SNC strikes $500-million deal with CGI to outsource most IT operations

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SNC-Lavalin Group Inc. is outsourcing the bulk of its information technology operations to back-office supplier CGI Group Inc. in a 12-year deal that bucks the industry trend towards smaller and shorter outsourcing contracts.

Under the $500-million agreement announced Wednesday, SNC-Lavalin said it will outsource the majority of its technology management and application needs to its cross-town partner. It's the first time the engineering firm has contracted out its IT operations.

With IT outsourcing contract values and deal durations both shrinking in recent years, the pact marks a rare decade-plus commitment in an industry moving away from big, long-term deals. Clients are opting for the flexibility of smaller and shorter agreements with more providers, and are willing to take on the added management that comes with that, outsourcing advisory firm Information Services Group said in a 2014 report.

"What we're seeing in the marketplace is clients have a rising cost-pressure in their existing IT environment that's been compounded by increased regulation," Michael Roach, CGI's chief executive, said Wednesday at the Jefferies Technology Conference in Miami. "They also have to bake in the cost of security, which is a new cost, an ongoing cost and a significant cost. Therefore, they're having trouble freeing up investment funds to move to a digital world."

The deal will see 400 IT employees at SNC migrate to CGI, with projected annual savings for the engineering firm of 20 per cent on its IT operating costs over the life of the pact. SNC will keep responsibility for its IT strategy, cybersecurity and the development of applications related to its core engineering business.

Neil Bruce, SNC's chief executive, said the deal represents the first of many initiatives to come at the engineering company as part of a new operational improvement effort which started at the end of March. That exercise comes on the heels of a separate and sweeping cost-cutting drive expected to help reduce expenses by about $100-million in 2016. The goal is to achieve an annualized EBITDA margin on its core engineering and construction business of 7 per cent by 2017.

"We will look at every opportunity as it comes up in order to get to that" margin, Mr. Bruce told analysts on the company's first-quarter conference call on May 5, pointing to the company's recent consolidation of some office space and properties as an example of the type of initiatives being pursued.

Over the past four years, Mr. Bruce and his predecessor, Robert Card, have pared down SNC's workforce to some 37,000 employees from more than 40,000 in a push to jettison less profitable business lines and boost returns. Its employee count is now just slightly larger than Montreal-based WSP Global Inc., which has about 34,000 workers.

SNC shares inched up 0.1 per cent in Toronto trading Wednesday, closing at $51.52. They've gained 25 per cent since the start of the year. Shares in CGI also rose marginally, to $58.35.

Earlier this week, SNC-Lavalin said it would try to strike a settlement with the Quebec government to repay sums from public contracts won through fraudulent acts stretching back to 1996. The company has 30 days to submit a formal proposal under Quebec's voluntary reimbursement program.