New strategy and implementation
As digitalization gains speed, demand for new data-driven innovations and the renewal of customers’ business and IT increases rapidly. Tieto’s customers are faced with a dual agenda: to run their existing businesses efficiently while innovating new services.
According to Tieto’s new strategy for 2016–2020, announced in March 2016, the company will enhance its competitiveness and growth through three strategic choices:
- Services to accelerate customer value
- Nordic leadership and international expansion
- Active participation in open ecosystems and co-innovation.
Focusing on Nordic enterprises and the public sector, Tieto seeks to grow by further increasing its market share in the Nordics. Growth will also be supported by international expansion of selected industry solutions that have proven to be effective in current markets
Tieto continues to drive shareholder returns above industry average. Positive financial development and attractive dividend policy are expected to continue while the company increases its investments to support innovation and growth.
New operating structure
Tieto’s operating model and structure have been aligned with the strategy launched in March 2016. The new structure, effective as from 1 July, will support Tieto’s ambition to be customers’ first choice for business renewal.The structure is based on industry groups driving go-to-market activities and service lines as the reportable segments
- Financial Services
- Public, Healthcare and Welfare
- Industrial and Consumer Services
- Technology Services and Modernization
- Industry Solutions, including data-driven businesses organized independently of other businesses
- Business Consulting and Implementation
- Product Development Services.
Tieto is seeking to grow faster than the market in the long term. The company aims to accelerate customer value with end-to-end industry solutions and active modernization of customers’ technology landscapes. Additionally, new data-driven businesses help Tieto and its customers to capture the opportunities provided by the data-driven economy.
Tieto drives scale and repeatability through investments in software businesses, including start-up businesses with exponential growth. Industry solutions based on leading industry-specific software products, system integration capabilities and partnerships form the basis for Tieto’s differentiation.
Growth will be based on a strong solution foundation built on a dynamic portfolio, starting with around ten solutions proven in current markets.The portfolio includes the following high-growth businesses, in which the company has increased its investments during the past two years:
- Lifecare, Tieto’s solution for the healthcare and welfare sector
- Cloud services
- Customer Experience Management
- Data-Driven Businesses and
- Security Services.
In 2016, aggregated sales of these businesses amounted to around EUR 330 million and growth totalled 18%. Cloud services continued to be the strongest area with full-year growth of 36%. During the fourth quarter, Tieto launched OneCloud, a dynamic solution allowing customers to efficiently manage multiple cloud services through one platform.
Security Services focused on enhancing its service portfolio, including own software as well as integration of third-party products, with a focus on providing customers with end-to-end asset visibility and protection with simplicity. Security Services saw full-year sales increase by 16% with growth accelerating in the second half of the year. In Customer Experience Management (CEM), the new Industrial Experience offering has been well received. Industrial Experience, targeted at business-to-business clients, is helping customers expand from transactional digital services to solutions providing improved user experience. CEM posted full-year growth of around 35%, supported by the acquisition of Smilehouse in December 2015. Lifecare’s full-year growth was 6%.
Data-Driven Businesses have started to generate and deploy data-driven ideas together with customers and the Nordic start-up ecosystem. The business currently employs around thirty talents and the focus is on building the innovation and incubation pipeline. By the end of 2016, the unit had brought a few of its cases into commercialization mode. Tieto's data-driven solution in the healthcare and welfare sector drives personalized and efficient healthcare and health management by maximizing the wellbeing of individuals while reducing the costs of public health and social care operations. Tieto’s Intelligent Building is a human-centric, data-driven concept that provides customers with benefits such as improved working experience and better utilization of assets.
Additionally, Tieto has increased its investments in industry solutions targeted at Nordic markets, such as
- Banking (Financial Services)
- SmartUtility (Energy)
- Case management solution (Public sector),
as well as spearhead solutions driving international expansion
- Payments (Financial Services)
- Production Excellence (Manufacturing) and
- Hydrocarbon Accounting (Oil & Gas).
The simultaneous market requirements for extreme productivity and innovation are increasing. To manage this dual challenge and support its customers in their business renewal, Tieto will continue actions to drive its competitiveness and to enable continued investments in innovation and growth.
In IT services, Tieto aims to grow faster than the market in 2017. In 2016, Tieto completed the acquisition of Emric, the Nordic market leader in software and services for credit processing, which will also affect sales in 2017. Emric’s annual sales amount to around EUR 20 million, of which around EUR 7 million was visible in 2016.
In addition to sales growth, performance drivers in 2017 include
- recruitments in new service areas and related competence development
- salary inflation
- offering development
- automation and industrialization in service deliveries.
Investments in high-growth businesses and automation are expected to support profit improvement in the mid term while resulting in short-term pressure on the margin. Recruitments of new talent within growth areas include industry and solution consultants, architects and software developers. During 2016, Tieto added around 800 new competences in IT services while reductions based on efficiency programmes amounted to close to 200. Personnel costs related to recruitments during the year, driving mid- and long-term growth for Tieto, resulted in an increase of around EUR 20 million in aggregated personnel expenses in 2016. Salary inflation amounted to around EUR 18 million in 2016.
As a part of its long-term renewal and the need to increase its productivity and price competitiveness, Tieto has initiated actions to optimize its productivity and cost structure globally. In Finland, Tieto started personnel negotiations affecting up to 250 employees, of which up to 180 in the Transformation Services and Modernization service line and the remainder mainly in the Public, Healthcare and Welfare industry group and Support Functions. The company expects that the actions altogether, including the anticipated reductions in Finland, will result in annualized gross savings of close to EUR 40 million. It is estimated that over EUR 20 million in savings will affect the cost base for 2017, mainly in the second half.
In 2017 overall, Tieto’s restructuring needs will be based on automation, other productivity improvements and the need to align the company’s competence base with market demand. Tieto currently estimates that its full-year restructuring costs in 2017 will represent 1–2% of Group sales.
The company will continue to renew and strengthen its service and solution portfolio in promising growth areas during the year with a special focus on software-based industry solutions. In 2016, offering development costs amounted to around EUR 75 million, up by EUR 15 million, and totalled 5.0% of sales. EUR 12 million of the increase is attributable to Industry Solutions, including new data-driven businesses. Offering development costs in 2017 are anticipated to remain at the 2016 level and at around 5% of Group sales. Capital expenditure (CAPEX) is anticipated to remain below 4% of Group sales.