Industry Insight
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Latest Edition - March 8, 2010
Contains commentary and insight from NelsonHall analysts on key industry developments that impact your sourcing decisions for the week ending March 8, 2010
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GFI Sells German Subsidiary To Vision IT For €5.2m
GFI Informatique has announced the sale of its German subsidiary, GFI Informatik, to Belgian IT services vendor Vision IT. The divested German operations had revenues of €22m, a net loss of €0.3m in 2009 and 110 personnel in ten locations.
GFI will receive €5.2m and will incur an accounting loss of €9.0m
Analyst comments:
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NorthgateArinso Acquires Convergys' HR Management Business for $100m
NorthgateArinso has announced its agreement to acquire the HR Management unit from Convergys for $100m, with $85m in cash due at closing. Another $15m will be paid over three years. NorthgateArinso will be acquiring Convergys' global HR service delivery assets and client portfolio and plans to offer employment to Convergys' 2,300 HRM unit employees.
The acquisition is expected to close in the second quarter following regulatory approvals.
The combined company will have almost 8,000 employees, an expanded network of services centers, and an established large market and midmarket client portfolio covering the U.S, the U.K., and Continental Europe with a growing number of clients in Asia/Pacific and Latin America.
Analyst comments:
NorthgateArinso is known for its strength in multi-national payroll capabilities, technology platforms and systems integration services. It had solid FY 2009 revenue growth of 22%, especially in the U.K. and Continental Europe. This is a major move for NorthgateArinso to establish the size and quality footprint it has wanted in the U.S. market for some time and could its increase top line revenues over 50%.
NorthgateArinso will be acquiring the HR client portfolio of Convergys for a reasonable price. Convergys has recently completed restructuring its underwater deals with two major clients and has negotiated renewals or extensions for many of its most visible deals to remove any outstanding liabilities and commitments, for example with the State of Florida (5 year extension valued at $185m) and Texas HHSC (2-year renewal). Convergys has largely completed the extensive write downs that have totaled more than $600m in the last two years and will be handing over a smaller but more stable revenue stream that should be operating at break-even or higher. (Convergys is removing $250m in expected HRM revenues from its 2010 guidance.)
NelsonHall considers this as good for Convergys, NorthgateArinso and the HRO industry.
Convergys is relieved of an asset at a fair valuation that it has spent two years stabilizing for sale, having incurred major losses in its existing contracts due to very high levels of customization of client services. The nightmare excursion into multi-process HR outsourcing is now over and will no longer be a major drain on company resources.
NorthgateArinso will be gaining sales and delivery capability to enable it to begin to develop a major presence in the North American market together with marquee clients like DuPont, Johnson & Johnson, and the State of Florida albeit on a legacy delivery model.
Current Convergys HRO customers will benefit from NorthgateArinso's provision of a more certain future and HR outsourcing roadmap. While these organizations have highly customized individual instances of SAP that can not be easily or quickly migrated to the more standardized multi-tenant approach of NorthgateArinso, they do at least have an ongoing roadmap for the future and may be able to conduct a gradual migration to this model on a geographic basis or to incorporate new functionality. However, in the main, these clients will remain a separate legacy business for the foreseeablle future.
The HRO marketplace benefits from a new large full service vendor positioned to compete in the large market in North America against IBM, Accenture and ACS.
Blending the two delivery organizations will be a challenge. Northgate is moving aggressively into platform based HRO services primarily with its euHReka services, while the Convergys delivery organization is supporting a number of one-off legacy customized services. However, NorthgateArinso has major ambitions in the U.S. and needs the local knowledge and expertise of Convergys personnel in selling and delivering its euHReka services. In particular, the current, largely European, form of euHReka lacks benefits administration functionality, which is a core requirement for the U.S. market, and the acquired Convergys delivery capability should assist NorthgateArinso in developing this capability within the euHReka service much more quickly than would otherwise be the case.
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Raytheon Professional Services Launches Technology and Services Price Per Event Program in Europe
Raytheon Professional Services (RPS) has launched a technology and services price per event program package in Europe.
The price per event package includes:- In-country administration services
- Records management
- Central services.
Analyst comments:
Buyers in all industries and of all services, whether it be learning, recruitment, payroll or some other service are under enormous pressure from their business leaders to reduce costs. RPS is smart to offer bundled pricing to help clients achieve their cost objectives, while at the same time improving service and freeing internal resources from performing transactional work, so they can focus on more strategic initiatives.
RPS has a presence in all major continents due to the company's global delivery capabilities, including in the U.K. and mainland Europe and are thus able to provide in-country administration services, which is particularly important to clients in Europe.
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SXC Health Solutions Announces Q4 2009 Revenues Up 51.4% to $443m
SXC Health Solutions has announced Q4 2009 revenues, for the period ending December 31, 2009, of $443.3m, up 51.4% year-over-year.
Q4 2009 revenues (and revenue growth) by service type were:
- PBM $416.8m (+54.5%)
- HC IT $26.5m (+15.5%)
- Transaction processing $15.4m (+5.3%)
- Maintenance $4.7m (+16.9%)
- Professional services $4.7m (+68.9%)
- System sales $1.7m (+11.8%).
Adjusted EBITDA in Q4 2009 was $30.4, a margin of 6.9%, compared to a margin of 5.0% in Q4 2008. Adjusted EBITDA in Q4 2009 benefited by $3.0m from unusually high professional services in HCIT, improved collections and reduced employee benefits in the quarter.
Full year 2009 revenues increased 66.7% to $1,438.6m. Full year 2009 revenues (and revenue growth) by service type were:
- PBM $1,336.0m (+73.1%)
- HC IT $102.7m (+12.7%)
- Transaction processing $61.2m (+16.0%)
- Maintenance $18.4m (+12.4%)
- Professional services $15.3m (+13.8%)
- System sales $7.7m (-9.0%).
Adjusted EBITDA in 2009 was $94.7m in 2009, a margin of 6.6%, compared to a margin of 4.9% in 2008.
Actual operating income in 2009 was $73.3m, a margin of 5.5%, compared to a margin of 2.9% in 2008
Cash from operations was $86.4m in 2009, compared with $41.6m in 2008.
SXC has provide guidance for 2010 of:
- Revenue of $1.9bn to $2.0bn, a targeted growth of 32% to 39%
- Adjusted EBITDA of $108 to $112m, implying targeted margin in the region of 5.6% to 5.7%.
Analyst comments:
The increase in PBM services revenue achieved by SXC Health Solutions in 2009 was a dramatic 73%. While this reflected the inclusion in 2009 of a full year of revenue related to the NMHC business as compared to only 8 months in 2008, SXC also converted several HC IT customers to full-service PBM customers and the company continues to forecast high revenue growth for 2010.
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TCS Awarded 10-Year NEST Adminstration Contract By PADA
TCS has been awarded the 10-year contract by the Personal Account Delivery Authority (PADA, part of the Department for Work & Pensions (DWP) to administer the National Employement Savings Trust (NEST), an occupational pension scheme designed specifically for people on low to moderate incomes who currently do not have access to an employer scheme.
The contract is expected to be formally signed later this month. The initial stage of the contract, until October 2010 , is to finalize the system architecture. Following on from this, TCS will implement and run the NEST scheme, which is due to launch in 2012.
Following the initial 10-year term, there is a 5-year extension option.
Analyst comments:
This is a significant and interesting award for TCS, though as the only bidder that had not withdrawn from the tender process. The value of the contract will depend on the number of people joining the scheme: it could be significant, with estimates for the number of auto-enrollees being as high as 7 million when the scheme is fully operational, potentially making it the largest defined contribution scheme in the world.
Originally, in addition to TCS, there were three other bidders in the tender process: a consortium led by Logica that included International Financial Data Systems and DST Systems; ATP Group, a Danish pension funds administrator; and U.S. based Great West Retirement Services (GWRS). However, all but TCS had voluntarily withdrawn from the process by the end of 2009.
One advantage that TCS had over the other bidders is its significant existing onshore presence, primarily in Peterborough (Diligenta). TCS is likely to utilize Peterborough for the front office services and also for data storage.
Aside from onshore presence, what is interesting about this contract is that a central government department has gone to an Indian provider with considerable offshore resources. Whilst exact details of how the contract will be implemented have not yet been revealed, it is highly likely that significant elements of system development, as well as back office operations, will ultimately be delivered from India. This this signals, at a time when the public sector needs to find huge cost savings, government willingness to tackle the sensitive issue of moving jobs offshore.
There is considerable risk associated with this contract. All three bidders who withdrew have considerable experience in this sector. ATP Group has been managing pensions since the mid 1960s and currently manages 4.5m members, including the Danish state pension. GWRS has been providing pension management since the 1940's and manages 3.5m DC pensions in the U.S. and Logica, through its WM Data acquisition, manages the Swedish state employee pension scheme. It is likely that that all three struggled to find an acceptable level of return from the project.
In addition, the Conservative party has stated that, if elected, it will review the whole NEST scheme. It is not inconceivable that the scheme is scrapped altogether, to be possibly replaced by a compulsory stakeholder model proposed by the Conservative back in 2004.
However, this should not detract from the fact that with this major award, together with its wins at Cardiff Council and the Child Maintenance & Enforcement Commission, TCS has emerged as the early and strong leader of the offshore providers seeking to penetrate the U.K. public sector, demonstrating the confidence and willingness to take on complex and risky contracts.
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Fujitsu Awarded U.K. Public Sector 'Desktop21' Framework Agreement
U.K. public sector procurement agency Buying Solutions has awarded a 4-year 'Desktop21' framework agreement to Fujitsu to provide desktop services to the wider public sector. The framework agreement starts today (March 1, 2010). This follows Buying Solutions' award to Fujitsu in August 2009 of a 4-year framework agreement for IT consultancy and delivery services.
'Desktop21' framework agreements have also been awarded to:
- Atos Origin
- HP Enterprise Services.
The 'Desktop21' framework agreement provides public sector organizations with access to:
- A range of desktop managed services, including thin and thick client capability, mobile and wireless devices and support, service transformation, security services
- Additional services such as IMAC, print, LAN/WAN, service desk, video conferencing, systems integration.
The framework is suitable for organizations procuring for 1,500+ seats. Alternatively customer groupings can procure for a shared service (from Fujitsu or HP), again with the 1,500 seat minimum.
Organizations can contract up to 7 years (5 +1+1).
Analyst comments:
'Desktop21' is a collaborative procurement process between Buying Solutions, the Department for Work & Pensions (DWP) and the Office of Government Commerce (OGC), that resulted in both last month's award to Fujitsu of desktop services contract with the DWP, and this framework agreement for the public sector delivering desktop services.
The framework agreement, which closely mirrors the DWP contract, is designed to provide a standardized set of desktop services suitable for the wider public sector, offering organizations faster procurement (~30% faster), and also no OJEU costs.
Having lost DWP desktop services to Fujitsu, this award is some consolation to HP.
Usage of 'Desktop 21' is likely to be higher than what has been seen with Fujitsu's earlier "Flex" framework agreement, though it is unlikely to reach the £4.5bn estimated total potential value.
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TSYS Partners With First National Bank of Omaha To Offer Merchant Acceptance Services
TSYS has partnered with First National Bank of Omaha (FNBO) to offer merchant acceptance services.
TSYS will own 51% ownership of FNMS for an investment of $150.5 m. FNBO will control the remaining 49% of FNMS. FNMS had net revenue of $93 million in 2009. The transaction is expected to close April 1, 2010.
The joint venture, First National Merchant Solutions, LLC (FNMS), will offer:
- Transaction processing
- Merchant support
- Merchant underwriting
- Visa and MasterCard branded prepaid cards.
Analyst comments:
Card processors, such as TSYS, are aggressively expanding into merchant acceptance processing. Banks like FNBO, which have established acceptance businesses (this one is 57 years old) are partnering with processors to:
- Reduce cost of delivery
- Expand network to drive new customer acquisition (FNBO expects to grow this regional business into a national one with the investment from TSYS).
Merchant acceptance is the fastest growing area of payments that also has large existing revenues. Merchants are demanding greater value for their interchange money. Successful merchant acceptance services vendors will invest heavily to create capabilities, primarily analytics, that help merchants drive sales from captured transaction data.
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VWA Announces Multiple Client Wins For Platform-Based O2C Offering
Vengroff, Williams & Associates (VWA) has won a range of new mid-market clients in the healthcare, telecoms and media industries for the provision of O2C services via VWA's proprietary 'Source MPO' platform.
Source MPO is a SaaS-based offering, enabling mid-sized companies in specific vertical markets to quickly outsource various levels of BPO back office processes, including:
- Collections and credit management
- Deduction management
- Vendor and payment processing
- Receivables management.
Key target sectors for Source MPO include manufacturing; technology; publishing; healthcare; cosmetics/Direct to Retail; financial services
VWA states that it manages ~$1bn of accounts receivables under the Source MPO umbrella, and claims the following benefits achieved for clients:
- Average reduction in operational costs of 43%
- Average reduction in days sales outstanding (DSO) of 7-10 days
Analyst comments:
VWA is one of the first players to have launched a platform-based offering for outsourced F&A services, though it has to be noted that VWA specializes in O2C, rather than full FAO as do players such as Accenture, Genpact, IBM. A true multi-client architecture, the Source MPO platform, launched in July 2008, today services more than 20 clients from a single instance.
VWA offers its Source MPO service primarily to mid-market organizations (with $500m-$1bn annual turnover) in the U.S. and U.K., but also claims to be seeing demand from larger corporates. The company claims to have seen high growth during 2009 for this offering, also for O2C BPO in general: VWA saw overall revenue growth of 32% in 2009.
The attractiveness of this offering lies in:
- Lower cost of service due to costs being shared among multiple clients
- The quick implementation (VWA achieves this in ~60 days from initial discussion to transition complete) with minimal up-front cost
- A transaction-based pricing model, allowing for flexibility
- The possibility to outsource even small-scale O2C operations, with as few as 5-6 FTEs in scope.
NelsonHall expects that more platform-based FAO offerings will be launched in due course, aiming to target mid-market organizations as well as subsidiaries of large corporates that are looking to improve economic efficiency, increase cash flow performance and optimize working capital. In order to succeed, it will be important for platform-FAO players to ensure that specific client requirements can be accommodated. VWA's offering, for example, is not fully standardized but allows customization for accounting treatment, invoicing, information gathering etc., thus setting up customized routines for each client, aligned across 'tiers' which reflect the client's status in comparison to best-practice levels.
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Xchanging Announces 2009 Revenue Up 35% To £750m
Xchanging has announced full year 2009 for the period ending December 31, 2009, of £750.4m, up 34.5% year-over-year. Organic revenue growth excluding the Cambridge acquisition and currency movements was 4.8%.
- Xchanging revenue was £604.4m, up 8.4% y-o-y
- Cambridge revene was £146.0m, down 1.2% y-o-y.
2009 adjusted EBIT was £63.9m, representing an operating margin of 8.5%, the same as in 2008. Reported EBIT was £24.8m, with £39m of exceptional items associated with the Cambridge acquisition.
XEBIT (Xchanging's share of EBIT following Enterprise Partner deductions) was £52.4m, a margin of 7.0%, up from a margin of 6.8% in 2008. XEBIT comprised
- Xchanging XEBIT was £44.5m, a margin of 7.4%, up from 6.9% in 2008
- Cambridge £7.9m, margom of 5.4%, up from margin of 2.1% n 2008, includes some currency gain.
Xchanging has changed its reporting structure to four regions and a global procurement unit to better reflect the increased international revenue distribution following the acquisition of Cambridge.
Full year 2009 revenues by region (and year-over-year change)
- U.K. £237.7m (+13.3%)
- Americas £145.9m (£113.3m from Cambridge, plus 1.6% organic growth)
- Continental Europe £165.1m (+9.9%, due to favorable currency movements)
- APAC £47.5m (£41.4m from Cambridge, plus 13.0% organic growth)
- Global Procurement £185.4m (+4.2%).
2009 XEBIT margin (before central costs) by segment was:
- U.K. 12.8%
- Americas 4.6%
- Continental Europe 7.8%
- APAC 17.1%
- Global Procurement 6.7%.
Factors contributing to the significant organic revenue growth in the U.K. include:
- Transaction volume expansion of the Insurers Market Repository (IMR) platform for the London Market
- Volume and service expansion of the trading platform for the London Metal Exchange (LME) with the addition of LMEselect (clearing platform) and LMEsmart (matching platform)
- New insurance processing BPO wins forXchanging Broker Services (XBS) with Cooper Gay (H2 2008) and Aon Benfield (H1 2009), and the expansion of an existing contract with Tokio Marine Group.
The flat performance in Continental Europe is due to the lower retail securities transaction volumes as retail investors stayed out of the market. However with acquisition of FondsServiceBank (FSB) in May 2009 and the winning of the account administration services contract with SEB Bank in January 2010, Xchanging is in a very strong position as this sector begins to pick up.
Xchanging has taken steps to improve its cost base in Europe by combining operations under a single management team in the UK and reducing onshore headcount by 250 FTEs across the U.K. and German operations. A further 230 European roles will be offshored during 2010. These actions will reduce costs by £14m in 2010 and will have an annualized saving of £17m from 2011 onwards.
In the Americas, Xchanging has restructured operations following the Cambridge acquisition, reducing the number of delivery centers from 45 to 16. The U.S. based insurance software operations launched a .NET Insurance Application Platform (XIAP) and secured a contract with existing customer QBE's European business. XIAP will be the platform supporting QBE's European commercial P&C business.
Headcount at end 2009 was 8,211, up from 4,541 at end 2008.
Analyst comments:
Though the 4.8% like-for-like revenue growth is at the bottom end of the 5-10% revenue growth guidance for 2009 provided by Xchanging in its update to the market in December, this is a strong performance in a challenging year. In the U.S. Xchanging has acted fast to turn around the business.
The Cambridge acquisition has brought in a significant offshore presence: Xchanging estimates that 35% of work is now delivered from offshore centers. One of the priorities during 2010 will be to further leverage this resource and to expand capacity in tier 3 and 4 locations in India.
Expect Xchanging's geographical revenue mix to shift by 2011 as the company pursues new opportunities in Continental Europe and the U.S., not only in imdustry-specific BPO but also in HR and procurement.
GFI Informatique had announced plans to focus its international operations on Southern Europe including Italy and Iberia.
GFI's German operations have been marginally profitable at best since 2001. The sales of those assets is the company's first in reshaping GFI into a more focused IT services vendor.