For Capgemini, Europe’s biggest technology consulting company, India is emerging as an effective strategy for improving profitability. It will also help the company compete better with rivals IBM and Accenture, apart from Indian outsourcing companies such as TCS and Infosys. Paul Hermelin, the group CEO of Capgemini, who will turn 58 next month, plans to replicate Indian companies’ pyramid structure, which involves hiring fresh engineering graduates and achieving double-digit profit margins, higher than around 6-7% currently. In an exclusive interview with ET, Mr Hermelin says it may be a tad too early to celebrate the end of recession. Excerpts:
Banks seem to have started spending in the US and Europe on technology again, but some argue that everything may not be right. Are we celebrating too early?
You’re right, celebrating early would be the right word. First, the downturn was amplified by severe cost cutting by the main companies. We now see the 2009 profits and find that they are generally less bad than what people feared 12 months ago. It meant staff cut for protecting earnings, which amplified the recession. It’s just like automotive — they cut their inventory of cars, they stop the production just to exhaust their existing inventory. By doing that, they over reacted. Part of the better feeling after the fall was we have done that kind of ‘cost killing’ exercise, and we have come back to something that is more appropriate, but it is not necessarily to the level before the crisis — we have swallowed the over-reaction, that’s it.
If I take one sector that has apparently recovered — it’s the banks. There are far less housing programmes, less borrowing by households, so it’s not exactly the same world as before. So, if I look from our angle, we now see bigger projects. Last year, it was all about price reduction, vendor consolidation, now, they are back launching some new projects, but most of the projects have a mission, which is to reduce costs. I do not see banks launching new projects.
There is one point which has not been addressed, that is, the confidence of the end consumer. People are still fearful. Frankly, the level of saving in the US is better than it was — they did not save at all! They just consumed more than they earned. France has one of the highest savings in entire Europe. Savings would be directed to investments. If they save and do not consume, the money will be frozen. The US looks more optimistic. Americans are always optimistic, but only when they are completely depressed. They can’t stand pessimism for long.
Have you started to win new contracts?
On system integration projects last year, it was difficult to sign a project worth more than e10 million because projects were sliced in two pieces, people were delaying commitments on large projects. So, now, we have a good pipeline of projects between e20 million and e100 million, which is normal.
Many Indian IT firms are now looking at public sector offshoring as the next big opportunity. What lessons do you have to offer based on Capgemini’s long haul in UK’s government outsourcing market?
This sector is not too good for our Indian colleagues because there is a lot of protectionism. We are a big player there. First, we start to see some offshore presence and we can leverage them, too. With central governments, you couldn’t even talk about it, now you can. So there is an openness to consider what it would bring. When we run the tax authorities in the UK, they transfer to us 2,600 people.
Among them, some are still civil servants, with all the rights of civil servants — we can’t lay them off, it’s forbidden. So, if we offshore completely, we would be left with civil servants. It’s just not about offshoring, it’s about dealing with substitution. They want savings, but it’s quite difficult for them to manage the social consequences, so we have to find a way out and empathise with a customer’s problem. Will it change? Probably yes. Can it be as radical as in the commercial sector, maybe not.
With nearly 75% of revenues from Europe, there are challenges for Capgemini as you drive more offshoring. How are you addressing the local sentiments?
The first point is UK is a mature market. Today, we see a higher acceptance of offshoring in the share of Europe where people can work in English, which could be Scandinavia and Belgium. These are small countries where in a customer organisation it’s pretty well accepted to work in English.
Now, when we look at all the resistance in Germany, even in these countries there are mature segments, there are true MNCs with global presence. During 2008, the offshore leverage was 48% in terms of headcount, last year we reached 55:45 and this year, we will reach 60:40. So you see, in two years, we moved 10 points on delivery inspite of big public sector contracts in the UK. If you put the UK public sector aside, the ratio of offshore is quite high, 70-80%. Today, we have transformed the French and the Dutch financial business units. In Southern Europe, we had offshore leverage of 9.5% and we moved it to 15% in one year, so it’s an evolution.
How much can you move offshore and what impact will it have on your profitability?
In terms of billable people, today our ratio is 32% offshore. We have grown the offshore ratio last year, from 28% to 32% and our goal is to move it to 36% by this year end. Last year, we grew our Indian headcount. If you look at the European IT services market, profit margins are between 5-10%. In the US, good players are at 12-15% and if I look at India, they are above 20%. So, the first point is the absence of flexibility in Europe, when you lay off someone it’s very expensive and you try to delay it, that has a weight
on margin. We at Capgemini said with offshoring it will move to double digits pretty soon.
I think it’s a question of mix. The talent of pure offshore players has been to leverage the pyramid very well and use the freshers. That’s the way Indian companies deliver superior margins. The tradition at Capgemini has been to sell mainly fixed price projects, whereas our Indian colleagues sell more of framework arrangements that are multi-year relationships — that’s the model that allows to optimise the pyramid.
Would you also look at hiring freshers?
Yes indeed. We have already started recruiting from the campuses. We had started with what are called lateral recruits, but we are now moving to hire more freshers. But this is the model that the western companies could not start, and we are getting there.
The 32% offshore in terms of revenue per head is one third, which means our offshore revenues is 13%. Which means 32% of headcount is 13% of revenues, and the margin impact is in proportion to people and not in proportion to revenues. So, while offshore will help us drive our margin up, today it’s still 13%.