NelsonHall Industry Insight: November 28, 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

HP Awarded $150m IT Infrastructure Management Contract by Maersk Line

Nov 23, 2011 | Contracts by Jamie Snowdon
industry: Distribution

HP has been awarded a $150m, 5 year IT infrastructure management services contract by Danish shipping company Maersk Line.

Services to be provided by HP include:

• Data center management: HP will be creating a private cloud computing environment for the data center components
• Desktop services
• Helpdesk services. HP will manage all of Maersk's computing devices including PC's for 38,000 users in 100 countries.

As part of the agreement HP will offer employment to Maersk staff in roles covered by this agreement.

Analyst comments:

This is a significant win for HP given the long and close relationship IBM has had with Maersk over the past 10 years. Back in 2004 IBM acquired Maersk's IT subsidiary Maersk Data, gaining nearly 3,000 employees.

Xerox Awarded 7-Year Managed Print Services Contract by UCLH

Nov 23, 2011 | Contracts by Rachael Stormonth
industry: Healthcare Providers

Xerox has been awarded a 7-year managed print services contract by U.K's University College London Hospitals NHS Foundation Trust (UCLH). UCLH, which has ~7,000 clinical, research and teaching staff working across six hospitals, an international education and research center, and numerous administrative buildings, is looking to save >£1.2m on its office printing costs.

Services to be provided by Xerox include

• Replacement of ~3,000 printers and >100 copiers and fax m/cs with 300 networked MFDs and 1,100 printers. UCLH is consolidating from 53 print vendors to Xerox as sole supplier
• Providing the Trust with data on devices, document printing and associated costs, across its entire campus. The Trust will be able to fix device faults remotely, replace consumables before they run out and recharge printing costs internally to departments for the first time
• A mobile print service across the Trust's campus.

These services form part of a wider outsource by UCLH, which has outsourced IT infrastructure and application management services to Logica: the Xerox MPS is being integrated onto the broader IT service being provided by Logica.

Analyst comments:

Xerox in Europe has been seeing strong interest in its Enterprise Print Services offering. We expect to see MPS awards such as this being increasingly folded within outsourced IT infrastructure management arrangements.

Today's news follows the announcement last week of a 5-year document management BPO contract with British Airways which includes EPS (see separate article).

Atos Worldline Partners With Travelex to Provide Dynamic Currency Conversion Capabilities at Atos Owned ATMs

Nov 22, 2011 | New Partnerships by Andy Efstathiou
industry: Retail Banks

Atos Worldline has signed a 5-year partnership agreement with Travelex to provide consumers with dynamic currency conversion capabilities at Atos owned ATMs in Europe. Atos Worldline owns 72,000 ATMs in Europe.

Travelex will deploy its solution for dynamic currency conversion (allowing consumers to select to pay in any currency today at a determined rate) on the Atos ATM network. Implementation is expected to begin in 2012. The Travelex solution, Currency Select, has been deployed in most major markets around the world.

The partnership will allow transactions for both card present and card not present transactions. Merchants will also be able to use the system.

Analyst comments:

Travelex has provided dynamic currency conversion services, Currency Select, since 2007. It entered the Australian, U.S., and United Arab Emirates in 2007, Japan in 2009 and other countries since then. First Data, TSYS, Mastercard, Visa, and many major card issuing banks offer these conversion services.

Internationally travelers have come to expect dynamic currency conversion to be available locally. However, adoption of these services varies widely by country and vendor. This partnership will allow Worldline's native markets (Benelux, Germany, and France), and its distribution network (ATMs) to deliver foreign exchange services that their customers expect as market standard services.

BAE Systems Will Not Renew HR BPO Contract With Xchanging

Nov 22, 2011 | Contracts by Charles Juniper
industry: Aerospace

BAE Systems has informed Xchanging that it will not renew the existing HR outsourcing contract when it expires at the end of 2102. The contract is valued at ~£18m per year at 5% margin.

The HR relationship was supported through Xchanging HR Services (XHRS) and was the first example of an Enterprise Partnership (EP) established in 2001. Xchanging subsequently acquired BAE's 50% stake in the EP in January 2007

Analyst comments:

While this will obviously have an impact on revenues for Xchanging, it was not unexpected. This is Xchanging's only significant multi-process HR contract and so effectively marks its exit from the market. Since the beginning of the year Xchanging has been undertaking some radical but necessary restructuring. Xchanging has unwound most of its existing EP structures, disposed of most of its unprofitable businesses, cut management numbers and is focusing on leveraging the areas where it has developed unique capabilities such as The London Insurance Market and the London Metal Exchange. At a recent analyst meeting where Xchanging outlined its offerings, HR was conspicuous by its absence.

Within single-process HRO, Xchanging still has some active payroll BPO contracts which NelsonHall estimates generates $13m per year of revenue. This is not a core capability for Xchanging, and it is possible that the company may ultimately look to deliver these services to those clients to whom it is providing other services through partners.

While this cancellation may raise some concerns about the U.K. procurement contract with BAE due to expire in 2012, the overall relationship appears strong with Xchanging securing a new procurement contract for BAE's U.S. operations and a contract renewal in Australia, both within the last 9 months and with a combined TCV of nearly $200m. Overall, Xchanging's Procurement Services is in much stronger shape than it was in 2010.

(NelsonHall will be writing about the new BAE HR partnership shortly.)

CSC Awarded $160m-a-Year IT Outsourcing Contract Renewal by BAE Systems

Nov 22, 2011 | Contracts by Dominique Raviart
industry: Aerospace

CSC has been awarded a five-year IT outsourcing contract renewal by BAE Systems. The contract has a value of up to $160m per year.

Services that CSC will continue to provide include:

• Service desk
• Collaboration
• End-user computing
• Mainframe management
• Management of physical and virtual servers
• Storage
• Network services
• Systems integration
• Application maintenance and support.

The geographical scope of the contract includes the eleven BAE Systems business units in the U.K., Saudi Arabia, and Sweden.

The contract, signed during CSC's fiscal Q3 (ending December 31, 2011), replaces an agreement due to expire in April 2012, and is the third contract renewal by BAE. CSC started servicing BAE Systems in April 1994, originally through a 10-year IT outsourcing contract in the U.K.

Analyst comments:

BAE Systems is one of CSC's key clients in the U.K. commercial sector, together with the Royal Mail group. This renewal was therefore very important for CSC U.K.

However, the value of the contract has decreased significantly from $1.9bn in the previous 5-year agreement to a maximum of $0.8bn in this new one. While one might expect reductions of up to 30% in large scale ITO contract renewals such as this, the TCV has declined by nearly 60%. Significantly, its geographical scope has reduced and no longer includes the following significant BAE Systems markets:

• The U.S. (43% of BAE revenues, with 52,000 employees in the U.S. entity). BAE initially looked to CSC to help it develop its defence sector business in the U.S.
• Australia (6,000 employees)
• India.

CSC was not available to comment this week on whether separate awards are pending in these geographies.

The original CSC/BAE Systems relationship had the hallmarks of an old-style 90s deal: monolithic and with adherence to rigid contractual terms and pricing structures. IT outsourcing contracts awarded today expect far more commercial flexibility from the service providers.

Last year, CSC renewed its IT outsourcing contract with missile manufacturer MBDA (U.K. and France) with a 4.5-year contract (~$85m NelsonHall estimated value). MBDA is jointly owned by BAE Systems (37.5%), EADS (37.5%) and Finmeccanica (25%).

HP Services Announces Fiscal Q4 2011 Revenues Up 1.7% to $9.2bn

Nov 22, 2011 | Financial Results by Jamie Snowdon

HP Services has announced fiscal Q4 2011 revenues, for the period ending October 31, 2011, of $9,281m, up 1.7% YoY.

Fiscal Q4 2011 revenue (and YoY revenue growth) by service type was

• IT Outsourcing services $3,886m (+0.9%)
• Technology services $2,810m (+2.8%)
• Application services $1,798m (+2.0%)
• BPO $683m (-1.7%)
• Other $104m.

IT outsourcing now contributes 42% of HP ES business, Application Services 19%, and BPO 7%.

Operating income (excluding corporate costs) was $1,188m, a margin of 12.8%, down from a 16.5% margin in Q4 FY 2010

FY 2011 revenue was $26,673m, up 1.0% YoY. Revenue (and revenue growth) by service type was

• IT Outsourcing services $15,189m (+1.7%)
• Technology services $10,879m (+2.4%)
• Application services $6,852m (+0.9%)
• BPO $2,672m (-7.0%)
• Other $362m.

For HP Group overall, fiscal Q4 2011 revenue breakdown by region was

• The Americas $14.6bn, down 3% YoY, down 4% in CC
• EMEA $11.7bn, down 6% flat YoY, down 10% in CC
• Asia Pacific $6.0bn, up 3% YoY, up 4% in CC
  - BRIC countries generated revenue of $3.8bn, up 9% YoY, contributing 12% of total HP revenue

Analyst comments:

Fiscal 2011 was a difficult year for HP and HP ES; as anticipated Q4 results did not bring any respite.

Looking at performance by service line:

• After stronger growth in Q3 (5.2% and 5.5% y-o-y), growth in ITO and TS fell back to Q2 levels, although TS consulting saw double digit growth in the quarter. Although many of HP's competitors experienced a levelling in growth from Q2 to Q3 2011 albeit from a higher base. With IBM, Infosys and Wipro all experiencing slight drops in revenue growth during this period
• BPO revenue has started to level out
• AS growth remained steady.

This level of performance is likely to continue for at least the next three quarters as HP makes the investments necessary to start winning more deals and positioning itself in higher growth and higher value services. HP management reiterated the historic under-investment in services and the ongoing commitment to invest in more sales capacity and additional service capabilities even at the expense of higher OpEx spend in the short term. Management emphasizes that the turnaround in the services business is going to take years rather than quarters and services margin is likely to face additional pressure in FY 2012.

Part of the investment plan is likely to include M&A, but not at the level of the recent Autonomy deal. HP states it is likely to make two to three acquisitions, probably around the $500m mark, and to fill holes in software capabilities or to gain truly disruptive technology. But the main focus for HP innovation will be leveraging internal R&D to develop its own technologies where possible.

SXC Acquires HealthTrans for $250m to Build Scale in PBM Sector

Nov 21, 2011 | Mergers and Acquisitions by Charles Juniper
industry: Healthcare Providers

SXC Health Solutions has reached a definitive agreement to acquire HealthTrans for $250m.

HealthTrans provides PBM and healthcare-focused IT services to 260 clients in Colorado, Florida, Georgia and Illinois including MCOs, PBM, workers compensation plans, speciality programs, medical TPAs and government sponsored plans. HealthTrans is privately owned, employs 250 staff and generated revenue of $270m and $20m in adjusted EBIT in its last fiscal year.

Analyst comments:

While this is SXC's most significant acquisition for some time, it is a continuation of the company's strategy of acquiring middle-market PBM providers that use the SXC platform to drive scale and ease integration. SXC's other recent PBM acquisitions include MedFusionRx ($100m, December 2010), MedMetrics (April 2011) and PTRx ($77m, October 2011)

SXC expects annual cost saving of $10-15m to be achieved within 12 to 18 months following completion of the transaction, expected to close in Q1 2012. The saving will come from infrastructure consolidation, operating saving and increased scale.