Made in Canada

Launched in Serge Godin’s basement in 1976, CGI Group today is well positioned in the hottest sectors of the global economy — and its prospects seem brighter than ever.

About a dozen years ago, an IBM executive repeatedly contacted Serge Godin, offering to buy his company. And each time, the head of CGI Group, a Montreal-based IT consulting firm, tactfully declined the offer. The IBM executive tried every quarter, until an irritated Godin fired back, "We’re not for sale. Are you?" The IBM executive never called again.

"I enjoy reading the menu, not being on it," Godin, now chairman, says. Drawing on his independent spirit and a flair for acquisitions and landing large contracts, Godin ensured his company’s rise to the top of Canada’s tech industry, in a country where tech leaders are none too common.

After purchasing the European IT services company Logica in August 2012, CGI’s revenue increased from $4.8 billion to $10.1 billion at the end of September 2013, surpassing IT darling Research in Motion (now BlackBerry Ltd.), whose revenue tumbled to $2.7 billion in fiscal 2014 from $11.1 billion in fiscal 2012. With 68,000 employees in 400 offices spanning 40 countries on five continents, CGI ranks fifth worldwide in the information technology sector.

"If you detect enthusiasm when I talk about Serge Godin, you’d be right," says Pierre Matuszewski, CEO of Société Générale (Canada), which has business ties with CGI. In a speech in Paris to prominent business leaders, he introduced Godin by saying, "Attention, people of France, what Céline Dion is to the entertainment world, Serge Godin is to the business world."

"I wanted people to understand the phenomenon," Matuszewski says. "Here’s a man with an exceptional career, who’s completed close to 75 acquisitions, managed to integrate all employees affected and, all the while, remained extremely modest."

There seems to be a general consensus about Godin’s modesty. "He doesn’t talk about himself, but takes an interest in the people he deals with, always trying to shift the focus on them," says Gilles Labbé, president and CEO of aircraft landing gear manufacturer Héroux-Devtek Inc., a CGI client. (Labbé is a member of CGI’s board and audit committee.)

The down-to-earth Godin is driven by a determination that borders on perfectionism, as evidenced by his morning routine. Whether he’s tired or under the weather, he is on his treadmill for an hour every morning at five. "I haven’t skipped my morning exercise ever since I started years ago," he says.

At 63, he recently joined the billionaires club, thanks to his 11.5% common share holdings and 46.98% voting rights in CGI. Godin has seen its shares grow by 25% each year over the past 25 years on the Toronto Stock Exchange and by 493% during the past seven years (share value increased to $36.15 in 2013 from $7.32 in 2006).

One client at a time

Godin has taken the road less travelled since landing his first client at the age of 26. Launched in 1976 from the basement of his Quebec City home, the company landed contracts with the Quebec government before opening its first office in Montreal in 1981.

"For a long time, CGI’s head office was run out of his car between Quebec City and Montreal," says André Imbeau, Godin’s childhood friend and CGI cofounder and vice-chairman. At the time, PCs were not common in companies, but numerous CGI contracts involved programs developed using punch cards. "You couldn’t mix up your cards; otherwise you’d have problems," Imbeau says. "USB keys were a long way off, but there was a huge advantage — the cards were much harder to steal than today’s USB keys."

In the 1980s, CGI, which until then had focused on consulting and integration services, dived into the emerging outsourcing sector. "It wasn’t an obvious move at the time," says Pierre Ducros, retired cofounder of DMR Group, which was the largest IT company in Canada when it was sold to Amdahl in 1995.

"I tip my hat to Serge for taking this route," Ducros says. "The secret of outsourcing," he adds, "is that it provides a revenue stream. In consulting, you bill 1,200 hours per year. In outsourcing, an engineer bills 1,900 hours and you have revenue coming in 24/7, 365 days of the year."

A turning point for CGI was a 10-year $4.5-billion outsourcing contract with Bell Canada in 1998 — the largest contract of its kind in Canada at the time. By absorbing the staff of Bell Sygma, Bell’s IT subsidiary, CGI doubled its staff and revenue.

From then on, the acquisitions were valued in the billions. In 2004, CGI purchased American Management Systems for $1.1 billion, which enabled CGI to sign contracts with the US government. In 2010, CGI acquired US IT services provider Stanley Inc. for the same amount, resulting in the company landing the US Department of Defense as its main client. And lastly, it acquired Logica for $2.7 billion, which increased CGI’s presence in Europe and more than doubled its staff from 31,000 to 68,000. Godin points out that if this deal were made today, it would have cost $7 billion due to the recovery of the European markets and the 15% increase of the British pound.

CGI is now strongly positioned in the hottest sectors of the global economy. It services 25 of the world’s largest banks, seven large insurance companies, more than 1,000 healthcare institutions, eight government agencies in North America, three oil and gas giants, six prominent global telecom providers and most of the major automobile and aircraft manufacturers.

High high-tech

Some observers view CGI not as a high-tech company, but as a service provider. But this is only part of the picture, as CGI has a portfolio of more than 100 patented state-of-the-art applications, often developed in partnership with clients. For example, CGI’s systems are used to prevent 43 million cyber-attacks a day on the US military and Secret Service networks. CGI’s software solutions enable retailers to offer online shopping and payment services, as well as online shopping on mobile devices. At Michelin, CGI develops and supports supply chain, logistics, marketing and sales applications.

Given that it collaborates on leading-edge work with its clients, CGI provides service of unparalleled excellence. According to Panorama Consulting’s 2013 ERP Report, 61% of ERP system implementations run overtime, 53% go over budget and 60% deliver less than half of the expected benefit. Conversely, 95% of CGI’s projects are on time and on budget, and have a 90% satisfaction rating. "These numbers are not based on survey results," says Godin. "They come from personally approved and signed client reports, a quality control check we perform with all our clients four times a year."

Convergence

"Proximity" is the word CGI uses to describe its business model. When it enters an outsourcing agreement (its main revenue stream), it becomes the client’s IT department, with most of the client’s IT employees transferring to CGI.

While IT services account for the bulk of the work (server and communications management, security, maintenance), what matters most is developing extensive knowledge of the client’s operations and strategic goals. "Through outsourcing, CGI joined Société Générale’s circle of preferred global providers," says Matuszewski. This is what happened in 2010 when Société Générale implemented Montreal’s IT solutions centre in partnership with CGI. Comprised of 140 CGI and Société Générale employees, the centre provides programming and software services to Société Générale’s international offices, particularly its New York City location.

This is one example of CGI’s nearshoring strategy. Over the past 20 years, the practice of offshoring has emerged as a trend in the service and manufacturing industries in North America and Europe. While CGI did not escape this trend — it has 8,000 employees in India and 1,000 in the Philippines — it also moved in the opposite direction, applying nearshoring strategies before the practice became the order of the day. It opened offices close to clients across Canada, the US and Europe.

The nearshoring centres — in locations including Paris and Warsaw — provide a multitude of basic and cutting-edge services to clients. The centres are relatively small, with 100 to 600 staff members who can promptly respond to client requests. The advantage is "they speak the client’s language," Godin says.

Did Godin wake up one morning and develop a strategic plan to turn CGI into a global business? "No," he responds. "We mainly did our best to meet our clients’ needs."

The rationale was applied to the Logica acquisition. "Our clients were saying they wanted us to assist them with their business in Europe, even though we earned less than 20% of our revenue there," says Godin. "So, in 2006, we set out on a quest for a European acquisition — and we found it. This acquisition allowed us to align with our clients’ operations, 95% of which were on a global scale."

Strong corporate culture

The proximity model also applies to CGI employees, who are referred to as members. "Our most important assets take the elevator every night," says Godin.

CGI boasts a mission statement and a "dream" statement, which reads as follows: "To create an environment in which we enjoy working together and, as owners, contribute to building a company we can be proud of."

The company’s vision is embodied in several ways, including a very broad shareholder base. "Employees represent the largest single block of shareholders, with at least 85% owning shares," Imbeau says. Every dollar a member invests in the share plan is doubled by CGI, up to a maximum of 3% of salary.

Employees seem to buy into the dream. "CGI is unlike any company I’ve worked for in the industry, in a good way," says a sector team lead. When you have a boss who’s present each day, it creates a unique culture and a very conducive environment," says a 35-year veteran.

The future

Resting on such an airtight business model, CGI will surely not rest on its laurels following the huge undertaking of integrating Logica, which was already contributing to profits after the first fiscal year. "It remodelled Logica’s cost structure and improved its profitability," says Thanos Moschopoulos, IT analyst at BMO capital markets in Toronto. "Now it can expand the company and ensure continued excellence by forging strong client relationships."

Despite a sustained pace of acquisitions, CGI also produced strong internal growth in the past few years. "But this growth is hidden," Moschopoulos says. "In reality, management is constantly improving its sales mix by increasingly shifting revenue from short-term consulting to long-term outsourcing, and providing valued-added services through its intellectual property."

And last fall’s Obamacare saga, which brought CGI under scrutiny after technical issues prevented many Americans from logging in and signing up for health insurance coverage with the insurance website, provided much fodder for the media. The US government eventually dropped CGI as the main contractor for the project, saying it was ineffective in fixing the problems. Despite the negative coverage in Canada, to some observers, CGI suffered only a minor setback. "It’s a drop in the ocean," Moschopoulos says. "Anything can happen when dealing with bureaucrats. I think clients understand that."

He adds a caveat, however. "The sector seems to be reaching maturity," he says. "For example, IBM and Accenture reported less than 10% growth."

Ducros, who serves on the board of the Canadian Institute for Advanced Research, believes otherwise. "The whole planet is moving toward the Internet, remote control systems (as in the healthcare sector), cloud computing, 3D entertainment systems and even holographics. It’s a development in which key players, especially in telecom, will lead the charge," he says. "We haven’t seen anything yet. Companies will not have sufficient human resources to do all the work internally. And CGI will be well positioned to work behind the scenes, handling the outsourcing services."

CGI’s long-term prospects seem brighter than ever. Is it time for the company to be sold to a foreign buyer like so many other Canadian IT companies? "No, CGI is not for sale," Godin says emphatically.

About the Author

Yan Barcelo


Yan Barcelo is a journalist in Montreal.

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