NelsonHall Industry Insight: August 30, 2011

The following extracts are  commentary and insight from NelsonHall Industry Insight, NelsonHall analysts weekly views on key industry developments that impact your sourcing. Register to receive your copy weekly  This newsletter forms part of NelsonHall's Key Vendor Assessments service. For further details, contact Paul Connolly.

•·         Wipro Opens First Rural BPO Center in India

Aug 26, 2011 | New Offerings by Rachael Stormonth

Wipro BPO has inaugurated its first rural BPO center at Manjakkudi Village in Tamil Nadu. The center has a capacity of 120 seats, and will open with a 50 seat pilot project for an international client in the retail sector. Wipro plans to expand its rural BPO operations to 500 seats in Tamil Nadu by March 2013 and also to replicate this BPO model across other states in India.

In this 'back-office to the back-office' model, established urban BPO centers are used for more specialized, knowledge-based services, and rural BPO centers for bulk data processing activities.

The Manjakkudi center is a result of a tie-up with the Swami Dayananda Educational Trust, a charitable trust involved in providing education to economically backward sections in rural Tamil Nadu. Manjakkudi, a village with a population of ~2,500, was selected due to the relatively high levels of investment in education in the region. It has ~46 colleges within a 40 km radius with ~13,000 students graduating from these colleges annually. Graduate students of 21 - 25 will be employed in the center.

Analyst comments:

All the Indian tier one IT services providers have always possessed a very strong sense of responsibility of their role in contributing India's economic growth, evidenced in areas such as job creation, the application of technology for educational and medical purposes, and in bringing opportunity to rural communities. This initiative is small in scale but will be an important early example to showcase the success of a rural BPO initiative.

For the local area, rural BPOs allow educated people in villages earn a decent livelihood without leaving the region and bring a new level of financial stability to these communities and individuals.

For BPO service providers, there is likely to be less attrition in the types of activity being transferred to the rural centers, and it also reduces the cost of service for these specific transaction processing activities.

•·         Infosys Awarded 5-Year F&A Contract Renewal by Alcoa

Aug 25, 2011 | Contracts by Rachael Stormonth
industry: Agriculture & Mining

Infosys BPO has been awarded a 5-year renewal by Alcoa's Global Business Services unit for services across finance & accounting (F&A) and knowledge services processes.

Analyst comments:

The services provided by Infosys BPO to Alcoa have expanded in both process scope and geographies covered since the relationship started in 2004 and Alcoa is now one of its key BPO accounts.

(NelsonHall has recently published an updated Key Vendor Assessment on Infosys, available to subscribers to this program).

•·         CSC Settles Longstanding Claim with U.S. Government

Aug 24, 2011 | Financial Results by Rachael Stormonth
industry: Defense

CSC has announced it has reached an agreement in principle with the U.S. government in its dispute of contract claims. On November 19, 2010 the Government and CSC entered into a formal agreement to stay the claims litigation and engage in a non-binding alternate dispute resolution process to resolve all outstanding claims and other issues associated with the contract. The case has been pending before the Armed Services Board of Contract Appeals.

Under the terms of the agreement in principle, CSC will receive a lump sum upfront cash payment of $277m and a 5-year contract extension (4 base years and 1 option year) with an estimated value of $1bn to continue to support and expand the capabilities of the systems covered by the original contract which is scheduled to expire in December 2011.

CSC anticipates that the settlement will result in a non-cash pre-tax charge to earnings in its fiscal Q2 of ~$250m.

Analyst comments:

CSC's claim was initially filed during in its fiscal Q2 2007 (September 2006). This settlement, once finalized, will thus resolve one longstanding uncertainty for CSC. At the beginning of July 2011, the total value of CSC's 14 claims was ~$675m. Although the $277m cash sum is substantially below this, the multi-year contract extension agreed in the settlement will include some portion of its previous claims.

CSC is also looking to conclude its negotiations in the U.K. over its NHS NPfIT contracts in the very near future. Should this also be finalized, there is the financially less significant matter of the Nordics accounting irregularities to be resolved.

•·         MphasiS Announces Fiscal Q3 2011 Revenue Up 5% to $290m

Aug 24, 2011 | Financial Results by Rachael Stormonth

MphasiS has announced fiscal Q3 2011 revenues, for the period ending July 31, 2011, of $290m, an increase of 5.1% year-on-year and up 2.9% sequentially.

Operating margin was 16.0%, down from 21.5% in the prior year quarter (and from 16.5% in fiscal Q2 2011).

DSO was 91 days, up from 78 in fiscal Q3 2010, and up from 89 in fiscal Q2 2011.

Fiscal Q3 2011 revenue share, estimated revenue in dollar terms (and revenue growth as reported in Rupees) by sector was:

• IT, Communication & Entertainment 30%m~ $87m (+18.8%)
• Banking & Capital Markets 25%, ~$72.5m (+5.3%)
• Insurance 9%, ~$26m (-3.8%, with project closures in the HP channel business and also declines in direct channel insurance business)
• Emerging industries 36%, ~$104m (-64%).

27 clients were added during the quarter with 18 of them being in the direct (i.e. non-HP) channel. Of the 27 added clients, 13 are in emerging industries, 7 in ITCE, 6 in BCM and 1 in Insurance.

Fiscal Q3 2011 revenue share by region (with comparative share in the prior year quarter) was:

• Americas 66%, ~$191m (69%)
• EMEA 17%, ~$50m (17%)
• APJ 17%, ~$49m (14%).

Fiscal Q3 2011 revenue share by service type (with yoy revenue growth as reported in Rupees) was:

• Application maintenance 37%, ~$107m (+0.1%)
• Application development 26%, ~$75m (-1.1%)
• Infrastructure management services 21%, ~$61m (+20%)
• Customer service 6%, ~$17m (+10.8%)
• Transaction processing services 5%, ~$15m (-6.4%)
• Technical help-desk services 4%, ~$12m (-16.9%)
• Knowledge processes 1%, ~$3m (-60%).

TTM client concentration (and in prior year period) is:

• Top client 10% (11%)
• Top 5 clients 30% (29%)
• Top 10 clients 44% (45%).

Number of clients generating

• $20m+ revenue per annum:120
  - 7 HP channel (10)
  - 4 direct channel (3)
• $10m+ revenue 24
  - 15 HP channel (13)
  - 9 direct channel (9)
• $5m+ revenue 41
  - 28 HP channel (28)
  - 13 direct channel (13)
• $1m+ revenue 120, of which
  - 78 HP channel (75)
  - 42 direct channel (34).

Blended utilization rates including trainees were:

• Applications services 76% (73%)
• BPO 66% (71%).

Utilization rates excluding trainees (and in the prior year quarter) were:

• Onsite:
  - Applications services 87% (90%)
  - BPO 76% (90%)
• Offshore
  - Applications services 76% (72%)
  - BPO 76% (79%)
• Blended:
  - Applications services 78% (75%)
  - BPO 76% (79%).

Analyst comments:

This is not a strong quarter for MphasiS: its 16.0% operating margin is the lowest in three years. This decline cannot be completely explained by the impact of salary increases in the quarter; the company is also suffering from price cuts in sub-contracted work from HP. Margins have declined in all service types, and spectacularly so in BPO (gross margin of 2.5%, down from 15.8% in the previous quarter, due to losses from the Javelina business.

• BPO and KPO is becoming a very small part of MphasiS' overall business: clearly HP ES is not putting much sub-contracted business its way
• RIM continues to be the only service line seeing significant revenue growth.

MphasiS currently generates 67% of its revenues through its HP Channel and a third of its revenues through direct channels.

Within the HP channel, MphasiS is aiming to develop relationships beyond its traditional relationship with HP ES to other areas of HP; revenue from non-HPES Business grew sequentially by 12.6% this quarter. However:

• HP contribution to overall revenue has slipped from 71% in fiscal Q3 2010
• The number of large HP accounts has reduced
• The number of new clients won through the HP channel is decreasing
• HP seems to be mainly using MphasiS for smaller, more tactical activities.

At the same time, MphasiS is placing a major emphasis in investing in its direct sales channel, which accounts for 70% of its sales expense. Management claims that the direct channel strategy is "tracking to plan". However

• Direct channel revenue growth is still lower than overall growth
• MphasiS is not making progress on increasing the number of $5m+ direct channel clients.

The area of growth is emerging markets, though for direct channel this currently contributes just 7% of total revenue (~$20m).

In the other comparable situation in the market, IBM has worked on integrating Daksh into its own global delivery network (including bringing in some best practice from Daksh). MphasiS, in contrast, is increasingly looking irrelevant to HP, and HP needs to make up its mind what to do with this $1bn business.

•                Serco Announces H1 2011 Revenues Up 4.9% to £2.25bn

Aug 24, 2011 | Financial Results by Sarah Burnett

Serco has announced H1 2011 revenue of £2,246m, up 4.9%, up 5.4% in constant currency, and 4.2% organic in constant currency.

H1 2011 revenue (and YoY revenue growth) by division (the first 3 are U.K/ Europe businesses) was:

• Civil Government: £599m (+4%)
• Defense, Science & Nuclear: £460m (0%)
• Local Government & Commercial (IT & BPO, integrated services, education, commercial): £428m (-1% and -6% organic)
• Americas: £446m (-2%, +3% in CC)
• Africa, Middle East, Asia & Australasia (AMEAA): £313m (+44%, +37% in CC).

H1 2011 revenue share by division was thus:

• Civil Government 27%
• Defense, Science & Nuclear 20%
• Local Government & Commercial 19%
• Americas 20%
• AMEAA 14%.

H1 2011 revenue share by region was thus:

• U.K. 57%
• U.S. 18%
• Rest of World 18%.

Adjusted operating profit was £133.8m, a margin of 6.0%, compared with a margin of 5.8% in H1 2010.

Order book at end June 2011 was £16.7bn, up slightly since December 2010. In the period the total of rebids, extensions and new contract awards was £2.5bn.

In this period Serco completed the acquisition of Intelenet. The company had revenue of £170m to 31 March 2011, operating profit of £19m and margin of 12% over the last 3 years.

Analyst comments:

The decline in local government revenue reflects the contract reviews and restructurings that have been taking place in the market in the U.K. public sector as a consequence of budget cuts. However, this is already creating new outsourcing opportunities such as school improvement contracts, albeit these are small scale. Serco has also been winning facilities management and environmental services contracts. These are much smaller than the large partnership deals won in H2 2010, such as the £200m contract with Hertfordshire County Council in November.

The picture is different in U.K. central government where Serco has benefitted from opportunities created from the government's strategy for privatization of services such as prisons. The company has even avoided a sharp drop in its Defense, Science and Nuclear business despite the Strategic Defence and Security Review and budget cuts, largely thanks to its engineering and scientific capabilities.

The Americas business was affected by slow budgetary negotiations and the debt ceiling woes. Serco is hopeful that the completion of budget negotiations in the U.S. public sector and its defense and engineering experience will deliver results in the next period. Budget negotiations are carried out annually though and Serco is among many suppliers that are looking to the U.S. not to drag out negotiations in the same way for next year's settlements.

Its AMEAA business achieved a stellar 44% growth, with growth coming from prisons management and transportation, and clearly validates Serco's geographical and line of business diversification strategy.

The Intelenet acquisition, completed in H1, has brought Serco an established client base in banking and financial services, travel and telecom. It also enhances Serco's presence in healthcare and government sector. Geographically, Intelenet gives Serco a good presence for India's domestic market as well as locations to serve its AMEAA business e.g. a new 150 seat service center in Dubai focused on financial services.

•                Solera Holdings Announce Fiscal Year 2011 Revenues Up 8% To $685m

Aug 24, 2011 | Financial Results by Charles Juniper
industry: Property & Casualty

Solera Holdings Inc. has announced FY 2011 revenues, for the period ending June 30, 2011, of $684.7m, up 8.4% (8.1% at CC, 5.8% organic growth) year-over-year.

FY 2011 EBIT was $193.5m, giving an EBIT margin of 28.3%.

FY 2011 revenue (and yoy growth) by region was:

• EMEA $390.5m (+8.6%, +8.9% at CC, +6.1% organic growth)
• Americas 294.2m (+8.3%, +7.0% at CC)

Fiscal year 2011 revenue (and yoy growth) by client category was:

• Insurance company clients $275.1m (+9.6%, +8.8% at CC)
• Collision repair facilities $243.6 (+8.0%, +7.8% at CC)
• Independent assessors $71.0m (+6.6%, 7.8% at CC)
• Automotive recycling $95.0m (+7.6%, +6.9% at CC)

Initial guidance for FY 2012 is:

• Revenues in range $822m to $832m
• Adjusted net income in the range $204m to $208m

Analyst comments:

Overall, these are a strong set of results from Solera but market volatility is impacting performance within some units. Solera has identified six regions which it classifies as 'challenged' including Spain, the Audatex unit (web-based claims platforms) in the U.K., and Romania. Underperformance in these regions is attributed to depressed car sales, high fuel prices and mild weather.

Solera also identifies seven units which have seen acceleration in business - these include Germany (where car sales have increased and fuel prices fallen), Brazil, the HPI unit in the U.K. (vehicle information databases) and Russia.

Solera is placing a strong focus on emerging markets where car ownership is expected to increase dramatically over the next five years and has an accident frequency double that of the mature insurance markets. The Russian business returned very strong growth in FY 2011. Solera set up operations in China during the year and while revenues are currently negligible, management expects to see significant growth in FY 2012. India has underperformed this year, but renewing growth in the region is a priority in FY 2012.

•                Accenture Completes Acquisition of Duck Creek Technologies

Aug 23, 2011 | Mergers and Acquisitions by Rachael Stormonth
industry: Property & Casualty

Accenture has completed its acquisition of Duck Creek Technologies (DCT), a privately held property & casualty (P&C) policy administration software specialist headquartered in Bolivar, Missouri. The intended acquisition was announced on July 14 (see separate article).

DCT will become part of Accenture's software business: ~370 employees, mostly based in the U.S. with a few in the U.K., are joining Accenture.

Analyst comments:

The addition of DCT's software products (which cover policy administration, rating & rules, and sales automation) will enhance Accenture's P&C software portfolio, particularly in the small/mid-size P&C insurer sector. Accenture's current P&C software offering is biased towards larger tier 1 carriers and the cost of the significant SI element required for most implementations has been an inhibitor for many smaller insurers.

Accenture has no significant P&C BPO presence in the U.S. (its BPO business is centered on EMEA). The DCT suite could provide the core processing infrastructure for a renewed BPO offering aimed at tier 2/3 insurers in the U.S and internationally, DCT's existing client base providing a good source of potential early adopters.

This tuck-in acquisition is part of a general drive by Accenture to expand its BPO portfolio in the middle office, reducing the bias towards the back office: Accenture also announced this week its intended acquisition of Zenta, which will bring in loan processing capabilities for the North American market.

(NelsonHall has just published a 110 p Key Vendor Assessment on Accenture: for details of the program, please contact paul.connolly@nelson-hall.com