NelsonHall Industry Insight: October 3rd, 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.

Capita Awarded £105m Pensions Administration Contract by U.K. Pensions Regulator

Sep 29, 2011 | Contracts by Amy Gurchensky
industry: Government

Capita has been awarded a £105m pensions administration contract by the U.K.'s Pension Regulator to support its direct communications and transactional processes with employers for automatic enrollment of staff into workplace pension schemes.

Capita's primarily responsibilities for the Pension Regulator include:

• Communicating campaign messages to employers
• Communicating AE duty dates to employers
• Ensuring employers register with the regulator
• Operating a customer contact center
• Some enforcement activities such as administering compliance notices and penalties for non-compliance.

The contract is for 7 years with an option to extend for a further 3 years, beginning in October 2011.

Automatic enrollment (AE) into pension schemes will occur in phases between October 2012 and September 2016, based on employer size with large organizations starting first.

Analyst comments:

The AE requirement of the Pensions Act of 2008 will likely lead to an increase in outsourcing now that the first staging date, for large organizations, is just one year away. The new AE requirements will provide ample opportunities for benefits administration service providers including:

• Identifying eligible employees on an on-going basis
• Providing required communications
• Calculating and deducting appropriate contributions
• Managing opt-outs and opt-ins
• Recordkeeping and report generation.

Capita, who recently announced that it will acquire NorthgateArinso's pension business and its ~64 clients, will be looking to improve its market share in the pensions administration arena by expanding services with existing clients to include AE duties. NelsonHall currently ranks Capita as number 8 in the U.K. benefits administration market in terms of revenue.

Fujitsu Awarded £32.9m 7 year IT Infrastructure Contract by UK Security Firm G4S

Sep 29, 2011 | Contracts by Jamie Snowdon
industry: Business Services

Fujitsu has been awarded a £32.9m (~$50m) 7-year IT infrastructure outsourcing contract by U.K. based security solutions firm G4S. The contract covers three of four G4S business units in the U.K. and Ireland: Cash Solutions UK; Secure Solutions UK; and the Group and UK & Ireland Regional Management teams.

Services to be provided by Fujitsu include:

• Server management, migrating G4S servers to two Fujitsu datacenters
• End-user services including a central helpdesk. Fujitsu will manage a migration to Windows 7 and a Citrix desktop virtualization, in conjunction with AppSense, across ~3,500 desktops and laptops, and 10,500 email clients. Fujitsu will use its cloud-based IaaS architecture to deliver the applications.

Technology transition from the incumbent supplier will commence immediately with anticipated go live date for services of March 1, 2012.

Analyst comments:

Winning G4S, itself an outsourcer of security and other services, including to the government sector, as a client against its incumbent provider is a much needed boost for Fujitsu's reputation for competitiveness in the commercial sector. G4S and Fujitsu share a number of government sector clients.

G4S will also be a useful client reference for cloud services. G4S Group is planning to make further acquisitions, and the cloud-based nature of its infrastructure will support its ability to scale its computing resources.

Accenture Announces Fiscal Q4 2011 Revenue Up 23.4 to $6.69bn

Sep 28, 2011 | Financial Results by Rachael Stormonth

Accenture has announced fiscal Q4 2011 revenues, for the period ending August 31, 2011, of $6,687.7m, up 23.4% year-over-year, and up 15% in constant currency. Accenture's guided range of $6.4bn to $6.6bn net revenue for fiscal Q4 2011 assumed a foreign-exchange positive impact of 8%. Adjusted for the actual foreign-exchange positive impact of 9% in the quarter, the guided range for net revenues would have been $6.45bn to $6.65bn. Net revenue was thus just above this adjusted range.

Fiscal Q4 2011 operating income was $922.5m, a margin of 13.8%, up 60bps from a margin of 13.2% in fiscal Q4 2010.

Fiscal Q4 2011 revenue (with actual and constant currency revenue growth) by service line was:

• Consulting and systems integration $3,881m (+25%) (+16% in CC)
• Outsourcing $2,807m (+21%) (+13% CC).

Fiscal Q4 2011 revenue (and revenue growth) by industry sector was:

• Products $1,586m (+26%) (+16% CC)
• Communications Media & Technology* $1,432m (+23%) (+13% CC)
• Financial services $1,372m (+23%) (+13% CC)
• Resources $1,299m (+28%) (+18% CC)
• Health & Public Service (HPS) $994m (+16%) (+12%CC)
• Other $5m.

(*On Sept. 1, 2011, Accenture changed the name of its Comms & High Tech operating group to Communications, Media & Technology (CMT). The three industries that make up the operating group - Communications, Electronics & High Tech, and Media & Entertainment - remain the same).

Fiscal Q4 2011 revenues (and revenue growth) by geography was:

• Americas $3,041m (+21%) (+18% CC)
• EMEA $2,690m (+22%) (+8% CC)
• Asia Pacific $957m (+39%) (+23% CC).

New bookings in fiscal Q4 2011 were $8.4bn, a record for the company, and reflect a positive 6% foreign-currency impact compared with new bookings in the prior year quarter. Fiscal Q4 2011 bookings by service type were:

• Consulting $4.16bn
• Outsourcing $4.28bn:
  - BPO bookings were the highest in 12 quarters, with growing demand for F&A and Procurement, aided by the acquisition of Ariba's sourcing unit earlier this year, also in industry-specific offerings in Resources, CMT and HPS.

Utilization for the quarter was 85%, the same as in fiscal Q3 2011. Attrition for the quarter was 14%, compared with 17% in fiscal Q4 2010.

Utilization in the quarter was 85%. Attrition for the quarter was 14% compared with 17% for fiscal Q4 2010.

Net revenue for full fiscal year 2011 was $25,507m, up 18%, up 15% in CC. FY 2011 revenue included a positive 3% foreign-exchange impact compared with FY 2010.

FY 2011 revenue (and revenue growth) by service line was:

• Consulting and systems integration $14,924m (+21%) (+17% in CC)
• Outsourcing $10,583m (+15%) (+13% in CC).

FY 2011 revenue (and revenue growth) by industry sector was:

• CMT $5,434m (+18%) (+14% in CC)
• Financial services $5,381m (+21%) (18% in CC)
• HPS $3,861m (+8%) (+7% in CC)
• Products $5,931m (+19%) (+16% in CC)
• Resources $4,882m (+25%) (+21% in CC)
• Other $17m.

FY 2011 revenue (and revenue growth) by geography was:

• Americas $11,271m (+19%) (+17% in CC)
• EMEA $10,854m (+13%) (+11% in CC)
• Asia Pacific $3,383m (+35%) (+23% in CC)

FY 2011 operating income was $3,470m, a margin of 13.6%, compared with the 13.5% margin reported for FY 2010.

New bookings for full FY 2011 were $28.8bn, above prior guidance (approaching $28bn).

FY 2011 new bookings by service type were:

• Consulting $15.4bn (+13%, +10% CC)
• Outsourcing $13.4bn (+18%, +14 CC)

Accenture has provided guidance:

• For fiscal Q1 2012 of revenue in the range of $6.8bn to $7.0bn. This assumes a positive 3% forex impact compared with fiscal Q4 2010.
• For full FY 2011, of:
  - 7% to 10% revenue growth in constant currency
  - An operating margin of 13.7% to 13.9%, an expansion of 10 to 30 bps
  - New bookings in the range of $28bn to $31bn.

Analyst comments:

This was the fourth consecutive quarter of strong (14%+ in CC) revenue growth for Accenture, achieved at the same time as operating margin improvement. Bookings are up and management commented on being "pleased with the pipeline".

• Particularly impressive was the revenue improvement in the Health & Public Service operating group, which has been trailing the other operating groups, particularly in Public Service, where Accenture has been repositioning its portfolio. Revenue growth continues to be driven by the Health segment, including health administration and EMR projects
• The Financial Services operating group, however, had its weakest quarter of YoY CC growth this fiscal year: management commented on keeping "an eye on consulting in Europe ... (where) we have a lot of critical transformational work going on" and that it may see slight cutbacks in some consulting work. The acquisitions of Duck Creek Technologies and of Zenta indicate Accenture's focus on increasing its outsourcing activity in P&C insurance and in mortgage processing.

Underneath the modest yoy improvement in operating margin that Accenture had guided for, sales & marketing expenses as a proportion of revenue were down 60 bps to 12.3%, and G&A costs were down 90 bps to 7.1%: against this, cost of services was up 90 bps to 6.9%.

Accenture secured 10 new bookings worth $100m+ during the quarter, of which presumably the largest by far was the one with Nokia involving the transfer of 2,300 personnel (see separate articles on this contract). Looking ahead, while Accenture expects management consulting growth to moderate a little in FY 2012, the company is well positioned for large-sized applications outsourcing and BPO deals requiring both a global presence and also capabilities to support transformation, whether the client's primary objective is business growth (for example through globalization) or cost streamlining (as in FAO and procurement BPO).

This is the third fiscal year where Americas has reported stronger topline performance than Europe, and the EMEA region has now slipped into second place behind Americas: Brazil in particular is now contributing revenue of over $1bn. (Across all its 10 priority emerging markets, Accenture achieved 30% CC revenue growth in FY 2011, to $3bn).

In spite of increased macroeconomic uncertainties, Accenture management reiterates it is comfortable with the 7% to 10% revenue guidance for FY 2012 that it first provided back in April 2010.

IBM Awarded £50-75m a year Application Services Contract by U.K.'s DWP

Sep 28, 2011 | Contracts by Rachael Stormonth
industry: State/Regional Government

IBM has been awarded a 7-year application services contract valued at £50m to £75m-a-year (~$80m-$120m) by the U.K.'s Department for Work and Pensions (DWP). The contract, which has a 3-year extension option, was signed on September 23, 2011 and the services commence immediately.

Services to be provided by IBM include

• The development and management of ~60 applications in the DWP's "business technology" estate, many of which will be used to support the introduction of Universal Credit
• Management of the Department's HR and financial applications, which are also used by several other government departments
• Under the contract, IBM may also be asked to provide technical consulting.

IBM will re-use existing assets in its development of applications to support the introduction of Universal Credit and also utilize IBM analytics capabilities to provide insight into the Department's data.

Analyst comments:

DWP has also awarded Capgemini an applications services deal estimated to be worth £5m to £10m-a-year. This contract includes the development of IT prototypes for welfare applications, and also maintenance services for several applications in marginal areas such as car park administration, security monitoring and medical leave administration. Capgemini replaces Atos and HP ES.

The DWP has been reviewing contracting across its entire IT estate, and back in 2009 announced it was going to change the way it had awarded contracts in application services for a number of contracts due to expire between February 2011 and August 2014, with a greater emphasis on COTS and on re-use across other government organizations. The contracts were broken into five lots;

• Lot 1: customer-facing systems, valued to £50-75m a year, covering applications used by customers to contact DWP and transactional activities
• Lot 2: core-benefit applications, valued to £50-75m a year, covering applications in benefit administration and helping people back to work.
• Lot 3: business facilitating systems, valued to £50-75m a year, covering applications such as customer payments, datawarehousing and customer information
• Lot 4: business prototyping, valued to £5m to £10m a year
• Lot 5: application maintenance & support, valued to £20m to £40m a year.

In the first two awards to be announced, IBM has won Lot 3 and Capgemini has won Lot 4. There is no publicly announced timescale for the award of the remaining three Lots. The stated LTV range of the two awards is guidelines only; the actual LTV will depend on the amount of work the DWP calls off against the contracts. In its first budget in June 2010, the newly-formed coalition government allocated funding to the tune of £2bn for the Universal Credit IT system.

The award of these contracts comes at a time when the DWP is developing the next generation of the U.K.'s benefits system with Universal Credit. Universal Credit requires near real-time integrated views of recipients' income, tax and benefit payments and entitlements and the IT system, which is due to be finished by 2013, needs to connect to the HMRC real-time benefits system, also currently under development. The integrated view requires a good deal of data integration and the contract awards are in support of these requirements. Given its complexity and tight timescale, this is a challenging IT project: earlier this month the Public Accounts Committee (PAC) published a report which highlighted concerns about its very tight timetable.

This is the first major IT award to be announced by the DWP since its cancellation of its IT infrastructure management services contract with Fujitsu in March this year.

Xchanging Acquires 100% Stake in Broking Service Enterprise Partnership From Aon for £10m

Sep 28, 2011 | Financial Results by Charles Juniper
industry: Other Insurance

Aon has exercised its put option under the contract terms of the Xchanging Broker Services Enterprise Partnership contract and has transferred its 50% stake holding to Xchanging. Xchanging will pay Aon a total of £10m for its share. Payment will be in two instalments, £4m payable immediately and the remaining £6m plus £540,000 finance charge due in September 2012.

Analyst comments:

This is another step in the financial restructuring of Xchanging following the voluntary insolvency of the remains of the CISGI unit yesterday.

This latest move will simplify the revenue flows between Xchanging and Aon. Under the EP arrangement, Aon paid a services fee to Xchanging but also received dividends back from the partnership. Service delivery will be unaffected by the move and Aon continues to be an important client for Xchanging, extending the service scope of the former EP and adding a new contract for Aon Australian Risk Solutions in 2010.

There is a similar put option for the Allianz EP that is exercisable in November 2011 with an exercise price of €13.6m. Xchanging would almost certainly like to gain full control of this EP also, providing the partner is willing.

There is also a put option with SIA-SSB for the Kedrios EP exercisable in January 2014 at €4.8m. However, the underperformance of Kedrios is such a pressing issue that significant restructuring of the unit will have to take place well before this date.

Sitel to Re-Launch Work-at-Home Model in U.S.

Sep 27, 2011 | New Offerings by Thomas Whittle

Sitel has announced the re-launch of its U.S. homeworking offering.

The company has been active in the homeworking space since 2007, but has re-launched to emphasize a new offering with the opening of a center of excellence.

The CoE is a multi-purpose center, primarily aimed at providing Sitel an ability to:

• More easily showcase the work at home management and supervision to prospective clients
• Provide a centralised hub for management and supervision training, as well as the capability to be used for agent training if client demand requires
• Provide a centralized location for demos of work at home security, and IT systems

The company offers both a hub and spoke model, with agents deploying from a specific center in a homeworking capacity, through to a fully virtual model.

The homeworking market has seen a number of developments in the last 12 months, with vendors targeting both movements back onshore, as well as transitions and expansions from onshore centers. Due to the flexibility to schedule evening and weekend shifts, the shorter shift increments, the access to higher quality agents, and the saving in fuel [both in financial, and CSR terms] the work at home method is seeing increased buy-side interest.

Analyst comments:

The use of a CoE is something that differentiates Sitel from a number of vendors. Although there is increased interest, existing worries remain for buy-side companies, specifically around security and IT concerns. If Sitel successfully deploy the center, it may provide an advantage in negating some of these concerns, and expanding its client base.

A second point that Sitel is emphasizing is a 'premium' homeworking security package. This involves the use of Sitel thin-client desktops [rather than the industry norm of using agents home PCs] and also offers options such as webcam coverage and increased security checks.

Sitel is focusing on the U.S. market at present, with a view to expanding into the UK in 2012.

(A detailed analysis of the work at home CMS BPO market will be available to subscribers of NelsonHall's customer management services research program from November).