Capgemini: 'Building a Global Powerhouse'

After beating earnings expectations for 2007, CEO Paul Hermelin talks to BusinessWeek about his expansive plans for the IT consulting firm

Paul Hermelin has seen both sides of the offshoring phenomenon. When he took over as chief executive of Capgemini (CAPP.PA) in 2002, Europe's largest information technology services outfit was still struggling to get past its 2000 merger with Ernst & Young Consulting while facing competition from upstart Indian firms. Now, thanks to a lot of hard work by Hermelin and his executive team, the company is benefiting from the massive shift in outsourcing to lower-cost countries—where Capgemini's staff has more than doubled over the past four years, to 20,000 people.

On Feb. 14, Capgemini turned in a stronger-than-expected earnings report. Revenues rose 13%, to $11.9 billion, and net income nearly doubled, to $602 million. The company's operating profit margin came in at 7.4%, and Hermelin expects it to hit 8.5% this year. Because of the restructuring of a major contract with the British government, however, Capgemini is forecasting only a 2% to 5% revenue increase in 2008. After the quarterly update, Hermelin discussed the company's strategy with BusinessWeek senior writer Steve Hamm.

Capgemini had a strong 2007, both in revenue growth and operating margin improvement. How do you account for that?

We are probably the one Western company, along with Accenture (ACN), that has truly embraced a global delivery model. You can see the speed of growth of our offshore head count. It helps us to be more and more competitive. We now have people in several countries. We're mastering multishore delivery. Now, in the U.S., if there are 100 people working for an outsourcing client, probably 45 of them are based in India. That makes us a hybrid animal between the Indian pure player and the traditional Western player.

You say Capgemini and Accenture are the Western companies that have most embraced the global delivery model. What about IBM (IBM), which employs 70,000 people in India?

Nearly half of them work for IBM software and hardware departments. If you look at the number of IBM people in India who are actually servicing Western customers, as a proportion of their revenues, they are behind us. I do not see them as often with customers with global delivery as I see Accenture.

You have dramatically increased your offshore workforce, both by acquiring India's Kanbay and through hiring, giving the company 5,000 employees in India. What are the biggest challenges you have faced, and how have you overcome them?

What worked very well was to use offshore skill groups initially as sort of offshore subcontractors. I could say to my Dutch guy or French guy, "You own the customer and you're rewarded for the revenue generation, and you keep the profit." It was a good way to awaken our onshore people to the offshore model. But that's not a sustainable model, because if I do that, I contain the Indian employees in a role they don't like, and I can't retain the best talents.

We are moving now to a model where there's a seamless organization that integrates on- and offshore people in a consolidated business unit. It's a little more difficult, but it's far more rewarding. It [offers] the customer a kind of embedded interface between offshore and onshore that they don't have to build. We won back some contracts from the pure players, be they Tata or Infosys (INFY). We can do this because of the multicultural nature of our organization. They are global players, but they're Bangalore-centric. There are other global players, like IBM, but they're Armonk (N.Y.)-centric.

We are the only global player that's truly multicultural and distributed. That's because the last time Paris was the center of the world was when Louis XIV reigned, 300 or 400 years ago. We can't do that now. So our only chance for building a global powerhouse is to combine many cultures and have a global company based on entrepreneurship and multiculturalism.