EuroBusinessMedia (EBM): Steria, one of Europe’s leading IT services companies, just reported earnings for 2007. François Enaud welcome, you are the CEO of Steria. What are your comments on the company's performance in 2007?
François Enaud (FE): We are in line with our expectations. One year ago our objectives were fixed around three goals. The first was to reinforce our market share in Europe in order to consolidate our positioning within the top ten players in the IT service market in Europe. That was the first objective we had. The second one was to push and to be much more advanced in the global delivery model in order to bring the right answers to the new demands of our clients. And the third was around increasing the added value of our services and very important in order to escape the very huge pressure on prices for the commoditised business. So around these three objectives we have made significant transformation all along the year and at the end of 2007 our profile has been really and dramatically transformed and changed. For the consolidation in the European market, we have now acquired a significant market share in the UK, which is the first IT market in Europe by far. We are now within the top ten players in the UK, reinforcing considerably our top ten position on the overall European market. For the second objective, at the end of the year our profile is definitely different than one year before, because we have now more than 5,000 employees in India - which is definitely a huge proportion of our overall headcount – 20000 people. 25% of our headcount is today located in India which is definitely completely in line with the demand of the market. And for the third objective, the increase of our added value, we have invested significantly in marketing and technical efforts to develop twelve core offerings to where we will have definitely some differentiators and some competitive advantage to be pushed on the market and to gain competitive advantage on the market.
EBM: More specifically what are your comments on the group’s financial performance in 2007?
FE: For the financial performance you are right, during this transformation Steria has at the same time achieved our goals, particularly for the revenue growth - revenue growth has been up to 1.4 billion euros, which represents an overall growth of 12%, pure organic 4% -, an improvement for the fifth consecutive year of the profitability from 7.1 to 7.3, and on top of that a significant improvement in the operating free cash flow which has increased by more than 150% versus one year ago, which is as well a very good sign of our capability to master our working capital.
EBM: What is your update on the integration of Xansa which you acquired just at the end of 2007, in particular can you provide us with more detail today about how you plan to deliver all of the synergies and how you will increase your margins in 2008?
FE: Yes sure. First, we are fully in line with our plan, the plan we designed when we knew of the acquisition. Regarding the customers’ point of view, I’m very pleased to notice the very, very positive feedback from our customer basis, taking the measure of the increasing added value we can bring to them now through the combination of these two assets. Secondly, it’s from our employees themselves, it’s very tangible to feel their enthusiasm to be part of this new entrepreneurial story, which is the combination of these two companies together now working as one. Third, we have of course, after having successfully done our refinancing, we have focused our energy on designing a new organisation, to set up new processes to leverage all these new capabilities we have together. Particularly in the UK now we are operating as a single organisation, mixing teams from Steria and from Xansa together, and we have as well set up common organisation, common processes to have a direct link between our Indian capabilities and our teams and business teams in the other countries in Europe. Secondly and thirdly, we have as well very intensively and rapidly invested, with a marketing team, to design a new, common portfolio of offerings which is now - I would say -the main tool for our sales force in each country we are in to promote in the same way our new capabilities, the capabilities of the new group. And what is as well very important to notice is the fact that within each of these twelve core offerings we have included an offshore dimension which is definitely a new capability we have, not just to be more competitive, more attractive with these offerings for clients, but as well definitely more productive in the implementation of these offerings. And concretely for the fact that we have included this offshore dimension in our portfolio of offerings, we have now currently a significant pipe of offshore business which is now above 100,000 man days booked in our pipe and we have already signed ten new deals, ten new contracts, for non British clients, for French, German and Scandinavian clients in only two months, which is very promising to achieve our goals, our goals being effectively to generate our synergies, the synergies we have indicated to the market, thanks to the use of these offshore capabilities. Regarding these overall cost synergies we have planned in our business model, we have indicated an objective for 2008 to generate 23 million of cost synergies overall, including, of course, the offshore I was just mentioning before. We are definitely fully in line with this target. I can confirm that I’m very comfortable to deliver this 23 million euros of cost synergies for this year, 2008, which is definitely a very solid outcome from the acquisition, which can help me to confirm my overall target for operating margin for 2008, which is to deliver more than 8% of operational margin in terms of profitability.
EBM: Can you give us more detail about your plans to apply Xansa’s Indian offshore capacity to Steria’s business model?
FE: First, I would like to say that we have the huge advantage to benefit from ten years of very successful experience of Xansa in working together in an integrated way between onshore and offshore resources. What they have developed very successfully is what is recognised by the market to be one of the most advanced delivery models in Europe. It’s a seamless organisation, putting together onshore and offshore resources to deliver a project for a client. What we have to do now is not just to reinvent a model for French or German clients, it’s just to replicate what does exist already - what is considered to be very successful. It’s far easier than if we were starting from scratch. Secondly, to replicate that successfully, what we have done already is to design this set of processes, methods, tools ready to be reused from the UK, in France and in Germany, we have designed and put at the disposal of all the sales forces and bid management forces and the project management forces, we have now brought to them this set of work packages ready to be used and that’s why they are now really successful to convince clients, not just of our Indian capabilities, but in our capabilities to be really industrial and very efficient in the transfer of activity from onshore to offshore and that’s why we have already signed, so far, to-date 10 deals with new clients outside the UK. Secondly, to go further and definitely to change the cultural mindset of our staff onshore, I have decided to go further than that, to put within a Steria academy, to set up a set of group training programmes to promote our best practices regarding our offerings, regarding our delivery model, regarding our way to sell them, regarding our way to provide transformation capabilities to our clients, we have designed a set of group programmes, common to all our staff, to be the support for training and this training voluntarily will be located in India, because the double benefit for an employee having such training will be not just to get the benefit of our best practice through this training programme, but to receive this programme in India to have as well the benefit of this new cultural dimension of the group.
EBM: For those clients who are buying into your offshore solutions or for those prospects who are considering doing so, are they requiring you to lower prices in return for going offshore?
FE: First, I would like to specify and remind you that offshore is not just a question of cost arbitrage. And I prefer to mention the global delivery model. What does represent a value for the client is not just to provide low cost resources, but is to secure the delivery of your projects. The main advantage for the client through this industrialisation is to be excellent the first time. The main source of savings they can expect is regarding this capability of their supplier to deliver service excellence from the first time and on budget and on time. That’s why the industrial model is much more important than the use of low cost resources within this model. Now, of course, within this model, when you have a significant proportion of offshore versus onshore resources, you add a second advantage - which is to decrease the cost of the production - and thanks to that you can propose to your clients a win-win game with this industrial approach, which is not just to decrease the price and so the cost for him, but is as well, together to increase the quality and service excellence and to share with him the productivity gain, meaning that you can be very attractive for him in terms of quality and cost advantage, but as well for you to keep a significant potentiality to increase your growth margin. Secondly, I would like to mention as well that offshore - and this overall industrial model - is definitely a growth driver, in the sense that with this overall approach and this industrialised integrated approach mixing together onshore proximity and offshore industrialised platforms, you can propose new services to clients. You cannot propose if you are just onshore. Just two examples, the first is about testing. It’s now a very hot topic for clients - how to secure the transition between the development of a new application and the running of this application. And it’s particularly important when this application is related to a core process, core business to the client. This kind of service was usually done before by the client on site. Now, you can - with new methods, new tools and the platform we have in a country like India - now we can propose these services on a very large scale, as we do for clients like Marks & Spencer or for large telco operators. We can propose these services on a very large scale and in a very productive way for the client. And the second example, is for business process outsourcing, what we call service on demand. Meaning that now, with such platform and capability we have in a country like India, we can propose not just IT services, but as well we can go further and propose services related to the business processes of clients, like we do for banks for instance, to propose services around their mortgage, or insurance for claiming processes or in e-payment for card processing. These kind of services can now be provided by a partner, by a supplier like Steria today with these offshore capabilities because we can provide very top level service quality at a far better price and cost than the client can do by himself on site, onshore.
EBM: How would you rate your ability to withstand a macro-economic slowdown in 2008 which is the prevailing scenario in the market today?
FE: First, I would like to say that for the time being we don’t see any slowdown in the market. The Q4 order entry has been good. Plus 9% versus one year ago. In the beginning of the year our order entries are still very dynamic and more than one year what it was in the beginning of 2007. So, definitely the current situation is still good. However, we cannot ignore that there is some tension in the overall economy and we cannot not prepare for a scenario of slowdown or downturn in the second half. To face such a new challenge and potential difficulty I would like to point out first that Steria has a very solid profile which is definitely more resilient than the average on the market and very, very concretely - not just conceptually - but on very concrete facts. First, our proportion of recurring business is above 60% of the overall revenue. Secondly, we are dealing mainly with public customers. Overall, what we do for governments across Europe represents more than 35% of our total revenue. The second market segment is what we do for retail banks, for utilities, energy notably, and telco where the demand is still very dynamic. So, that’s definitely the advantage we have, which has been as well significantly reinforced by the merger with Xansa, because within Xansa more than 80% of their overall revenue is locked on long-term contracts. So, in case of sudden downturn and slowdown - obviously we are thinking about this worst scenario - and we are preparing with the executive team an action plan which is ready to be implemented in case of, and within this plan - just one thing, without going into detail - is we are considering within our portfolio of offerings, the one we can especially propose in a case of very difficult economic market just to help clients to manage themselves the challenge they will have to face in case of a sudden slowdown and particularly on BPO, on cost reduction, we can have some specific offerings to bring the right answer to clients, to help them to face this very difficult, potentially difficult economic market. That’s one action - very concrete - within our plan, is to select this kind of offering and to design the offerings properly to convince clients rapidly and, of course, we have as well a plan regarding cost reduction if we consider that we have to reduce the overhead cost in order to align our cost structure with the new revenue profile of the group in case of slowdown and we have as well a set of plans - particularly regarding recruitment - in order to save our overall margin target, which is, I remind you, to deliver more than 8% in 2008.
EBM: Other players in your sector are seeing a slowdown in the UK market in 2008. What is your outlook for sales in the UK this year?
FE: First, I would like to point out that our situation in the UK for this year is a bit specific to Steria, because we are in an integration year. The first objective for us is to succeed in this integration. This integration has very well begun - as I said just before - but the first objective as I said above the others is to deliver the cost synergies, the 23 million euros in cost synergies, we are committed to. We are very well on track to deliver this objective. Now regarding the revenue, I would like as well to point out that our profile in the UK is very solid and resilient because we have more than 50% of revenues for local and central government, definitely less sensitive to any sudden variation in the economy. And secondly, we have more than 50% of our revenues on managed services of BPO business, which is a long-term business. So, as a result of that, a significant proportion of our revenue is locked on pluri-annual contracts, meaning that in case of sudden slowdown, our current revenue is not vulnerable. Now, for the additional growth, the question is, of course, about what will happen in the economy, so, prudently we have planned a very slow growth for this year considering that first we have to deliver the cost synergies and to succeed with the integration and secondly to take into account these uncertainties in the economy - in Europe globally and in the UK especially - we are prudent; but again we are not at risk to preserve our current revenue considering that a big proportion of that is locked on long-term contracts.
EBM: François Enaud, CEO of Steria, thank you very much.
FE: Thank you.
