Tieto provides a full range of IT services comprising integration and operations management services complemented with its own products. The company aims to be at the forefront of efficient delivery of high-quality services and pursue new service models enabled by the ongoing market change. Digitalization is currently the biggest change driver, providing opportunities for enterprises, including IT service providers, who play a critical role in this transformation. The company proactively renews and strengthens its service portfolio and competencies in order to be a preferred digitalization partner to customers.
Product Development Services (PDS) is the largest Nordic provider of product development services in the telecom sector. PDS continues to increase efficiency and maintain profitability within its existing business operations. In addition, PDS aims to build its scale globally.
To grow faster than the market in the longer term, Tieto will continue to invest in its high-growth services and new talent. The company has defined its future key offerings, compensating for the decline of traditional IT services. The selected offerings and the company's measures to increase the industrialization of its services are expected to contribute to growth and the long-term operating margin (EBIT) target of 10% towards 2016.
Investments in future high-growth offerings driving significant growth over the following few years
- Customer Experience Management – providing Tieto's customers in the financial services and retail sectors with a competitive advantage by excelling in customer interaction and service
- Lifecare – the leading Nordic industry-specific solution for the healthcare and welfare sector
- Industrial Internet – supporting customers' business beyond pure equipment sales by extending to services, especially in the manufacturing sector.
Investments in other key services to enhance scalability of selected key offerings
- Selected offerings in Industry Products to further strengthen well-performing solutions in the areas of financial services, hydrocarbon accounting and supply chain management
- Standardization of services in application management and automation in infrastructure management to drive quality, speed, efficiency and customer experience
- Cloud services, mainly in Managed Services, to further drive growth of existing services, e.g. Tieto Cloud Server and Tieto Productivity Cloud, and to launch new services.
Customer Experience Management (CEM) as well as Business and IT Transformation practices are segments with attractive double-digit growth potential for CSI. In the CEM area, Tieto has won new cases, e.g. in the finance and retail sectors, providing customers with improved business value by opening new opportunities to attract customers and accelerate revenue growth. Examples of Tieto's role in this area include serving as an advisor for digital customer experience innovations and a provider of a "Software as a Service" -based online and mobile bank.
The market for Lifecare has remained good due to the ongoing digitalization of the healthcare and welfare sector. Further investments will be made in the suite of applications, with a number of new launches being expected also in 2015 and 2016. In 2014, the number of Lifecare applications and interfaces launched by Tieto rose to over 30, of which around half in the fourth quarter. Key applications are designed for areas such as national interoperability, mobile homecare and eServices for citizens. The market for Finnish national interoperability has been active in 2014. Currently, over 90% of Tieto's healthcare customers in the public sector have been connected to the national archive. In 2015, preparations to connect healthcare customers in the private sector are ongoing. In the Finnish market, Tieto's applications in this area represent a substantial share of customer solutions.
In Industrial Internet, Tieto's growth-stage investment, the focus has been on the design of offerings and the partner network. The first pilot cases and negotiations on continuing activities are currently ongoing. In 2014, Tieto and Cisco announced that they will collaborate on the Internet of Everything solutions, which will help various industries, e.g. manufacturing, to take advantage of data being generated by machines and derive more value from their existing networks. In 2014, Tieto focused on the development of offerings for various sectors and won new customers in the areas of manufacturing and welfare. In 2015, the company will focus on creating scale and growth.
Tieto provides a variety of services, including cloud-related consulting and integrations in addition to cloud-based capacity services. In Managed Services, Tieto Cloud Server and Tieto Productivity Cloud continue to see strong demand. The service line also continues to invest in user interface development and self-services as well as industry-specific offerings combining the company's technological competences with industry expertise, e.g. in the public and healthcare sector. In the full year, cloud services grew by 153%. Cloud offerings currently represent close to 10% of Managed Services' sales.
Tieto has increased standardization and automation in application management and infrastructure management. This enables Managed Services to further automate deliveries and reduce system downtime. Investments in increasing competitiveness are already paying off. In both application management and managed services areas, Tieto has won large agreements that will be based on global delivery capability and industrialized processes.
To stay competitive, Tieto plans to continue to recruit new competences and retrain existing employees to match the needs in new service areas. New roles include data analysts, industry consultants, system architects and technical specialists among others. As new services are less labour-intensive and automation via self-service channels will reduce the need for certain existing roles, Tieto announced personnel adjustments in January.
Performance improvement in 2015
The company seeks organic growth in its full-year sales of IT services in 2015 in line with the market, and the trend in IT services profitability is expected to remain favourable. Sales growth in early 2015, may be slower than that expected for the full-year. New contracts visible in the year-end strong order backlog are expected to start contributing to sales growth later during the year. In IT services, the reductions initiated in 2014 and 2015 are anticipated to result in gross cost savings of around EUR 35 million in 2015, largely in the second half. However, the impact of savings on the IT services cost base will be partly offset by recruitments of new talent within growth areas. During 2015, the company expects to add several hundred positions in new competence areas. The company continues to invest in its high-growth businesses and new service innovation. Offering development costs are expected to be at least at the level of 2014. In early 2015, currency fluctuations are anticipated to have a negative impact on sales and operating profit compared with corresponding period in the previous year.
In Product Development Services (PDS), 950 of the redundancies are related to the business volume decline caused by the insourcing decision made by one key customer. As a result of this decision, sales for PDS are anticipated to decline as from the first quarter of 2015. Full-year sales related to this customer represented around 5% of Group sales in 2014 but this share is anticipated to decline to less than 2% in the first quarter. Tieto plans to adjust its cost base in parallel with the reduction in business volumes. Measures to lower the cost base will include personnel reductions, initiated in 2014, as well as reduced subcontracting, facility and other operational costs. The total net cash flow impact of the measures related to the insourcing is expected to be slightly positive during 2015, as the release of working capital will offset the negative impact of reduced business volumes.
Tieto aims to proactively manage its competence structure and continuously follows changes in the operating environment. In 2014, Tieto announced efficiency measures in both IT services (160 employees in CSI) and Product Development Services (1 200 employees). In January 2015, Tieto initiated personnel negotiations related to the company's service and competence renewal. The planned reductions will affect the Managed Services (up to 650) and Consulting and System Integration (up to 190) service lines.
Tieto's investments (OPEX) in offering development and innovation increased in 2014 from the 2013 level of EUR 40 million to around EUR 50 million. The increase was visible mainly in Industry Products and Consulting and System Integration. In 2015, investments are expected to be at least at the 2014 level. A great proportion of offering development will be directed at high-growth offerings, including Customer Experience Management, Industrial Internet, Lifecare, cloud services and selected industry-specific products. Additionally, investments in the industrialization of services will continue. Capital expenditure (CAPEX) in 2014 declined to EUR 42.4 (68.3) million and is anticipated to remain at the level of 3–4% of sales which is below the current depreciation level (EUR 63.4 million in 2014).
Related to measures initiated in January 2015, Tieto will book restructuring costs of some EUR 35 million. Currently, there are no other major restructuring plans while the company continuously monitors the changes in the demand for its services.