Vendor Ratings, VDR Ted Kempf, Frances Karamouzis

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1 Vendor Ratings, Ted Kempf, Frances Karamouzis Research Note 22 July 2003 Vendor Rating: Covansys Corporation Covansys, a hybrid offshore IT professional services company with headquarters in the United States, maintains a significant delivery presence in both the United States and India. Covansys Corporation Overall Rating: What You Need to Know: In terms of revenue, Covansys is one of the largest of the U.S. headquartered IT professional services organizations with significant capacity in India. Because of this positioning, the company s challenge for growth is to clearly articulate the benefits of this value proposition and compete with leading companies in India and the United States for the emergence of global options for end-user buyers. Analyst Comments: Covansys challenge for growth is to clearly articulate the benefits of this value proposition and compete with leading companies in India and the United States for the emergence of global options for end-user buyers. Detailed Rating: Detailed Ratings: Initiative Corporate Viability Strategy Geographic Pentration (Europe, the Middle East and Africa) Financial Marketing Organization Product/Services/ Technologies Product/Service Application Development Application Maintenance and Management Enterprise Application Services Business Process Outsourcing Technology Pricing Customer Service/ Product Support Sales/Distribution Rating Caution Caution Positive Positive Positive Strong Positive Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Support Services Corporate Viability: Background Covansys has offered IT professional services since In 1991 the company created the whollyowned subsidiary, Covansys India Private Limited, for the delivery of offshore services. Although company headquarters is in Michigan, Covansys has significant delivery center capabilities in both the United States and India. Strategy Covansys strategy is to offer business process solutions designed for specific vertical markets that rely heavily on systems integration and outsourcing services. These solutions are primarily offered in the public sector, financial services and healthcare industries. Covansys has developed proprietary software and solution frameworks to meet the needs of public sector, insurance, healthcare and the container security initiative (CSI) secure supply chain. Covansys also offers a variety of systems integration and outsourcing services to other vertical markets for which it does not have specific business process solutions. Core to Covansys strategy is its ability to offer clients the choice of having some IT services delivered on-site, onshore or offshore to optimally manage business needs with cost structures. Financial In the face of a weak economy and a very challenging U.S. consulting and systems integration market, Covansys experienced an overall reduction in total revenue during the past two years. In 2001, revenue dropped 3.6 percent to $404 million (calendar year end) before dropping another 5.4 percent to $382 million in 2002 (calendar year end). Table 1 offers revenue information by category and region. Table 1 Revenue Breakdown by Category and Region % of Total Revenue Category Application development 51 Application maintenance and management 37 Enterprise application services (Packaged applications 9 such as SAP, PeopleSoft, Oracle and Siebel) Infrastructure support 0.5 Other, including R&D and product revenue 2.5 Region North America 92 Europe 5 Asia/Pacific 3 Source: Covansys Covansys was able to mitigate the drop in revenue by capitalizing on its offshore offerings because the demand for these global delivery options continues to grow at a feverish pace among U.S. clients. During 22 July

3 2002, Covansys use, though down in the United States, improved in India. This contributed to better gross margin performance, with an onshore/offshore revenue mix of approximately 83.8 percent and 16.2 percent in the fourth quarter of Covansys offshore revenue only reflects the portion of work done in its development centers in India and does not include all other work done on-site for the same customer. Covansys five largest clients accounted for 21 percent of the total revenue in 2002, and the 10 largest clients accounted for 36 percent. Of the top 20 clients, nine were from the public sector, two were from healthcare and the remaining nine were from the other vertical markets that the company serves. Revenue from Covansys top twenty clients was approximately 51 percent in Fourteen of the company s top 20 clients used offshore resources on their projects. The characteristics of the Covansys revenue base that differentiates it from a number of U.S.-based or Indian competitors include the following: Industry focus Covansys is one of the few vendors Gartner analyzed that has achieved a level of scale in specific industries. This is primarily because of the proprietary software applications that the company has developed in specific domains such as public sector, insurance, healthcare and the CSI secure supply chain. Repeat customers Over the last five years, 80 percent of Covansys business has been from repeat customers from the previous fiscal year. As of December 2002, Covansys total head count was approximately 4,860 employees; about 1,800 of these employees are located in India and approximately a 95-person sales force is dispersed across 24 sales offices worldwide. About 38 percent of Covansys professionals are based in India in three offshore development centers (Chennai, Bangalore and Mumbai). There has been close to a 40 percent increase in offshore resources as Covansys grew from 1,300 employees in India in the third quarter of 2001 to about 1,800 in the fourth quarter of Delivery Centers Table 2 presents a breakdown of Covansys head count by delivery centers. Table 2 Covansys Head Count Location Head Count Farmington Hills, Michigan 250 Chicago, Illinois 160 Columbus, Ohio 220 Milpitas, California 170 Bangalore, India 201 Chennai, India 1,582 Mumbai, India 38 Belgium 75 Singapore 75 Source: Covansys 22 July

4 Marketing In many ways, Covansys is a pioneer of the model U.S. headquartered service provider with delivery capabilities in India. This model has a number of advantages and can be positioned to overcome many of the cultural, communications and time-zone hurdles that have become an issue for Indian IT services providers with headquarters overseas and management teams and the bulk of their workforce residing in India. Covansys has struggled to establish itself among its peer group as the leader in this race. Covansys has been opportunistic in defining itself on a deal-by-deal basis rather than put forth a brand identity that defines the company and explains its competitive advantage. One clear example of this issue is that although Covansys has a much larger footprint, as defined by a revenue base and established development centers in the United States among their direct peer group, yet smaller vendors such as Cognizant are considered to have higher brand equity. Covansys largest marketing success is among its established customer base: the company s brand value is high, which has led to a significant amount of repeat business. Covansys challenge is to also achieve success beyond established clients in the marketplace to ensure consideration on shortlists and grow the pipeline. Organization Covansys overall organizational structure is similar to many of the vendors that Gartner is analyzing in the offshore category because it has a large pool of technologists with depth in both legacy platforms and emerging areas. Therefore, many clients seek out Covansys to source these skill sets a lower cost structure. The difference between Covansys and the other organizations analyzed is its focus on a few key vertical markets where it has developed deeper industry solutions targeted to a specific client base. The public sector, finance and insurance, and healthcare are Covansys three primary vertical market focuses. For each of these vertical industries, Covansys has created at least one industry-specific solution. Covansys goal is to try to lead with the development of a specific innovative solution. For example, Covansys has been an early IT services provider to prepare enterprises for the CSI and Sunrise 2005 by developing the secure supply chain solution. Covansys has proprietary software specific to public sector, insurance and healthcare. As of the second quarter 2002, the public sector accounted for 34 percent of total revenue; whereas finance and insurance and healthcare accounted for 23 percent and 12 percent, respectively. In addition to its three primary vertical focuses, Covansys also offers vertical market systems integration and outsourcing services to the retail, manufacturing and telecommunications and utilities industries. The public sector vertical has the largest number of dedicated consultants (1,207), followed by finance and insurance (682) and healthcare (395). Covansys Public Sector Practice has industry solutions dedicated to serve public health, motor vehicle services, health and human services, public retirement and emerging markets/unemployment insurance, and Homeland security. Covansys also has developed proprietary applications and frameworks for the following: Clarety for public retirement agencies Child Care Management System (CCMS)/2000 for child care eteams for integrated/universal case management 22 July

5 Women Infants and Children (WIC) and WIC banking applications Motor vehicle registration, titling and licensing application Health Insurance Portability and Accountability Act (HIPAA) assessment and remediation tools Covansys, like many other vendors offering offshore services, has made significant investments in support of execution. Key investments include delivery process certifications and infrastructure to have development centers in both the United States and India. Covansys has also invested to ensure strong project management capabilities, a key success factor for executing a global delivery model. Covansys is a Project Management Institute (PMI)-registered education provider and has more than 100 PMI Project Management Professional-certified project managers. Other major investments have been made in solution development because Covansys is one of the few organizations to offer industry and process specific solutions. Also, Covansys is searching for industry specific software solutions to acquire. Investments over the last two years include the following: Secure Supply Chain Solution to address the CSI and Sunrise PDA acquisition, May 2002 Insurance, WIC and WIC banking software GetHIP HIPAA remediation software, 2001 TEAMS IP Integrated Case Management Application acquisition (April 2001) TEAMS port from client/server to Web technology (eteams), (July 2001) CCMS/2000 port to electronic child care management system (Web-based) (ongoing since June 2002) Packaging and marketing of SupportNet (Indiana Child Support Enforcement [CSE] Web-based employer obligation payments March 2002) Packaging and marketing of LetterGenie (forms and letter generation for CSE fiscal 2002) Motor vehicle registration, titling and licensing software (fiscal 2002) Products/Services/Technologies: Covansys categorizes its service offerings into three areas: industryspecific solutions, strategic outsourcing and integration services. Covansys offers one healthcare, four finance and insurance and five public sector, industry-specific solutions. Strategic outsourcing services include three major offerings: applications maintenance and development, full outsourcing and business process outsourcing/it-enabled services. Integration services include seven offerings: custom application development, e-business, Web-to enterprise integration (WEI), data warehousing, re-engineering, enterprise resource planning (ERP) and document management. Application Development, Maintenance and Management 22 July

6 Application services constitutes the staple source of revenue. Covansys combined revenue in application development and application maintenance and management contributed 88 percent of its overall revenue base. Covansys provides these application service across all of its targeted industry segments. The company s continued focus on methodology and quality has resulted in considerable positive feedback in this area of services, which has led to a strong base of repeat business. Enterprise Application Services Covansys has a dedicated line of business focused on ERP application and one of its locations in India (Mumbai) is designated as the company s ERP hub. The applications that are primarily focused on include PeopleSoft and SAP (application linking and embedding financial accounting/controlling, human resources and sales distribution). In addition to this dedicated practice, on 25 February 2003, Covansys was selected by J.D. Edwards to help the company extend the development capacity of its product. The agreement calls for Covansys to provide additional development resources and to establish a development center for J.D. Edwards in Chennai, India. J.D. Edwards will tap the resources of 60 additional full-time Covansys developers, which will enable J.D. Edwards to decrease the time it takes to deliver new products while maintaining the quality of its J.D. Edwards 5 collaborative commerce software. Also, J.D. Edwards will use Covansys development operations in Chennai to reduce initial costs associated with the establishment of a new physical plant. In addition to benefiting customers worldwide, the agreement will enable J.D. Edwards to provide its Asia/Pacific customers with specialized, regional software development and services. In June 2003, PeopleSoft announced its intention to acquire J.D. Edwards. Following that announcement, Oracle also announced its intention to acquire PeopleSoft. All of these announcement have led to a flurry of speculation. It is unclear what these organizational changes will mean for Covansys contract with J.D. Edwards as well as other enterprise applications services work. Business Process Outsourcing Over the past year, Covansys has formalized business process outsourcing (BPO) as a service offering by acquiring domain expertise in vertical markets such as the public sector, healthcare, telecommunications and financial services in terms of contact centers, claims processing and document management. Their BPO business is focused on Levels 1, 2 and 3 service categories, as follows: Level 1 Commodity driven; low level customer interface; price based; low technology, including data entry with simple edits or proofreading, mailroom operations and document preparation. Level 2 Midlevel technology and customer interface; complex business rules, including health claims data capture, medical transcription, e-books and credit card processing and reconciliation Level 3 BPO services that are an integral part of customer s workflow include mid- to high technology, shared risks/gain, and partnership focus. The services include health insurance claims adjudication, accounts payable administration, human resources, payroll, benefits, regulatory compliance administration, outbound call center, and animation services. Vertical specific BPO experience includes State Disbursement Unit where all child support payments are processed; call center management for retirement systems; and application service provider management of their WIC and WIC banking applications. 22 July

7 Technology Three elements of technology were evaluated as they relate to Indian external service providers (ESPs ) service strategies and delivery: The range and depth of competencies, as well as the scale of resources in a wide range of technology platforms that prospective customers must align to their business and technology needs. IT service delivery methods and technology tools, including software and tools built into solutions to facilitate the overall management and delivery of IT services for example, an on-site dashboard or monitoring tool available to U.S. clients to monitor the progress of a project that is being worked on remotely in India. Technology infrastructure for the execution of an ESP s global delivery model (on-site, domestic, nearshore or offshore). The ESP must have technology infrastructure in the client s country, as well as in the location where the work is performed, which can be nearshore (that is, in an adjacent or nearby country) or offshore. This includes infrastructure to ensure the secure, timely exchange of data and programming code among locations, as well as redundancy, business continuity and disaster recovery plans. Based on all three of these areas of technology, the rating for Covansys was positive because the company has significant investments in technology infrastructure in both India and the United States. Also, Covansys has a solid base of technology tools for delivery. Pricing Any contract with an ESP (including Indian ESPs) has many variables for example, relationships, geography, team members tenure and skills, and roles and competencies that affect the structure of the deal. Therefore, unlike software products, in the IT service business, pricing is a combination of art and science - many variables, in addition to pure internal cost structure, influence the price of a deal. In the current market, many enterprises initially sought out Indian ESPs for the huge differential in rates between a list price of a resource located in India compared to an on-site resource historically sourced from a domestic ESP. Because all Indian ESPs offer extremely comparable list rates, we rate Covansys a strong positive in this category. Customer Service/Product Support: Sales/Distribution Sales strategies and execution to customers in the United States and Europe, as well as partnership and alliance strategies, were the primary areas of analysis. As a result, for Sales/Distribution Covansys rated promising because the company is still in growth mode and building its capabilities in this area. Support Services The primary areas of analysis were relationship, performance and contract management. For Support Services, Covansys rated promising because the company has impressive levels of repeat business, which demonstrates relationship management skills. Related Research and Ratings: ESP BPR Magic Quadrant for 2003, 22 July

8 You Can Still Meet the HIPAA Privacy Deadline, HIPAA Status Update on HCO Privacy Training Approaches, Decide Where to Do Application Work With Global Delivery Hype Cycle for the IT Services Global Delivery Model, The Impact on People When Going Offshore for IT Services Rating Definition: Strong Positive Positive Caution Strong Negative Solid provider of strategic products, services or solutions. Customers: Continue investments. Potential customers: Consider this vendor a strong strategic choice. Demonstrates strength in specific areas, but is largely opportunistic. Customers: Continue incremental investments. Potential customers: Put this vendor on a short list of tactical alternatives. Shows potential in specific areas; however, initiative or vendor has not fully evolved or matured. Customers: Watch for a change in status and consider scenarios for short- and long-term impact. Potential customers: Plan for and be aware of issues and opportunities related to the evolution and maturity of this initiative or vendor. Faces challenges in one or more areas. Customers: Understand challenges in relevant areas; assess short and long term benefit/risk to determine if contingency plans are needed. Potential customers: Note the vendor s challenges as part of due diligence. Difficulty responding to problems in multiple areas. Customers: Exit immediately. Potential customers: Consider this vendor only if there are no alternatives. Acronym Key BPO CCMS business process outsourcing Child Care Management System 22 July

9 CSE CSI ERP HIPAA PMI WIC WEI Child Support Enforcement Container Security Initiative enterprise resource planning Health Insurance Portability and Accountability Act Project Management Institute Women Infants and Children Web-to-enterprise integration Core Topic ESP Evaluation and Selection ~ Sourcing Covansys Corporation Headquarters: Farmington Hills, Michigan Web Location: 22 July