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The doves - Josepha

For a clear view of the Group at the end of 2003, you really need a pair of bifocals. In the short term, it means examining the results, and that can be very frustrating. Taking the longer view, however, gives a better idea of what has been accomplished – the successful revival of cer tain key aspects of the organization, the positive effects of energy spent – and then we find that we are more confident, even cheerful.

In many respects I would have liked to celebrate my tenth anniversary with the Group in a happier context. An unfavorable environment unfortunately made that impossible. We’re in the third year of a sluggish demand, all of Europe is infected by the negative trends we saw emerging in the U.S. (price pressure, the appearance of new competitors – especially in India), a trans-Atlantic crisis between the U.S. and Western Europe, conflicts in the Middle East with their string of deferred investments.

At the same time, we have reached a new stage in the maturity of our markets and their key players. After the fervor of the 1990s, the highly-touted “new information and communications technologies” have by now asserted their contributions to our clients’ progress and productivity. A few important trends are emerging which are gradually shaping tomorrow’s IT landscape: new open architectures to accommodate Web services, virtual machine networks, the co-existence of large proprietary or open standards, etc. And all this is happening as consolidation continues, and as the players grow more powerful and more specialized in their respective fields.

A frustrating year? No, I would rather call it a challenging one. Once again we had to report a shrinkage in revenues (-12% at constant rates), and we were unable to stop this decline during the second half of the year. That was the price we had to pay for a business mix too exposed to an economy in recession, with too much weight still being given to strategic – but for the time being not very dynamic – business lines (e.g., consulting and systems integration). The strengthening of our position in the public and healthcare sectors is significant, but still not strong enough. This effort to “re-profile” the Group also accounts for restructuring expenses much higher than we had budgeted at the beginning of the year, the continued reorganization to which we were committed, the down-sizing actions we had already forecast, and it is easy to understand how all of this took its toll on company morale.

The difficulties we encountered in two of our key countries – the U.S. and France – also bear witness to the disruptions resulting from our merger with Ernst & Young Consulting in 2000, and the complex, even confusing, operating model we adopted at the time: the weakening of some Group processes (especially in managing large responsibility projects); overweight structures; a preference for combined units mixing activities as diverse as consulting and IT engineering, etc. – weaknesses and compromises which correct performance measurements for each business line gradually brought to light.

In a general climate as depressed in 2003 as it had been the year before, we made the firm decision to re-energize the Group with the deployment of LEAP, a program designed to prepare Capgemini to meet future challenges.

Among these challenges were the problems arising from the customary resistance to change inherent in such a program. What we actually had to do was untangle and reorganize the operational units in-depth (which caused a lot of personal upset) in order to provide each discipline with a new dynamic: to defend ourselves better in the marketplace, optimize costs.

A look at the contracts signed in 2003 offers a good illustration of this “two-toned” year. On one hand, we signed contracts amounting to an uncontested record in the history of the Group, because this figure includes the largest contract signed by any service company anywhere in the world in 2003. On the other hand, however, apart from this exceptional win, the results from the rest of our “normal” business were just average, in a particularly flat economic environment.

Yet, despite this rather frustrating performance, a feeling of mobilization, renewed energy and a readiness to do battle seems to have been pervading the Group in the last few months. Everyone realizes that it isn’t easy to achieve even a modest improvement in operating income when we’re reporting a large decrease in revenue. Reorganizing the Group in-depth while maintaining the pressure on projects underway, energizing everyone while unavoidable painful restructuring programs are going on, call for the strictest attention to the human problems created or intensified as a result of these measures. At a more basic level, staying the course, not listening to the sirens’ song, defending and exemplifying the Group values in these troubled times has been, and continues to be, a defining challenge for all of us.

A great deal has been accomplished. The geographic units in the greatest difficulty at the end of 2002 have been reorganized and restructured within the framework of the LEAP program, and the results on record for the second half indicate that they are beginning to stabilize and are showing improved performance. This is the case for Central Europe – Germany, in particular – the United Kingdom and Benelux, but also for Asia-Pacific and even the Nordic countries.

Because the U.S. and France seemed to be doing a little better than the other regions, we deferred the deployment of LEAP initiatives. Now a fait accompli, this operation nevertheless highlighted some of the hidden problems which were costly to solve and which weighed on the second-half results.

In order to close the traditional gap between the operational units and corporate management, an executive committee was created made up of eight people: the five leaders of the five large operational units (the Strategic Business Units), the Group Chief Operating Officer, Chief Financial Officer and myself. The role of this executive committee is to drive and run the whole Group with me (and not to defend the interests of each unit to me) so that we can fight together and win.

In 2003, we took decisive steps in two of our four disciplines.

With regard to Local Professional Services, a reminder that in January 2002, we created a separate organization devoted to this business line which we authorized to take the name Sogeti – the name of the very first Group company ever established. In 2003, this new Sogeti expanded into two new countries, Spain and Sweden, and finished the year with a total workforce of 6,000 and a very satisfying operating margin. The acquisition, on December 31, of Transiciel – a company founded seventeen years ago by a former Group member who shares our proven values – will enable this combined unit of 14,000 people to “think big” in the coming years.

As part of the strategy the Group has been pursuing for the past two years, outsourcing represents a major development lever. The recent signing of a monumental contract with the U.K. Department of Inland Revenue last December, as noted above, gives credence to the actions already taken in this area, and is hastening the implementation of a large, pan-European unit devoted to outsourcing. Today, including other prestigious references, this activity accounts for 28 percent of Group revenue, and our objective is to see that figure eventually reach a third of our business, with margins equal to those of the highest earners in this industry.

However genuine these advances, we remain clear-headed about the difficulties encountered in 2003, some of which may continue into 2004. Without entertaining any illusions about a market rebound – which we have been told is coming for the last eighteen months but which still hasn’t occurred – we have to get on the growth track again and, at the same time, quickly restore our profit margins. To do that, we must continue to reduce costs; but in a business where salaries account for 70 percent of operating revenue, cost savings have to be very carefully targeted. We must continue to improve the utilization rate of our workforce: although already much improved, it is still possible to do better; our priority is directed outside the Group – i.e., to our clients and markets. We have to keep simplifying our organization and working methods, to lighten the structures in order to speed up decision-making, improve productivity without reducing employment; we have to innovate and encourage. In short, we have to “restart the machine.” Recently, there have been some small positive signs in consulting, especially in the U.S., and a reawakening among some of the big users of technology (telecom providers, for example), giving rise to the hope that the worst of the crisis is behind us and that the overall climate is more favorable.

In any case, it is in this hopeful frame of mind that the Group will soon be embarking on an international advertising campaign, marking the adoption of a new logo and a return to the “Capgemini” name. Exactly four years after the merger, and in accordance with legal commitments made at the time to use the Ernst & Young name only until 2004, we are relinquishing all references that might cause confusion with Ernst & Young Audit.

Thus it is a new Capgemini – four disciplines and 50,000 members strong – which is mobilizing to serve its clients, and committed this year to three key objectives: to revive the appetite of its managers to go out into the field and sell on their own (and not simply record the sales carried out by others); to return to a rhythm of revenue growth which at least equals what we’re seeing in our markets; and, finally, to improve Group profitability and in a way that prevents the poor performance of any one country from undermining the beneficial impact of positive performances achieved elsewhere.

“We are all sales reps,” was the Group’s slogan during the ‘80s. We have to get back to that. Our clients’ demands have changed, their businesses have evolved, sometimes “dramatically” (as the Americans like to say), and we have to listen to them better so that they will hear us better.

Then, maybe next year, Serge Kampf and I, at least I hope this is the case, will have an easier task when it comes time to take stock of 2004, which will probably be as challenging a year as the one we’ve just been through, but will mark the beginning – and I will do everything in my power to make it so – of a new period of growth for Capgemini.

Paul Hermelin
CHIEF EXECUTIVE OFFICER

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