Canadian consulting firm CGI Group Inc. on Wednesday announced it will cut 1,000 positions as the result of lower than expected volumes of work from its client BCE and internal restructuring.
The Montreal-based company’s revenues from BCE Inc., the parent company of Bell Canada, are less than the $400 million minimum guaranteed business levels for 2006. The Montreal-based firm expects that the job cuts will save it $90 million a year in headcount and real estate costs while Bell Canada will be forced to cough up $10 million in severance payments.
“Today we’re announcing a plan to strengthen our competitive position,” said CGI president and CEO Michael Roach, who recently took over the position after founder and executive chairman of the board Serge Godin stepped down at the end of January. The decision was, “spurred by lower than expected revenue and associated margin pressures from BCE,” added Roach, who made the announcement via a teleconference and Web cast to investors and journalists Wednesday morning.
Out of the total amount of job cuts, there are 360 positions in Montreal and 420 positions in Toronto that will be eliminated with the remainder in Europe and the U.S. Five hundred of those cuts will take place immediately, according to the company. CGI will vacate its downtown Toronto office and move its remaining employees up to its new facility at the 407 Highway and Leslie St.
CGI said it will continue attempting to redeploy employees affected by the cuts with individuals whose positions have been eliminated receiving financial assistance and outplacement services from the company.
Nigel Wallis, research manager, application services, IDC Canada, who is also a former CGI employee, said in terms of laying off people who aren’t part of the BCE division, CGI has always had a much leaner corporate structure than its competitors such as EDS or IBM.
“This is the first time they have had to lay off people because of business reasons,” he said.
CGI made the decision to go ahead with the cuts last month after its second quarter revenue from BCE fell short of the 2006 minimum guaranteed business levels on an annualized run rate basis. The levels are outlined in an amending agreement reached by the two parties last December that pertains to existing commercial agreements, which have been extended to 2016.
Under the deal, CGI is guaranteed minimum business levels of $400 million in 2006 calendar year. The agreement also said guaranteed minimum business levels for CGI’s Q1 fiscal year 2006 are $120 million.
“The revenue last quarter was over $120 million and we do build in seasonality but the drop was more abrupt, significant and prolonged than what we have seen in past years,” said Roach.
In its defense, Bell said cost reduction is a key priority for 2006. “We stated in Feb 1 that we’re stepping up our cost reductions to meet targets that are central to our operating plan for 2006,” said Bell spokesperson Mohammed Nakhooda, reading a prepared statement.
Wallis said Bell’s comments do not surprise him. “This is driven primarily because Bell is driving more efficiency and trying to cut out all the overhead costs it can from business as it’s being hammered in the local and long distance core markets that it has,” said Wallis.
In the meantime, Roach said CGI continues to talk to all of its good clients, including Bell.
“BCE is still a very good client of CGI’s,” he said. “We continue to work with them very closely to meet their needs and help them win in the marketplace.”
Asked why revenues from Bell are lower than expected, Nakhooda replied, “The terms of those agreements have not changed since last December and we’re in compliance with those terms.”
CGI also announced that it will create 400 new jobs throughout its network of Centres of Excellence as part of its Global Delivery Model. Two hundred of the jobs relating to the BCE account will be relocated to Atlantic Canada with 150 positions moving to a new Centre of Excellence that will be built in Prince Edward Island. The remaining positions, which are separate from the BCE account, will be created in Bangalore, India with the completion of a Centre of Excellence there in early 2007. CGI will also add 300 positions to support its U.S. clients at a new Centre of Excellence in Russell County, Virginia.
Remote workers like those at its Centres of Excellence account for 15 per cent or 3,500 of its 25,000 workforce globally, according to Godin. Out of that number, there are currently approximately 1,000 workers in India in Bangalore and Mumbai, 2,500 in Canada, and a couple hundred in Europe, primarily Spain.
Unlike its competitors like EDS and IBM, CGI has stuck with a nearshore model to provide services to its clients. While labour is not as cheap as India or China, for example, there are other benefits to keeping business within North American borders, said IDC Canada’s Wallis.
“The upside of keeping Atlantic Canada is it’s more or less the same time zone, it’s the same culture and your project management costs stay the same,” he said. “If you move work over to India, China or the Philippines, you end up looking at much higher project management costs because of the fact that you can’t be onsite.”
CGI, which was founded 30 years ago, is the eighth-largest IT consulting firm in the world with annual revenues of $3.6 billion as of December 31, 2005.