Thursday 10 January 2013

Capgemini NL: disruptive, desperate, or both?

Capgemini has made headlines in the last past months, starting July 2012. Dutch headlines, that is, as Capgemini NL decided to start a large reorganisation that involves laying off hundreds of people and restructuring the organisation so it can meet the current challenges any system integrator faces: a changing market, and shifting revenues

This post will show you why Capgemini is desperate, and whether it is disruptive. It is innovative for sure, and maybe leading the way for others, or just postponing the inevitable in the longest way possible

In October some 400 people were laid off, and this week another 400 have heard that they are too expensive, and should turn in up to 10% of their salary - or be laid off as well. The latter can up their market value by increasing their competences via a program called Diamond, but to which extend that will save them from turning in salary or be spared from being laid off, yet remains unclear

The latest news (today) is that Capgemini NL will additionally operate via a broker (sorry, Dutch only) in order to claim a larger piece of the freelance pie, via a separate legal and fiscal entity that will largely if not entirely offer freelancers to their customers where the rate is just beyond and below what Capgemini can afford for their own employees. Please the customer as an organisation and still make a buck, but without Capgemini personnel.
And the other news of today is that Capgemini NL will cease to offer local solutions (sorry, Dutch only) as those simply stopped being profitable, as their CEO claims. That does seem to be in contradiction to the previous paragraph, but I think the full message reads "offer local solutions via Capgemini personnel"

1 Let's first discuss the situation

Ever since the dotcom bubble, revenues and profits have declined. Demand decreased at first but increased shortly after, yet rates fell hard and sharp and didn't return to their initial level. As a second movement, offshoring / outsourcing entered the IT arena and regardless of the debate whether that has truly resulted in decreased costs for clients on a whole, it certainly is an important factor in attributing the loss of revenue and profit per employee.
System integrators have managed to polish their figures by "going Indian", i.e. replacing some of their workforce by others who are a few times cheaper, and have less experience, education and company culture. However, the fact that they are x times cheaper (if memory serves me correctly, the average Indian cost $20 back in 2003) largely made up for the lack of the latter three

A general disclaimer: I'm not treating anyone like cattle, or at least I'm not intending to do so, but I'm merely rephrasing the general perception of "a cheap resource may be not even half as good as his traditional counter-part, but he's so many times less expensive that we'll easily make up for that, and proper spray-painting will do the rest" that has ruled the field of outsourcing since the beginning

Compare Accenture, Atos Origin, Logica and Capgemini for the last 8 years and you'll see the drops in per-person revenue and profit. That is even true for their Indian counter-parts or the so-called pure players. Although the latter have increased their workforce by a factor 4 over the same years, whereas the others only managed to double it. Overall outlook: the system integrator sector as a whole has a year-over-year decline in revenue and profitability

In addition to this situation, there's another (huge) trend in NL: Capgemini and others have been meeting stiff competition from IT personnel that used to work for "one of the above" but chose to continue independently as a freelancer. The trend for these is that self-employed in commercial services increased by 41% in 9 years, whereas perms did by 1%. In numbers: 88,000 over 35,000. Over those same years, e.g. Capgemini went up and down from 5,700 employees to 6,200 employees (and now stands at 4,700 - the same number of people it had in the year 2000).
Needless to say, freelancers have a lot less cost than the average IT employee: they usually have 10-15 years of experience, so not much need for training. Lease-car? They probably own their own, like me, and drive it privately - I even make money on my car year-on-year, in stead of paying 1,000+ per month for something I don't even own. Buildings, conference rooms, events, advertising? Yup

IT freelancers run their business at almost zero cost. A laptop, a phone, and a car is all they need, and for less than 5,000 a year you can have that all.
Compare that with the likes of Capgemini, where training takes up 10 weeks on average in the first 3 years, and 2 weeks each after that. The cost of training sits around 500 euros a day, but the missed revenue is equally hurting, and 50-75% of that. Guesstimating that at 15 weeks and 750 euro a day, BAM that's 11,000 euros a year for training in the first 5 years.
A company lease car? The trend to that is that people are leasing smarter, as the Tax department has been hunting them down, and smaller, cheaper, less fuel-consuming and more environmentally friendly cars are being leased. Still, where a mid-size car used to cost 1,000-1,250 euros a month, it's more like 900 now. And that is another 11,000 euros a year, this time for driving.
Office cost? The general rule in NL is that an office space costs 11,000 euros a year (I'm not making these numbers up guys!), of which housing makes up 30%, Services & Means another 30%, and ICT another 30%.
Last but not least we have marketing and branding in the largest sense of the word. Capgemini's Les Fontaines is a perfect example of that although the usual advertising and conferences add to it as well. Big companies have their own travel agencies, legal departments, spokespeople, gurus, evangelists, and so on: I have no idea what that costs but let's just top it off at 7,000 euros a year so we reach the nice round number of 40,000 euros a year.
Sickness, maternity leave, holidays, and being in between assignments deal another blow to billability (sic) and profitability. But let's just leave fixed cost at 40,000 shall we?

All in all, we have 40,000 a year in cost for a greenhorn IT employee. Training need will become less over the years, but training expense and missed revenue will increase, as will leased car expenses. So, let's just stick to 40,000 euros a year in fixed costs for a traditional IT employee, excluding salary, insurance, pension, benefits and Lawd knows what


Combine that with the dropped revenues. Get the problem? I sure hope so. The answer to the first question thus is: Yes, Capgemini is desperate. And it should be. Fixed costs like these and an average work year of 1,500 hours mean that your employee's rate starts at 27 euros an hour, which will still not put a dime into his pay check. With a starting salary of 30,000 a year, that means a newbie without any experience needs to work 1,500 hours a year for a rate of 45 euros an hour excluding VAT, and you will break even

2 But is Capgemini disruptive?

The measures currently taken involve 75 million euros. With the current labour laws in NL, that allows for roughly 750-1,000 people being laid off, but the programme is wider than that.
Laying off people is not disruptive, but in NL it's a long-term investment that can hardly be carried out by one country alone without the help of HQ.
Asking personnel to turn in salary seems disruptive, although this so-called recalibration also occurred when Capgemini took over Volmac in 1992. Guesstimating that some will go all the way, some will be laid off, and some will manage to hand in less, the average savings here will be 3 million euros a year - that is 2.5% of per caput NL operating profit, or in other words will buy Capgemini NL (yet another) year of not having to increase salaries across the board.
Extending your market across your own company's boundaries (via the broker mentioned above) certainly is disruptive. A 10-15% margin seems feasible, looking at the traditional market, but under the new circumstances this will probably not be more than half of that. I'm being benign here as I know of some high-volume brokers that ask 1 to 1.5 euros an hour just for mediating the contract and pay.
Given the fact that the average Technology Consultant rate for Capgemini (worldwide) is 75 euros an hour (page 20), and that the people traded via this construction will be considerably undercutting that, let's take a rate of 50 euros an hour on average, on top of which Capgemini NL manages to make that 5-7.5% margin.
That translates to 2.50 euros an hour margin, possibly 3.75

Again, a pause to let that sink in. 20 euros a day, averaging out on 25 euros a day, 500 a month, 4.500 a year given a 20% slack in billable hours.
Yet, it's net operating profit, mostly. Do 200 of those (and I'm confident Capgemini NL can do up to a thousand) and there's almost 1 million in operating profit - 4.5 million for 1,000. What will the broker take? Half a million in cost, I think, so that 5-7.5% margin is actually 10% less, but let's not fuss about that as these are guesstimations anyway.
Disruptive, yes. Life-saving? No. On average, given the Capgemini NL operating profit over the last 5 years, this will add 4.5% to that. But most importantly, it will extend Capgemini's market from traditional onto new. Question just is, will it be successful?
Capgemini NL is not unfamiliar with hiring third party personnel and deploying those at a client, yet it is not noted for its speed and ease of issuing payments according to contracted agreements, from what I hear of freelancers. In addition, freelancers hired via Capgemini will certainly rub off some Capgemini paint at the client, and be perceived as "those Capgemini hires" regardless of their relationship with Capgemini

The verdict
Update January 15th 2013 07:58: I forgot to give my conclusion with regards to the measures taken above. Here it is: the total impact of the measures taken will be that Capgemini NL adds 7% to their operating profit by asking 400 people to turn in 10% of their salary (4.5%), and when successfully deploying a broker who trades non-Capgemini personnel on the free market (2.5%). Laying off the 400 (some claim it's 500) people will save them another 25 million in salary costs, but the work those did will have to be done by others, and the revenue they generated (no matter how small) will be lost. Let's suppose that half of them generated 50K a year: that's 12.5 million lost, or 12.5% operating profit. So the measurements taken will add 20% to the operating profit, meaning that Capgemini NL will break even on this reorganisation after 4 years, maybe 3 if they get lucky
The decision to cease delivering to local markets for local solutions seems a big mistake. Especially in combination with the news of the last week. However, what Capgemini NL really is saying is that, after dozens of years, it stops delivering local projects, and only will pick up the much feared project-glove in a global context where it can use its economies of scale.
The underlying truth appears to be that it has failed to turn its old-fashioned Time & Material approach around to a project-driven one, something that it has been trying for the past 20 years. It might also be interpreted as a confession that Capgemini simply can't deliver global projects from a local perspective, at least not when it concerns Capgemini NL. The harshest claim would be that Capgemini NL thus admits that it sucks at project management, but I certainly won't go as far as that

It seems to be in direct contradiction to the measures undertaken: if rates for body shopping sink, you should cut cost and try to make money by delivering smarter - not cut costs period. Capgemini NL should use its decades of experience to outwit the competition like an experienced rally racer who knows each and every corner, ditch and tree on the track. Evading something that will be in your way is much less time- and money consuming than running into it and fixing it afterwards

The road ahead for Capgemini NL that I see, given their current (re)directions, is one of outsourcing its own and even other employees at the lowest possible cost. The programme thus far is focusing on cutting cost, in stead of developing new ways of doing business. The aim at Infrastructure Services in stead of Application Services will be regretted in 3-5 years from now, if not already.
If infrastructure weren't a commodity already, it will certainly become one in this decade, with Cloud slowly eating large pieces of the pie. SAP and Oracle will lose ground ever faster, and small SaaS solutions will take over - that need to be integrated, managed, and maintained.
The future for Capgemini could and should be in Application Management from start till end, meaning that it should change its role from system integrator to supplier integrator. The customer doesn't want 13 different people to call when there's an issue in his IT landscape in 2020, it wants one person to take care of it, and report back to him. It is the age-old story of why there are building contractors and site supervisors.

Capgemini NL seems to be making the mistake that it considers cost without considering profit. There is no cost, there's only profit margin. Increasing your profit margin by trying to deliver the same for less will go down like a lead balloon, given the average fixed cost of 40,000 K a pop

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