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Morningstar | We Believe High Customer Switching Costs Underlie Atos' Narrow Economic Moat Rating

Atos is the product of numerous amalgamations between European consulting and IT services companies. The firm's rich European history has led to its entrenched position in the region. However, given globalization and industry consolidation, the company faces increased competition from multinational rivals with greater financial resources and scale. To counter this pressure, in the past couple of years Atos has moved to expand its scale and deepen its technical capabilities to provide higher-value services. Management's goal is to win more large and profitable digital transformation deals; we believe it can achieve this only through greater scale and in-depth, differentiated industry knowledge. We are encouraged by the firm's partnership with Siemens and its recent acquisitions of Bull, Xerox ITO, Unify, Anthelio, and Syntel. These maneuvers have provided Atos with improved size and expertise in areas such as Big Data, cloud technology, cybersecurity, and healthcare. Still, we think Atos has some way to go before it rivals industry leaders such as IBM, Accenture, Cognizant, and Tata Consulting.We believe Atos' deep-rooted ties to the European market underlie its narrow economic moat rating and lead to significant switching costs. The company's client relationships often date back decades, and the firm is a trusted brand in the European market. In fact, this trust has led to significant sticky relationships with critical infrastructure organizations such as the European Union, the U.K. Ministry of Justice, NHS Scotland, and the German Federal Agency for Employment, among many others.Although Atos' complexion is one of a low-growth regional champion, we think it should be able to defend its positioning in the market and generate modest revenue growth and operating margin expansion over the midterm. The acquisitions of Bull and Unify will help with the development of next-generation services, while the acquisition of Xerox ITO will greatly improve Atos' U.S. presence and global delivery capabilities. Management's focus on improved account farming, offshore workforce leverage, and cost control should further support modest revenue and margin improvements.