A year later, EXL delivered full year 2014 revenues that beat revised non-GAAP guidance by $11.6m, finishing the year with 9% growth in Q4, bolstered by better than expected contribution from the recently acquired Overland Solutions (OSI, $12.2m, against the anticipated $10m).
By service type,
Though details of the ‘new EXL’ won’t be revealed until the Investor Day next week, the journey that has been made by EXL this year has been marked by three specialist acquisitions within seven months, the third announced only this week.
All in all, EXL will have invested over $130m in these three acquisitions, all of which
Looking ahead to 2015, EXL has given revenue guidance of $570m to $590m, excluding any impact of RPM, a growth rate of 8.5% to 12.5%. Q1 is the last quarter where revenue headwinds from transitioning clients will have a significant effect.
EXL is developing analytics CoEs, particularly in support of healthcare and insurance and is expecting to sign a number of $10m plus annual revenue clients. Will we see further tuck-in acquisitions to further expand its capabilities in different areas of analytics for insurance and healthcare in 2015? The indications are that this is very possible.
EXL started emphasizing its analytics offerings around 18 months ago: at the time, much of the portfolio was based on India delivery. EXL today has a much richer portfolio to offer in its target verticals in the U.S.
Meanwhile, the U.K. , which accounts for over 20% of global revenues, delivered a strong year; EXL does not provide constant currency growth figures, but reported revenue growth for the U.K. in 2014 was 10%, all of which organic. Were EXL’s spending spree to continue into 2015, maybe U.K./EMEA will come higher up its investment priorities.
Finally, EXL has authorized a three-year $20m annual share repurchase program to offset share dilution from annual employee equity grants.
We note that EXL’s share price is at its highest for over two years and has surged by ~20% since the beginning of the month.
By Fiona Cox and Rachael Stormonth
NelsonHall will be producing its first ever Key Vendor Assesment on EXL in March.
]]>Quite simply because of the revised revenue guidance for 2014 from growth of at least 16.5% to at least 14%. This is a huge cut of ~$220m (from ~$10.3bn to ~$10.08bn), all of which coming in H2. This forecasts:
CEO D’Souza highlights two main factors contributing to the reduced guidance:
Of these, the largest relates to client-specific issues at a handful of clients. The implications in the earnings call were that these were temporary issues but in at least one case (including a U.K. retail sector client), we believe Cognizant has lost business to an Indian competitor.
On a positive note, Cognizant has been selected for three major outsourcing contracts with a TCV of $3.5bn that it expects will bring in incremental revenue of $200m in 2015. And the new business is all long-term outsourcing ... whereas, if we are correct in our understanding, the business that Cognizant is losing is primarily ADM type activity. These new contracts will help accelerate Cognizant’s revenue mix from being still very dependent on traditional custom applications development projects and application maintenance engagements (activities which we believe have been growing for Cognizant at lower than the company average for some time) to having a greater mix of what the company terms “Horizon Two” (BPO, IT infrastructure management) services, where it was arguably somewhat late in building scale. Similarly, Cognizant was relatively late in investing in Continental Europe, but is now reaping some benefits from its CI Group business unit acquisitions. One of the three new large signings is Vorwerk, a European consumer goods firm.
By far the most important signing in Q3 will be that with Health Net, not just because of its size (at $2.7bn over seven years, the largest in Cognizant’s history), nor because of the breadth of services being provided (BPO plus applications outsourcing and IT infrastructure management), but because it appears that the intention is for Cognizant to leverage the software IP and the delivery capabilities it will acquire with the deal to set up a BPO utility for other U.S. health payors. This would indeed be transformational for Cognizant - and for the sector.
The third large deal, with an unnamed financial services client, illustrates Cognizant expanding an existing relationship to include both BPO and ITO. Again, now that it has scale in some areas of BPO some areas if industry-specific financial services BPO, F&A) and in IT infrastructure management services, Cognizant is much better positioned to secure complex multi-service outsourcing deals than it was a few years ago.
Cognizant claims its revenues from SMAC services are around $500m per annum: if so, then its Horizon 3 businesses are also gaining traction.
So, the short term loss of revenue is obviously a major setback that will continue to be a headwind in 2015, but recent investments and new wins position Cognizant well to resume stronger topline growth in the mid-term. It certainly claims its pipeline is healthy. We may also see further inorganic growth in Continental Europe.
Finally, Cognizant is contending with offshore attrition by offering a wage hike (10%) that is at the higher end of the industry, a tactic that works well in India.
]]>This is the third quarter of improved topline growth. Management has raised revenue guidance for full FY 2014 to growth of 11.5-12% (up from prior guidance of 9-10%, and double the level of growth achieved in FY 2013). This would mean Infosys is getting back to Indian IT services market growth rates (NASSCOM predicted 12-14% for FY 2014).
So where has the growth come from this quarter? It is the last quarter of acquisitive growth from Lodestone (acquired Oct 2012) contributing 41% of the y/y growth (55% last quarter). Infosys’ traditional areas of ADM (which underperformed for much of FY 2013) contributed a healthy 28% of the overall growth. This indicates the effectiveness of the recent drive at Infosys to go back to basics; its BITS businesses overall contributed 55% of the overall growth this quarter. Management commentary on client budgets emphasized their ongoing focus on initiatives cost optimization, is where Infosys BITS service lines play.
In terms of service lines, BFS and Manufacturing continue to be the growth engines. But Telecoms continues to be a major drag (down an estimated 9.6% y/y): it has declined from contributing 12.9% of revenue in FY 2011 to 7.9% this quarter.
The revised FY 2014 revenue guidance implies anticipated y/y growth in Q4 of between 8 and 9.9%, thus H2 overall will deliver slower growth than was achieved in H1. Accenture also saw a slowdown in its quarter ended November 30: the indications from these two bellwethers are of slower revenue growth in Q4 CY 2013: we shall know more next week when more results are published.
The operating margin of 25.0% is up 322 bps sequentially (up 150 bps excluding the one-time visa provision last quarter). Infosys has been stripping out costs by offshoring both billable (where relevant, depending on service type) and non-billable roles (notably in marketing: sales & marketing expense is 5.0% of revenue, down from 5.8% last quarter, with management referring to increased investment in sales). Narayanan Murthy commented on ensuring that “all jobs that can be done in lower cost locations are done in lower cost locations”. Increased pricing also contribute to the sequential margin improvement. Nevertheless, this is the sixth consecutive quarter when operating margin is down y/y.
Another factor contributing to the sequential improvement in margin is the 1.1% q/q decline in headcount (the last time this happened was four and a half years ago, in the June 2009 quarter), or 1,823 employees.
Infosys has been looking to get utilization up to its 78% to 82% target range, but it has again declined sequentially to 76.9% (from 77.5% last quarter).
Attrition continues to increase, to 18.1%; this may be part of the drive to weed out underperformers, but is also possibly indicates a trend in employee morale, in spite of the wage hikes from July 2013. There has been a string of departures of senior execs in the last six months (since the return of N.R. Narayana Murthy) and this is likely to have caused some short-term disruption.
As part of a reshuffle at the top, B. G. Srinivas and Pravin Rao have been appointed as Presidents, with B. G. Srinivas focusing on global markets and Pravin Rao focusing on global delivery and service innovation, on top of their existing portfolios. These are clearly the two front runners for the next CEO after S D Shibulal retires in May next year, unless Infosys elects to go for an external hire. One indication of the level of rethinking that is going on at Infosys is that just a couple of months ago it significantly expanded its Executive Council. That same Council is being disbanded from April 1 with the two new Presidents being given responsibility to put in place “appropriate governance sectors for their respective areas”. Historically, Infosys was a company where any major changes tended to focus on its long-term vision and were planned in detail beforehand; today it appears to be focusing on shorter term imperatives.
Infosys continues to enjoy a very strong balance sheet, ending the quarter with $4,236m in cash, up from $4,130m in the prior quarter.
Looking ahead, management shared its outlook for FY 2015 client IT spending; the tone was cautious, referring to “a mixed bag” across segments.
So what should we expect from Infosys in FY 2015? The company is clearly making progress on getting back to basics with its BITS offerings and it continues to enjoy the boost from the Lodestone operation; next quarter will indicate whether Lodestone is helping drive organic growth in its consulting business. It is still too early to tell whether the newer PPS offerings, on which Infosys places so much store, will pick up steam this year and begin to approach, even outstrip overall company growth. PPS businesses currently contribute 5.3% of company revenue, down from 7.1% back in FY 2012. PPS is key to Infosys' long-term vision, but two years on it is hardly a success story. Indian media is speculating on setting up a separate subsidiary for PPS; we would expect to see some inorganic growth in the next year. Meanwhile, there are several new key roles still to be appointed including a global Head of Sales. Infosys is looking in a better shape now than it was three quarters ago but it going through an unsettling period.
NelsonHall will be publishing an updated comprehensive Key Vendor Assessment of Infosys within the next few days. For details, contact [email protected]
]]>1. BPO will increasingly contribute to the “C-level” vision and not just fine tune operations
2. BPO will increasingly morph into “business services”
3. BPO governance will become more partnership-oriented as BPO is incorporated within client Global Business Services organizations
4. BPO will necessitate wider country coverage
5. Cost will remain “king” with pricing becoming more transactional in nature
6. Vendors will build labor arbitrage within labor arbitrage
7. Automation be “front-of-mind” with buy-side organizations
8. Analytics will increasingly address business insight as well as process improvement
9. Web chat and social media will continue to increase in importance in support of CSAT and revenue uplift
10. There will be a resurgence in emphasis on front- and middle-office BPO.
The principal trend for BPO in 2014 is the need to move beyond addressing short-term process excellence in the narrow context of the process outsourced and to provide a vision and a roadmap, and ongoing execution, in a wider business context. The need for external process expertise has always been a key driver for BPO as organizations have sought process excellence and standardization alongside achievement of upper quartile cost performance. However, this need for external expertise has now moved beyond a short-term view of improved global process models, with organizations expecting vendors to lead with a long-term vision of how the outsourced process, whether finance & accounting, or HR, or elements of supply chain management, or customer service, will contribute to the wider goals of the overall business within their industry.
For example, recruitment process outsourcing should demonstrate how it can contribute to the wider talent management goals of the organization including succession planning and performance management. Similarly F&A BPO should, for example, demonstrate how it contributes to more effective allocation of capital to value-creating opportunities or shareholder value creation. Supply chain management BPO should demonstrate, for example, how it contributes to increased customer retention and cross-selling to existing customers as well as improving joint innovation with suppliers.
This need to demonstrate to ‘C-level executives’ that they are being taken on a transformational journey that transcends the immediate process or sub-process being outsourced is also leading to a change in the service mix within BPO, with an increasing need for consulting and systems integration skills to be deployed in conjunction with operational delivery. Nonetheless, these consulting skills need to be routed in the capabilities of “operational consultants” with shop-floor level domain expertise and be less top-down than those found in traditional consulting organizations.
Successful BPO has always been about partnership and the ability of the client and service provider to work together. Nonetheless, this has traditionally remained something of an arm’s length relationship. This is now changing as major organizations increasingly establish internal Global Business Services organizations. Indeed one NelsonHall survey indicates that the proportion of major organizations implementing GBS will double between 2014 and 2016. Besides assisting in cost reduction, the adoption of GBS operating structures will lead to improved control and change management and be more responsive to business change. In particular, GBS operating structures will lead to improved communication and more collaborative working, with the majority of major organizations adopting GBS also adopting a mixed economy for service delivery. Consequently, it is highly important for BPO vendors to adjust their governance models to assist organizations to achieve a step change in their KPIs by contributing to the process vision within a GBS environment.
The requirement for BPO country coverage is continuing to expand. Even where processes such as finance and accounting or HR have been widely standardized on a regional basis, there have typically been a wide range of countries that were too small to service within the framework used for the client’s mainstream countries. These have traditionally been served by specialist or local vendors, often acting as subcontractors. However, the more mature BPO adopters have now moved beyond the standardization of processes in their major countries and are seeking to apply standardized processes to the next level of geographies. This is increasingly being supported through SaaS-enabled services using software such as NetSuite and Microsoft Dynamics. However slimmed down processes and software are insufficient in themselves, vendors also need to demonstrate that they are “a safe pair of hands” and have thorough knowledge of the compliance requirements for each specific country.
Despite all the discussion of BPO being about wider business value, and it is, the ultimate metric for many BPO processes remains cost reduction, and many buyers will continue to judge vendors on their ability to deliver year-on-year cost reduction. At the same time, many organizations want to move from static fixed price and per FTE pricing and these will increasingly transition to a transactional pricing structure. While organizations are increasingly talking about outcome-based pricing, the majority of the reality behind “outcome-based pricing”, once these models are deconstructed, will in 2014, as previously, continue to be a variant on transaction-based pricing.
Notwithstanding increasing use of automation and all the talk of non-linear costs and pricing, labor-arbitrage will continue to deliver the bulk of cost savings in 2014. Accordingly, while considerable marketing will be geared to automation, it will also be important for vendors to build labor-arbitrage into their existing labor arbitrage and continue to develop an n-tier location portfolio incorporating both lower cost onshore locations and lower cost offshore locations into their global delivery models. And these global delivery models must incorporate seamless interoperability and a strong business continuity component across centers.
Nonetheless, with many organizations having already derived considerable cost benefit from low cost locations, buy-side organizations are now placing a higher than ever emphasis on process automation. While fears of wage inflation and unfavourable and volatile exchange rates have receded for the time being, buyers do worry about these factors and view automation as a means of risk mitigation against both these factors and staff turnover. Accordingly in 2014, buyers will increasingly prefer an automated approach over people-based service delivery. Indeed, new technologies such as robotics are increasing the perception that vendors should be able to help organizations to automate even if the means of automation is frequently unknown to their clients.
In 2014, the primary role of analytics will remain in support of process fine-tuning. However, analytics will increasingly provide wider business insight into customer and supplier behaviour and not just process optimization support.
In customer service, web chat has been the fastest growing channel in 2012 and 2013 and this will continue in 2014, with the timely and informal nature of the channel lending it, if not to cost reduction, then definitely to enhanced CSAT and increased sales in support of online commerce. Social media has so far been a minor part of customer service, principally being used for offline customer insight and some brand protection. However, social media agents are increasingly being used in support of sales in specialist areas of the retail industry and in 2014, the usage of social media agents will increase in support of sales outreach in a wider range of industries.
Overall, the adoption of BPO will accelerate in 2014. BPO has been through a period of relatively low growth during the downturn, with organizations unwilling to commit in a period of economic uncertainty. However, as demonstrated by NelsonHall’s quarterly BPO Index, the level of BPO contract activity has steadily built during 2013, and BPO is entering 2014 with strong activity in Europe, growing activity in “growth markets” and some resurgence in the U.S. In particular, resurgence in the financial services sector, with capital markets firms increasingly looking for creative approaches from BPO vendors and contract activity once again increasing in retail banking, is driving a renewed focus on industry-specific BPO. This trend is being reinforced by increased emphasis on supply chain support within the manufacturing sector.
]]>This might sound like the traditional IT-led role of consulting and systems integration. However, while the desired goals may be broadly the same, there is a fundamental difference in the background and approach of the “consultants” involved. Traditional consulting and systems integration was always strong on “vision” but often had inadequate understanding of operations at the agent level and tended to place IT ahead of process with a consequently high failure rate. Conversely, traditional BPO delivered a high capability to incrementally improve existing processes and deliver relatively narrow process excellence but typically lacked the vision to achieve strategic business change.
The emerging expectation of BPO is that it will finally combine these two virtues, with “operationally-oriented” consultants bringing both a knowledge of existing processes and current process excellence together with a vision of how future process models can lead to a step change in key business metrics and performance. In the short-term, complementing this longer-term process vision, organizations are additionally looking for one-off sub-process improvements led by process and analytics consultants. Accordingly the level of consultancy within BPO engagements will increase significantly but using consultants well-grounded in operations and process analytics to implement global process models, to deliver sub-process reengineering, and to support the longer-term business vision.
The level of IT-related delivery within BPO will also increase. Buy-side organizations are now placing a much greater emphasis on eliminating use of people altogether, with automated processes rather than people-based processes being seen as delivering greater long-term cost certainty and reduced operational risk. This renewed emphasis on automation will accelerate the deployment of vendor and third-party tools around client core systems. There is a particularly high emphasis on using these tools to facilitate use of mobile and digital channels and analytics, and in 2014 a high proportion of these tools will be hosted by the vendor, even if typically still in single instance rather than multi-client mode, leading to more rapid adoption. In addition, there are increasing opportunities to utilize application management services to hasten modifications to client ERP and core systems to hasten process change.
Accordingly, BPO has now come full circle, moving from being an operational adjunct to consulting & systems integration and IT outsourcing services led by a high level business vision, to being the operational vision increasingly supported by consulting & systems integration and IT outsourcing services. In commercial terms for vendors, this means that consulting & systems integration and IT outsourcing are now necessary adjuncts to protect BPO revenues, instead of BPO being the vehicle which helped to protect consulting & systems integration and IT outsourcing revenues as in the past.
]]>Pindar has become the third CEO of a major U.K. outsourcing company to resign this year. The other two, Nick Buckles of G4S and Chris Hyman of Serco, both left behind companies that are being investigated for fraud by the British Government. No such allegations have been directed at Capita.
The company has done extremely well under the leadership of Pindar. In the past ten years alone:
Pindar leaves the company in good shape, with:
Today's announcement coincides with the news that Capita has resolved the problem of its under-performing personal insurance BPO businesses. It is selling Lancaster Insurance Services, Sureterm Direct, BDML Connect and Delta Underwriting to Markerstudy Group for an undisclosed price. The four businesses (685 personnel based across three locations) are expected to generate ~£47m in revenue and make a combined operating loss of £15m in 2013. Capita is also closing its SIP administration business based in Salisbury.
]]>Zurich is a key insurance sector client for Accenture, for a range of consulting and application services; for example in 2010 it was awarded a ten-year, $50m contract to build and maintain a core insurance system and provide underwriting, policy administration and claims management support for Zurich’s P&C business in LATAM. Accenture did not win several back-office BPO contracts at Zurich; for example it lost a major procurement contract against Procurian – a competitor which it is now in the process of acquiring – and lost in an F&A BPO award against Capgemini (initial contract was renewed for five years in Q3 2012).
So why is Accenture announcing this 2012 contract with Zurich now? The emphasis in today’s press release is the extent to which Accenture is involved in and knowledgeable of Zurich’s finance IT processes through its work in this initiative to help Zurich better align its finance IT function to support its business objectives and reduce costs. There are some clear benefits of having one service provider for finance AM and for F&A BPO. Is this a statement of intent by Accenture that it remains interested in also providing some F&A processing as well?
(NelsonHall recently published an updated comprehensive Key Vendor Assessment on Accenture, available to subscribers of the KVA Program)
]]>There are some clear positives in Wipro’s performance this quarter:
The Americas (essentially the U.S.) continue to be the weakest region at Wipro in terms of overall topline growth. Elsewhere, Wipro continues to see double digit growth in APAC and other emerging markets, which together crossed the $200m revenue mark this quarter and accounted (by NelsonHall’s estimate) for ~35% of the overall y/y revenue growth, with EMEA accounting for another 40%.
In terms of service line, Technology Infrastructure Services and Business Application Services continue to be the growth engines for Wipro, although the rate of growth in the former is slowing slightly. Encouragingly, two weak areas, ADM and R&D services (the latter exposed to softness in the telecoms market) are showing signs of stabilization.
The revenue guidance for next quarter indicates we should expect to see similar, or slightly stronger growth next quarter.
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