NelsonHall Industry Insight: January 9, 2012

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

Accenture Awarded SAP Application Management Contract by Shell

Jan 04, 2012 | Contracts by Rachael Stormonth
industry: Energy

Shell has announced that in July 2011 it was awarded a multi-year SAP HR and payroll application management services contract by Shell. Shell recently completed the transition of these activities to Accenture.

Services that Accenture is providing to Shell include:

• Application maintenance
• Application support, including incident resolution and user access management, application operations & monitoring, service desk support
• Design, develop, test and implementation of enhancements.

The client's SAP-based HR and payroll systems are used by 90,000 people in 60 countries. Service delivery is from Accenture GDN centers in India and the Philippines.

Analyst comments:

Accenture has had a close relationship with Shell since the mid-1990s, supporting Shell in a range of outsourcing, technology and consulting projects across its businesses. These services have included support for a global SAP ERP roll out. Shell also has application management contracts with IBM, Logica and Wipro.

In February 2010, Shell announced a program targeting £1.9bn in cost savings through standardization, simplification and offshoring.

However, the company continues to prefer its own shared services for its back office operations. Shell's Business Services organization operates six SSCs in Cape Town, Chennai, Glasgow, Krakow, Kuala Lumpur and Manila that provide finance, HR, IT, and other business services to Shell companies globally.

IBM Software Acquires Green Hat to Reinforce Systems Integration Testing Functionality

Jan 04, 2012 | Mergers and Acquisitions by Dominique Raviart

IBM has acquired Green Hat, a U.K. ISV with dual presence in London and Wilmington (Delaware) specializing in software testing solutions.

Green Hat solutions enable fast provisioning of virtual testing environments. It also allows users to proceed to systems integration testing through the simulation of other applications and software e.g. SAP and Siebel running on different IT infrastructures.

IBM is to integrate Green Hat within its Rational Software business. The company is to offer services around Green Hat software through its GBS AMS line of business.

Green Hat was already a partner of IBM's Rational Quality Management Platform, which also includes Worksoft, smartesting, DeviceAnywhre, iTKO-LISA, Spirent and Sogeti.

Analyst comments:

In June 2010, CA Technologies acquired a competitor of Green Hat, ITKO, for $330m in cash. ITKO, which is known for its Lisa product had revenues of ~$39m in fiscal 2011 (ending March 31, 2011), was "highly profitable". The company had 120 employees and 125 clients. This compares to the estimated 45 headcount and the 80 clients of Green Hat.

The IBM Green Hat acquisition expands the company's software testing offering from test execution and project management to test support offerings e.g. provisioning of test environments, of test data.

T-Systems Announces 80% of SAP Business is Sourced from the Cloud

Dec 28, 2011 | Contracts by Dominique Raviart

T-Systems has announced that 80% of its SAP business is hosted in the cloud. Revenues from cloud clients "range in the double-digit million euro range".

Clients of T-Systems include

• Brazilian insurer Intermedica, which sources 60% of its ICT from T-Systems datacenter
• PRISA group, the Spain-based media group; for which T-Systems operates the IT platform and provides its online presence, hotline for Internet users and PRISA personnel
• Consol Africa: an Africa-based glass producer uses SAP cloud services, for computing and storage service
• Jet Aviation, a Swiss aviation logistic and aircraft maintenance clients, for which T-Systems provide SAP cloud services. The client has recently renewed its contract, "several years ahead of time"
• Correos, Spain's national post service, for which T-Systems is operating and modernizing existing SAP applications and consolidating IT systems. The client has recently signed the 4-year €41m contract.

Analyst comments:

SAP's SAP Dynamic offering is essentially a private cloud offering.

The 80% number asserted by T-Systems refers to SAPS, a SAP-specific unit for measuring number of performance of a system configuration in a SAP environment. It based on the Sales and Distribution module benchmark, where 100 SAPS is defined as 2,000 fully business processed order line items per hour.

T-Systems is the IT services vendor that has been marketed its SAP private cloud offering. The company has highlighted several times that the offering has been instrumental in securing recent major ITO contract e.g. Philips in the Netherlands, Continental in Germany.

(NelsonHall is to publish an updated Key Vendor Assessment of T-Systems in early January).

CSC Announces Negotiations on NHS IT Program MoU Still Going On. Withdraws Fiscal 2011 Guidance

Dec 27, 2011 | Contracts by Dominique Raviart
industry: Healthcare Providers

CSC has released an 8-k filing about progress on its MoU for the U.K. NHS contract. The company has been informed that neither the MoU nor recent suggestions for its contract amendment would be approved by the government. CSC expects further discussions related to reductions in scope and contract value to occur in January 2012. The company highlights that the value and scope are "materially" different from those in offered the MoU by CSC in May 2011.

As a result, CSC is:

• To recognize during fiscal Q3 2012 a "material impairment" on its net investment in the contract. The company is unable to provide an estimate of the impairment value at this point, but it indicates that the charge could be as high as its net investment in the contract to date (November 30, 2011: ~£943m or ~1.5bn). Furthermore, additional costs could be incurred depending on the nature of the amendment (presumably including those related to headcount reductions and write-downs related to iSoft), and these could also be "material"
• To withdraw its fiscal 2012 guidance. CSC will provide updated guidance for FY 2012 with its fiscal Q3 results in February.

Previously, CSC had announced in:

• May 2011: that it had "substantially" completed negotiations of a MoU in reduction of scope and value
• September 2011: the U.K. government confirmed it would continue to work with exiting suppliers including CSC for the NHS Trusts
• November 2011: that it was still engaged in further discussion regarding the MoU, which include a contract amendment for value and scope change different from those from the MoU.

The previous guidance, which was announced with its fiscal Q2 2011 results, was:

• Revenues of $16.5bn to $16.7bn (previously $16.5bn to $17.0bn). The lowered guidance is related to NPS and the NHS
• Bookings of $17bn (unchanged)
• Operating margin of ~6%, excluding the claims settlement and the U.S. contract goodwill impairment charge (previously 7.0% to 7.5% including the impact of iSOFT)
• Operating margin of 4.5% including the claims settlement and the goodwill impairment charge
• FCF >90% of net income, excluding the goodwill impairment charge.

Analyst comments:

CSC has a market cap of $3.7bn for revenues of $16bn. The share value was down 9% on December 27.

The guidance withdrawal is not a surprise: conversations with the U.K. government about a MoU have been going for over a year now and the NHS contract is being referred to in Parliament for political purposes.

The profitability of the contract and of CSC overall depend on the value reduction agreed.

• In November, CSC had based its previous guidance of CSC on a TCV of £2.1bn (versus £2.9bn initially) with a contract extension expected to June 2017. The indications are now of a vastly reduced scope or even of termination
• CSC had stressed it still would make a profit on the contract. This is now looking highly unlikely.

What comes as a surprise is that CSC is no longer mentioning it is entitled to significant termination fees should the NHS decide to terminate the contract. Under the terms of the contract, CSC would receive at least £430m (~$680m) in fees (as of September 2011), plus 12 months of revenues.

• Given that the NHS represents ~3% of CSC revenues, 12 months of revenues amount to ~$500m
• In total, CSC could receive over $1.2bn in termination fees. This is to be compared with the $1.5bn net investment made by the company, but is a figure that can be seized on and used for political purposes.

Today's news comes after a goodwill impairment charge of $2,685m recorded by CSC in its fiscal Q2 2012. Fiscal 2012 is turning out to be an 'annus horribilis' for CSC: hopefully, the uncertainty about the NHS contract will be removed before a new CEO is appointed.

(NelsonHall published a 102 page Key Vendor Assessment in CSC in December 2011: this will be updated when there is any news of a MoU).

G4S Awarded £200m Multi-Tower BPO Contract by Lincolnshire Police

Dec 21, 2011 | Contracts by Sarah Burnett
industry: Local Government

G4S has been awarded a 10-year £200m contract by Lincolnshire Police to deliver industry specific and back-office services as part of the Police force's Business Transformation Project.

Services to be provided by G4S Police Support Services for Lincolnshire Police include:

• Management of its:
  - Custody & ID Unit (excludes custody sergeant role)
  - Force Control Room (excludes inspector role)
  - Town Enquiry officers
  - Crime Management Bureau
  - Central Ticket Office and Collisions Unit
  - Criminal Justice Unit
  - Firearms Licensing (excluding manager and initially licensing officers)
  - Resource Management Unit
• Business support services:
  - HR Services (excluding Occupational Health Unit)
  - HR Learning & Development
  - Assets and Facilities Management (including Fleet Management)
  - Finance & Procurement
  - Support Services
  - ICT.

G4S will also design and build two new custody suites to be staffed by G4S custody detention officers.

The contract is expected to start in April 2012 and is to deliver £28m in savings over its lifetime. Around 500, or ~45%, of the police authority's staff will transfer to G4S.

Analyst comments:

G4S beat 12 other bidders to win this contract, including a partnership between Steria and Reliance that had made it to the final shortlist alongside G4S.

This is the biggest multi-process outsourcing contract ever let by a British police authority. Steria's contract with Cleveland Police awarded in 2010 was for £175m over 10 years which saw ~475 civilian staff transfer to Steria.

While G4S is generally known for its security services, and offender and facilities management, it is not well known for back office BPO. The contract extends G4S' portfolio into back-office services, demand for which in the U.K. public sector is on the increase as more public agencies look to outsource services to save costs.

Lincolnshire Police hopes that in time it can turn its centers of operations into service hubs for sharing services with other police authorities.

G4S' win is a blow for Steria which has ambitions to deliver shared services to Police forces in the U.K. based on its multi-tower BPO contract with Cleveland police. Steria has relationships with over half of the police authorities in the U.K. for its 'Storm' command & control system.

Infosys to Acquire Portland Group to Enhance Procurement BPO Capabilities

Dec 21, 2011 | Mergers and Acquisitions by Rachael Stormonth

Infosys BPO is to acquire Australia-based Portland Group Pty Ltd, a provider of strategic sourcing and category management services. The acquisition is expected to be completed by early January 2012.

Portland Group, founded in 1999, is headquartered in Sydney and has offices in Melbourne, Brisbane, and Perth. The company reported revenue of AUD 31.3m for the fiscal year ending 30 June 2011 and has 113 employees.

Analyst comments:

This acquisition will greatly enhance Infosys' procurement BPO capabilities, bringing in key sourcing and category management capabilities to service BPO clients, such as Rio Tinto, that are based in Australia. Infosys may ultimately acquire similar capabilities in other regions.

Unless they are already managing billions of dollars of spend across a wide range of categories and across geographies, vendors with an IT services background that wish to offer end-to-end procurement BPO capabilities typically need to acquire front-end sourcing and category management capabilities, as these are extremely difficult to grow organically.