NelsonHall Industry Insight: June 27, 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.

 

Accenture Announces Fiscal Q3 2011 Revenue Up 20.6% to $6,720m

Jun 24, 2011 | Financial Results by Rachael Stormonth

Accenture has announced fiscal Q3 2011 revenues, for the period ending 31 May 2011, of $6,720m, up 20.6% year-over-year, up 15% in constant currency.

Fiscal Q3 2011 operating income was $949m, a margin of 14.1%, compared with a margin of 14.4% in fiscal Q3 2010.

Fiscal Q3 2011 revenue (with actual and constant currency revenue growth) by service line was:

• o Consulting and systems integration $3,966m (+23%) (+17% in CC)
• o Outsourcing $2,754m (+17%) (+12% CC).

Fiscal Q3 2011 revenue (and revenue growth) by industry sector was:

• o Products $1,575m (+20%) (+14% CC)
• o Communications & High-Tech $1,443m (+22%) (+16% CC)
• o Financial services $1,441m (+25%) (+19% CC)
• o Resources $1,284m (+28%) (+22% CC)
• o Health & Public service $971m (+5%) (+3%CC)
• o Other $5m.

Fiscal Q3 2011 revenues (and revenue growth) by geography was:

• o EMEA $2,935m (+21%) (+13% CC)
• o Americas $2,921m (+16%) (+14% CC)
• o Asia Pacific $865m (+38%) (+25% CC).

Fiscal Q3 21011 new bookings were $7.1bn, and reflect a positive 6% foreign-currency impact compared with new bookings in the prior year quarter. Fiscal Q3 2011 bookings by service type were:

• o Consulting $3.7bn
• o Outsourcing $3.4bn.

Utilization for quarter was 85%, down from 88% in fiscal Q3 2010. Attrition for the quarter was 15%, compared with 17% in fiscal Q3 2010.

The company ended the quarter with a global headcount of >223,000, with 130k employees, or 58% of the workforce, in low cost regions, and it has also increased its hiring target this year from 64k to 66k.. Utilization in the quarter was 85%. Attrition, which excludes involuntary terminations, was 15% compared with 14% in fiscal Q2.

Revenue for the first nine months of fiscal 2011 was $18,819m, up 17%, up 16% in CC.

Fiscal 2011 nine months year-to-date revenue (and revenue growth) by service line was:

• o Consulting and systems integration $11,043mm (+19%) (+18% in CC)
• o Outsourcing $7,776m (+13%) (+13% in CC).

Fiscal 2011 nine months year-to-date revenue (and revenue growth) by industry sector was:

• o Communications & high-tech $4,002m +167%) (+15% in CC)
• o Financial services $4,008m (+20%) (+20% in CC)
• o Health & Public service $2,867m (+5%) (+5% in CC)
• o Products $4,345m (+17%) (+16% in CC)
• o Resources $3,583m (+24%) (+21% in CC)
• o Other $123m.

Fiscal 2011 nine months year-to-date revenue (and revenue growth) by geography was:

• o Americas $8,230m (+18%) (+17% in CC)
• o EMEA $8,164m (+11%) (+12% in CC)
• o Asia Pacific $2,426m (+34%) (+23% in CC).

Fiscal 2011 nine months year-to-date operating margin was 13.5%, compared with 13.6% in the prior year period.

Accenture has provided revenue guidance:

• o For fiscal Q4 2011 in the range of $6.4bn to $6.6bn, or local currency growth of 10% to 14%. This assumes a positive 3% forex impact compared with fiscal Q4 2010.
• o For full FY 2011, of 14% to 15% growth in local currency, revised upwards from previous guidance of 11% to 14% in local currency
• o The preliminary guidance for FY 2012 provided in April, of revenue growth of 7% to 10% in local currency, remains at this point.

Accenture reaffirms prior guidance of operating margin for FY 2011 of 13.6% to 13.7%.

Guidance for new bookings for the year is now at the upper end of previous guidance of $25bn to $28bn.

Analyst comments:

This is an extremely strong quarter's results. Revenue was above prior guidance of $6.3bn to $6.5bn, which, adjusting for exchange rates, was $120m higher than the top end of the guided range provided in March. This was partly driven by Japan results that were better than expected.

This was a quarter where Accenture made a number of records:

• § Its highest ever quarterly revenue, with broad-based demand across industries (each of the 5 Operating Groups reaching a quarterly high), growth platforms and geographies (though even Accenture has yet to see a recovery in the Netherlands). Revenue growth was assisted by some bookings converting to revenue a little faster than it had expected
• § EPS of $0.93 was also a quarterly record
• § The new bookings were Accenture's highest in 11 quarters. They include the mega deal with Nokia announced this week Consulting bookings, at $3.7bn, are very slightly down from the $3.8bn achieved last quarter, but this was expected and it are expected to tick back up next quarter..

Management commented on the nature of demand by service line and Operating Group. Looking at demand in consulting:

• § In Management Consulting, clients are looking for help to target and action opportunities to deliver value in their operations, reduce costs, grow their top line, implement improved compliance and risk management and integrate operations they acquire
• § In Technology Consulting Accenture is seeing demand to help clients to rationalize their infrastructures and build IT strategies for transformation & streamlining of their global operations
• § System Integration bookings continue to reflect strong demand for ERP, particularly to support global expansion, also Accenture saw an uptick in bookings for application modernization. Client demand is increasing around web development and new technologies to support mobile solutions, also for SaaS, in functions such as sales management.

Looking at demand in outsourcing

• § In Technology Outsourcing, clients continue to focus on reducing costs of legacy systems and there is more work in enhancements and add-on work. Some clients are now integrating newer mobile technologies and upgrading their networks and data centers
• § BPO bookings in Q3 reflect continued demand for F&A and procurement, and for industry-specific services, particularly in health.

Looking at demand by Operating Group:

• § Resources: revenue growth was dominated by significant growth in Consulting, led by demand for ERP programs. Outsourcing revenues continue to be driven by demand for operational effectiveness
• § Financial Services: strong revenue growth in both Consulting and Outsourcing, with continuing demand for replacing core systems and also for post-merger integrations, operational effectiveness, risk, and global operating models
• § Comms & High Tech: consulting activities driven by a focus on operational improvements, improving customer service and supporting new products and services through provisioning platforms; Outsourcing a continued focus on improving operations in supply chain procurement and finance
• § Products: well-balanced revenue growth across the Products' industries in consulting around ERP and infrastructure
• § Health & Public Services: revenue growth in health, including connected health and EMRs, was offset by Public Service revenue decline due to budget pressure and economic uncertainty, particularly in U.S. state and local (Accenture saw 'modest growth' in U.S. federal) and some countries in EMEA and the Americas. Accenture is repositioning its Public Service business to focus on three areas of opportunity: human services, especially around welfare benefits and pension; finance and HR operations; activities around border protection.

Accenture highlights that its 10 priority emerging geographies (BRIC, South Korea, Mexico, Turkey, Middle East, South Africa), which contribute ~$3bn in revenue together grew at a significantly higher rate in the quarter than Accenture overall. Accenture is targeting revenues of ~$6bn from these emerging geographies by 2015.

Accenture is clearly benefiting from

• § Its positioning as a 'transformation partner' based on its ability to assist large enterprise clients on their globalization agenda, including initiatives focused on integrating acquisitions, improving their operational efficiency in order to compete against the new world, complying with new regulations, etc. As well as ERP implementations, Accenture is seeing projects which have mobility or analytics at their core
• § Its strong industry domain capabilities, including around regulatory compliance
• § Being hardware independent, making it a provider of choice for front-end advisory services around Cloud, plus having taken an early dominance in implementing SaaS solutions
• § Its investment in areas such as analytics: during the quarter the company expanded its network of analytics innovation centers, opening centers in Dublin and Barcelona to develop assets and solutions. These centers join existing centers in Milan, Delhi and Mumbai.

During the quarter, even though the stock traded at an all-time high at $58.21, Accenture repurchased $644m worth of stock at an average price of $56.50, a clear sign of confidence.

This quarter may turn out to be Accenture's strongest for a while: management commented on ongoing volatility and uncertainty in the macroeconomic environment and its preliminary guidance for FY 2012 suggests it anticipates a deceleration in revenue growth.

The company has a cash balance of $5.3bn and continues to look for tactical tuck-in acquisitions.

•                Capgemini Acquires Praxis Technology in China to Enhance Local Energy Sector Capabilities

Jun 24, 2011 | Mergers and Acquisitions by Dominique Raviart
industry: Energy

Capgemini is to acquire Praxis Technology, a Chinese IT services vendor with a headcount of 110 and revenues of €5.4m.

Praxis services the local energy market: clients include China National Petroleum Corporation (CNPC), China Guangdong Nuclear Power Corporation (CGNPC), China Southern Grid, China Datang Corporation and Shenzhen Energy Group Co.

Services offered by Praxis Technology include business management consulting, ERP (SAP) services and development. The company has developed industry-based SAP templates and is one of the founding members of the Electric Power Industry Solution Center of SAP China Research Institute. Praxis Technology is based in China.

Capgemini has 1,800 personnel in China (of whom half are providing BPO offshore services) with a headquarters in Beijing and offices in Guangzhou, Shenzhen and Hong Kong. It provides BPO services from Guangzhou and Kong Kong and has a shared service center in the Jiangsu province. Capgemini is providing IT services to utilities and manufacturing sector clients in the country.

Analyst comments:

The acquisition expands of Capgemini's energy and smart meter activities and its SAP services capabilities to China. Capgemini has been clear about its intention to develop in Smart Energy Services, one of its fast-growth Top Line Initiatives, in the country. The Chinese government is expected to invest ~$7.3bn in energy sector initiatives over the next few years. Other non-domestic IT services vendors pursuing opportunities include IBM, who set up an E&U solutions Lab in Beijing in 2010, with a reported investment of $40m.

SAP is making a major push in China, both to support multi-national manufacturers expanding in the country, and to target the domestic market through localized offerings and partnerships.

In many aspects, this acquisition is similar of Atos Origin's 2009 acquisition of Shanghai Covics, a SAP services vendor to the automotive supplier, pharma and high tech verticals. At the time of the purchase, Covics had a headcount of ~100.

The acquisition of Praxis Technology is not the large Chinese acquisition that Capgemini has been hunting, and the company recently acknowledged that, given high valuations of IT companies in China, it would probably have to buy small to mid-sized vendors, going up to the $200-300m range. There are very few Chinese IT services firms that have the scale of ChinaSoft (10k headcount) or hiSoft (4.5k headcount): most have just a few hundred employees.

Capgemini is on a buying spree, with ~10 acquisitions in the last 12 months, and only last week announced its imminent acquisition of Prosodie in France. The company is looking to acquire in other emerging regions, including in Mexico and Turkey.

(Following a recent analyst and advisor meet, NelsonHall will soon be publishing an updated Key Vendor Assessment on Capgemini which includes an outline of the company's strategic objectives and strategy for inorganic growth).

•                NorthgateArinso Awarded 7-Year Multi-Process HR Outsourcing Renewal by Fifth Third Bank

Jun 22, 2011 | Contracts by Amy Gurchensky
industry: Banking

NorthgateArinso has been awarded a 7 year multi-process HR outsourcing renewal and expansion by Fifth Third Bank.

NGA will be implementing its euHReka platform in addition to continue delivering the following HRO services:

• § Payroll administration and processing
• § Time and attendance management
• § Benefits administration
• § Compensation administration
• § Performance management support
• § RPO including recruiting, specialized staffing, and technology
• § ESS/MSS.

Analyst comments:

In March 2010, NGA acquired the Convergys HRO business. This contract renewal demonstrates NGA's ability to deliver a high level of satisfaction to a legacy Convergys client, which is key to maintaining and developing the company's presence in the U.S.

Through the contract expansion, Fifth Third is capitalizing on NGA's core competency of technology and systems integration by upgrading its SAP HCM platform to euHReka to streamline the self-service user experience. In NelsonHall's latest "Targeting Multi-Process HR Outsourcing" report, four market segments were identified. This contract is an example of the "technology-led HR service enhancement" segment.

This renewal bodes well for NGA's capabilities to deliver and improve on the services, which will be important as other major legacy Convergys clients like DuPont and Johnson & Johnson come for renewal in the future.

•                Transcom Restructures Delivery Amidst Reducing Volumes

Jun 22, 2011 | New Offerings by Thomas Whittle

Transcom has announced an amended outlook for 2012 and a restructuring plan to be executed in H2 2011.

Transcom has suffered sharp volume decreases since 2008, and despite divestments including large French centers in Tulle and Roanne, the company still has overcapacity. This is reflected in profit margins of between €0.5m - €0.7m for Q2 2011 on revenues of ~€135m.

Total cost for the restructure will be €32.8m with the objectives being:

• § Annualized gross savings of approximately €10 to €12m when the restructuring and operational improvement plans are fully implemented
• § A reduction of available seats by approximately 10% (2,400).

Analyst comments:

The main thrust of the restructuring is center closures and geographic consolidation; Transcom will close four sites in Canada and consolidate other sites in the North America & Asia Pacific, North, Iberia, South and West & Central regions.

There will thus be a major reduction in North American capacity, where Transcom has suffered from overcapacity since 2008. However considering Transcom operates over half of its centers with fewer than 300 agents, it appears that beyond merely cutting capacity, Transcom is also transitioning the delivery model to larger-scale centers.

•                IBM Launches Social Networking Platform Incorporating Compliance Functionality

Jun 21, 2011 | New Offerings by John Willmott

IBM has launched a social networking platform, IBM Connections, incorporating compliance functionality.

IBM plans to offer compliance functionality within its IBM Connections platform via a partnership with Actiance. IBM is aiming to introduce Actiance Vantage for IBM Connections, which archives and logs social content to help enterprises remain compliant with corporate and government regulations, in Q3 2011. Actiance software is used by nine of the top 10 U.S. banks and approximately1,600 organizations globally for the security, management and compliance of unified communications, Web 2.0 and social media channels.

Additional features within IBM Connections also support:

• § Moderation allowing managers and editors of online content to review materials before they are published
• § Social analytics to help users find experts and the ability to comment or vote on ideas in a community. The Connections Ideation Blog is designed to allow crowdsourcing of ideas across teams and customers.

Analyst comments:

Organizations are making social networks, forums, instant messaging, and blogs available for employees for both internal collaboration within the organization and increasingly for use with partners and customers.

Accordingly as this activity matures, it is becoming increasingly important for organizations to be able to monitor activity and compliance within these new channels and media. These enhancements to the IBM Connections platform are a first step in bringing this level of monitoring and control to organizations at large and not just within specialist environments such as trading firms, giving organizations the opportunity to closely monitor and manage web content, Skype messaging, and BlackBerry SMS.

•                Capita Awarded £100m Vehicle Excise Duty and Continuous Insurance Enforcement Services Contract by DVLA

Jun 20, 2011 | Contracts by Sarah Burnett
industry: Federal/Central Government

Capita has been awarded a £100m 5-year contract with the U.K. Driver and Vehicle Licensing Agency (DVLA) to provide Vehicle Excise Duty (VED) and Continuous Insurance Enforcement (CIE) services nationally. The contract includes a two-year extension option.

Capita will take over from NSL, the incumbent contractor, on November 7, 2011. Around 300 staff are to transfer to Capita.

Services to be provided by Capita Professional Services include:

• § VED and CIE enforcement notifications
• § Immobilization, removal, and storage of vehicles through a network of 23 regional pounds around the country
• § Disposal of unclaimed vehicles.

Since February 2011 it has become illegal to keep a vehicle in Britain with no insurance except where a vehicle is declared offroad. To implement the continuous insurance enforcement (CIE) scheme, DVLA will do a daily comparison of its vehicles database with the motor insurance database managed by the Motor Insurers' Bureau to identify uninsured vehicles and then pass the list of uninsured vehicles to Capita for action.

Analyst comments:

The combination of VED and CIE makes the services to be provided under this contract large in scale. Capita's scale will have helped it win this contract against NSL, the VED services incumbent contractor (who now provides the enforcement services in London as a sub-contractor to London), and Mouchel.

The contract price looks low compared with Capita's former revenue of ~£50m pa from the London Congestion Charging Scheme. Although the scope of services are not the same (for example, Capita does not have to do the database comparisons as the DVLA will provide it with the list of vehicles to take action against) the scale is significant and Capita will have upfront costs of setting up and equipping staff.

Capita states that it intends to equip its enforcement officers with Android mobile phones, satellite navigation and digital pens, invest in route planning and scheduling software and upgrade its vehicle fleet. It will deploy a modified version of the software used by Equita, its enforcement arm