Steria has reported strong growth in public sector revenues in the United Kingdom, significantly outperforming its other markets in Q3 2014. This is set to continue as the company gains new public sector clients thanks to its joint ventures with the British government.
Overall, Steria’s Q3 revenue grew by 7.3% organically year on year to €454.4 million.
In the same period Steria’s UK revenue grew by +24.7%, driven largely by its shared services joint venture, Shared Services Connected Limited (SSCL) with the Cabinet Office and also by NHS Shared Business Services (SBS) with the Department of Health.
Revenues for the same period declined by -5.4% in France, and by -15.1% in Germany.
Steria reported organic growth in its other Europe zone region including Scandinavia in Q3 2104 of +8.1%, boosted by strong growth in the public sector of +14.2%.
Business process services has been an engine for Steria’s revenue growth. It accounted for 53% of the revenue in the UK, and recorded a stellar growth of +52% in the period.
The growth in UK public sector is set to continue as the much anticipated move by the UK’s Ministry of Justice (MoJ) to award the running of its back office shared service to SSCL was confirmed last week. The contract brings with it the Home Office which uses MoJ’s shared services. These are major government departments which join SSCL’s 18 existing clients including Department for Work and Pensions (the UK’s biggest government department), Department for Environment, Food and Rural Affairs, and Department for Education. Steria also reported growth in other segments of the UK public sector including +7.6% in Defense and +37.4% in Homeland Security sectors.
Steria’s approach to growing its shared services operations follows the pattern of first expanding the client base and then adding more services to its portfolio. The NHS SBS operations, for example, started with F&A and payroll and has expanded into primary care services and procurement.
This is a pattern that I expect SSCL to follow. The contract with the Cabinet Office allows for scope and service line expansion as well as adding new clients from both public and private sectors. There are a number of factors that will drive other government agencies to move to SSCL. One is the lack of capital funding for legacy upgrades. Another is the government requirement that existing departmental shared service centers have to operate on par with commercially run centers. This is not easy to achieve by civil servants with limited funding and without service providers’ experience of standardizing and industrializing services.
These factors combined with strong encouragement by Cabinet Office will mean that the majority of central government departments and their agencies will move their shared services either to SSCL or its main rival ISSC1 (run by arvato) over time. There is plenty of business for both service providers. Steria estimated a TCV of circa £1bn (€1.3bn) over 10 years at the time of the contract announcement in 2013 and is likely to achieve this.
Q3 results did not show the operating margin. Steria stated that owing to operational issues, largely in Germany, it will be unable to meet its operating margin target for 2014 and anticipates a slightly negative net attributable profit for the financial year. The outcome-based nature of the SSCL deal with the UK government is likely to negatively impact the bottom line too initially with investment in activities such as client on-boarding and consolidation.
Finally, a word on Sopra with which Steria is merging in a friendly tie up; For the same period, Sopra announced smaller revenues of €341.5 and also a smaller growth of +0.5%. In France Sopra’s revenue grew by 2%, highlighting the complementary nature of the two merging businesses. Sopra’s revenue in Europe (excluding France) grew by +4.1% to €63.1. Between them, the two companies will have profitable businesses in multiple regions of Europe: UK, France and Scandinavia. Additionally Setria’s broad portfolio which includes BPO and IT infrastructure management enhances Sopra’s application and system management services. The two companies will have to address some common growth challenges too e.g. lack of growth in Germany and also the financial services sector.
Look out for more commentary on this merger from Everest Group in the coming months.