We continue to keep abreast of unfolding developments in RPA and cognitive intelligence. In October and November, John Willmott wrote a sequence of three handy blogs on RPA Operating Model Guidelines:

• Laying the Foundations for Successful RPA
• How to Identify High-Impact RPA Opportunities
• From Pilot to Production & Beyond – The Keys to Successful RPA Deployment

Turning to Andy Efstathiou and some of his musings on FinTech and RPA developments in the Banking sector:

• Having discussed in February How Banks Can Develop a FinTech Roadmap to Drive Performance Improvement, in December he looked at FinTech in the Commercial Banking Sector: From Mass Market to Custom Processing Efficiency
• And in July, Andy looked at How RPA is Helping Banks to Enter New Markets & Diversify Offerings

Regarding developments in Customer Management Services:

• In April, Ivan Kotzev declared that Chatbots Are Back & Here to Stay
• In June, Vicki Jenkins looked at Alorica’s growth story: Alorica Acquires EGS to Become Global Top 3 CMS Vendor: Healthcare Business Key to Growth
• In September, Ivan looked at the changing role of analytics in CMS: Analytics are the Key to Disruptive Customer Experience

Fiona Cox and Panos Filippides have been keeping an eye on BPS in the Insurance sector. Two of their blogs looked at imminent vendor M&A activity:

• In February, Panos considered the significance of Wipro planning to acquire HealthPlan Services: Wipro Makes Fresh Start in U.S. Healthcare Payer BPS
• In July, Fiona looked at EXL’s planned acquisition of LISS: EXL Enhances LA&P Platform Digital Front-End Capabilities

Blogs in the HR Outsourcing domain have included innovation in RPO, and in employee engagement, learning at the beginning of the employee life cycle, talent advisory and analytics services, employer branding, improving the candidate experience, benefits administration and global benefits coverage, cloud-based HR BPS, and more! Here’s a couple on payroll services, so often an overlooked topic, that you might have missed:

• In April, Amy Gurchensky took a One Year Check-In with Excelity Global: Diversifying APAC Business to Address Demand for Cloud Payroll
• In November, Gary Bragar wrote Payroll Services Vendors Need to Redouble Efforts to Introduce New Digital Models

Dominique Raviart continues to keep a close eye on developments in Software Testing Services. For example:

• In October, he looked at Testing Platforms – The Emerging Opportunity to Commercialize Vendor Testing IP
• In August, he wrote about crowdsourcing: Passbrains Expands Crowdtesting Offering to UX

Dominique also keeps abreast of unfolding developments in the IT Services vendor landscape. For example, in November he wrote about Dell Services: the Glue for "One NTT DATA" In North America.

Staying with IT Services, David McIntire:

• In July, described 3 Key Ways IT Service Vendors Are Enabling Clients’ Cloud Journeys
• And, following a visit to Ukraine in July, wrote about Luxoft Diversifying Offerings, Clients & Delivery as it Eyes $1Bn Revenues by 2018

Meanwhile, Mike Smart has been blogging about IoT. Here are two of his earlier ones:

• In February, he reported that IoT Connected Vehicle Market Driving Towards $1.5Bn by 2020
• In March, he wrote: IoT in Manufacturing: It’s Not Just About Efficiency

And Rachael Stormonth continues to consider the significance of unfolding developments in the larger and more interesting IT Services and BPS vendors:

• In writing about HCL Technologies – Automotive, Autonomics & Partnerships Key Elements of its Future Growth, she posited that HCL would be an engineering services consolidator, a month before the announcement of the acquisition of a business from Butler Aerospace
• In May, she described Capgemini as Looking to U.S. for Makeover as it Prepares for 50th
• In June, she wrote about a BPS specialist opening an innovation center in Silicon Valley: Genpact Combining Design Thinking & Digital Technologies to Generate Digital Asset Utilities
• And in October, she described Atos Getting Into Health in the U.S. with Anthelio

That’s just a small sample of the wide-ranging themes and hot topics covered by NelsonHall blog articles in our trademark fact-based, highly insightful style.

Keep up with the latest blogs from these and other NelsonHall analysts throughout 2017 here, and sign up to receive blog and other alerts by topic area, or update your preferences, here. 

Capita states it believes the acquisition would:

• Position Capita as a leading provider of technology-enabled BPS
• Provide a stronger platform for Xchanging to accelerate sales growth and to develop its offerings
• Enable Capita to secure £35m+ in cost synergy benefits
• Be immediately earnings accretive.

Capita has been in discussions with Xchanging since early August regarding a possible offer, upping its initial 140p offer to its final 160p proposal on September 24 - which Xchanging’s board confirmed it would be willing to recommend on September 29 should Capita make a firm offer. Capita was granted due diligence access and had until 5pm on November 2 to make an announcenent.

There is another suitor, Apollo, with whom Xchanging has been having discussions about a potential 170p offer. Will this announcement push Apollo into making a counter offer? Xchanging's share price has surged since the news of the potential talks (over 165p at the time of writing, though still below its one-year peak).

Xchanging has been contending with a range of issues, and its global portfolio lacks coherence, partly a reflection of its heritage in a few large and diverse “Enterprise partnerships”. Xchanging is currently between CEOs, Ken Lever having announced his intention in July to step down at the end of the year, and new CEO Craig Wilson not yet started.

If Capita were to complete, this would be its largest ever acquisition, dwarfing its second largest, the £157m acquisition of avocis this February (though there have been a number of £50m+ acquisitions since 2011, helping Capita expand into new markets or extend its IT capabilities).  So why is Capita so interested?  

In recent years, Xchanging has repositioned and invested to emphasize its capabilities in “technology-enabled BPS”- exactly what Capita is emphasizing with its own various BPO offerings.  Also, the private sector is increasingly important to Capita (over 60% of its current pipeline is in commercial sectors) and Xchanging would increase its presence in the Lloyds market, where Capita already has a presence for specialist services.

Looking in more detail at Xchanging assets that would be attractive – or at least very relevant - to Capita:

1. Xuber software suite for the non-life commercial market: the biggest investment to date (a whopping $200m+ in total investments since 2011), both in platform development and in acquisitions: in 2014, Xchanging invested £75.6m in acquiring Total Objects, whose binder software is now integrated into the Xuber suite, and Agencyport Europe,extending its software into the health insurance sector, with software for international private medical insurance and exposure modeling (acquisition was delayed), plus a further £11.7m on development of Xuber. Xchanging has found converting interest in Xuber to sales more challenging than anticipated, particularly in the U.S. Will Capita’s greater commercial clout help? It would inherit sales teams from Xuber, Total Objects and Agencyport Europe that need integrating into a single unit to cross-sell, where relevant, the portfolio. Would Capita place the Xuber business in its newest operating division “Capita Digital and Software Solutions”, or would it place it in an insurance sector division?
2. The Xchanging Claims Services BPS unit : Capita is already active with a range of specialist services in the London insurance market: this capability would neatly expand its portfolio
3. Xchanging’s business in Germany, where it provides investment account administration BPS for Fondespot Bank, will also be of interest to Capita, who is building a presence in the DACH region, via an acquisition spree in the CMS BPS market, also via an insurance BPS contract with Zurich. The complex administration services in Germany that Xchanging would bring in to Capita would fit well in its Asset Services division
4. Procurement: Xchanging has been through a significant change of direction with its procurement services in recent years, to technology-led offerings, boosted by the acquisitions of MM4 (which was U.S centric) and Spikes Cavell Analytics Ltd (SCAL, which was U.K public sector centric). These offerings may find traction in the Capita client base
5. Expanded offshore IT services capabilities: in India, Xchanging has centers in Chennai and Pune, Bangalore, and tier 3 cities such as Shimoga (Karnataka).  It also has a center in Kuala Lumpur, Malaysia, most providing IT infrastructure services to YTL Communications, and a smaller ADM unit in Singapore (where Capita also has a small presence, targeting the reinsurance sector). There is also some offshore BPO activity in India and Malaysia. Capita may rationalize some of these sites, but would certainly be interested in the expanded offshore application services and BPO delivery capabilities
6. IT services: Xchanging has some networking capabilities, with a client base in the education and health sectors, as well as Lloyds – this would fit well into the Capita IT Enterprise Services division, which has grown through a series of acquisitions in recent years

And less attractive to Capita?

• The Australian operations, where Xchanging’s New South Wales Workers’ Compensation contract was not renewed, and where its procurement business has not really gained traction.
• The U.S. business: Capita’s international efforts are currently focused on Northern Europe. It would be a major change of strategy for Capita to start targeting the U.S., and its management will be highly aware of other service providers who have tried and failed to penetrate the U.S.

But overall, Xchanging’s portfolio is particularly well suited to Capita's business and where it is looking to develop over the next few years. And the cost synergies from the head office rationalization are also a particularly good match.  

We thus believe is highly unlikely that, even if there is a higher counter offer from Apollo, the Xchanging board will change it recommendation to shareholders: Capita presents a better option longer term. Howver, a counter offer from another IT services vendor might be more attractive.

NelsonHall has just published a comprehensive Key Vendor Assessment on Capita. We have also historically included Xchanging in the KVA program.

However, IBM is in the midst of a major adjustment of its portfolio. In line with this, the company is reporting $25bn in revenues (and 16% revenue growth) in 2014 (out of a total of $92.8bn) from its "strategic imperatives". IBM's acquisition of Softlayer, where it continues to invest strongly, appears to be delivering $3.5bn annual "as-a-service" run rate and IBM reports that its "Cloud" business had 2014 revenues of $7bn and 60% revenue growth (this includes hardware, software and services),

The revenue growth reported from IBM's other "strategic initiatives" were:

• Analytics +7% (2014 revenue approx $17Bn)
• Security +19%
• Mobile >200%.

Maintaining a high mix of software remains important to IBM but its strategy is now much more nuanced than the simplistic "software good" strategy the company sometimes appeared to adopt in earlier years, with the company rediscovering success in IT infrastructure management. Indeed IBM's acquisition of SoftLayer and its ongoing investment in Cloud infrastructure including in additional in-country SoftLayer data centers and cloud enablers such as security and its Bluemix cloud development platform is arguably having more impact on its signings than any of its investments outside Watson and analytics. In Q4, IBM's cloud infrastructure business moved way beyond the standard fare of IaaS contracts with start-ups to facilitating major infrastructure transformation contracts with values of a $1bn+ with the likes of Lufthansa and WPP.

Indeed, while the impact of SoftLayer was insufficient to lead to material growth in IBM's outsourcing revenues in Q4 2014, its impact is certain to be felt on outsourcing revenue growth  in 2015 as a result of these and additional major transformations to cloud infrastructure. Led by these deals, IBM's outsourcing signings transformed in Q4 2014, up 31% (in constant currency and adjusted for disposals). IBM now just needs its application management business, which is continuing to decline under competitive pressure, to undergo a similar transformation.

Let’s start by looking at the legacy Concentrix business, which may have fallen below the radar of CMS BPO industry watchers.

Legacy Concentrix: the GBS unit of Synnex Corp.

Synnex Corporation’s primary business is wholesale distribution, providing distribution services for IT systems, peripherals and system components, software, and complementary products. Its primary OEM supplier is HP (it has not been an IBM hardware distributor). Synnex distributes technology products in the U.S. Canada, Japan and Mexico, with around 87% of its total revenue (prior to the IBM CRM acquisition) from North America. Its distribution services business also provides some contract assembly services.

Legacy Concentrix was the global business services (GBS) SBU of Synnex Corp. It offered a range of BPO services including tech support, renewals management, lead management, direct sales, customer service, back office processing and ITO. Many of these services are delivered on proprietary software platforms it has developed or acquired. Its primary client base was manufacturers of IT hardware and CE devices, ISVs, cloud service providers, and broadcast and social media. The value proposition in its BPO services was helping clients customers achieve greater efficiencies in time to market, cost minimization, real-time linkages in the supply chain and after-market product support. Concentrix served ~150 clients

Concentrix has been acquisitive - in its fiscal year (ending November 30):

• 2010 it acquired Aspire and Encover for $40m, gaining renewals management software
• 2011, it acquired 100% of gem, which brought in a social media platform, also certain assets of e4e and of VisionMAX Solutions for a total of $43m. These brought in additional scale, expanded its client base and geographic presence, and complemented its offerings in social media and cloud computing
• 2012, it acquired a small business for $6.2m.

Acquisitions have accounted for over 70% of its revenue growth in the last three years. FY 2013 revenues reached $224m.

How has the integration of IBM CRM gone so far?

In terms of the headcount involved, this has been IBM’s largest divestment in its history, and many of the transferring contact centers were embedded within larger IBM sites. This was never going to be a big bang transfer, but it appears to have gone to plan. The first wave of the acquisition was completed by end January, and the second tranche by end April, with the addition of 19 delivery locations across 13 countries.  Over 95% of the acquisition is now completed; the last tranche will be completed by the end of this month.

The acquisition of IBM’s CMS business has added ~35k employees in six continents, servicing ~170 clients from >40 delivery centers. The combined entity has ~45k employees, >50 delivery centers, with capabilities in 40+ languages, and services ~300 clients.

Concentrix also announced earlier this year the addition of ~1k new jobs in Belfast, and the set-up of a new center in Varna, Bulgaria. 

Concentrix claims that it is seeing scope expansion with existing clients and also new client wins.

Its H1 FY 2014 revenues (to end May) were $420m. Excluding expenses of nearly $25m relating to the IBM CRM acquisition & integration, also amortization, non-GAAP operating margin was 9.4%,up 97 bps y/y.

But financing the acquisition has pushed Synnex Corp’s debt to capitalization ratio to 38% (Q2 FY 14), a big increase from 18% in the prior year period.

What does IBM bring to Concentrix?

Clearly, the first thing is scale: Concentrix is now a $1.2bn business, leapfrogging it into the top 10 global CMS BPO providers.

But this is not just a scale play: aspects of IBM CRM’s BPO business that were attractive to Synnex Corp. is that it:

• Is a higher margin type of business than its distribution business 2.39% (the legacy Concentrix GBS business achieved a 6.83% segment margin in FY 2012; its distribution business 2.39%)
• Brings in some industry capabilities in banking, healthcare and insurance, sectors in which Synnex has not operated. In fact there was very little overlap in the client base
• Also brings in analytics capabilities (both operational and customer), that Concentrix had struggled to build internally. The company claims it has now gained hundreds of people with skills in unstructured and text analytics, speech analytics, also predictive analytics and forecasting. Operational insights might, for example, help in reducing AHT. Customer insight analytics might, for example, help an agent in making a best offer to a customer.

What is the positioning of the new Concentrix?

With the acquisition now more or less complete, Concentrix is now focusing on GTM and marketing. The drive is to combine the capabilities it has acquired from the IBM CRM business with its own attributes.

In terms of GTM, Concentrix is focusing primarily on just four verticals: healthcare, banking, insurance and technology. The first three of these are all new target markets for Synnex/legacy Concentrix, and it is looking for additional specialists in these sectors.

Concentrix’s positioning is based on its ability to deliver high value services that focus on transforming the customer experience. The emphasis is on the application of analytics, technology and process optimization, in particular to streamline the customer journey across all channels. Concentrix offers customer journey mapping, in which it looks at every interaction that a client has with its customers, across front and back office and industry-specific processes, with the aim to reduce the customer effort in every interaction. There is a clear emphasis on being able to get a holistic, single view of the customer across all touch points and all channels.  (The benefits, of course, are reducing costs of interaction, increasing CSAT and revenue).

Concentrix highlights the effectiveness of its legacy Concentrix virtual team model, now being driven to IBM clients, whereby virtual teams that have representatives from HR, finance, IP, sales, delivery are assigned to a client. Their different perspectives in team meetings help drive the innovation agenda.

This is not a “bums on seat” play to win large traditional customer contact center services. Concentrix is driving both omni-channel and the end to end story (in terms of customer touch-points throughout the customer journey), faster than most well established CMS players are doing in their target verticals.

Concentrix’s proprietary technology, a mix of legacy and IBM, includes two platforms:

• Renewal Manager (legacy): used to service clients such as F5 Networks and Symantec
• GIAS insurance policy administration software platform (former IBM/Genelco), offered as traditionally licensed software, SaaS or BPaaS.

The legacy Concentrix organization (according to its claims) was flexible, entrepreneurial and was very risk oriented. Concentrix says it is willing to start small with a new engagement to demonstrate how it can deliver the benefits sought by the client (for example, better qualified lead generation. Concentrix is particularly interested in commercial models where there is some level of gainshare. A lot of the work that Concentrix historically did (lead management, direct sales, renewals management) had some level of risk reward. It is now looking to introduce more risk reward work in some legacy IBM accounts.

What should we expect to see next at Concentrix?

Concentrix still contributes less than 10% of Synnex Corp’s overall revenues, and the appetite for acquisition continues. The most likely investments would be in industry-specific solutions and services, perhaps in healthcare insurance (U.S. healthcare CMS is currently an attractive market for a number of BPO providers). The IBM CRM business did not have much capability in this market.

It is possible, for example that Concentrix might look to develop Renewal Manager for use in services around healthcare plan renewals, where the U.S. will be facing much greater volumes each year. And it is likely the intention is to build an insurance middle-office BPO business around GIAS.

A sector that is perhaps surprising in its omission as a target market is retail/e-commerce, given the customer journey mapping, the focus on technology and innovation, and the emphasis on social media.

It is not yet clear if we will see more focus on the technology IP as standalone software offerings or if the intention is to build a bigger BPaaS business. 

What is evident is a greater sense of vitality as Concentrix applies its entrepreneurial approach and its willingness to invest to the legacy IBM contact center business (one that IBM described when announcing the divestment as a"commodity, lower margin" business). And we hear anecdotally that some clients are happier now than they used to be….

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.

Accenture has had a long history of providing FAO services to manufacturing companies in the Scandinavian market including Finnish steel manufacturer Outo Kumpu. Other clients have included Yara and Volvo. NelsonHall is seeing increased interest by organizations for multi-tower outsourcing, in particular that spans F&A and procurement, especially by organizations such as SSAB (a $6bn group that is currently loss-making) that urgently need to strip out costs.

SSAB is headquartered in Stockholm, and employs ~9,000 FTEs in 45 countries. The Scandinavian market, which the scope of this contract covers, accounts for ~70% (6,500 FTEs) of the workforce and 38% of global revenues.

Weakening of steel markets globally, following reduced demand from China, has led to pricing pressures, and the European market is also challenged with over-capacity. SSAB has gone from being one of the more profitable steel manufacturers in the world to reporting significant operating losses since H2 2012.

In 2012 SSAB introduced an efficiency program for its EMEA operations targeting annual cost savings of SEK 800m from 2014. The program is also intended to increase flexibility to better address market fluctuations. Outsourcing is clearly seen as the lever needed to help address both these challenges: to strip costs and to increase flexibility.

Accenture, like IBM and Capgemini are one of very few organizations globally that have the capability to provide all the three BPO service areas in scope in this contract. The appetite for multi-process outsourcing deals, including in northern Europe, remains undiminished.