CGI on springboard to U.S. success
Microsoft pact pushes CGI toward
$4-billion sales target, James Bagnall
reports.
James Bagnall
The Ottawa Citizen Monday, Sept 13/99
For most of the past two
years, Montreal-based
CGI Group has been one
of the hottest,
fastest-growing
technology firms in the
country.
Now, following its
far-reaching alliance with
Microsoft Corp. --
unveiled Friday -- CGI is
quickly transforming itself
into one of the industry's
pre-eminent players as
well.
CGI has more than
10,000 employees in its
stable -- including more
than 700 in the Ottawa
area. In the next three
years, look for this to
triple.
"We are just completing a
strategic plan for taking
this firm to $4 billion-a-year in sales by 2002," says company chief
executive Serge Godin. "We think we're being conservative."
Indeed. CGI is on track toward topping $1.4 billion in sales in fiscal
1999 (ending Sept. 30). With Microsoft's considerable assistance,
CGI expects to generate about $500 million U.S. over the next
three years -- providing a major assist in reaching the $4-billion
target.
CGI, an information-technology services operation specializing in
telecommunications and financial services, also intends to bulk up
through acquisitions and internal growth.
Mr. Godin estimates the potential market in Canada and the U.S.
for the services his firm delivers --outsourcing, consulting and
integrating computer systems -- is roughly $630 billion U.S.
annually.
Most of this consists of information technology activity now being
handled by company-employed IT specialists.
Mr. Godin's job is to persuade large corporations and government
departments to turn over responsibility for running their computer
networks and applications to CGI.
Microsoft, for its part, has been facing an uphill battle trying to
convince large enterprises that its latest generation of software is
up to the job of handling enterprise-wide applications. Having CGI
on hand may help ease these concerns.
Under their new alliance -- one of only a handful of so-called
'enterprise' pacts sponsored by Microsoft -- the two partners have
pledged to jointly develop new products and co-market them for the
North American market.
"CGI is doing exactly what it needs to do to grow its business,"
says Rajiv Das, an analyst with Toronto-based CIBC Wood Gundy,
"This will help them win business in the U.S. and maintain their lead
in Canada."
Only three years ago, CGI was a comparative midget with sales of
only $122 million -- less than one-sixth the size of competitors like
Ottawa-based SHL Systemhouse Inc., then a standalone player.
CGI's secret? There are several. First, after identifying computer
outsourcing as a major opportunity several years ago, CGI made
sure its managers had procedures in place that would allow them
to define and measure exactly what their customers thought of the
service.
Then it made its second move, by launching an aggressive
acquisition program aimed at creating a national IT infrastructure
from which it could launch its outsourcing program.
Third, CGI decided to concentrate on a few industries such as
telecommunications and financial services firms. By late 1995, CGI
was in a position to negotiate an equity alliance with Bell Canada.
This, in turn, led to a blowout agreement in January 1998 in which
Bell Canada's IT systems development and maintenance group
was folded into CGI as part of a 10-year outsourcing contract
estimated at $4.5 billion.
This mega-deal was the catalyst for CGI's recent meteoric growth,
which has recently been topping more than 100 per cent,
year-over-year.
It wasn't the first time Bell Canada had arranged to outsource its IT
unit. A similar deal involving SHL Systemhouse fell apart in early
1993. SHL was later sold to MCI Communications Corp. More
recently, SHL was acquired by EDS Canada of Toronto.
CGI, meanwhile, has become the country's number one
independent IT services firm and may be on the verge of eclipsing
SHL in sales.
Inevitably, the pace of growth at CGI has to slow -- the larger the
firm, the tougher it is to grow quickly. But CGI still has plenty of big
contracts on the way. Mr. Godin, a 23-year veteran of the firm,
recently told analysts that CGI expects to win $4-billion worth of
outsourcing business, based on negotiations currently under way.
On average, this represents about $400 million worth of new
business each year.
Perhaps surprisingly, CGI's share price of late has not tracked the
company's sales and earnings growth. Despite a small boost,
courtesy of the Microsoft announcement, CGI's share price closed
Friday at $28 -- down 7.4 per cent since the beginning of the year.
One factor depressing the price may be a delay in the
announcement of a long-expected deal involving Portugal Telecom.
Related to this is the fact that CGI's third-quarter revenues -- $342
million -- were only marginally ahead of its second-quarter
numbers.
In part, it's the nature of the business. "If you sign a large contract
as we did," says Mr. Godin, "you see a big jump in the first quarter,
followed by stability in the top line."
As CGI acquires more heft, the impact of new contracts will
become smaller in relative terms.
The company itself will become much more diverse. By 2002, when
CGI expects to have met its $4-billion revenue target, Mr. Godin
predicts 30 per cent will come from U.S. customers -- compared
with just 18 per cent today.
Part of this reflects Microsoft's predicted influence. Since the
CGI-Microsoft alliance could be amended to extend beyond North
America, it may also contain the seeds for growth at CGI for many
years to come.
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