While Capgemini, LogicaCMG, Capita and Axon all turned in solid results, ATOS ORIGIN – Europe’s second largest IT services company – lost ground and found itself the subject of an unwelcome takeover approach. For 2006, the French company reported revenues down 1.1% to E5.4 billion ($6.48bn) with net profits of E235.4 million in 2005 turning into net losses of E264.4 million.
Some of its major problems seem to stem from the company’s operations in the UK, where a ramp up of consulting staff has run well ahead of contract wins. That shows in staff utilisation rates. While Atos UK entered 2005 with staff averaging 71% of billable time, that utilisation rate had crashed to 51% by the closing quarter of 2006. Company-wide, the average stands at 65%. The story was similar for systems integration staff, where utilisation in the UK was running 6% below the company-wide average of 81%.
The company now claims all the major contracts in the UK pipeline have been signed, including deals with the Department of Constitutional Affairs, NHS Scotland, National Farmers Union Mutual, Government Gateway portal and Rail Settlement Plan. One such contract, with NHS Diagnostics, seems to have already gone awry though.
In March, the Department of Health suspended a five-year contract with Atos to provide diagnostic scans in the UK’s North West, due to start in April, after patient information was found to be incorrectly recorded or missing from reports.
One aspect that will create concern among other customers is workforce volatility. Although it ended the year with around 50,000 staff, almost 8,000 left during the year, including a quarter of its entire consulting team. Unlike its rivals, few of those are in low-cost skill bases such as India, a situation the company has just started to address with plans to ramp up its use of Morocco as a near-shore base for 400 staff by late 2009.
Meanwhile, to get it back on track, the company has embarked on what it calls Transformation Program 3O3, setting itself ‘three objectives over three years’: accelerate organic growth, improving efficiency and operate as a global company. The upshot should be 8.5% growth in 2007, it says.
Perhaps as a measure of confidence in that plan and as a judgement on the 2006 performance, the company has had private equity buyers sniffing around. While its management has responded to the “expressions of interest” by hiring investment bankers to help it “explore strategic options”, various news sources suggest UK private equity firm Permira Holdings and hedge fund Centaurus Capital have already made approaches.
The turmoil at Atos could not be in sharper contrast to the upbeat mood in other quarters of the IT service market. The largest European player in the sector, CAPGEMINI, reported a 12% gain in revenues during the second half of 2006, taking revenues to E3.92 billion ($4.7bn). Net profits also looked strong at E293 million, up by a factor of three on last year. Over the past three years, the company has undergone a major shift in its business model to enable global delivery on projects. Almost 30% of the employees it uses to fulfil outsourcing and technology services business are based in India, where it now has 13,250 staff. That follows the completion of its acquisition of Indian company Kanbay in February.
Also leveraging India is the UK business process outsourcer CAPITA. The public sector-focused group saw revenues rise by an impressive 21% to £1.74 billion ($3.3bn) for 2006.
Among the 23 new wins during the year were a £132 million deal for handling the BBC’s HR, a £120 million deal to manage parts of the Northern Ireland Civil Service and a £140 million deal with Swindon Borough Council. But Capita’s largest deal of 2006 – £250 million – was in the private sector, with Co-operative Insurance. In fact, only 52% its revenues now come from the public sector.
The company boasts that its current bid success rate is one in two, although it will stay happy even if that drops to one in three in the future.
Currently, Capita uses partners to tap into the Indian low-cost skills base. Mastek, for example, works with the company on the London Congestion Charging Scheme contract. But Capita says that by 2009 it will have around 3,000 of its own staff based in India, up from 800 today.
Expansion is also on the minds of executives at AXON, the UK IT services company built around expertise in SAP business applications software. Even though it discontinued its operations in the Middle East during 2006, revenues for its second half rose 56% to £74.1 million ($140.7m).
It may only have 1% of the global SAP services market, but its success in pan-European SAP contracts and in local government, plus a successful push into the US market through niche acquisitions, has made it “the largest consultancy in the world focused exclusively on SAP services”.
Drawing on its strength in SAP consulting, development and implementation, Axon – like many other IT services companies – is now also building an applications management business so it can offer remote management of its client’s software. Profitability at the company was also strong: net income at £7.4 million in the second half was up from £2.6 million in the same period a year earlier. Helping that was the continued use of offshore resources. The company now has 300 people working out of Kuala Lumpur in Malaysia.