Constant improvement is Ordina’s objective

Ordina can look back on an exceptional year, a challenging time in which the emphasis shifted from growth and market share expansion to profitability. “Ordina has now attained the status and size that it needs in order to concentrate fully on customer intimacy and the quality of its services. This will be our focus from now on”, explain CEO Ronald Kasteel and CFO Hans den Hartog.

A stable strategy based on clear choices and a sound financial position: these are the key ingredients that should make Ordina less vulnerable to the vicissitudes of the business climate. It was back in the 1990s that Ordina took the first strategic steps to evolve from a straight forward IT Services business (based on time and materials) into a strategic knowledge supplier. CEO Ronald Kasteel reckons that focus has been the key to success in this respect. “Whatever direction the economy moves in, we are not going to be swayed.” The choice is clear: Ordina wants to be a service provider that knows its customers intimately. For this reason, the company has decided to concentrate on large corporate customers in the Benelux countries, particularly in the Public sector and the Financial market, and to an increasing extent in the Healthcare market. Within these data-intensive environments business processes, IT and IT-support needs are all extremely complex. They are also areas in which specialist knowledge of the local markets and knowledge of new legislation can make a huge difference. “These are vital markets, both now and in the future, regardless of the state of the economy”, is how CFO Hans den Hartog sizes them up.

Value in the long term

“More and more of our customers regard IT spending as a strategic investment. By developing knowledge and building solutions that make a difference at the core of our customers’ business operations, we demonstrate our value to them. We are also keen to forge long-term relationships with our customers”, says Ronald Kasteel. “And this is something we are capable of. We have realised a good track record providing Application Outsourcing services to big corporate clients. It is a market that is still developing and we are aiming to earn between 30% and 35% of our future revenues from this type of work. We are also signing a growing number of long-term project contracts as well as framework contracts. The contracts with the Immigration and Naturalisation Service and the Ministry of Agriculture, Nature and Food Quality are good examples of this. They have enabled us to raise the proportion of recurring revenue in our sales, which makes profit easier to forecast. Despite the turbulent market, we succeeded in landing a number of major contracts in 2008: KPN, the Post Offices and the Erasmus Medical Centre amongst others. Contracts that underscore our status as a leading market player. Moreover, there are plenty of requests for project quotations in the pipeline.” Ordina is also performing well in Belgium, where the recession has had less of an impact to date. With a workforce of 700, Ordina Belgium is well on its way to acquiring a solid position in Ordina’s target markets and in its core business. The company acquired E-Chain in 2008, rendering it the biggest supplier of SAP-based services in Belgium and Luxembourg.

Learning from our experience with BPO

The results from Business Process Outsourcing (BPO), previously regarded as a promising activity, were less successful. Four years ago, Ordina launched a BPO business aimed at the Financial market. Ronald Kasteel: “In order to grow in this market, we needed to structure knowledge that was in short supply and reduce its independency on individuals. That meant standardising our services, which was where BPO came in. Our aim was to market high-value BPO services, geared towards our customers’ primary processes. This would also make it less easy to replace us with a different supplier.” But things did not go according to plan. At the end of 2008 Ordina announced that it would be terminating its BPO activities. The investments that were needed in order to develop a single, standard banking platform would far outweigh the returns they were expected to generate. The situation was exacerbated in the summer of 2008 when Robeco Direct decided to terminate its BPO initiative and the financial crisis started raising its head.

“In hindsight, we have to conclude that we were trying to develop too broad a package of services too quickly”, claims Hans den Hartog. Ronald Kasteel explains: “Right from the outset, we maintained a number of platforms for our clients – platforms for securities, home loans, and savings and payment services. That went well as we managed to provide our clients with an operational service of at least the standard to which they were accustomed. In retrospect, it would have been better to concentrate on a single banking process. Apart from proving too complex, designing banking platforms that could cater for a range of new clients took too long and was too expensive. This is the lesson we have learnt.”

Because of the high level of uncertainty in the market, continuing with BPO constituted too great a financial risk. It has been a painful decision that will not contribute to Ordina’s reputation. Which is why Kasteel and Den Hartog are committed to ensuring that existing BPO clients are offered an attractive alternative. “Our first objective is to make sure that our customers continue operating without interruption”, Ronald Kasteel hastens to add. “We are investing a great deal of time in discussions with them as well as the regulatory authorities.” The directors are confident that they have found a reliable and experienced party in Centric, who will be taking over all shares in Ordina BPO as well as all employees on 1 April 2009. Centric holds a strategic position in Business Process Outsourcing in the pensions domain. Ordina is satisfied that the sale to Centric guarantees continuity for clients as well as employees.

Mature market

The desire to learn from past mistakes is a recurring theme in the decisions taken during last year. In disclosing its interim results for 2008, Ordina announced plans for sharpening the focus on efficiency and profitability, after the operating margin just failed to meet the target set. Ronald Kasteel: “We have not estimated the complexity of a number of large projects well enough, which meant that they were less profitable than we expected. There were also problems on the operational front, where we have not a number of projects under tight enough control. I don’t believe that this is tantamount to saying we are incompetent. What we need to do is to learn from this. We are now entering the next stage in our development. We are standardising more and more of our working methods and establishing more formal, more disciplined relationships with our customers.” Hans den Hartog could not agree more. “It is all about maturity: the maturity of the market as well as our own business. Customers expect us to deliver the results that we agreed upon. We are called upon to execute large-scale, high-risk projects on their behalf. Our response to this demand has to be a professional one. Working on a time and material basis in the past, we were used to being at our customers’ beck and call. However, as Project Managers, we cannot always do that. We have to define the boundaries within which we operate and state our views on how to achieve the best results for our customers.”

Profitability before growth

Ordina made a series of new choices in 2008. The emphasis in the past had been on business growth and winning market share, a policy that has turned Ordina into one of the undisputed leaders of the IT services market in the Benelux countries. Now the time has come to switch the focus to improving the company’s profitability. Ronald Kasteel: “We have decided to focus our attention primarily on achieving a lasting improvement in our profitability in the coming years, rather than achieving growth. Customer intimacy and delivering a high quality service are the main objectives in this respect.

We are going to improve our internal efficiency and tighten up our working methods.” The term ‘customer intimacy’ implies that Ordina wants to derive most of its growth from activities that require both careful management and interaction with the customer. This is why we will be expanding our consultancy activities and undertaking more project management assignments. The IT Division will focus on testing, design & analysis, and implementation & integration. Ordina intends to outsource a growing portion of its operational activities or to perform them in collaboration with external partners, either in the Netherlands or abroad.

Jobs over income

One of the measures taken to increase the company’s profitability was the decision to rationalise over 100 jobs in management and support. This should enable Ordina to benefit more the economies of scale resulting from past acquisitions. A further 250 jobs will be reduced in other areas. This additional measure had to be taken after the sudden collapse in demand for individual services in the second half of October. “Although 250 jobs seem realistic at the moment, the market is still highly unpredictable”, says Ronald Kasteel. “We have learnt our lesson from the previous downturn though. Since 2001, we have boosted our flexibility by using temporary staff to a greater extent. If business declines, we are able to replace external staff with our own people. Moreover, we have increased the performance-related portion of our remuneration packages in recent years. This also helps to create a buffer for dry spells in the economy. If the company does well everyone benefits. If profits take a dip, we are able to preserve as many jobs as possible, at lower salary levels. The same applies to the management: salaries for 2009 have been frozen and many bonuses have been cancelled.”

Financial stability

Despite the turbulence affecting the company and the markets in which it operates, Ordina remains well positioned for the future. “Market conditions really are exceptional at the moment, but in the long term, our markets remain growth markets. What we want to do is turn the spotlight on profitability without giving up any of our market share. And also safeguard our financial stability”, comments Hans den Hartog. This is the background against which the decision to abandon the possible acquisition of BAS, a Getronics subsidiary, should be viewed. “We simply felt that the price was too high. It was an attractive option as it would have led to us becoming the biggest operator in our vertical markets and activities. But we do not wish to become the biggest at any price. We want to have enough freedom in which to plot our own future.”

Outlook

For the near future, this is going to mean sticking close to the fence and not taking any chances, without losing sight of the future prospects though. Ronald Kasteel and Hans den Hartog both use graphic metaphors when explaining how they intend to operate in these uncertain times. “We are going to make sure that we come out of 2009 stronger, with more muscle and less fat. We are not going to panic about the state of the market. Nothing has changed from our perspective. We are simply shifting the emphasis primarily to profitability and quality of our services. Our focus on long-term contracts should help to improve the predictability and stability of our financial performance. We intend to continue with our policy of outsourcing a larger portion of our operational activities, as this helps to spread our risks. We want to play a more prominent role in managing our projects and do so in a more disciplined way as well as retain control over work that has to be done close to our customers. At the beginning of 2009, we altered our organisational and management structure to place us in the best possible position to achieve these objectives.” Ronald Kasteel is full of praise for the efforts of his staff during the final months of last year. “These were difficult times, but still we managed to pull together, buckle down and come up with new plans. We are now ready to put these plans into action.”

Next Chapter: Radical change at a relaxed pace