Reorienting for growth
Digitalization keeps pushing the limits of technology, and as the leading IT services provider in the Nordics, we are the first in line to adopt it as a new normal. The transformation we continuously talk about with reference to our customers has not left us untouched. Tieto has undergone a major change during the past two years, which has opened new business opportunities and the door for growth.
The scale of change all businesses need to face with digitalization resembles that of the industrial revolution. Concepts such as big data and industrial internet will transform traditional business models, offering countless possibilities for all industries. IT service companies need to constantly be able to review and transform their portfolio and competencies. For Tieto, this has meant finding innovative ways to create benefits for our customers.
In 2014 our focus has been on increasing quality and profitability, establishing growth investments and expanding competencies. The new digital world requires new kinds of services and competencies, which has opened career opportunities and accelerated skill development at Tieto. By active renewal of our competence pool, we can ensure being the best possible business partner to our customers.
Growth emerging in IT services driven by cloud
During the year we saw healthy order intake in many of our businesses spanning from financial services to public, healthcare and welfare, manufacturing and retail industries. Managed Services, Consulting and System Integration together with Industry Products enabled good performance for IT services. On the whole, our IT services business grew organically by around 3% in 2014.
Cloud was driving faster-than-market growth – for example, in Managed Services cloud grew by over 150% in 2014. Cloud has become a standard part of new offers as customers seek ways to reduce the total cost of ownership. Due to greater automation, services are becoming less labour-intensive and more cost-efficient, helping service providers to remain competitive. Tieto’s extensive product portfolio and industry expertise makes us an ideal long-term business partner for companies looking for new opportunities through cloud.
In the future we anticipate double-digit growth also from our start-up operations Industrial Internet and Customer Experience Management. In the long run we aim at growing faster than the market in all IT services.
Improved profitability despite changes in market environment
During the year, we also managed to improve our profitability. Improvement was driven by increased business focus, higher quality and additionally, we reduced our cost base by around EUR 40 million compared with the previous year due to the efficiency programme started in 2013. With underlying operating margin of 9.9%, we continued to take steps towards our long-term ambition.
However, the market environment for our Product Development Services business remains challenging due to market changes. Consequently, we have initiated actions to reduce the cost base and to improve our performance within our existing customer base. Additionally, we continue to seek growth for PDS through new customers globally.
Growth investments established
In 2014 we established two in-house start-ups driven by the accelerating digitalization, Industrial Internet and Customer Experience Management. These start-ups not only drive our business forward by enlarging our portfolio and competencies, but also bring a new kind of start-up culture within Tieto ‒ leading us into increased agility and new ways of working. These investments also support our aim of being the best possible business partner for our customers in all their IT and transformation needs.
One of the key focus areas has been Customer Experience Management. Companies need to create a seamless customer experience across all touchpoints combining digital and physical. This is where Tieto steps in – we take a holistic approach towards CEM, working from vision to execution, and seeing the business value of CEM in addition to technology. By using industry knowledge, technological expertise and innovation ecosystem Tieto is able to create value through transforming our customers’ businesses.
With the other burning topic of the year, Industrial Internet, we are supporting our customers’ businesses and creating opportunities in the connected world. By utilizing new ways to connect devices, analyse data and distribute intelligence and autonomy among devices, our customers are able to increase efficiency, create new business and improve the service experience for end customers. There is huge potential in the Industrial Internet and Tieto is well positioned to take an active role in the development.
Our third growth investment with a lot of growth potential is the healthcare sector. Increasing regulation and digitalization of healthcare and welfare processes are the key drivers for Tieto’s business. Tieto is planning on new investments in the suite of applications, with a number of new launches expected in 2015 and 2016. Tieto is currently the leading IT solution provider for the healthcare and welfare sector in the Nordic countries.
In addition to the growth investments, we continued to build our competitiveness by industrializing our infrastructure and Application Management services, increasing offshore capability and growing our cloud service and industry product portfolio. This left us well positioned in our target markets.
Ready to accelerate growth in IT services
In 2014, we witnessed a new kind of optimism at Tieto. Our actions have supported our strategy, and we seized the opportunities the accelerating digitalization set for us. We worked hard to get closer to our target profitability, and the efficiency improvements played a big part in getting us there. We are now getting ready for growth.
With improved profitability, growth and a healthy cash flow, the shareholder return increased to 36%. For this we are proud and determined to keep on creating value for our owners. Looking into 2015, our journey toward growth continues with the support of new products, competencies and a bit of start-up attitude.
I would like to warmly thank our customers, employees, partners and shareholders in supporting us on our continued renewal!
President and CEO