Market trends: opportunities and threats

Introduction

In 2007, we benefited from favourable conditions in the markets in which we are active. Economic growth in the Benelux countries contributed to a rise in consumer and business confidence. This is reflected in our clients’ spending patterns and greater willingness to invest. We do not believe that the upward trend of the past few years is likely to reverse at the present time, despite recent world economic developments.

The economic upturn has clearly affected the labour market. The number of job vacancies in the Netherlands reached an all-time high in 2007, while unemployment was at its lowest point in nine years. The shortage of highly skilled workers has logically also become an issue in our sector. Clients and suppliers have to go to great lengths to recruit and retain staff. Especially the number of IT professionals starting their own businesses has increased dramatically. This creates opportunities as well as threats. At Ordina, we use these external resources to meet growing demand in an ever-expanding market, making our business more flexible. At the same time, we are working hard to distinguish ourselves from other IT providers because we see it as a priority to attract and retain talented individuals. Despite fierce competition on the labour market, our workforce continued to grow organically at a rate of 6% during 2007. The recruitment campaign launched in the second half of 2007 certainly boosted our visibility in the labour market.

The high demand for consultants and IT specialists has led to an increase in salary and fee levels. However, revenues in the sector did not necessarily keep pace with this rise. Maintaining a strong presence with large clients continues to be a critical success factor as clients will value quality over price given the long-term interests involved. This development ties in with our vision on sustainability and putting the interests of our clients first.

Corporate social responsibility is a topic that has been highlighted by the authorities and business leaders on an increasing scale. Supply chain partners and investors are reviewing companies based on their corporate social responsibility policies and the criteria are becoming more stringent.

Our markets

Ordina wishes to achieve sustainable growth. We believe that the Finance and Public markets will provide the greatest opportunities for sustainable growth in the long run. But we will continue to serve the industrial market as well. With our portfolio and focus on client service concepts and business and management issues we are well-positioned to respond to developments in all of these markets.

Trends in the Finance market

Banks, insurance companies and other financial services providers have to go to extra lengths to retain their client and market position. In order to do so they are focussing their efforts to develop client service concepts. The Internet is still gaining importance as a distribution channel. It enables better comparison of providers and it influences consumer behaviour. Margins have come under pressure, particularly for homogeneous products. Innovative products as well as new distribution channels are necessary to differentiate from competitors and to win and retain clients. Because of the increased pressure for transparency financial service providers must respond to the demands for flexibility. These developments affect the way in which they are organised from front office to back office.

Traditional competitive conditions on the financial markets are changing with the arrival of (foreign) market players and consolidation. The acquisition of ABN Amro by a consortium of three banks is the most concrete example of this. Foreign players do not have to resort to a merger or acquisition to win Dutch clients however, simply using the Internet as distribution channel enables any supplier to sell products or services from remote locations to the Dutch market.

In this changing commercial arena, financial institutions still need to be beacons of trust and calmness within the economic system. Boundaries between insurance and banking activities are fading, making full transparency essential. Increasingly strict and ever-changing laws and more stringent oversight by the Netherlands Authority for the Financial Markets (AFM) of compliance with those laws affect the scale of compliance investments made by financial institutions.

Against the backdrop of these major trends, our entire services portfolio, and especially BPO, stands to benefit greatly from market developments and the ensuing growth potential. Financial institutions are likely to focus more on the customer side of their operations and less on their back office as a core activity or unique proposition. Replacing legacy systems by flexible solutions that are, and will remain, compliant with prevailing laws and regulations requires enormous investments. These are only a few reasons why small and medium-sized financial institutions in particular are outsourcing some of their back office operations. However, large banks are also increasingly considering their options.

Trends in the Public market

Public Sector performance is in the spotlight, with citizens and businesses having specific views on how the Public Sector is, or should be, operating. Driven by public opinion, the Dutch government has initiated a debate on how Public Sector performance can be improved and streamlined so that citizens regard the services they receive as valuable. Citizens are faced with increasing regulatory pressures and little transparency. The quality of service from the Public Sector is perceived as poor. The Dutch government has decided to introduce measures to change this negative perception.

Firstly, the government wants to deliver better and smarter public services. Similar to the Finance Sector, the focus will be shifted to strengthening front office delivery: the government wants to provide better services by introducing a “one-stop-shopping” concept. The number of policy areas will be reduced, easing regulatory pressures. The extensive standardisation of underlying processes will allow front desk staff to deliver more responsive services. Digitisation will play a key role in the change process.

It is paramount that rules imposed by the government should be duly observed. Proper checks by inspectorates will remain as important as ever. However, oversight and enforcement can and must be organised more efficiently. Once again the government plans to do away with much of the bureaucracy by having inspectorates collaborate more closely and offering more digital services.

In addition to these organisational aspects, the government has defined several priority policy aspects. Key areas where the government intends to make changes include education, healthcare, law enforcement, and safety and security. Core public services in these areas will not only be improved, but transformed. Increased transparency and improved chain management are key to the government’s initiatives.

Trends in the Industry market

Since the beginning of time the battle for business has existed, but the way in which it is fought has changed. Those in the lead are surpassed by the competition much quicker than before, resulting in a shortened product lifecycle. If businesses do not want to be defeated by their own success, they will have to act quickly and flexibly. Accordingly, industrial companies are increasingly looking to partner up with other businesses in the same supply chain in order to deliver top quality at minimum costs. Overlap is avoided where possible. Reverting to core business activities has become an overall trend. Supply chains are becoming global, scaleable networks of specialist operations that work together to deliver a finished product or service. Choices regarding network composition are made continuously. As a result, organisations are reinventing themselves over and over again.

The Internet is an important channel for services and distribution. It has led to increased transparency and better options for clients and end-users. For suppliers of products and services, the Internet is both an opportunity and a threat. Doing business over the Internet creates high expectations amongst end-users. Suppliers must live up to their promises by properly aligning their processes and systems throughout the supply chain. Operational excellence is a prerequisite for providing quality at competitive prices.

Our industrial clients are looking to strike a balance between sound management on the one hand and entrepreneurialship and innovation on the other. Businesses are forced to conform to generally accepted corporate governance codes, accounting policies, laws and regulations. In addition, the government, shareholders and public opinion make increasingly stringent demands in terms of sustainable business practices. As a result, enterprises need to invest in compliance, in people as well as in systems, allowing them to better account for their corporate governance performance and their sustainable business practices.

A major concern among industrial companies is how to retain talented employees and business knowledge. To tap that knowledge, they are teaming up with supply chain partners and suppliers, both where supporting processes such as IT and their core portfolios are concerned.

Client concerns crossing the vertical segments

In summary, we have seen a number of similar trends occur across all of our market segments. Strikingly, the corporate and public sectors are both becoming more client-focused. Our clients want to create added value by increasing their market share or improving their services. Rapid innovation of front office delivery and product development has become the order of the day; this is where a difference can be made in terms of client or citizen perception. At the same time, this sharpened client focus means that tendering procedures are now more and more time-consuming and also require greater depth. Service providers face higher costs as a result.

The outside world (clients, public opinion, shareholders and regulators) is insisting on greater transparency and compliance. Corporate performance management is widely embraced by both the corporate and public sectors as a means to align execution to strategy. Decision-making on whether to invest in digitisation in order to achieve these process changes and improvements takes place at the highest level. The proper deployment of IT is key to strategy implementation and is purely business-driven. Clients look at these investments rationally. They demand a healthy return on their investment, either in the way of lower costs or in the shape of innovation and progress.

Although funds are channelled towards innovation, cost-cutting remains a focal point. Clients demand more standardisation and prefer packaged solutions to customised products. In our key markets, more and more back office operations are being rationalised through process optimisation (e.g. shared services). Clients outsource their IT operations more readily, through offshoring or otherwise. They are looking for new forms of contracts in which the client and supplier each assume transparent obligations. The trend to outsource a full range of business processes that are no longer regarded as a core business activity has grown.

Finally, each of our markets is affected by a shortage of qualified and highly skilled workers. The challenge to recruit and retain talented individuals is present in all market segments.

Prevalent themes for clients

• Focus on service to end consumers
• Transparency and compliance
• Return on investment
• Outsourcing and offshoring
• Recruitment and retention of staff

Visible impact for our industry

Investments must yield returns. A growing number of clients demand that suppliers take responsibility for deliverables. Whether a project is successful is not the only criterion. What has become important is whether the envisaged cost-savings or improvements are in fact achieved. In order to assume that responsibility, the partners to a project should get together as early as the design stage of a project rather than waiting until the implementation stage. This change of approach means that suppliers will have to work on a project basis more often than before, take on a more dominant and pro-active role as a partner to the client and learn more about the client and organisational issues in general. It is in the best interest of the supplier and the client to make clear agreements at the very start of a project.

Another phenomenon is that outsourced projects tend to become larger and more complex rather than smaller. Large clients select their contract partners for their knowledge and skills, but also based on scale and continuity. Bids on contracts are more often submitted by enterprises joined in a consortium nowadays. We also see a continuing trend towards consolidation in the sector. This has reduced the number of large suppliers in the Benelux considerably. Winning or losing a large tender now has a much more substantial impact on their market position than before.

Clients are looking for the right specialist provider when it comes to outsourcing processes such as systems development, application management or Internet services. In addition to knowledge and skills, suppliers need to offer scalability and continuity in different subfields. Using different suppliers means that clients increasingly need to professionalise their status as a contract principal. Clients expect support from their suppliers in developing this competence.

Leading suppliers of technology and packaged solutions, such as IBM, Microsoft, SAP and Oracle, have come to dominate the landscape. It is often difficult not to accept and execute a large project other than on the basis of this technology. Accordingly, suppliers need to carefully monitor compatibility with state-of-the-art technology. Offshore businesses also carry out a substantial part of the work, whether alone or in collaboration with (technology) partners.

Finally, the shortage of qualified and highly skilled professionals has also become a reality within our industry. Service providers have hundreds of job vacancies, while professionals increasingly choose to start their own businesses, with or without employing staff.

Strategy and positioning