Mumbai: Paul Hermelin, chairman and chief executive of the Capgemini Group, Europe’s largest information technology (IT) services firm, is one of the earliest proponents of the offshoring model. The company is the only European firm to employ more than 50,000 people in India, making the country its largest offshoring centre. In an interview on Thursday, Hermelin explains why India will continue to be important for Capgemini. He also addressed concerns over the slowing European economy, which accounts for 71% of its overall revenue, and underscored that clients are increasingly looking for digital transformation deals which involve social, mobility, analytics and cloud, or SMAC, technologies with analytics being the biggest driver of innovation. Edited excerpts:
There are concerns about Europe, your main market.
Everybody was hoping that recovery in Europe would happen soon. But clearly that has not been the case. However, from the outside, you look at Europe as a whole, but there are many parts to it. The UK is growing nicely for us. And for the first time, we have recovery in southern Europe. So Spain that has been languishing for many years, is looking up. There’s good progression in Italy, too. Besides, we are a provider to large companies and even big European companies are global and use technology to support their growth, and so have to invest in technology. I would not be that optimistic for purely European domestic clients. We can sail our way in Europe, but I will not be very optimistic about European spends. Also Capgemini has a fairly solid performance in the US. And we are helped because of our Indian platform which is growing 17% annually, especially when most Indian IT firms are growing in single digits.
What role do you see for India on digital transformation deals?
Clients today look at technology as a cost. That led to a generation of outsourcing (Hermelin calls it externalisation) contracts. My role at Capgemini is to build (the business) around two pillars--one is productive IT, and the other I would call, differentiating IT. Consumer goods and retail are the most demanding sectors and clients in the US remain the most demanding.
For Capgemini, India is truly where we engineer new solutions for productive IT. Then there is IT that supports digital transformation. Here, too, India has a role to play. But we should acknowledge that the West coast of the US is perhaps the birthplace of innovation. So what is the contribution of India to the new acronym SMAC? First, we test new ideas. Then we develop some solutions here. We test them with some Indian clients, too, that are eager and hungry for innovative solutions. We have developed solutions in India for utilities, smart meters and smart grids. We have also developed a client-relationship platform in retail, but that I would say is the new world. It will include a combination of people with different skills including creative people.
That is why we see even some new competitors even from the advertising world that are starting to play with technology. So we have to deal with that and reposition ourselves.
I was positively surprised to discover that when it came to sectoral growth, our biggest growth this quarter (July-September) was in utilities. We had good growth in manufacturing, some growth in financial services. In the financial crisis, they froze all their investments, after which they did catching up and now it seems to be stabilising. For us, telecom is not doing well, since there is a crisis in the European telecom sector. If there are 14 telcos in the US, Europe has 140 and none of them has critical mass. They are all bleeding. Until a consolidation occurs, the sector will continue to be in trouble.
Your consulting practice, though, has been contracting in the last two quarters.
Traditional consulting is shrinking but digital consulting or digital transformation consulting is on the rise. We are fine with that. Progressively, our consulting will be all about digital—analysis, diagnostics for digital customer experience and digital supply chain. Digital transformation contracts usually cost clients a million euros. A program for mobility will be in the range of €5-10 million A contract on big data can go up to €50 million. There are some transformations that are more technologically-intensive than others.
Clients today are focused on the digital customer. There are three dimensions to digital transformation. First is the customer—market segmentation and platform for ecommerce—that will fetch you a couple of millions. Then there is transformation of production—like a digital supply chain for a manufacturing company—that can get you a hundreds of millions. Last one is transformation of value-added services.
For example, I can see Google some day proposing home insurance to consumers using data provided by Nest that it will use to automate their smart homes (Google Inc acquired Nest Labs for $3.2 billion in January). So Google may become a competitor to insurance companies. In all such cases, you will need a bit of consulting and then add technology to it.
Even as digital is growing at a fast pace, your traditional services still account for 80% of your business. When do you see digital becoming at least 25% of your overall revenue?
Traditionally, most of our go-to-market was oriented towards the IT department. Today, SMAC accounts for around 13% of our revenue, growing at 20% per annum. So we should be around 25% in seven-eight years. According to Gartner, technology ordered outside the IT department is growing at about 20% while that ordered from within the IT department is growing at only about 3-5%. So we can’t ignore digital.
Are deals becoming smaller?
Ten years ago, 75% of outsourcing was in the US and the UK. Today clients in these markets are very mature and they try to optimize their contracts by slicing them into three-five individual contracts where they look for specialised services providers. But in Continental Europe, which does not have a tradition of large contracts, we are seeing some very large ones since these are first-generation contracts. Same is the case in countries like Germany, Holland and France even as deals in the US and UK become smaller and more specialised.
Companies today talk about automation and robotics as non-linear initiatives or those that reduce the reliance on headcount growth. You have 140,000 employees. How do you perceive the whole linear vs non-linear growth debate?
We do not know how to grow without adding people. When I started I did not know that the group would go so big. The current Capgemini management model can accommodate about 200,000 people. After that, it will require a new model. Productivity IT work, which accounts for about 80% of the revenue, is labour intensive. But differentiating IT, which gets 20% of the revenue, is non-linear. However, the 80% business is still growing.
Do you perceive companies like Google Inc and Amazon Web Services posing a major threat to companies like yours with their huge data centres and cloud infrastructure services?
Those are capital-intensive businesses. Our capex is 2% of our revenue. The cloud infrastructure model is a very different one. We don’t have the balance sheet to do it.