Solid strategy implementation and performance improvement

Solid strategy execution has resulted in a number of successes during the past years. Tieto has progressed in its transformation with a great focus on service renewal and efficient delivery supporting improved competitiveness. A full stack of services supports the company’s ambition to become the preferred business and IT modernization partner for its clients and to assist customers in the rapidly changing environment with new technologies. Tieto’s differentiation is based on leading industry-specific products in selected areas and the company continues to build on industry expertise to help customers seize new market opportunities and support renewal of customers’ businesses.

In 2015, the pace of growth initiatives accelerated. Tieto implemented a number of acquisitions and focused on the development of chosen growth businesses by investing in offering development and recruiting new talent. Furthermore, the company prepared to launch a third start-up, Security Services, as announced in January 2016. The company also concluded several partnerships in order to be able to provide customers with best-of-breed technologies supplemented with a stack of Tieto’s services and solutions. Examples include partnering up with Temenos, a market-leading banking software provider, and with Salesforce.com and Workday, a leading provider of enterprise cloud applications for finance and human resources. Tieto's strategy is continuing to evolve. Updates to the current strategy are currently being considered. The conclusions will be disclosed during the spring.

Acquisitions and divestments

In August, Tieto completed the agreement to acquire Software Innovation, a leading software company in the Enterprise Content Management (ECM) business in the Nordic countries. The transaction strengthens Tieto’s presence especially in Norway and expands the company’s scalable software-driven business. In addition, Tieto sees attractive opportunities to provide Tieto’s current broad set of services to new customers. Software Innovation has approximately 350 employees, and in 2015 the company’s net sales amounted to around EUR 40 million. Around 75% of its sales come from Norway and the rest mainly from Sweden and Denmark.

In November, Tieto acquired Imano AB, a Swedish consulting company offering consulting services and helping its clients in the paper and forest industries digitalize their business processes. The acquisition supports Tieto’s objective of becoming the largest IT services provider in the paper and forest industries in Sweden and Norway. The company has approximately 50 employees in Sweden and net sales in 2015 amounted to around EUR 7 million.

In December, Tieto signed an agreement to acquire Smilehouse, the largest Finnish solution provider of multichannel commerce with operations primarily in Finland and Sweden. The acquisition strengthens Tieto's position as one of the leading Nordic players in digital Customer Experience Management and supports the company’s aim of accelerating growth in this market. Smilehouse is a leading Finnish vendor in the digital commerce area, with a total of 75 employees. The acquisition substantially increases Tieto’s sales in this area. Smilehouse’s sales amounted to around EUR 10 million in 2015 and are anticipated to grow faster than the market.

In line with its target of reinforcing the focus of operations, Tieto agreed to sell its Lean System business in Finland in September. The divested business with its close to 40 employees offers services mainly to Finnish SME segment customers and as such was not a good fit for Tieto’s strategy of focusing on medium-sized and large enterprises and customers in the public sector.

Service and competence renewal

Tieto aims to be at the forefront of efficient delivery of high-quality services and pursue new service models enabled by the ongoing market change. The company continues to renew and strengthen its service portfolio and competencies in order to be a preferred digitalization partner to customers. In 2015, Tieto recruited new competences to match its needs in new service areas. New roles include industry consultants, digital architects, user experience designers and software developers, among others. By the end of December, Tieto had recruited around 500 new employees. Recruitments were mainly implemented in the first half. On the other hand, new services are less labour-intensive and automation via self-service channels will reduce the need for certain existing roles. Tieto has also invested in sales by recruiting new sales people. This has somewhat increased sales costs in IT services.

Tieto stepped up its investments in offering development in 2015 with a view to ensuring its position as a preferred digitalization advisor and enhancing scalability. By industrializing its application management and infrastructure services, the company drives quality, speed, efficiency and customer experience. Full-year offering development costs for IT services exceeded the previous year’s level by around EUR 10 million. Additionally, the full-year results were affected by costs related to the automation programme in Managed Services. The increase of EUR 5 million in costs materialized in the first half of 2015. Development costs amounted to around EUR 60 million in 2015, representing over 4% of Group sales.

Tieto targeted its most extensive offering development measures at selected high-growth services, seeking to grow faster than the market in the longer term. Annual sales of the following emerging services amounted to over EUR 260 million, and growth totalled 20%:

  • Customer Experience Management
  • Lifecare
  • Industrial Internet
  • Cloud services
  • Security services,
    a new start-up to combat modern cyber security attacks, launched in January 2016. The established unit will enhance the company’s current business in this area and will be one of selected growth services Tieto will invest in.

Customer Experience Management

New services provide enterprises with means to differentiate themselves from their competitors by excelling in digitally empowered experience and utilizing advanced user behaviour analysis. Customers focus on the holistic use of digital services, enabling better marketing, sales and service across all digital channels. The Nordic market is expected to grow by an annual rate of around 20% in the coming years.

To harness the growing opportunities within omni-commerce, Tieto acquired Smilehouse, the largest Finnish solution provider in the area, in December. Based on their combined expertise, the CEM start-up can offer truly comprehensive omni-channel solutions and services to a larger group of customers, reaching beyond Retail and Finance services to also cover Manufacturing, Telecom and Energy. Tieto also increased its investments in this area and recruited new talent in 2015 to strengthen its thought leadership position in its home markets. In 2015, around 140 new experts joined the team, including Smilehouse employees. In 2015, Tieto’s sales in this area amounted to around EUR 30 million, with growth totalling 20%.

Lifecare

The market for digitalization in the healthcare and welfare sector has remained strong. There is strong demand for new solutions helping to meet increasing service demand, partly related to the growth of the elderly population, coupled with the need to cut costs. Lifecare is the leading Nordic industry-specific solution for the healthcare and welfare sector. This was a focus area in offering development in 2015 and Tieto has also recruited more personnel to support its growth ambitions. Key applications are designed for areas such as mobile homecare, education and eServices for citizens. Solution development is based on modularity. Certified open interfaces support the ecosystem and the integration of diverse third-party applications and services in the system. In 2016, a significant number of Tieto’s public healthcare customers are expected to transfer to Lifecare. In 2015, Tieto’s sales in this area amounted to over EUR 160 million, representing growth of 6%.

Industrial Internet

Industrial Internet applications are rapidly gaining ground, integrating the internet into a wide range of everyday devices. Aside from improving automation and providing savings, new applications also provide new business opportunities for enterprises, including IT service providers. Industrial Internet can be used for monitoring equipment, homes, cars and human beings, to mention a few examples. Based on the data analyzed, a multitude of new services can be designed in all industries, e.g. manufacturing, construction, healthcare and telecom. Benefits include increased utilization of assets, lower maintenance costs and improved customer service. The Nordic market is expected to grow by an annual rate of around 50% (CAGR) to over EUR 5 billion by 2020.

Shaping the offerings and solution productization were focus areas for Tieto in 2015. Tieto introduced a number of solutions, including

  • Real Time Factory for manufacturing companies to digitalize factories to the era of Industry 4.0
  • eSense, a solution to support smart home care
  • VITAL, a solution with analytics for various applications in fleet monitoring and maintenance management
  • M2M-In-a-Box, service co-developed with TeliaSonera and currently part of TeliaSonera’s IoT product portfolio

Towards the year end, the development of the Tieto Connect platform intensified.  Launched in January, this new cloud-based platform enables companies to compose their own Internet of Things application in minutes. Tieto Industrial Internet was ranked high for innovation in market reviews, including a recognition for innovation in a global benchmark study by HfS. In 2015, Tieto’s investments in Industrial Internet amounted to around EUR 4 million while sales remained below this figure.

Cloud services

The market for transferring operations into scalable and standardized cloud environments is growing fast. Cloud-based technologies combined with global delivery and industrialized processes also enable enterprises to lower the total cost of ownership. Currently, cloud services are a standard part of new offers. The cloud market, including public and private cloud, is expected to grow annually by around 30% (CAGR 2013–2018) during the coming years.

In Managed Services, growth was driven by sales of enterprise cloud offerings, such as Tieto Cloud Server, Tieto Productivity Cloud and Tieto Dynamic Landscape for SAP. Additionally, cloud transformation services have also become an essential part of any outsourcing case. In late 2015, Tieto launched two new offerings, Tieto Enterprise Cloud Orchestrator (TECO), and Tieto Dynamic Landscape for databases (powered by Oracle). TECO automates customers’ end-to-end application lifecycle management and the deployment of infrastructure and thereby helps customers innovate and deploy new digital products and services in a more agile way. As TECO speeds up the development and release of applications in a multi-vendor environment, it enables companies and organizations to significantly reduce the time needed to deploy new services while at the same time cutting costs. Sales of cloud services grew by 65% in 2015 and currently represent around 17% of Managed Services’ sales.

Security services

According to a recent study, 90% of businesses worldwide recognize that they are insufficiently prepared to protect themselves against cyber risks. To help customers in the increasingly complex IT security environment and to seize security-related market opportunities, Tieto launched its Security Services start-up within the company in January 2016. Tieto's Security Services are developed to secure the digital operations of enterprises and public sector organizations. The managed security services model will help any organization to achieve visibility, simplicity and protection for their digital assets. Tieto’s Security Wall offers unique, real-time transparency and information to lead security by monitoring digital security 24/7. Tieto has appointed Markus Melin, security expert from F-Secure, to lead the Security Services start-up. The cyber security market is forecast to grow by about 10% (GAGR) until 2020 and the Managed Security Services market at an even faster rate. 

Performance drivers in 2016

In IT services, Tieto aims to grow faster than the market in 2016. Sales for the companies acquired amounted to a total of EUR 57 million in 2015, of which EUR 17 million was visible in Tieto’s sales for 2015. 

The trend in profitability is also expected to remain favourable. In addition to sales growth, performance drivers in 2016 include 

  • automation in Managed Services and industrialization in application management 
  • offering development and
  • recruitments in new service areas.

In January 2015, Tieto announced a programme related to the ongoing automation in Managed Services and industrialization in application management. Of the planned reductions, 650 were anticipated to affect the Managed Services and 190 the Consulting and System Integration service lines. By the end of December, Managed Services had implemented over 500 of the planned reductions. In Consulting and System Integration, around 100 reductions had materialized, including voluntary leaves and internal mobility. The implementation of the measures will continue in 2016. These reductions are anticipated to result in gross savings of around EUR 50 million, of which around EUR 20 million materialized in 2015.

Service and competence renewal is expected to continue in 2016. The impact of gross savings on the IT services cost base will be partly offset by continued recruitments of new talent within growth areas. In 2016, Tieto will continue to increase its investments in offering development in promising growth areas. Offering development costs are anticipated to increase from 2015 and to amount to over 4% of Group sales in 2016.

In Product Development Services, sales for the first quarter of 2016 will be affected by insourcing by one key customer whose projects ended at the beginning of the second quarter of 2015. As the efficiency measures undertaken have resulted in a healthy cost structure for the existing business the normalized underlying operating margin is expected to remain in a range below 10%.  

Tieto anticipates that its restructuring costs will amount to less than 2% of sales, including costs related to the programme announced in January 2015. Capital expenditure (CAPEX) is anticipated to remain at around 3–4% of Group sales.