Genpact has just released Q4 and full year 2013 results.

In terms of revenue performance, Q4 was back to double digit y/y growth, albeit at just 10.0%. Global Client revenues were up 13.3% y/y, but this the lowest Global Client growth rate for some time. Full year 2013 Global Client revenue growth of 16.4% was led by the BFSI, Life Sciences and Hi-Tech verticals.

Q4 2013 operating margin was 12.8%, down from 13.9% in Q4 2012, and down from 16.1% in Q3. Expenditure on SG&A was a whopping 24.4% of revenue. Within this, S&M spend was ~5.4% of revenue, up from just 4.7% in Q3, reflecting increased expenditure in client-facing roles. But this means that G&A expenses account for around 19% of revenue - there surely is room for improvement here.

Full year revenues were up 12.1% to $2,132m. JAWOOD contributed around 2.5% of revenue (~$53m), so organic revenue growth was around 9.6%.  Management referred again to four major revenue headwinds that together had a ~3% point impact on topline growth in 2013:

• A reduction in its mortgage BPO business related to U.S. refinancing volumes
• Softness in its GE business related to a continuing shrinkage in GE Capital
• Adverse FX
• Delays in large deal conversions, with sales cycles longer than expected.

Guidance for full year 2014 is even more muted:

• Revenue growth of 4-6%, with GE revenues down ~ 5% and Global Client revenues continuing to be impacted by 2013 revenue headwinds
• Adjusted operating margin of 15% to 15.5%, reflecting accelerated investments in our client-facing teams and solutions. We expect these investments will begin to pay off in 12 to 18 months with accelerating returns thereafter.

2013 has clearly been a disappointing year for Genpact. The company has been pursuing a strategy to effect a major transformation of its business for over a year now, one on which it is looking to increase its ability to win longer-term, more transformative engagements that are multi-geography and have multiple components in scope. This has involved increasing its investments in:

• Its portfolio, targeting underpenetrated niche opportunities in areas such as F&A and vertical-specific operations
• Its client-facing organization, claiming to have been encouraged by the results of increasing its investments in senior client-facing teams in Europe.

But transforming both the portfolio and the sales engine at the same time is challenging:

• A key part of the portfolio is analytics – yet revenues for “Smart Decision Services” were up just 5% in 2013, down to just 3% in Q4. Management referred to two clients who chose to move the work in-house because they considered it to be “too core”. The ambition is not to sell Smart Decision Services as a standalone, but to integrate them with BPO, plus the relevant tools and platforms
• Genpact has been talking about increased investments in the sales engine for over a year and also about being in "the middle of discussions" with clients about transformational engagements, yet guidance for 2014 is for decelerating revenue growth. So what are the challenges with its sales engine? Essentially, there is a lack of experence in securing the types of deal Genpact is now targeting and possibly sales retraining efforts have not been as effective as envisaged. In one change, the company is now making its sales comp plans so they are much more leveraged.

CEO N. V. Tyagarajan describes 2014 as “a pivotal year” for Genpact. During the earnings call, he provided a high-level view (more will be revealed in its Investor Day on March 6) of the four pillars in the next phase of the company’s strategy:

1. Directing investment in selected industry verticals and service lines within these verticals and enterprise services such as F&A. These will be concentrated on North America, Europe, Australia and Japan. He alluded to some de-emphasis of “noncore” areas, possibly in emerging markets
2. Building capabilities that bring together its operations, technology and analytics offerings. For example, in F&A building F&A consulting capabilities and frameworks and investing in technology capabilities to take finance processes to the cloud
3. Adding a new set of senior client-facing leaders able to act in the role of “trusted adviser", and also expanding onshore capabilities
4. Expanding the size and capabilities of solutioning teams, in terms of domain SMEs and lead solution architects.

These investments will be ~$45m or 2% of projected revenue in 2014, of which Genpact expects to spend around two thirds on client-facing teams (so S&M will reach ~6% or revenue in 2014, up from 4.7% in 2013). Genpact has indicated that the investment payback will start to be evident by mid-2015, and for it to take three years for Global Clients to pick up to mid-teens revenue growth.

The lack of progress made by Genpact in its transformation strategy in 2013 is partly a function of the external market, but also indicates the challenges the company has faced in changing its stripes from being an operational business, with its heritage in GE. That it needs to make these changes is without question, however.

In 2014, we should expect to see:

• A significant refresh of the sales force, along with its expansion
• Further acquisitions to enhance IP in selected verticals.