Posted by Lutz Peichert on December 16, 2010
Rumors became official on Tuesday: Siemens succeeded in finding a viable partner to buy its IT Solutions and Services (SIS) business. For all of us following the market in the past it wasn’t a surprise that ATOS ORIGIN is paying €850 million to take over Siemens’ IT business. This sum is a mixture of shares, bonds and cash, which will make Siemens a prime shareholder of ATOS for at least for a five-year period. In return ATOS will provide Siemens with Managed Services and System Integration worth €5.5 billion over a period of 7 years.
Question: What does this mean?
In the short run, even though this transaction will make ATOS the biggest European-headquartered IT service provider (with an expected combined revenue of approximately €8.7 billion in 2010 growing to an expected €10 billion in 2013) the direct impact for the IT user market will be minor. The mentioned outsourcing contract effectively represents one of the largest deals globally, but the impact on clients will be minimal as SIS delivers a significant amount of services to Siemens today. Second, ATOS ORIGIN is currently running a major restructuring program called TOP. And those projects combined with an acquisition of the mentioned size will be a challenge — at least. Thus meaning that ATOS ORIGIN’s focus will either be to finish the TOP program and then integrate SIS or extend TOP to include SIS. Either way the new organization will need some time to form — and so will the market impact.
However, in the long run ATOS ORIGIN will be able to become one of the most prominent — if not the prominent player at least in the European market space. Siemens’ historically strong presence in some industries and regions (e.g., public sector services in Central Europe) as well as its extensive knowledge and capabilities in the PLM, smart grid and utility management, and the healthcare sectors can become a real benefit to better position the new ATOS ORIGIN in a market segment beyond infrastructure services — where it is mainly positioned today. And the sum of the international clients that both companies are serving at the moment can help ATOS ORIGIN to better position and strengthen their global presence.
Question: What is the risk?
As with any large acquisition such activities carry some risk. The biggest risk is with the employees. How will they behave, and how will they accept this acquisition? Especially those who are extremely important for ATOS ORIGIN to drive future business (PLM, smart grid and energy management) or those currently working in the big deals that SIS is bringing to the table (e.g., BBC, Hercules, etc.). Another risk is the energy that this acquisition and the integration that has to follow will absorb and the effect this will have on the existing client relationships.
Question: What are the challenges?
Even though this acquisition is really big, it is a Europe-centric acquisition. Both companies are delivering and serving mainly European clients and both companies didn’t really succeed in opening up the other continents. Only 7% of SIS clients are in the US, and approximately 12% are based in the Pacific Rim. Not to say that the majority of their delivery capabilities are still in Europe — even though near- and offshore capabilities are growing. But the biggest challenge for both parties is not to make the same mistakes that other companies have made when integrating the organizations. Recent exercises have shown some horror scenarios in which account management relationships are changing almost on a monthly basis due to organizational integration efforts.
Question: What does it mean for me if I am a client of either company?
Existing clients of both of the companies should closely watch and monitor their vendor relationship. As a nature of such acquisitions, the account management and client relationship activities as well as service delivery efforts will likely experience a shift in focus as internal activities and integration efforts will require attention of individuals. Those clients should schedule additional meetings and develop a more intimate relationship to ensure a constant service quality.
Clients that are currently in an RFP phase to outsource services to either of the two companies should investigate and discuss any impact factor that will have an influence on future transformation and delivery services. Those issues have to be included in the risk section of their selection matrix and have to be quantified, measured, and factored into the equation.
Clients whose contract is coming to an end within the next 12 months and envision renewing the contract should contractually make sure that the delivery workforce does not change without early warning to ensure equal delivery quality. In addition you may want to review all contract clauses that deal with early termination and the right to renegotiate if major changes are going to happen. In addition clients should renew those contracts for a shorter period as usual to observe proceedings and allow for changes.
At Forrester we will keep a close eye on what is happening as a result of the paperwork due to be finished mid-2011, and we will publish research as the acquisition moves forward.