Capgemini acquires Kanbay and aims for 35,000 staff in India by 2010

Douglas Hayward and Dominique Raviart, Senior Analysts

Capgemini said on 26 October 2006 that it is acquiring Kanbay International, a US-listed offshore player specialising in financial services. Kanbay brings around 6,900 employees - of which 20% are located onshore - and expected revenues for 2006 of $400 million. Capgemini's Indian presence is now 12,000 out of a total headcount of 72,000, making 16% of staff offshore.

Meanwhile, Capgemini wants to have around 35,000 (excluding BPO personnel) staff based offshore by 2010, mostly working out of India. Capgemini also said that its Q3 2006 revenues were up by 12.4% in Q3 to €1,881 million. Capgemini is revising its guidance slightly upwards for an operating margin in 2008, possibly up to 8.5% (and 10% during peak activity times).

This is a clever move for several reasons. Firstly, Kanbay brings presence in financial services (79% of revenues) and in the US: two areas where Capgemini needed to develop not only in project services but also in application management. Secondly, Capgemini becomes a significant player in India and pulls well ahead of its European peers in offshore provision. Thirdly, Kanbay brings a focus on financial services, rather than on generic staff augmentation offering.

So is everything rosy? Well, there are a few concerns apart from the usual integration issues. Kanbay is heavily dependent on HSBC, especially in North America. 34% of Kanbay's revenues come from HSBC, down from 53.1% in 2005. Morgan Stanley also accounted for 11.6% of revenues in 2005. So Kanbay's revenues are not diversified enough.

We'd like to hear more about how Capgemini is retraining its onshore employees now that it wants 35,000 mostly Indian staff by 2010. And we want to know more about how it will increase its Indian headcount not only in 'back-office' work but in higher-value front-office work too. Already, the company is considering addressing some German financial-services clients through a direct Indian channel (echoing a move last year by Accenture) and is also considering the UK market selectively. A good move, we think, although incomplete.

Through its new focus on the 'Three I's' - intimacy, industrialisation and innovation - Capgemini is developing a more subtle understanding of the dynamics of global sourcing. It is attempting to construct a balanced blend of higher-value onshore services (supplying 'client intimacy') with 'industrialised' offshore production services. It is not treating offshore resources as commoditised, generic services bought by the kilo.

The Kanbay acquisition shows that Capgemini understands that with Indian labour costs rising as talented staff become harder to find, offshore is no magic bullet, and that suppliers combining onshore/offshore models need client-focused vertical specialism offshore as much as onshore.

As Kanbay CEO Ray Spencer admitted, offshore providers must now focus on business-value creation and increased productivity (in part through repeatable intellectual-property assets), moving beyond labour arbitrage - something he called 'third-generation' delivery. So, onshore and offshore need each other more than ever - we're steadily moving towards a converged business model. But we would still like to see in more details how the 'Three I's' will practically evolve.

Douglas is a senior analyst in the Holway@Ovum service, which looks at the UK IT services industry. He covers the IT consulting and systems integration markets. He is also the service manager of Ovum EuroView, the ground-breaking information and advisory service that began operating in February 2004.

Dominique Raviart is a member of Ovum's outsourcing practice. He is Ovum's lead analyst on the application-led outsourcing (ALO) market across Europe. In particular, he covers application management.