Ordina is subject to external circumstances that influence its business into a large extent. Before analyzing historical performance and forecasting future performance, it’s important to get a grip on Ordina’s environment first.
There are two levels on which external analyses can be performed: macro and meso. The results from both analyses will be input for the subsequent analysis of the company’s internal environment; it’s so-called micro-environment.
The macro environment (the ‘contextual’ level) contains all outside forces that can’t be controlled by individuals within a company, like the economy. The meso environment (the ‘transactional’ level) contains the outside forces that can be influenced by the company, like suppliers, competitors etc.
A regular method to analyze the macro environment of a company is the PEST-model, a framework used to describe the Political, Economic, Social and Technological factors in the company’s environment. While the basis of this model is successfully deployed since 1967, some extensions were added over the years: Legal, Environmental and Demography factors add important influences on Ordina’s macro environment, which is why the PESTLED variation of the model will be deployed.
The Dutch government implements a new law (Wet Arbeidsrecht in Balans) per 2020 that secures payrollers have similar rights as employees with regular employment contracts. Following this implementation an update is expected per January 1st, 2021 of a related law (Wet Deregulering Beoordeling Arbeidsrelatie). This law determines whether agreements between a contractor (Zelfstandige Zonder Personeel) and an employer should be qualified as regular employment.
Implications for Ordina of the first law will be negligible, as it mainly affects low-skilled labor. The second law will impact Ordina, as still approximately one-third of Ordina’s project hours can’t be executed by its own employees. For these projects third parties are contracted, many of them being small independent contractors. If these relationships are classified as employee-employer relationship, Ordina would be liable for (historical) social security fees and taxes for these contractors. Not only would this be a onetime cost, it would also mean future margins erode (or pricing must increase, leading to less competitiveness).
Although the economy of the Benelux is robust, the general perception is that the growth of the economy in the Benelux is slowing down. After a record growth of 3,0% in 2017, the level is forecasted to decline to 1,5% in 2021 and 1,1% in 2022.
But the forecasts for the IT-sector are more positive: it is expected to keep growing in a faster pace than the economy with an estimated 3-5% year on year growth for the complete industry.
A - Ordina is a local ICT-services provider in the Benelux. Although the IT-sector is growing fast, the core of Ordina’s operation is temp labor and this business model is known for its high level of cyclicity: the sector reacts fast to changing economic circumstances. The implications for Ordina are substantial: Research from CBS and ING shows first signs of decline in the temp labor sector and it is likely that this decline will impact Ordina.
B – Although the IT-sector as a whole (including infrastructure, software etc) is expected to outperform GDP, Ordina depends on a segment of the sector that isn’t performing well: IT- services. Changes are required for Ordina to profit from the expanding IT-market and increasing demand from customers.
The penetration of digitalization is still increasing in the Benelux. More industries and governmental institutions are transforming their style of working through digitalization.
In the IT-industry, human capital has a vital role and attracting and retaining personnel is important. Diversity is one element that has impact on the performance of a company. The second is the perceived attractiveness of the employer. And the latter changed, because where in the early ‘00s the large corporates were still regarded the most attractive employers, this popularity has faded away: current graduates prefer working for trendy start-ups or start their own business.
A - Ordina is well positioned to profit from the increasing digitalization and is able to serve customers with solutions that support future growth.
B - Ordina actively reports about diversity in each annual report, but the ratios are below industry average. As attracting and retaining employees is an important element for Ordina’s success, their lacking diversity may have negative impact.
C - The decrease in perceived attractiveness of large employers puts more pressure on Ordina’s recruitment and human resource departments.
New technological developments such as cloud services, the internet of things, artificial intelligence, data analytics and virtual reality are changing the world in a high pace. IT became core business for many companies and the driving force behind innovation.
At the same time RaboResearch reports an ever-increasing outsourcing level of IT and IT-infrastructure. Many companies are still in the process of a digital transformation. The demand in the IT-industry in general is not expected to drop, however the growth is not foreseen across the board: specialists are expected to profit where general service providers are expected to bleed.
A - Ordina should be able to profit from the industry growth if its personnel has up to date knowledge of the different (emerging) specialisms.
B - As Ordina is still highly dependent on the general services part of their business, it may expect a negative impact: expectations for the temp labor segment are lagging compared to other IT-markets.
The most important downside of digitalization is the security vulnerabilities in IT-systems. Countries are concerned with the privacy of its citizens and are introducing new privacy laws to protect fundamental rights of its citizen.
This has a two-sided effect on Ordina: on one hand it has anticipated this development by establishing a dedicated business proposition for Security & Privacy. This may support future results. On the other hand, the risks and costs are increasing for IT- services providers that don’t comply with the increasingly complex privacy laws.
Society is focusing on reduction of CO2. Large corporates and governments are obliged or expected to select partners more and more on the level of awareness of their environmental responsibilities.
Although Ordina’s own direct footprint is limited, the development can’t be ignored. Customers move to green infrastructures and Ordina should anticipate not to fall behind.
New generations constitute new generations of potential employees and these generations bring new (technical) capabilities and knowledge.
Ordina is highly dependent on its human capital. The main reason for Ordina’s past acquisitions has been to acquire their human capital: large customers asked for new technology (apps for example) which Ordina didn’t have in house. To keep up with customer’s demand, Ordina must have a focus on the attraction of new and young employees. The aging population is a factor of risk.
Digitalization is still increasing, and the growth of the IT-sector is expected to keep outperforming the economy. But Ordina is depending on its cyclical IT-temp labor business, which exposes it significantly to the developments of GDP, and the economy is slowing down. To keep up, Ordina should nurture its human capital and make sure new generations of employees flow in with new capabilities.
The meso environment (the ‘industry’) is the part of an external environment on which a company has some (indirect) influence. It is the direct environment of a company and contains elements like suppliers, supply and demand, competitors and alliances.
For the analysis of the meso environment, first the market and its trends will be described. Then follows an examination of the industry’s attractiveness, Ordina’s peers and distinctive value drivers.
The Dutch IT-industry counts approximately 215.00016/17 employees and accounts for 4,5% of the gross domestic product. The sector is usually divided in the following sub-sectors:
1. Software companies
2. System integrators / IT-service providers
4. Hosting- & Cloud-providers
6. Tech / Internet companies
Ordina is a system integrator/IT-service provider. This sub-sector consists of 14.800 companies, of which only 0,6% employ over 100 employees: the market is characterized by many small specialized companies and independent contractors. The 89 companies that do employ more than 100 employees have on average 435 employees (in other words, its 2647 employees make Ordina a large player).
The sub-sector of system integrators/IT-service providers (from here ‘IT-service providers’) accounts for 14,3 billion euro in the Netherlands. When extrapolated to the Benelux based on GDP, this would be a total Benelux market size for IT-service providers of approximately 23,9 billion euro. Of this total market, Ordina would have a share of 1,5%.
Industry trends provide companies with important data to help them remain competitive in the marketplace. For Ordina the following trends are expected to be most influential on future performance:
A - The main challenge of the IT-sector is the “war for people”. Research from Rabobank points at a problematic shortage of qualified personnel for 30% of the IT-services companies. These shortages are expected to remain a factor of importance in the coming years. As a result, Ordina will remain having issues to attract and retain qualified employees. Keeping this in mind, it is not likely that the level of contracted work will decrease anytime soon. This puts pressure on Ordina’s (future) margin.
B - The number of (small) IT-service providers is increasing year on year. Correspondingly, competition is increasing. Often these (smaller) IT-service providers choose to focus on 1 specific product or technology to improve quality and become the number one player in that niche.
C - Transition in business models (driven by smaller players) from hourly based contracts to subscription based. As Ordina is dependent for 70% on the hourly based model, it will need to consider whether customers prefer these new business models and what the impact will be.
D - The IT-sector as a whole is expected to keep on growing. But the perspective for IT-service providers is less optimistic. This puts pressure on the majority of Ordina’s current business.
E - Most customers don’t regard IT as a primary activity and choose suppliers that unburden them. As a result, larger IT- suppliers integrate within the value chain to be able to provide a “one stop shop”, leading to an active M&A market. Being an integrated services supplier, Ordina may expect more competition for its ‘one stop shop’ proposition.
F - Large tenders become less common, because
new (cloud) technologies offer a range of configurable functionalities that make large ICT-projects unnecessary. Customers increasingly choose (smaller) specialists
Micheal Porter introduced his famous 5 forces model in 1980 as a tool for business analysis that helps explain why various industries are able to sustain different levels of profitability. In other words, the model indicates an industry’s attractiveness.
Within the analyzed industry, the level of growth differs per segment: tech and internet companies are expected to grow fast, while IT-services providers like Ordina are expected to grow at a slower pace or not to grow at all.
Competition in the industry
The sector consists of many service providers. Only a handful has the size of Ordina, but as large tenders are becoming less common and more projects are divided in sub-solutions (“scrum-like”) the smaller players nowadays are direct competitors for Ordina. On top, large international (mainly Indian) service providers entered the Dutch market, putting further pressure on Ordina’s margins: competition is intense in the Benelux market.
Potential of New Entrants
The market has low barriers for entry: for small projects, new entrants enter the market on a daily basis, as any independent contractor with a laptop can be viewed as ‘competition’. Large projects require a stability in service that only the integrated service providers can offer. For them the barriers are more substantial, but history has proven that international players regard the Dutch market as a good place to obtain a toehold in Europe. Indian service providers as Tata Consultancy and Infosys recently grew to a Dutch market share of approximately 5% in just a few years.
Power of Suppliers
As Ordina drives on human capital, its main suppliers are its people. While they are not organized, they do put pressure on Ordina’s margins: there is a shortage of IT-employees leading to two margin problems: 1. Personnel is hard to retain, leading to high salaries. 2. Employees tend to become independent contractors to which Ordina is becoming more dependent and on which it is difficult to make a margin.
Power of Customers
Ordina mainly serves large customers. While there is the advantage of less competition in this league, the concentration of customers has more leverage on Ordina than vice versa.
Threat of Substitutes
Ordina acts in a fast-changing environment. New technologies like many “cloud” solutions have a direct impact on the company. The sector is known for its disruptors.
Concluding, the IT-industry in the Benelux is very competitive and the segment where Ordina operates is not likely to grow substantially in the next years. This most likely will intensify the level of competition even further, as an increasing amount of providers need to share the same pie.
Peer groups are the basis for benchmarks of a company’s performance (and value). These peers are usually in some way competing with the company in question, therefore an analysis of Ordina’s competitors is an useful starting point to define a peer selection.
Competitors can be identified by using a customer’s point of view: what are their alternatives?
For large tenders, customers can choose for alternative local companies such as ICT Group N.V. and Centric or consider large international companies that are locally active: Atos, Capgemini and Sogetti. And more recently, the choice for lower cost alternatives Tata Consultancy and Infosys emerged.
For small projects, customers have a broad range of (local) parties to choose from, based on specialism and pricing. The choice will be between the one stop shop offering from a large more stable services provider as Ordina versus a more agile, possibly more specialized and more cost-efficient smaller competitor.
To come from competitors to peers, a selection has been made based on key distinctive factors: Industry, Geography, Size, Lifecycle phase and forward-looking EBITDA and Sales growth. The selected peers will be used throughout the report as reference to other industry participants.
Besides ensuring peers are really peers, it is important to use a sufficient amount of them. The usage of at least 8 peers is recommended.
Although there is a multitude of competitors in the Netherlands, most are private. As for valuation purposes there is a need for data, which only listed companies provide. Within that limitation and based on the key distinctive factors, the following selection of peers will be used30, classified as tier 1 or tier 2 based on their comparability:
The value of any company is ultimately defined by its return on invested capital (ROIC), its revenue growth and the ability to sustain both over time. Value drivers are the factors that influence these elements and either reduce risk or increase growth or returns.
The general key drivers of value are growth and the spread between return on invested capital (ROIC) and weighted average cost of capital (WACC). Applied to the business of Ordina, these core elements are best represented by revenue growth and operating profit. To analyze both, underlying value drivers have been defined which are similar for comparable industry participants.
Attachment C and D contain the resulting value driver trees. Its dominating drivers are used for the hereinafter discussed historical analysis and forecasts.
The IT-services segment in the Benelux has a fierce competition and isn’t likely to grow in the coming years. Companies try to specialize themselves in technologies/products or try to integrate multiple parts of the value chain to offer a one stop shop. As Ordina has a market position as the largest independent IT-services provider, it usually is one of the preferred suppliers for large customers as the Dutch government. But while this used to be a comfortable position, competition is on the rise with the entry of (lower) cost efficient international players. Together with the change in customer demand for sub-solutions, also leading to new competitors, Ordina is in a position where (additional) competition arises from new providers and further pressure on margins of their core business is likely.