Experts in the global services terrain

Transaction pricing is a wonderful thing, a thing of beauty. We’ve seen payments companies and infrastructure companies delink labor from their pricing and harvest the benefits of this model. It’s the quintessential non-linear model. It sounds great. But there’s a danger.

The problem with transaction pricing is that providers essentially commoditize their offerings. Never forget that people are involved in services relationships. Pricing on a transaction basis makes it more difficult to maintain interpersonal relationships, which then leads to a commoditized, purchasing exercise.

For example, if a provider’s cost per check or cost per server is $10 and another provider can offer it for $5, price becomes the dominant factor. The issue then becomes one of switching costs. The result? Low switching costs accelerate the race to the bottom and sever the interpersonal relationships that often build and sustain services contracts.

 

Shakespeare said a rose by any other name would smell as sweet. However, what the eternal bard did not say but easily could have is that it would not have sold as well. The rose that’s catching fire now in the marketplace is as-a-service offerings. But service providers are confusing the market.

As-a-service offerings take a business function (CRM, HR recruitment, etc.) and provide it on a consumption basis (pay for it as used) and bundle the entire end-to-end process including hosting the application, the network and often some business function.

It’s interesting to see these function ideas brought to the market, and it’s the most powerful and disruptive force in services today. Providers range from startups such as ZenCash, which delivers receivables as a service, to more established companies such as Salesforce for CRM as a service. Many of the Indian providers’ as-a-service offerings come in the model of platforms or as managed services.

No matter what the providers call their offerings, all the marketing terms are names for very similar business constructs. The providers seek to differentiate themselves by naming the offering using different terminology in an effort to claim that they’re different. But the market largely ignores these efforts. Why?

Because, a rose by any other name may be just as sweet, but people looking for roses don’t stop to look at flowers called something else. Buyers adopt offerings that they recognize as something they want. The sweet thing the market now recognizes it wants is the power of consumption and end-to-end functionality — which it recognizes as buying an “as a-service” offering.

Providers can deliver an as-a-service offering off a common platform or build it unique. But the market is signaling that “as-a-service” has become the recognized term for what the market wants — simplicity and easy-to-adopt functionality instead of past experiences with big, complex projects that require long lead time and are complicated and risky to implement.

Calling as-a-service offerings by different terms just confuses the market and slows down growth.


Photo credit: Yannis

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Observing service providers’ much talked about efforts to provide new levels of value and create new growth opportunities through big data and analytics reminds me of a quote often attributed to Yogi Berra, the great NY Yankees coach. “In theory it’s simple, in practice it isn’t.”

Yogi captures, as only he can, the timeless truth that sometimes things that are obvious and easy to articulate are very hard to execute. Those of you who play golf will immediately recognize the power of this observation.  The service industry’s collective experience with big data and analytics is causing a lot of service providers to also identify with this Yogism.

Service providers have been quick to recognize the potential for big data and analytics to change the game in their increasingly commoditized offerings and have made substantial investments in talent and tools they hope will be important in applying these new sources of value to their customers. In a cursory analysis these efforts are encouraging and yielding fruit. The providers continually talk about it to customers and crow about the rapid growth they are seeing in these areas.

But upon further reflection we see mostly a set of tools and capabilities with a lot of hype but disappointing total revenue given the amount of attention and hype. We find that the growth comes off a very small base and amounts to a small total revenue.

The use cases the providers use as examples are few, and they use the same use cases or case studies again and again. Plus the case studies are very industry and company specific and therefore are not easily repeated across the customer base. Basically these are one-off solutions that don’t lend themselves to broader industry application.

Big data and analytics are powerful and obvious in terms of their impact. It’s simple in theory. But in practice it’s difficult to build large big data and analytics revenue streams.

Atos has completed the €620m acquisition of Bull, a deal which was first announced in May 2014. Like Atos, Bull is a largely European player. Based on 2013 data, 85% of its €1.26bn revenue comes from Europe, and that mostly from France (55%), with the rest of Europe accounting for 30% of revenue.

The high level view of the deal

One of Atos’ key objectives for the acquisition was to help it become the number one cloud services provider in Europe. Atos is targeting one of the largest markets for cloud in the world. Everest Group Cloud Vista research shows that Europe (including the UK) accounted for 50% of global cloud deals in 2013. Bull brings Atos with managed services and cloud operations which accounted for 48% of Bull’s 2013 revenue. These complement Atos’ existing managed services and cloud (Canopy) businesses. The acquisition also enhances Atos’ cyber security and big data capabilities. 26% of Bull’s revenue came from big data and security.

Looking beyond the headlines

Atos is getting much more with Bull than first meets the eye. Bull has a large number of patents related to technology, analytics, devices, power generation, conversion and distribution of electrical power as well as information storage. I believe some of these bring Atos capabilities to go beyond enterprise IT. There is a burgeoning cloud market for the Internet of Things (IoT) and the industries that are closely linked to it. Take the smart utilities sector which is a key market for Atos. Smart utilities have a growing need for managing devices and their data, and geographical information. Prior to its acquisition, Bull had announced a strategic initiative to provide new machine to machine (M2M) and IoT solutions. This was targeted at opportunities coming from smart grids, smart cities, smart building, smart home, intelligent transport systems, connected car, e-health, environment, and others.

Another aspect of the deal is to help Atos along its journey towards an IT world that is becoming increasingly software defined. That brings with it more automation in the IT infrastructure. Automation in turn increases the need for more real-time analysis of data to trigger events and activate sequences of automations at the right time. Bull’s high performance computing and analytics capabilities will enhance Atos’ ability to deliver services in the software defined world.


Photo credit: el ciego

 

Capita has acquired SouthWestern Business Process Services Limited from private equity group Ion Equity, for €35m (£28m). SouthWestern provides customer relationship management, financial shared services, data processing and inspectorate services to private and public sector organizations. It has delivery centers in Ireland, the UK and Poland. Clients include the Department of Agriculture Food and Marine, Bord Gáis, the Department for Environment, Food and Rural Affairs, Bord Bia, Eircom and Failte Ireland.

SouthWestern is expecting revenues of €33.6m and an operating profit of €3.4m for 2014.

This is not the first Capita acquisition in Ireland. In 2011 it invested €33 million to acquire the international financial services business of Allied Irish Bank, AIBIFS. It integrated the acquired business with its own investor and banking services division, which at the time employed 2,000 people in Ireland, the rest of Europe, and India.

Capita already operates in Ireland, including as “servicer” to the National Asset Management Agency (NAMA) and contracts with Prudential International Assurance, St James’s Place International and Ireland’s Department of Communications, and Energy and Natural Resources to manage the delivery of a new postcode system across the country.

In 2013 it opened new offices in Dublin and at the time it had a target of employing circa 800 people in Ireland. That target has grown to 1600 since and SouthWetsern brings circa 1000 FTEs. These are mostly based in two sites at Co Cork, at Clonakilty and Little Island, as well as at smaller sites in Lodz, Poland, Dublin and Milton Keynes in the UK.

SouthWestern enhances Capita’s contact center capabilities. It offers multilingual customer services, supporting in up to 14 languages with 24/7 voice and multichannel services. Its other services, such as financial services administration, debt collection and risk management are a good fit to Capita’s existing but currently largely UK-focused services. SouthWestern also brings Capita a bigger presence in the Irish public sector market, which it will be able to expand fast given its long and successful experience in the UK public sector.

Capita’s plans for SouthWestern are ambitious. It is aiming to more than double SouthWestern’s operating profit to €7m and increase its revenue by 40% to €47m in 2016. An investment in SouthWestern’s IT systems in 2015 is to support this growth. Another factor to take into account is a strong pipeline of opportunities. In its H1 204 results, Capita indicated a pipeline of £5.7bn. These included 27 bids of which 90% relates to new business and 10% to contract renewals.

Both Capita and SouthWestern have delivery centers in Poland (Krakow and Lodz respectively). The Polish centers are likely to be consolidated but any additional capacity would help Capita with its plans for growth in Continental Europe. The move to expand into Europe was signaled by Capita’s acquisition of tricontes, a specialist customer management company based in Munich, Germany, for an undisclosed sum in July 2014.

While Capita has always been very acquisitive, a strategy for expansion beyond UK borders is emerging since the new head, Andy Parker, took over from long-term CEO Paul Pindar, this year. We will be watching this space to provide additional commentary in the future.


Photo credit: Charles Clegg

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