success of its ongoing cost control and operational efficiency measures. The Q4 pre-tax margin for its services business was 17.5%, the highest for at least 16 quarters. Thanks to this impressive performance IBM GS margin has pulled away from its on-shore rivals like HP and even Accenture, and it gets ever closer to the margins delivered by the offshore providers.
The current backlog implies that revenue growth in 2012 is likely to be similar to 2011. The 15% CC decline in new outsourcing signings in Q4 implies a challenging time for new signings but in fact this was against a hard compare in Q4 2010, when outsourcing signings were up 23% in CC.
Revenue growth in the quarter was boosted by performance from IBMs "growth market" countries, with CC growth of 13% for Services in these countries.
GTS Outsourcing remains resilient, delivering CC growth consistent with Q3, but ITS slowed its CC growth by one point.
GBS saw stronger CC growth in Q4 than in Q3. This improvement was due mainly to improvement in GBS Consulting & SI which returned to growth after flat Q2/3. Challenging conditions in the public sector and in Japan contributed to the slow growth. Excluding Japan and the Public Service business, GBS revenue would have been up 9% in CC. It is encouraging that signings for transactional work is up 4% CC for the quarter, this should return GBS C&SI to higher levels of growth in H1 2012.
The strategic push for growth from IBM Global Services continues with expansion into faster growing economies and developing solutions for fast growing technology areas. Cloud, business analytics and Smarter Planet offerings remain the global priorities in technology.