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IBM Exits CMS and Most Industry-Specific BPO: Divests Business to Synnex Corp

IBM and Synnex Corp. have announced that IBM is to sell its global customer management services (CMS) BPO business to Synnex for $505m: $430m in cash and $75m in stock (representing less than 5% equity ownership of Synnex). The purchase price includes an estimated 40-50% in intangible assets. IBM expects to recognize a total pre-tax gain on the sale of between $125m and $175m.

The operations being divested by IBM include its contact center business, also agent-based processing services for banks, insurers and healthcare clients. In 2012 the divested business delivered $1.3bn of revenue and $0.1bn of operating pre-tax income. The areas of IBM’s BPO portfolio that remain include F&A, procurement and supply chain management, HR, and mortgage origination and servicing.

The acquired business will be branded and integrated with Synnex’s business services division Concentrix. As part of the transaction Synnex will enter into a multi-year agreement with IBM and Concentrix will become an IBM strategic partner for global CMS BPO services.

The transaction will be completed in phases, with the initial closing expected within the next few months, followed by a series of country closings during the course of 2014.

Synnex provides services in IT distribution, supply chain management, contract assembly and BPO. Founded in 1980, it has ~12,500 employees, of whom >8,000 are in Concentrix. Concentrix has 25 centers in the Philippines, China, Costa Rica, Nicaragua, Canada, the U.S., U.K., Hungary, India and Japan.

In its press release about this divestment, IBM emphasizes that its business model is based on continuous transformation, and a shift to higher value solutions and services is an important element of that transformation. IBM highlights the investments it has made in recent years to enhance its Smarter Planet and analytics capabilities which have supported its BPO offerings, including the acquisitions of Kenexa in HR, Emptoris in supply chain management, and Wiltshire in mortgage servicing.

IBM indicates that it is divesting a commodity, lower margin business. The pre-tax margin of the divested operation in 2012 was ~7.7%, way below the pre-tax margin of 16.8% for GTS overall. IBM does not report EBIT margins for its business segments, but in comparison the EBIT margin of Teleperformance in 2012 was 8.2%. Nevertheless, NelsonHall believes that CRM outsourcing is now entering possibly the most exciting stage of its evolution, and a significant move up the value chain with the rise of truly integrated multi-channel and personalized customer interactions backed up by customer analytics. In its ‘Smarter Commerce’ messaging, IBM focuses on the power of omni-channel sales and service - but it no longer will be able to offer clients the contact center/webchat/social media elements of a managed service without having to sub-contract; the ‘Smarter Commerce’ capability remains essentially software.

IBM is also divesting all its industry-specific BPO business apart from mortgage origination and servicing. IBM's industry-specific BPO business has been typified by a few large engagements which have stayed ‘one offs’ - where it has not managed to expand the services being provided to multiple clients. One example is a contract to provide bank and card collections and account services for a major U.K. retail bank; at one point a few years back IBM had >1,000 FTEs in India supporting this client. IBM was also looking to develop a fraud and risk management service for retail banks, and a sizeable healthcare BPO business providing services such as member servicing, claims management and provider relations. NelsonHall is not aware that either of these became substantial businesses for IBM - but Concentrix may look at building industry practices to offer CMS-centric industry-specific services; if it does, we would expect to see an announcement sooner than later, if only to reassure existing clients.

What IBM is retaining is a sizeable BPO business across all the back-office towers, with just mortgage origination and servicing in industry-specific BPO. One might have expected a company of the size and capability of IBM to have developed a more substantial vertical BPO business.

IBM is divesting most of the former Daksh operations; Daksh brought in both scale and also skills in process discipline, skills that are critical for a successful BPO operation, and skills which IBM admitted it subsequently applied to its other BPO units.

But IBM is not selling a standalone business: some of the operations to be transferred are embedded within IBM facilities that are also providing other BPO or IT services; examples include Colorado, Hortolandia in Brazil and the sites in Australia. So some Concentrix centers will be located within IBM sites.

And a good many of IBM's CMS clients are also clients for a range of other IBM services. In these cases, while the CMS BPO contracts will novate to Concentrix, it will be important for Concentrix to develop its own relationship with the client and not end up being treated by IBM as a sub-contractor. Account management with these clients is likely to be a key priority for Concentrix. Concentrix will also need to review profitability contract by contract and possibly look to renegotiate low margin contracts.

As well as account management, there will be a lot to do in developing the sales force and the marketing messaging. Our understanding is that IBM has a small sales force for standalone CMS BPO and some other IBM sales personnel will be rebadged. There is also likely to be a sales recruitment drive by Concentrix; certainly there will need to be significant sales retraining of transferring staff. The value proposition of a pureplay CMS BPO provider is not the same as that of IBM (and indeed the types of engagement sought will be different) - any messaging based on IBM solutions behind ‘Smarter Commerce’, for example, will no longer apply.

Concentrix will be jumping from an 8,000 agent operation to a 45,000 agent business with delivery centers in over 50 locations, and this will of course pose its own challenges, but it will nevertheless become a top 10 player in the global CMS BPO market.

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