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November 6, 2005

Capgemini reorg on track, new US boss says

Capgemini SA's North American restructuring initiative is in the final stages and is "tracking on plan or ahead of plan," according to the company's new North American head, Salil Parekh.

By CBR Staff Writer

Parekh took the position last month, after Capgemini fired COO Pierre Danon for reportedly pursuing the CEO position at French hotel group Accor SA.

Danon seemed to have secured investors’ trust and managed the restructuring plan quite deftly, replacing some 80% of Capgemini’s North American management in less than a year at the company. And Parekh, a 13-year Capgemini veteran, so far seems to be finding his own groove at the company.

Last week Parekh told ComputerWire he was confident in both the cost-cutting measures the company was taken and the strategic execution for managing contracts and winning future business. Next week when Capgemini releases its quarterly financials, Parekh said there should be some promising results for the North American turnaround.

While he declined to go into specific figures for growth, margins, or profitability on certain contracts, Parekh did emphasize that sales, bookings, and growth in all areas of North American business were now ahead of what the company had anticipated back in March and April. He forecast growth rates for 2006 that were higher than single digits, bolstered by strong bookings and contract performance.

Parekh said the company has now completely taken the high cost-structure out of its North American business, through several cost measures. For example, Capgemini restructured some of its North Americans offices, decreased the overall number of vice presidents, and disposed of several non-performing IT assets, Parekh said.

According to Parekh, Capgemini has scored a good number of strong consulting bookings since April. He explained that the average size of consulting deals the company is winning is above what it saw several years ago, or even last year.

Parekh cited recent consulting success in the life sciences, retail, energy, and telecom verticals. Transformative business consulting is now a hot product for Capgemini, with forays into the retail, automotive, and even the federal sectors. Supply chain work is also a big service area, Parekh added.

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On the outsourcing side, Parekh noted some positive developments on the ten-year, $3.5bn deal it signed this May with Texan energy giant TXU. The initial start-up cost of the deal has cut into the company’s recent profits; last quarter, for instance, Capgemini reported 6.6% margins for its North American business.

But Parekh, one again unable to comment on specific profit levels on the deal, said that the deal is now over the negative period.

He also said the outlook was sunny for future work with the energy business, especially as these companies look to invest some of their record profits into systems technology. Parekh told ComputerWire that Capgemini was in talks with two of the largest Texan oil and gas firms. The company currently enjoys a multibillion pipeline in the utility sector, he said.

Capgemini’s mix of BPO to ITO work in North America stands at roughly 75% BPO and 25% ITO, up from an even split last year. Parekh said the main factor behind the shift has been the BPO-heavy TXU contract. Looking ahead, BPO makes up nearly 40% of the sales pipeline for outsourcing, according to Chris Carrington, president of Capgemini’s president of outsourcing for the Americans.

In terms of BPO services, Capgemini is focused mainly on F&A and procurement, although Parekh said there was a potentially deep and untapped market for technical writing outsourcing, something it has explored with transport and aerospace manufacturer Bombardier.

On the IT front, demand from the biggest vertical user, financial services, remains steady, Carrington said. He also said there was increased demand in utilities, manufacturing, telecom, and media.

In terms of competition in North America, Parekh said the company regularly goes up against the well-known systems integrators such as Accenture and BearingPoint. Capgemini sees competition from the big offshore IT vendors in some areas, but not on a full scope of services.

Parekh downplayed the overall affect of offshore competition on Capgemini’s pricing and margins. Noting that its current offshore headcount of about 5,000, including 3,000 in India, helps provide Capgemini with low-cost maintenance work, as well as some development and BPO services. He said there are plans to increase Indian headcount to 10,000 over the next two years.

Capgemini reports quarterly results November 9.

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