Can Capgemini Bounce Back?

Midsize and regional services firms, with their local presence and vertical-industry focus, are winning customers at a rapid clip. Offshore-based firms are chipping away at GSI margins, as well, thanks to lower labor costs and 'round-the-clock application-development services. And some customers--the ones who spent millions during the Internet boom on large-scale consulting projects that produced questionable results--have simply sworn off working with global integrators ever again. As a result, all of the so-called Big Four integrators (Accenture, BearingPoint, Capgemini and Deloitte) are moving quickly to alter their business models, introduce new services offerings, and change their partnering habits. Capgemini, in particular, has undergone some of the most radical changes of all GSIs. The Paris-based firm (which recently changed its name from Cap Gemini Ernst and Young) built on its roots as a powerhouse systems integrator (SI) and outsourcer overseas with the 2000 acquisition of Ernst and Young's consulting group. What followed was a period of organizational and cultural chaos that left many wondering whether the company would collapse under its own weight.

Capgemini is, in many ways, the product of a marriage of necessity. The original firm, Cap Gemini SA, was one of the top SI firms in Europe and Asia. However, it had a relatively small presence in North America. In 1999 and 2000, the firm was on the hunt for an acquisition that would give it instant presence and credibility with U.S.-based customers, while at the same time open new avenues for growth in its traditional markets. During this same period, conflict-of-interest scandals erupted among the U.S.-based Big Five accounting firms and their consulting divisions. To avoid further perceived conflicts, the Securities and Exchange Commission pressured the accounting parents to spin off their consulting divisions into separate entities, or sell them outright. The firms begrudgingly complied. Ernst and Young put its consulting division on the market, and Cap Gemini came calling.

Once the deal closed, managers embarked on a path intended to merge the two companies' services offerings and leverage their global presence. On paper, it seemed like a good fit, and company executives predicted the integration of the two firms would be relatively painless, given the lack of overlap in their core services offerings.

The reality was much different--thanks to both internal and external forces. Some factors were simply out of Capgemini's control. As with every IT vendor, beginning in 2000 the firm had to deal with the double whammy of an economic downturn and the bursting of the Internet bubble. Many at the company later commented that the timing of the merger could not have come at a worse time.

What happened inside the company proved even more troubling. The Paris-based management team underestimated the challenges of running its new U.S.-based division from overseas, while the U.S.-based management team underestimated the business expectations of its France-based parent and failed to grasp its operational approach.

In retrospect, part of the problem was distance; the firm's leaders initially failed to establish a complete management team in the United States to run the former E&Y business. Another part of the problem was cultural. As a public French firm working mostly in Europe and Asia, Cap Gemini operated under different financial disciplines than the American-based E&Y. Shifting from a private to public entity--where investments, services, business models and management decisions come under intense shareholder scrutiny--was a big leap for many former E&Y consulting partners. Faced with these new business realities, many E&Y partners jumped ship. Their exodus resulted in a brain drain that damaged morale as well as the firm's ability to maintain existing services and create new ones.

Capgemini was not the first company to experience growing pains related to a merger. But the symptoms seemed to linger longer than most. It took more than two years for the firm to emerge from its funk. Its Paris-based executive team eventually established a new management structure that resulted in stronger global ties, and revamped the business model to make sure the firm had the resources to address customer needs. However, the delay proved costly: Accenture, IBM Global Services and others capitalized on Capgemini's troubles and stole customers and revenue.

Four years after its merger, the company now has a new name and a renewed focus on its four core service areas: consulting services, technology services, outsourcing/systems management and local professional services (delivered through its European-based subsidiary, Sogeti). Currently, Capgemini has more than 48,000 employees worldwide and reported revenue last year of almost $6 billion (down from $7 billion in 2002). The largest portion of that revenue comes from North America (29 percent), followed by France and the United Kingdom (each with 17 percent). Revenue is also fairly well-distributed among a variety of verticals (see "Vertical Glance," below).

Capgemini is also making investments in newer services offerings. One of the areas garnering particular attention is dynamic utility computing (a trend that has several names--on-demand, adaptive, agile, utility, etc.), which promises to deliver real benefits to customers, such as IT infrastructures that are flexible, adept and easier to manage by linking virtualized resources to new policy-based management platforms. Capgemini executives have realized that IBM, Hewlett-Packard and other vendors--the ones spending the most marketing dollars on pushing their utility-computing-based products and strategies--could establish dominant positions and leave GSIs out of the game. In the end, Capgemini officials came to believe that the firm needed to show it could implement utility systems that can be managed either by a customer or by Capgemini through an outsourcing agreement.

To compete, Capgemini intends to start talking to customers about its ability to deliver utility-based infrastructure resources--including some elements of virtualization and new policy-based management capabilities--through outsourcing agreements. To demonstrate that, Capgemini recently launched a grid-based utility capability inside its Netherlands practice, which has some 8,000 employees. The entire infrastructure is now up and running as a utility being run internally by Capgemini. The firm initiated the project to test its ability to roll out utility-based services and because the Netherlands division was due for a complete revision and upgrade of its IT infrastructure and systems. Capgemini performed its own internal assessment of its business processes to determine how the new infrastructure should be built and decided that employees in the Netherlands practice should share pooled infrastructure resources that can be provisioned according to different groups' business and application needs.

Since launching its utility operation six months ago, Capgemini has saved 35 percent on its overall operating costs for the Netherlands practice thanks to the utility architecture, which relies on commodity (Intel-based) servers. Capgemini intends to use this initiative as a showcase to customers on the potential savings of adopting a utility model. If it's good enough for the SI to implement internally, the thinking goes, then why shouldn't customers take a chance on it as well?

Success, of course, is not guaranteed. Capgemini still could be acquired or broken apart, depending on how well its renewed efforts play among customers. Competitive pressure from fellow GSIs and newer midsize players will continue to produce roadblocks on its journey to post-merger recovery. But whatever the final outcome, Capgemini is to be commended for emerging from its troubled history with a new purpose and a willingness to take chances again.

John Madden is director of the Professional Services Strategies practice at Summit Strategies, Boston. This column is based on his report, "The Sum of its Parts: Capgemini Retrenches for Future Success."