Photo illustration by Derreck Johnson. Photo by Norm Betts/Bloomberg via Getty Images.
Most Americans first heard of the international IT services company CGI only a month ago, during the disastrous launch of healthcare.gov. CGI’s U.S. subsidiary, CGI Federal, was the largest contractor on the project, with contracts totaling more than $200 million. CGI also designed the Vermont and Hawaii exchanges, which were subject to overruns and functionality issues. Yet these problems, which might have doomed many an organization, have not even made a dent on CGI’s stock, thanks to the careful strategy of founder and CEO Serge Godin, who has made sure that CGI’s wingspan reaches far beyond health care and government work. A classic tortoise, he has constructed an impenetrable shell for CGI that weathers such blows with ease. This year, the 63-year-old Godin celebrated becoming a billionaire.
It took 36 years: Godin co-founded the tiny French-Canadian information-services company CGI Group in 1976, when he was 26; in 2012, CGI’s purchase of British IT giant Logica more than doubled its number of employees (from 30,000 to more than 70,000) and yielded a 53 percent jump in the company’s stock, pushing Godin over the 10-figure line. While the pace sets Godin’s tech career apart from the Icarus-like ascents of Zynga’s Mark Pincus (who made it to the billion-dollar mark in four years) or Napster’s Sean Parker (who made it the day Facebook went public), it doesn’t make Godin’s success any less noteworthy. Now the chair of one of the largest IT services and outsourcing companies in the world—approaching giants like IBM, HP, and Fujitsu—Godin’s “buy and build” strategy speaks to a more reliable, and more patient, business strategy than stumbling on the right tech at the right time.
With 300 offices in 40 countries, CGI has established a comprehensive reach across the IT sector through Godin’s strategy of acquisition and consolidation. For years, Godin has realized that growth was key in itself. In the IT services world, cutting-edge technology and efficiency count for very little next to meeting a checklist of qualifications, including size and reach. Without being sufficiently large, they would not be taken seriously as an IT outsourcing provider. After a modest first 20 years, Godin’s ensuing battery of acquisitions allowed him to build an integrated, successful conglomerate out of distinctly nonrevolutionary technology. “This is a guy who has acquired, over the last 35 years, 70 different companies,” says Bell Canada ex-CEO Michael Sabia. “And every one of those acquisitions—every one of them—has been accretive to earnings.” CGI’s average of 25 percent annual growth per year is not Google-level, but investors have never complained.
CGI’s strategy ensures that performance problems and cost overruns pose a lesser risk to its fortunes than you’d think.
In addition to prestige, CGI’s many acquisitions bought it comprehensive access. It was a crucial pair of billion-dollar purchases that allowed Godin to make successful forays into the U.S. government contracting market, including the $200 million healthcare.gov contract. The first buy, in 2004, was the civilian side of the tech consulting firm American Management Systems, founded by deputies of former Defense Secretary Robert S. McNamara; the other purchase, in 2010, was IT firm Stanley Inc., which had provided services to the armed forces since 1966 and to the State Department since 1992—it was Stanley employees who snooped into Barack Obama’s passport file. More than buying capital, Godin was purchasing reach and access, allowing CGI to gain business unavailable to it through competition alone. Rather than competing head on with IBM, it uses acquisitions to slide in behind them.
It was these well-timed acquisitions that allowed the U.S. division of CGI Federal to be one of only four preapproved contractors to bid for the $200 million healthcare.gov contract and others like it. Access has its privileges. The $3 billion Logica acquisition cost Godin only a third of what it would have five years ago, due to European market turmoil and debt crises, and was a testament to Godin’s patience and timing—it immediately entrenched CGI as one of the top IT players in the European market.
Another of Godin’s strengths is a knack for locking clients into a comprehensive package that embeds CGI into multiple stages of their clients’ business for the long run. Just as Gmail and Facebook provide “sticky” Web applications that make it difficult to leave even if the functionality or terms of service change, CGI seeks to do “sticky” IT that makes it hard for their clients to decouple. That means performance problems and cost overruns pose a lesser risk to CGI’s fortunes than you’d think. This, Godin says, is why CGI has been so consistently reliable as a stock. “The ultimate aim,” according to a Globe and Mail profile of CGI, “is to establish relations so intimate with the client that decoupling becomes almost impossible.”
Despite the criticism of CGI for its part in healthcare.gov and for the delays and overruns with the Vermont and Hawaii exchanges, analysts are not worried: “It will all be forgotten in a few months,” said Cote 100 President Philippe Le Blanc. In any case, these contracts only make up a small part of CGI’s business. Likewise, the loss of a $46 million contract from 2009—to build a diabetes registry for Ontario, Canada, which missed its completion deadline multiple times before finally being canceled in 2012—had only a tiny impact on CGI’s $10 billion of yearly revenues. The stock has remained robust—it’s what Godin calls a “defensive” stock. Insulated from the shifting winds of technology, consumer confidence, and even national crises, Godin carefully hedges against problems both internal and external.
It seems a good “defensive” bet that Godin will remain a model for the less flashy billionaires of the future. Due to diversification, embedded relationships with clients, and sheer size, Godin has little reason to worry about the future of CGI. Long after Zynga’s Farmville is in the dustbin with other Macromedia Flash-in-the-pan startups, modest giant CGI—set to be inherited by Godin’s daughter Julie—will still be inextricably part of the world’s IT circulatory system.
Source: http://www.slate.com/articles/business/billion_to_one/2013/11/healthcare_gov_and_cgi_federal_the_patient_person_s_guide_to_becoming_a.html
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