Sopra suffers in the UK

(By Anthony Miller; Sunday 22nd Feb 09 5.00pm). We thought the recent announcement of French mid-cap Sopra’s FY08 results earlier in the month (see here) worth a belated mention for a few reasons. Firstly, their UK business. This is essentially based on three acquisitions: Mentor (1999); CS Rand (2001); and the largest, Scotland-based Newell & Budge (2005). Indeed, it was Scotland that kind of let the team down last year due to banking sector contract cancellations (e.g. RBS). But it seems to me that Sopra’s UK business cannot have been firing on all cylinders for some years. UK revenues last year were €73m (+1.7% organic), let’s call it £55‑60m. Yet when Sopra acquired N&B, the Scottish systems house was “on target” to reach £37‑38m in 2005 and was expected to hit £60m revenues in 2006. Mentor record £10m revenues the year before it was acquired. Hmm, something just doesn't seem right.

The second thing that piqued my interest is that despite its modest size Sopra seems to be ‘getting’ the offshore message. Indeed, N&B already had 100 FTEs in Delhi back in 2005; now Sopra has 600 FTEs there (in Noida, to be more precise), which is ~20% of its 3,000-strong delivery centre workforce excluding its semi-autonomous products arm, Axway. They also have 50 FTEs in Casablanca and 200 in Madrid, though I do struggle with calling the latter destination ‘offshore’. However, Sopra’s total headcount exceeds 12,000 so there’s a lot more work being done outside of Sopra’s delivery centres which surely deserves closer attention. Sopra aims to boost offshore headcount by another 700 FTEs this year, but also refers to partnering with the likes of Wipro and MindTree “when necessary”. Mind you, I always worry when a small player like Sopra tries to partner with a large Indian SI like Wipro; phrases involving ‘tails wagging dogs’ spring to mind (and I have absolutely no idea how well that translates into French!).

Finally, I just wonder about the durability of Sopra’s group business model. Through a combination of organic and acquisitive growth, Sopra seems to have ended up with a bit of a mish-mash of businesses. The most profitable is its enterprise application integration (EAI) products business Axway, accounting for 15% of group revenues and nearly 20% of group profit. There’s also a management consulting business (Orga), contributing a tiny 4% of group revenues and 2% of profit – that’s a 5% margin, the lowest in the group. The core business – and the key growth engine – is Sopra’s domestic SI business, which accounts for over 60% of group revenues and profit, and grew 14% (organic) in 2008. It's not clear to me exactly how all the bits are meant to work together; Sopra appears rather unfocused and geographically diverse for a company of its size. This may cause disproportionately greater grief during the downturn than more focused mid-tier peers, as there is unlikely to be a single set of levers that management can pull to adjust the entirety of its business operations – i.e. too many bits to keep an eye on. As we have said many times before, the mid-market is a very uncomfortable place to be.