This week saw the news that Cognizant will be acquiring Norwegian oil and gas services group Akastor’s IT and BPO captive Frontica Business Solutions for NOK1,025m (~$128m). Frontica’s staffing business Frontica Advantage is not a part of the transaction.

In 2015, Frontica generated revenues of NOK 4,919m (~$610m), down 14.5% y/y. 2016 has seen further market softening and Q2 2016 revenues were down 30% y/y, though EBIT margin was up to 0.5 pts to 3.0%. So why is Cognizant buying a captive with plummeting revenues and low margins in an industry which is likely to continue to be very soft (to put it gently) for a while?

The Nordics is an important region for Cognizant, for both IT services and BPS. Cognizant has quietly been developing a BPO business in the region for some years. F&A clients in Norway include Norway Post and Tryg (the latter won in partnership with Visma).

And earlier this year Cognizant acquired a 66% stake in insurance and pension fund management firm Storebrand’s BPS captive Storebrand Baltic UAB in Vilnius (~370 employees) for ~NOK 50m (~$6m).  As part of the transaction, Cognizant secured a multi-year IT services and BPS contract with the Storebrand Group. Cognizant is modernizing Storebrand’s IT systems, re-engineering business processes across the customer life-cycle and moving to a BpaaS model, and developing digital platforms.

That deal provided Cognizant with a nearshore delivery capability in the Baltics. Cognizant is clearly looking to commercialize the Vilnius center (which now has >400 employees), targeting primarily banking and insurance firms in the Baltics.

So what will Frontica bring in? It has ~800 employees and offers:

• Back-office business process services spanning HR and payroll, transactional F&A, sourcing and category management, and transactional procurement - mostly serving Akastor portfolio companies and Akastor sister company Aker Solutions, also providing payroll services for Statoil staff working in the U.K.
• IT infrastructure and application services, including SAP and engineering and document control systems - serving Aker Solutions, Kværner and the Akastor group.

At end Q2, Frontica had an order backlog - to 2021 - of NOK 5.2bn (~$620m), following 5-year renewals with Aker Solutions and Akastor portfolio company MH Wirth. So Cognizant gains a sizeable business, even if it does not manage to commercialize the operation very quickly. There are bound to be enough cost levers to pull to improve margins significantly. Frontica has been looking to improve its profitability through both process efficiencies and increasing offshore leverage (from Malaysia): Cognizant will be able to accelerate that journey and also apply automation.

But the larger opportunity is to continue the efforts that Frontica has been pursuing to diversify its client base to industries adjacent to the oil & gas sector. In January it appointed a new SVP of strategy and business development with this remit, though given his recent experience included the EVRY outsource to IBM, this option was clearly on the cards.

The combination of the Vilnius center, focusing on financial services, and now the Frontica operations, means that Cognizant will be able to offer multi-lingual offshore/nearshore/offshore BPO and related IT services to organizations  in the Nordics in a range of sectors. And of course, smaller oil services companies are likely to be more interested than ever in outsourcing to a third party-owned SSC with expertise in their industry.