NelsonHall recently attended an EXL advisor and client event in London.

What a difference in 18 months!

Back in November 2013, EXL received a notice of termination from its largest client at the time (an event that was unfortunate, but not due to under-performance). The impact of this on 2014 results was significant: a $38m reduction in revenues from this client (of which $26m from the reimbursement of disentanglement costs).

In spite of what could have been a major setback, EXL has since proceeded to:

• Achieve revenue growth, on both an organic and an inorganic basis. On a constant currency basis and excluding transitioning clients, EXL achieved 12.4% growth in 2014, which has further expanded to 14.6% y/y growth in Q1 2015 
• A key area of growth at EXL is its analytics business: in Q1 2015, excluding the contribution from RPM, analytics revenue grew to $18.5m. a growth of nearly 40% y/y, and 42.7% on a constant currency basis.
• Made some key acquisitions that bring in IP:
  • Blue Slate, acquired in July 2014, now part of the Analytics and Business Transformation segment
  • Overland, a provider of premium audit services, commercial and residential underwriting surveys and loss control services to P&C insurers using a BPaaS model, acquired in October. As well as IP, Overland brought in ~750 U.S.-based employees based in regional offices and a nationwide network of auditors and surveyors
  • RPM Direct, closed in March, specializes in analyzing large consumer data sets. It has its own database and supports data on ~250m U.S. consumers and ~120m households
• As well as inorganic investments that will grow its insurance business, EXL has also been investing in growing its clinical healthcare business, including hiring a Chief Medical Officer and Chief Actuarial Officer, and upgrading its CareRadius care management platform
• Expand its global delivery capabilities: opening new operations centers in Mumbai; Alabang and Cebu in the Philippines; and Dallas. This year, EXL will be able to offer delivery from Colombia for Spanish language delivery services, working with foundation client and partner Carvajal
• Recruit onshore data scientists in the U.S. Data scientists, of which there is a talent shortage, are key resources in being able to foster client intimacy around using analytics to support the client’s business. EXL estimates that its overall analytics headcount in the U.S. has increased by 50% in a year
• Roll out the EXLerator Framework across its operations, developing industry-specific BPaaS solutions and building proprietary technology enabled products. This is key in helping EXL strengthen existing client relationships, also in acquiring new clients
• Make some key structural reorganizations: the different consulting practices, for example, have now been consolidated into a single body - watch this space
• Change its reporting segments nomenclature to Operations Management (formerly called Outsourcing Services) and Analytics and Business Transformation (formerly called Transformation Services) “in order to more accurately reflect the changing nature of its engagements with clients”
• See an ongoing increase in its share price, from a low of under $23 in Q4 2013 to  current levels of around $35.

At end Q1 2015, EXL raised its revenue guidance from prior guidance in the range of $570-590m to $600-620m, with a 1% currency headwind, an increase of $30m at the midpoint. RPM is expected to add ~$35m of revenue. EXL’s revised guidance represents annual revenue growth of 14% to 18%, including organic growth of 11% to 14%. Margins will be dampened in the short term, partly because of increased investments in sales and marketing.

20:20:60 Targeted Change in Business Mix

So, in less than 18 months, EXL has handled the (very unlucky) upset of Travelers’ decision and is guiding on above market growth acquisition-led growth. These acquisitions are helping lead to a change in the nature of its revenue mix, with two revenue engines, each expected to contribute ~20% of 2017 revenues (a figure we estimate could be at least $150m)

• BpaaS, leveraging
  • Proprietary platforms such as Subrosource, LifePro, CareRadius, more recently developed offerings such as MedConnection, and the more recent capabilities around premium audits and property surveys brought in by Overland
  • also SaaS solutions from partners such as Coupa, Blackline and Sungard
• Analytics, where EXL has been building its capabilities through both inorganic and organic investment, including setting up an analytics CoE. EXL’s analytics business delivered 44% revenue growth in 2014 to $66m, representing 13% of total revenues (up from 9.5% in 2013).

EXL anticipates that operations management will move from ~76% of 2014 revenues to ~60% of total revenues in 2017. This does not mean declining revenues from operations management, in spite of the cannibalization effects of automation. As we have noted before, EXLerator marks a fundamental shift in EXL’s value proposition in operations management (BPS), which it defines as “architecting as well as managing” operations, to higher level, more complex activities. Being seen by clients as both the BPS provider and also an expert go-to resource for high end analytics services that can support in helping them formulate their business decisions - this will help EXL engage with clients more deeply in their business, especially in an environment of business model reinvention because of digital

What is clearly apparent at EXL is a strong focus on selected markets, notably healthcare and P&C insurance, and on applying a powerful combination of domain expertise, process knowledge, enabling technology, automation, and analytics to be able to go to market with differentiated offerings.

What about the U.K.?

The U.K. currently contributes around 20% of global revenues (the U.S. ~74%). It was notable that, in addition to EMEA leadership, EXL representatives attending the client event included CEO Rohit Kapoor, Chairman Garen K Stagli, at least one other board member, and several representatives from BlueSlate and Overland, all of whom had flown over from the U.S. This indicated to us a clear focus on growing the U.K. business.

One area of interest is developing a near- or on-shore contact center capability to be able to serve the U.K. market. And it looks like EXL has selected South Africa, where it is setting up a legal entity and operations this year. South Africa is a great choice for complex non-scripted voice interactions in sectors such as insurance, banking and utilities. This would give EXL a richer set of BPS delivery capabilities to service these sectors.

EXL appears to have invested very well for future profitable (and already achieving non-linear) growth in the U.S. for operations management, BPaaS and also analytics services - and with RPM it will be looking to combine RPM’s database management and digital marketing with EXL’s existing analytical modeling capabilities to offer a broader marketing analytics set of offerings. RPM currently is a U.S. business. Could EXL also leverage some of those capabilities in the U.K.? One area EXL is exploring is expanding the RPM Direct database (developed through credit agency partnerships), into other geographies, also possibly extending its usage from insurance and healthcare into other verticals such as banking and utilities.

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Given the range of its recent and ongiing investments as well as its existing IP and capabilities, there are several directions that EXL might take over the next year or so with both existing and new clients - any of these will be a significant development in its evolution.