“Witness to the revolution” is the way I would have described CGI, and chief executive Serge Godin cited the company’s 1998 decision to merge with Bell Sygma as the moment it became what he called a “credible player in the large outsourcing market.” Investors and financial analysts must have forgotten about that one.Despite reporting a year-end profit of $216.5-million, several analysts are wondering why CGI is not hell-bent on acquiring more rivals to insulate itself against its larger competitors. IBM and EDS each have $10 billion in revenue, three times as much as CGI.
The implication in the financial analysts remarks is that unless it bulks up, CGI won’t be mentioned in the same breath as outsourcing firms with more of a global scale.
The criticism sounds a bit weird when you add up the more than 20 companies CGI has bought up since 1986. Its US$438 million purchase of IMRglobal in 2001, marked the largest Canadian merger or acquisition that year. It fended off what was arguably its largest local rival, Cognicase, through a controversial $313-million bid that was marked by an acrimonious situation where Cognicase senior management refused to meet with Godin.
Last year, it completed a six-year effort to acquire the kind of entity most analysts probably approved of: a $1.4 billion buyout of American Management Systems Inc., which has contracts with 10 of the U.S.’s largest banks.
Godin’s response to those who want CGI to open its wallet more often is that it refuses to overpay for acquisitions. You can’t fault that, and certainly CGI has a reputation for successfully bringing over staff from the companies it buys or forms services agreements with, introducing a corporate culture dubbed “the CGI way.”
The problem is not so much what CGI is doing but what its peers in the market are doing. IBM, for example, has been accused of continuing to develop technology products only so that it can feed its Global Services business. That may be true, but in many cases they’re really great, innovative products that give Big Blue the expertise that draws customers to its consultants for advice.
While some clients might see IBM as too big and too broad, others in the market are diversifying to meet niche requirements. That’s part of the reason A.T. Kearny decided to buy out EDS’s stake and spin off as a standalone entity. EDS has the advantage, however, of maintaining a close, potentially symbiotic relationship with A.T. that might make it appear to have more resources than CGI. Compared to these two, CGI could seem a little too broad but not really that big.
On the other hand, CGI has not demonstrated a lot of innovation around business process outsourcing, whereas specialty shops like ADP are introducing services — such as an electronic way to manage record of employment requests.
Prudence has been Godin’s watchword, and he has close to 30 years of success to back him up. With fewer players left, it may be time for CGI to take a few calculated risks that would set it apart from other me-too outsourcing juggernauts.