Is Cap Gemini the perfect IT services company? A casual glance at the evidence might suggest the answer was ‘yes’ but Paris, France-based Cap has some way to go before it can truly claim this accolade. Europe’s largest established services vendor grew its revenues organically by 28.6% during 1998 to reach FFr25.94bn ($4.04bn), its highest level since 1993. Its operating margin has also climbed 2.2 points to 10.3%. These figures are virtually unrivalled by similar-sized competitors. But while its size and forward planning have been major competitive advantages in Europe, Cap has so far failed to conquer the US, despite it being a target since the company’s inception.
Cap’s 1998 results marked the latest high of a financial turnaround in the last three years, following the restructuring of the company to bring together its IT services and management consulting divisions in May 1996. This has been helped by a policy of increasing longer-term contracts, streamlining its shareholder structure and the merging or selling off of holdings it did not have full control over. The company now claims a healthy pipeline of deals for 1999 and is not expecting any significant slowdown in the face of a pre-millennium spending freeze.
Despite the recent usurping of Cap’s long-held title of largest European-based provider of IT services by the recent takeover by Netherlands-based Getronics of Wang Global, Cap remains the largest of Europe’s established IT services fraternity. This size has given Cap an immediate advantage over its European-based competitors. Investment analysts Merrill Lynch and Goldman Sachs also feel that Cap has a superior strategic position over rivals in a market increasingly driven by the demand for one-stop-shop suppliers of IT services. Central to this perceived competitive advantage has been Cap’s combining of more traditional technology services with its own in-house management consultancy expertise. This allows Cap to make both systems upgrades and business process improvements simultaneously, enabling the company to benefit from the growing synergy between IT policy and business management. The success of this approach has seen many of its rivals forced into offering similar services, either by acquiring their own consultancy or their own in-house services business, whichever was lacking.
This convergence approach has been extended in Cap’s four global market units (GMUs) established between 1996 and 1998. These include telecoms and media (14% of revenue), life sciences (5%), insurance (8%) and utilities (4%). These are all sectors which are undergoing major changes, whether in demography, deregulation or market expansion, and ones which Cap believes are most amenable to its converged consultancy and technology services. Cap appears to be justified in this belief, with these GMUs accounting for around 10% of revenue after two years and with growth running at between 37% and 70% during fiscal 1998.
In terms of services themselves, Cap’s business is evenly split between management and IT systems consulting (23%), systems integration (25%), applications development (25%) and outsourcing (23%). These cover a range of increasingly important IT issues including applications management, enterprise resource planning (ERP), Euro and Y2K compliance, integrated supply chain management, customer relationship management and knowledge management solutions.
Outsourcing, in particular, has become increasingly important to Cap, both as a way of securing longer term income and as a means to extend its vision of combining management consulting and IT services. To date, sales have come mainly from big customers in the UK including Yorkshire Electricity, Virgin and British Steel but now Cap also hopes to capitalize on the growth of outsourcing in continental Europe.
Cap will, however, have to replace or modify some revenue streams. Most obviously, Cap’s continued devotion of considerable resources to Y2K, European monetary union and ERP projects, which together are estimated to make up around 20% of total revenue, may leave it vulnerable. Undoubtedly some reorganizing will be necessary post 2000. New technologies could be the company’s preferred route with its integrated supply chain offerings leading the way. It could also be looking to enter more niche technology markets and expanding the number of its GMUs, possibly in its second-tier verticals such as retail and transport.
Cap’s geographical penetration is, with two main exceptions, good. France and the UK both made up 24% of sales in 1998, with the Benelux countries adding 17% and the Nordic region adding another 12%. Cap has also been adding greatly to its European staffing levels, leading the European-based IT services employee growth table with a 23% increase, equating to 7,500 heads, during 1998. Outsourcing contracts provided more than 2,000 of these, while another 4,000 were graduates. Staff growth was highest in the UK where the company now has 8,500 employees compared with 10,300 in France and 1,400 in Spain. The Cap Gemini brand is an important factor in the company’s ability to continue attracting top talent although Cap showed a staff turnover of around 19% during 1998, partly explained by the high rate of additions.
Surprisingly, though, Cap is under-represented in Europe’s largest market for IT services, Germany. This apparent oversight can actually be traced to the 1997 sale by Cap of its 19.6% interest in debis SystemHaus, the German joint venture between Cap and Daimler-Benz InterServices, in exchange for the German company’s shares in Cap. Cap now has only around 700 consultants and IT engineers in Germany, most of whom work for Gemini Consulting.
More significantly, Cap is still struggling to make its presence felt in the US, a problem it shares with all other European-based IT services providers (with the possible exception of the recently merged Getronics/Wang Global). The company sourced only 14% of its 1998 revenue from the US, a market which makes up around 40% of the world market for IT services. Cap currently has around 4,000 employees in the US but although it has been trying to crack the American market since the company’s formation in 1975 it has so far failed to make the impression it might have wanted, currently lingering somewhere between 12th and 15th in the market, according to one company estimate.
Cap is, however, keen to address these deficiencies. The company’s April 1999 acquisition of Beechwood, a New Jersey telecommunications services firm, for around $200 million may turn out to be the beginning of a spending spree for Cap as it looks to grow its US and German operations. Strong financial income during FY1998 has enabled Cap to rid itself of debt, in preparation for additional purchases, possibly in 1999. The company is estimated to be prepared to spend up to FFr10bn ($1.59bn), using the FFr3.75bn ($595m) it raised in a March 1998 share issue and increased gearing to 50%. The company also intends to make a secondary public offering on either Nasdaq or NYSE to raise further cash. But while the lack of a strong German presence may be alleviated by acquisition – Siemens IT business has been mentioned as a possible takeover candidate – the problem remains for Cap that it has so far failed to make a real impression on the US market. How it deals with this will be crucial to its future success.
One way in which Cap feels it can raise its profile for its global push is through forging niche partnerships with other IT companies. This was demonstrated by its June 1998 partnership with US consultants Hagler Bailly to exploit the deregulation of the American utilities industry. Similarly, Cap is partnering US firm Saville for telecom network billings. Cap also announced a tie-in with Microsoft in April 1998 for the development of e-commerce solutions, an agreement that was extended in May 1999 to allow for provision of Microsoft’s knowledge management solutions.
All said, while Cap Gemini may not be the perfect IT services company, its proactive approach to the IT services business sets it apart from many of its competitors. While rivals like ICL and EDS continually have to reinvent themselves to remain competitive, Cap seems able to foresee market trends and to make provision before they happen. If Cap can apply the same logic to increasing its US presence there is no reason why it cannot soon regain its position as the leading European IT services company.
