Tag: as-a-service

Is the Services Industry in Decline? | Sherpas in Blue Shirts

Information Services Group (ISG) publishes a quarterly “ISG Outsourcing Index,” which is widely read in the services industry. Q1 2015 wasn’t a pretty picture. The Americas saw a modest 10 percent gain in ACV, and India/South Asia showed strong. But the rest of the world took a bullet, so to speak; EMEA’s ACV declined by 25 percent, Asia Pacific by 45 percent, and Australia/New Zealand had one of the weakest quarters in a decade. So the modest gains are dramatically offset by large losses elsewhere. This is further evidence of what I’ve been blogging about for some time – the industry is at an inflection point and preparing to shift. Let’s look at where the shift is headed.

But, first, a word of caution. We at Everest Group stopped publishing our index based on publicly announced deals many years ago because we found the data was inherently flawed. If all you use is publicly announced deals, you’re only looking at the large transactions and only some of those because many deals are not published. The next-generation deals and smaller deals are typically not announced. So the data is inherently noisy. Having said that, there is some value to looking at what’s happening in publicly announced deals. As such, the ISG Outsourcing Index is as good as any.

Four themes in today’s market 

The services industry is now in a mature state. As such, it has four major characteristics or themes in what’s happening:

  1. Affected by economic cycles
  2. Brownfield deals
  3. Pricing pressures
  4. Shift toward smaller transactions

Cyclical impact. As a mature industry, the services business is affected by the cyclical economy to a much larger degree than it has been in the last 15 years. To wit, where we have a growing economy in North America, the industry has share increases; where there are struggling economies in the rest of the world, the industry has share and ACV decreases.

Brownfield deals. The services world now is largely defined as brownfield deals in that the majority of activity is recompeting existing scope rather than capturing new scope. In this world, awards are smaller transactions for shorter durations.

Pricing pressures. In a recent blog post, I detailed the pricing pressures now hitting service providers and resulting in a major downward spiral and pricing wars. The ISG data also reported the downward-pricing situation. Brownfield deals also exacerbate this situation as they’re hinged on winning recompetes with existing customers, which are intent on driving prices down.

Shift toward smaller transactions. In addition to the brownfield impact there is an uneasiness in the market due to customers’ desire to break up current deals and shift to next-generation models that are automation based, as-a-service or digital. We see this movement clearly as we look at the unannounced deals that we track at Everest Group. Our observation is that these unannounced deals are taking share but with small ACV awards.

This phenomenon is particularly prevalent in the infrastructure martketplace, where there has been a secular shift from large, bundled, asset-heavy transactions to asset-light, unbundled transactions with shorter duration. The emerging markets of cloud computing and as-a-service accelerate this movement. Finally, we see tangible evidence of enterprises preparing to make large-scale shifts to cloud by adopting shorter, more flexible transaction structures for their legacy infrastructure and applications.

Bottom line

The industry faces the prospect of a maturing market impacted by economic cycles, pricing pressures, brownfield focus, and customers shifting to new models. The good news is that the new models and technologies are growth areas for the industry. However, these deals are smaller and are not usually announced deals and therefore don’t show up in the ISG Index.

Capgemini Acquires IGATE to Power North American Ambitions | Sherpas in Blue Shirts

Today, Capgemini announced the merger agreement to acquire IGATE for $4.04 billion. IGATE is a US-listed technology and services company headquartered in New Jersey with US$1.27 billion in revenue in 2014. The sale of IGATE has been in the offing for a while after private equity company, Apax Partners, which financed most of IGATE’s US$1.2 billion acquisition of Patni Computer Systems in 2011, converted its debt into equity in November 2014 (becoming its largest shareholder) and also filed with the U.S. Securities and Exchange Commission to have the option to sell its stake. The combined group will have nearly US$13 billion in annual revenue and 177,000 people globally. Capgemini aims to realize revenue synergies of US$100-150 million (through cross-selling and account farming) and cost savings of US$75-105 million over the next three years. The deal’s size and cross-ranging implications make it one of the most significant transactions in the IT-BPO industry. Capgemini is paying a premium for its North American ambitions, over 3x revenue multiple. It outstrips other such deals in the marketplace, notable CGI-Logica (2012) and IGATE-Patni (2011), indicative of the scale and urgent imperative driving deal rationale.

Major acquisitions in the IT-BPO market (US$ million)

Major acquisitions in the IT-BPO market

What works?

Prima facie it gives Capgemini a sizable foothold in the North American market, the biggest IT outsourcing market in the world. North America becomes a significant market for the combined entity, comprising nearly one-third of 2015 projected revenue, up from 20% for Capgemini earlier. Europe will still account for over half of the combined revenue. The North American region contributed nearly 80% to IGATE’s revenue in 2014, with marque clients such as GE and Royal Bank of Canada. This had increasingly become important for the company since its French-rival Atos bought Xerox’s North American ITO business late last year. That deal also made Atos the primary IT services provider to Xerox (~US$240 million annual revenue) and also have the right to first refusal on collaborative opportunities with Xerox.

It enhances Capgemini’s delivery presence in offshore/low-cost regions specifically India, where most of IGATE’s 33,000-strong workforce is based. Capgemini had earlier acquired Kanbay in 2006 with a focus on increasing India operations. It also bought Unilever’s India GIC – Unilever India Shared Services Ltd (UISSL) – in parts over 2006-2010. Around two-fifths of Capgemini’s global workforce of 144,000 employees is based in India, with the combined group having an offshore leverage of nearly 55% by the end of 2015, comprising over 90,000 people.

The move adds greater definition to the verticalization maneuvers Capgemini had been driving of late. IGATE’s strong BFSI client roster (CNA, Royal Bank of Canada, MetLife, UBS, Morgan Stanley), comprised over two-fifths of its revenue last year. Similar synergies are expected in manufacturing, healthcare, and retail sectors.

Capgemini’s functional spread stands to gain on account of IGATE’s mixture of IT and BPO services. Specifically, Capgemini has been looking to grow its ADM and BPO business, as enterprise clients exhibit a preference for integrated services stacks led by an expanding As-A-Service economy, combine infrastructure, application, and business process service needs. This is the driving force behind IGATE’s business model – ITOPS or Integrated Technology and Operations, which will help Capgemini position itself as a fully integrated service provider. The deal also holds Capgemini in good stead, bolstering its industrialization play. As the value proposition in the global services space moves beyond labor arbitrage, service providers are looking at non-linear IP-driven revenue sources through products, platforms, and solutions. IGATE has monetized the ITOPS value proposition through productized applications and platforms – IDMS (for BFS), IBAS (for TPA clients), and SIB (for retail customers) – which are distinct P&L-plays for the company. Capgemini is also likely to receive additional tax benefits from the deal, as it is carrying a large deferred tax asset in the U.S.

The uncertain

The adage “culture eats strategy for breakfast” couldn’t be truer for this merger. There is a stark cultural tension with a Europe-heritage firm struggling with offshoring trying to integrate an Indian IT service provider with a strong North American client roster. Plus all is not rosy with IGATE. One of its largest clients, Royal Bank of Canada, has been facing problems for its use of IGATE services while GE’s contribution to revenue has been falling. CEO Ashok Vemuri’s hire-for-growth plan witnessed a bump when Q4 2014 headcount actually fell by about 900 employees. IGATE registered an annual revenue growth of just 10% to $1.27 billion in 2014, lagging other IT peers. On the executive front, the merger means uncertainty for Ashok Vemuri, who left Infosys specifically to take over as CEO after Phaneesh Murthy left. His dream of staying a CEO might be curtailed, and he will be tempted to move on, as he wouldn’t want to occupy a role similar to what he held at Infosys, with even less leverage with the leadership. This potential void in leadership could pose a major hurdle for the integration process.

The road ahead

The move is indeed a bold one by Capgemini to catalyze growth, plug delivery/regional/vertical gaps, and streamline operations. IGATE is the right size for Capgemini to absorb – not too small so it does not have a tangible impact but not so big that to create an integration struggle. The sizable deal size could spur U.S. giants to action. Given Capgemini’s European legacy, other regional service providers could mull their options in a bid to expand their operational footprint. We have already seen recent activity in Europe with the Steria-Sopra merger last year. MNCs struggling for growth and looking at globalizing delivery could start thinking of mid-sized players as possible targets. Some of these players have growth issues, significant PE investments, scaling problems – all of which make a good rationale for a merger with a bigger player. On the other hand, the deal lacks some specific attributes when it comes to next-generation technology tenets such as cognitive computing, automation, digital, and analytics. Moreover, Capgemini will need to bridge the inherent disconnect between two different cultures, systems, processes, and people, to make this integration successful. The deal is certain to spark further consolidation and conversations, as service providers witness pricing pressures, evolving engagement models, and increasing anti-incumbency, in a bid to adapt to the As-A-Service construct.


Photo credit: Capgemini

Oscar and the Emergence of Consumer-Centric Healthcare | Sherpas in Blue Shirts

As I’ve blogged before, the healthcare space is at the cusp of a transformative change. Consumers are assuming greater ownership, control, and responsibility of health outcomes. Consequently, the decision making is shifting to the individual. Consumption patterns have undergone a significant change owing to disruptive mobile computing, rapid adoption of social media, next-generation sales/engagement channels, and ‘‘anytime-anywhere’’ information access. As individual consumers (patients and physicians) become more empowered, healthcare is transitioning to a principally patient-centric operating paradigm, with focus on cost, efficacy, and equity.

Analogous to what Uber has done to transportation, in progressive (and controversial) ways, there is a fundamental transformation in healthcare, placing patients at the center of all the action. These changes are reflected in the way reimbursements are distributed (moving from volume-based to outcome-based) and the onset of personalized medicine therapies based on real-world evidence. These gamut of changes are also aided by various cultural and socio-economic forces. The disruptive shift – from a healthcare provider-centric to a more customer-centric model – is driving significant healthcare investments in digital enablers of consumerization – social media, mobility, analytics, and cloud.

Healthcare consumerization levers

The New Kid on the Block

These winds of change have given rise to an immense opportunity to cater to this new patient-centric paradigm leveraging next-generation technology channels and enablers. Which brings us to Oscar, a New York-based health insurance start-up. Health insurance in the United States has conventionally been complex and non-transparent. With the advent of PPACA and health insurance exchanges (HIX), there has been a greater sense of accountability. Oscar aims to bring big data/analytics, design thinking, and transparency to the often-puzzling world of health insurance, making it smart, intuitive, and simple for consumers.

The idea for Oscar was born when one of its co-founders received his health insurance bill and realized that none of it made sense to him. The complexity and high entry barriers to health insurance can be gauged from the fact that Oscar was the first new health insurance provider to launch in the state of New York in more than a decade. The start-up sells coverage to individuals through insurance marketplaces in New York and New Jersey. The insurance plans offer free basic care including doctor visits, phone calls with doctors, preventative care, and generic drugs.

The company is backed by seasoned venture investors Peter Thiel and Vinod Khosla as it attempts to bring Silicon Valley mojo to health insurance. It was co-founded by venture capitalist Josh Kushner (an early stage investor in Warby Parker and Instagram), Kevin Nazemi (a Microsoft veteran), and Mario Schlosser (MIT Media Lab and hedge fund experience). The company’s strong digital health ethos is reflected in the senior leadership team – CTO Fredrik Nylander is a former Tumblr executive, Dave Henderson (ex-Cigna and EmblemHealth) is Oscar’s president of insurance, board member Charlie Baker is former CEO of Harvard Pilgrim Health Care, and senior medical executive hires from EmblemHealth, a leading health plan in New York state.

Oscar

What’s different?

Oscar’s value proposition is on being a more personalized health insurance provider, with a strong sense of convenience and personal attention, aided by marketing, design, and consumer service practices that are aligned to the needs of the millennial generation. It has a sizable emphasis on telemedicine (offering it free of charge), and lets customers speak to doctors 24×7 with a goal of 10 minute wait time or less. To help answer medical questions, the company has doctors on call to chat online or over the telephone with customers. Oscar also lets customers check prices for procedures ahead of time and offers three free in-person doctor visits and free generic drugs.

The company faced minor bumps in the beginning with poor reviews and complaints (an average Yelp rating of 2 stars), but has instituted a feedback input mechanism based on customer interactions. The company aims to productize every customer interaction by implementing feedback as soon as it receives it. It has a slew of partners and tie-ups in line with its strategic focus.

In December 2014, Oscar announced a partnership with Misfit (a wearable tech company), by offering members free fitness trackers, along with Amazon gift cards, as part of an attempt to incentivize healthy behavior and bring down employee healthcare costs. Oscar also offers services at many hospitals and retail locations such as New York CVS CareMark. It is a health insurance company that resembles a technology start-up rather than a faceless insurance behemoth, sort of a health insurance start-up for “born digital” natives.

The future

Since commencing operations in July 2013, Oscar has had a reasonable start. It had about 15,000 members and estimated revenues of U$72 million in 2014. It doubled that member base to 30,000 in January 2015, with one month of enrollment left to go. Oscar is seeking approval to enter California’s individuals exchange by 2016. The primary litmus test for Oscar is going to be the same as for any health plan – managing risk, keeping premiums reasonable, maintaining margins, handling payer-provider convergence, and improving health outcomes. Oscar is a prime example among modern companies looking to shape consumer-driven healthcare in the United States leveraging next-generation technology. As it looks at a reported valuation of significantly more than US$1 billion (implying a handsome 14x sales multiple!), the bet might just pay off.


Photo credit: Oscar

Infosys’ New Strategy Connects all the Dots | Sherpas in Blue Shirts

I recently had a chance to sit down with Infosys’ CEO and his team, and they shared with me their new/renew strategy. From what I understand, it resonates with where the market is heading. This is remarkable as it addresses the vexing problems and risks service providers now face in trying to change their business to address new models, new technologies and new customer expectations. It is always easy to drink the Kool-Aid, and I am definitely experiencing a sugar high. However, the Infosys strategy is one to watch as it appears to connect all the dots in a quickly evolving marketplace.

There are a number of things I find attractive about this new/renew strategy. First is the simplicity of its messaging. It’s easy to understand where they’re coming from and that they are focusing on their customers, not on Infosys like their past strategies. That in itself is powerful for customers’ understanding of what Infosys stands for and where they are heading. And it’s also powerful for the Infosys team to be able to understand what to focus on and what not to focus on. That resonates.

The new aspect

Second, I find the direction compelling. Clearly there is much in the market that is new. New technologies and new business models are driving the market and, when combined, are extremely powerful.

Digital changes how companies interact with their customers, and there’s nothing more powerful than that. Cloud changes the speed and agility and price at which companies can move. The consumption-based and as-a-service models allow companies to align services closely with business outcomes and only pay for services as they consume them. Taken together, these new technologies and business models are very relevant to where customers are headed with their business, and these new areas are capturing the growth in the services segment.

Infosys aligning itself with this direction makes perfect sense as they move to redesign their growth and maintain their leadership position in the services industry.

The renew aspect 

This aspect of Infy’s strategy is equally powerful. There is a second set of technologies that allows providers to change the way they deliver services. I’ve blogged often about four of these technologies: automation, analytics, robotics and artificial intelligence. Providers such as Infosys are looking to harness these technologies transform their environment, lowering costs and making their existing services far more responsive than they’ve been before.

Customers are more demanding

So Infosys is tapping into the big themes in the marketplace. They’re leveraging new technologies and new models to connect the dots to new opportunities for growth. And they’re renewing their existing business by harnessing new technologies and capabilities to optimize their service delivery.

Underpinning the strategy is a sea shift in customer expectations. Enterprises are increasingly more demanding of their existing services and at the same time impatient to take advantage of new technologies and business models.

I like Infy’s new/renew strategy because I believe it is directly in concert with where we at Everest Group see the market moving – taking advantage of new technologies and rethinking how to optimize existing services. And it embraces the “old wine in old wineskins” concept I recently blogged about.

I think this strategy will position Infosys well. A word of caution: as an often-quoted lines goes, “Execution eats strategy for breakfast.” So we look forward to seeing how they execute in this marketplace.


Photo credit: Flickr

As-a-Service Implications for IT | Sherpas in Blue Shirts

One of the great struggles in today’s enterprises is the ongoing shift of influence from the CIO community into other stakeholder groups. I’ve blogged about this before. An important aspect of this influence shift is the fact that IT has increasingly become unaligned with business goals. But the pendulum is now swinging back. The mechanism the pendulum is using is the as-a-service offer set.

During the recession, companies focused on cost reduction and operational excellence, and IT increasingly lost touch with the business. Purchasing departments focused relentlessly on driving up unit costs and countless operational process improvement vehicles to further lean out organizations. As a result, IT organizations became more efficient — but also less aligned with business needs.

Business users reacted by demanding greater focus on business outcomes and began taking things into their own hands and purchasing as-a-service offerings.

The as-a-service path is a reorganization

One of the benefits of the as-a-service model is that it creates a seamless linkage between business functionality and delivery. And it cuts through layered IT organizations, reorganizing according to business functionality.

As a service

The benefits that an organization extracts once it goes down this path is tight alignment by business functionality — close to functionality on demand — and far more flexibility. It enables focusing on the business impact of technology. Businesses can move more quickly and flexibly to adopt the functionality and also scale their consumption to usage.

The implications for IT are enormous in that it requires a rethinking of the classic IT functional organization, which has been in place for the last 15 years. It requires a reconceptualization of the following aspects:

  • How IT is organized
  • How assets, services and software are procured
  • How IT is measured and managed

The benefits of the functionality and scaled consumption to usage are extremely powerful and can only continue to reshape how IT is delivered. But the reconceptualization of IT is far from trivial. It is not just a new pose for IT. The as-a-service model fundamentally reshapes the IT philosophy on how it’s organized, procured, measured and managed.

Remedying IT Overcapacity | Sherpas in Blue Shirts

Too much. That’s an accurate assessment of IT environments in most, if not all, enterprises. They have more data center space than they need and more servers than they can use at any point in time. They have more software operating systems, middleware, and enterprise licenses than necessary. They also have more of the wrong resources and never enough of the right resources in application development and maintenance. The as-a-service movement seeks to address this, but the journey to get there isn’t as simple as it appears.

So how much overcapacity is present in enterprises? At every level there seems to be a 25-50 percent overcapacity in IT. Since IT varies from 1-7 percent of revenues, the 25-50 percent overcapacity is in the range of 40 percent overcapacity overall.

As we at Everest Group look at applying as-a-service principles into IT environments, we see an opportunity to remove 40 percent of the IT cost by eliminating the wastage in service capacity. But the journey to achieve this as-a-service cost benefit is neither quick nor easy.

Renegotiating enterprise licenses takes time and often requires waiting until they expire. Reconceptualizing the infrastructure and application support is also complicated and requires a resolute effort and substantial patience.

It can take a year to three years to complete the journey. But the benefits are very substantial, starting with a 40 percent cost reduction in IT — a heady prize for the journey. In a future blog I’ll discuss other benefits.

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