Clearly, this was a fire sale, presumably of an unprofitable business. We were intrigued as to why HGS was buying further Indian contact center business - and indeed there is a story behind the announcement. The main reason for the acquisition is to more broadly expand the domestic Indian business as well as add banking and financial services clients.  This domestic Indian expansion will help HGS handle domestic India business for international accounts (it recently won some business in India for a global CPG client).

HGS is picking up two telecoms clients, which together account for ~88% of the acquired business, plus four insurance and banking sector clients.

This acquisition may have been opportunistic, but it has some other benefits:

• It will significantly expand HGS’ footprint for servicing the India domestic market (India CMS BPO accounts for ~6% of HGS global business, its India payroll business another 2%). As well as adding to HGS’ existing nine cities with contact centers (with ~7800people) for domestic business in  India, the Mphasis centers will bring in delivery capability in the northern Hindi-speaking states in India
• HGS will also acquire some premium level support capabilities for the Indian telecoms sector – for services which are often slightly less price sensitive
• And it will provide HGS with some referenceability in the key CMS BPO banking and insurance sectors. Expect HGS to look to win more BFSI BPO business in the region.

In short, what is a fire sale for Mphasis looks like as if it as the potential to become a great asset for HGS.

It comes as no surprise that Onex is selling its stake in Sitel. What is perhaps a surprise is the size of the company making the acquisition - and the price.

Groupe Acticall, a national player in the French CMS market CY 2014 revenues of $196m, has grown through largely inorganic means since its inception in 1994. t is owned by Creadev (55%) and founders and exec officers Laurent Uberti, Olivier Camino and Arnaud De Lacoste (45%).

The much larger Sitel Worldwide has been majority owned by PE firm Onex Corp. since January 2007 when ClientLogic, which Onex owned, merged with the larger Sitel. Onex has to date invested $320m into Sitel. Onex’s general strategy would be to realize an investment of this nature by 15 years at the latest. In this case Onex has decided to sell its stake in a company that has been struggling with profitability for years.

In mid-2013 Sitel restructured to support a focus on higher margin activities such as its SaaS offerings, transformational CMS contracts (such as the win with TDC in September 2014), WAHA, multi-channel and social media support. By the end of 2014 these measures had not yet had a chance to have much effect, with Sitel’s operating margin reducing from 4.6% in 2013 to 3.4% in 2014. Q1 2015 performance was more favorable, with revenues up 1.2% y/y, up 10% in CC, to $355m, and operating margin up 1.6 pts to 4.4%. The company has been exiting low margin/unprofitable contracts and closing some contact centers, while opening others (e.g. in Nashville, TE, Pompano Beach, FL, Coventry, U.K. and Bulgaria).

At end Q1 2015, Sitel had ~ 59k employees, with approximately 41.4k in the Americas (which includes APAC) and 17.6k in EMEA. The company has 108 contact centers across 21 countries.

Following the acquisition the combined company will have ~68k employees and 128 contact centers globally.

This is a fire sale by Onex, the purchase price of $55m representing just 1.1 x 2014 EBIT and a fraction of its $1.44bn revenues.

Sitel was the fourth largest CMS vendor (in terms of CMS BPS revenue) in CY 2014. This is a reverse takeover with the well-established Sitel name being retained and its current management team remaining in place… though it is not yet clear where the combined entity’s head office will be. Like Teleperformance, the largest CMS vendors globally, Sitel will have French ownership.

We look forward to hearing more about the strategic intentions for the future Sitel & Groupe Acticall.

While the concept of isolated sales-focused call centers is nothing new in the outsourced CMS space, the way in which IC conducts itself, especially now that it is a division of a large CMS pure play, is particularly interesting. IC seems to have maintained its “small company“ agility and go-to-market strategy; for example, the vast majority of the division’s contracts are run on a pure outcomes-based pricing model, a concept that many of the larger CMS vendors would baulk at! This pricing model is also reflected in agents’ compensation, ensuring an incentivized and motivated workforce.

The division has also proved to be an early mover in adopting and developing some of the more interesting and actionable analytics and agent-facing platforms. IC has developed a customer profiling tool, icConsumer, which uses a combination of data sources, including information entered online by the customer prior to an outbound call, multi-channel contact history (including previous purchasing information), lifestyle and interest data gathered from social networks, and data from third party providers. The aggregated data from icConsumer is segmented, then fed into icDial, a managed dialer service which proactively prompts an agent to call a profiled customer at a particular time.

Once an agent is speaking to a customer, another tool, icEngage, displays relevant customer information, including age, gender, marital status, number of children/dependents, interests, a geographic map of the customer’s location, local weather and local news. With this information agents are able to build rapport with the customer before using the customer’s spending history to make the most relevant suggestions for an initial sale. Once the initial sale is completed, agents can then use information such as number of dependents, marital status, interests, etc. to make up-sell and cross-sell suggestions – e.g. family contracts, insurance, or extra data bundles if selling on behalf of a telecom client.

IC currently has clients in the telecoms, BFSI and utilities verticals. For a large U.K. telecom, IC has become a major sales channel, operating 100% of the client’s outbound sales, accounting for a third of the client’s new contracts per annum.  For this client, IC-acquired customers generally remain ~20% longer than customers acquired through the client’s other sales channels. Similarly, for another large U.K. telecom, IC acquired the equivalent of ~300 high street stores.

Moving forward, Convergys is planning to target the U.S. market by opening additional IC centers in the U.S. and the Philippines later on this year. Convergys is also looking to sell IC technology, including icConsumer, icEngage, and icDial on a SaaS basis in the future.

Given that the vast majority of its contracts have an outcomes-based pricing model, which is then filtered down throughout the organization, IC has fostered an entrepreneurial and sales-focused mindset across its operations. This high-pressure, results-driven environment, which requires a particular type of agent, can often lead to extremely high attrition levels; however, IC’s attrition of between 5%-7% per month is better than would normally be expected of a large outbound sales call center.

See related article Convergys to Acquire Stream Global Services, Becoming Number Two CMS BPO Vendor Globally

For analytics, a popular claim is the use of big data for predictive modeling within contact centers. But is it really happening? The reality is that, while certain vendors are using data for simple predictive modeling, this is still a distinct differentiator among vendors and there is significant room for improvement. It is simply too early to claim that vendors are systematically using big data for predictive modeling.

An example highlighting this is a contract with a telco in which big data (including multi-channel contact history, lifestyle information from social media channels, information from third-party reference agencies, and customer local data such as weather and news reports), are simultaneously displayed via infographics and text to an agent’s desktop to help the agent better understand the consumer’s needs, build greater rapport and, in revenue generation contracts, retain, up-sell and cross-sell to a greater degree. However, in terms of predictive analytics, the data presented to the agent suggesting offers for the customer is based only on previous spend history and does not combine all of the above-mentioned big data sources.

So, are real-time analytics solutions currently being used in contact centers to either change agent behavior or provide customized offers to consumers?

While there are some interesting real-time analytics applications currently being used, this is limited at present. One example is a platform that analyses offshore agents’ rate of speech and displays the ‘sweet spot’ for this via an avatar on the agent’s desktop. This is done in real-time and assists with rapport-building with customers through the NLP technique of matching and mirroring.

Another innovation being piloted is a voice analytics platform that tracks a consumer’s words, phrases, and voice stress levels. These can then be used for compliance and industry-specific regulatory requirements in outbound campaigns, whereby a prompt appears in real-time on an agent’s desktop to recite a compliance statement, or proactively offer to remove a customer from a calling list if the customer is becoming stressed.

The move to using this type of real-time analytics for personalized offers and promotions is underway, but it will be a while before it is widespread.

Another common claim from CMS vendors is their ability to deliver transformation in their client contracts. What is the reality?

There has been a shift in recent years in how CMS transformation is delivered. When CMS was largely about agent numbers, a vendor would look to incentivize agents, improve training, and look to hire more skilled agents, in order to improve service delivery and reduce costs.

Then, about five years ago, there was a big shift: multi-channel, analytics, and social media became the new transformational levers, and are now considered an essential part of CMS delivery, though by no means have these yet reached maturity. Also, now that agents have access to increasingly complex customer data, and customers are now only interacting across live agent channels for high-complexity queries, the quality of the agent delivering this service is vitally important. Therefore, most of the transformation we are now seeing revolves around the HR aspect of service delivery. Training complexity and length is increasing, with many vendors now adopting a continuous agent learning and development scheme within their operations. And with the additional training investments vendors are now making, attrition is becoming even more costly; hiring agents who are more likely to deliver a high quality service, and stay with the company, is now more important than ever.

Hence, behavioral-based hiring methods are now been used in transformational deals over traditional skills-based hiring approaches. These methods are able to identify agents who might not have all of the required skills, but who have the correct mindset with which to learn and improve, and are more resilient. This type of hiring approach is already proving to reduce attrition levels and improve initial KPI adherence.

In summary, there’s no shortage of big claims from CMS vendors about the extent and effectiveness of their offerings in the areas of analytics and transformation. And big changes are happening in both areas, but not always quite as the vendors would have you believe.

Growth in GDP is, to a large extent, driven by increasing private consumption, which alone will look to outstrip real GDP growth in 2015. Growth in private consumption indicates the need for increased customer facing capability of organizations, hence potentially a rise in the need for outsourced CMS.

There has been over the last 14 months a flurry of acquisitive activity highlighting the potential both vendors and PE firms are seeing in this market. Examples include:

• Xerox’s acquisition of Invoco in December 2013 (1,800 FTEs, 10 centers)
• arvato’s acquisition of Walter Service’s German operations in April 2014  (1,100 FTEs, 5 centers)
• Livia Group’s acquisition of SNT Deutschland
• Capita's focus on the region. The firm has made two contact center acquisitions in Germany over the last eight months:
  • In July last year tricontes, a Munich based telemargeting vendor with a retail, telecoms, utilities and insurance focus
  • Last month, customer management consultancy Scholand and Beiling
  • And this month, avocis for £210m. avocis has ~5,000 seats in Germany, where it is one of the largest CMS vendors, accounts for 53% of total revenue, and Switzerland, which is where its foundations lie, and where it claims to be market leader in . avocis was created as an umbrella brand in 2011 from the amalgamation of six companies. It services clients in the telecoms/IT, utilities, financial services, and healthcare sectors
  • In its first acquisition since Andy Parker started as CEO, Capita is paying 1x 2014 revenue for avocis, which is a growing business: 2014 revenues were up 21%, and its EBITDA margin was 14.2%, up from 11.4% in 2013. Capita expects avocis to achieve its target for a post-tax ROC of 15% within two years. Significant in being Capita’s largest acquisition to date, avocis is s one of the largest CMS BPO vendors in Germany, It is a capacity move in the region: avocis' vertical focus aligns with that of tricontes. Together with tricontes, Capita will have a significant presence in the German commercial sector CMS BPO market. That is a phrase that one (German, commercial sector CMS) would not have expected to say of Capita even four years ago! This move into Germany for CMS BPO has been an extremely interesting strategic decision by Capita, who outside its specialist activities in financial services and insurance, is known as a U.K. public sector specialist.

With a large addressable market that is showing increased interest in outsourcing, positive consumer consumption, a stable economic & political environment and the above mentioned buy-ins from vendors and PE firms. The region has historically been services by small to mid-sized vendors. With companies such as Capita now building scale, the vendor landscape is now changing, Expect to see some large CMS BPO deals in the region over the next few years, led by the telecoms, banking and retail sectors.

• Webhelp setting up centers in Cape Town and Johannesburg with an agent headcount approaching 1,000
• Capita transitioning part of its O2 support to Cape Town in the form of a ~1,400 seat operation.

One (of many) attributes that make South Africa such an attractive destination to CMS BPO vendors (and to organizations looking to setup captives) is the tax grants offered. Recent announcements by the South African DTI have indicated that in order to qualify for future tax grants foreign BPO providers would need to have a level four BEE status, the qualification of which is soon to become more stringent. Serco South Africa is ideally positioned to take advantage of this, given its 100% South African management team and partial black ownership. Serco is in a fortunate position in that it can comply with the new BEE Level 4 requirements which kick off soon, although they are due to be reviewed again at the end of next year.

Serco initially opened a 500 seat center in Cape Town in March 2013, as part of a move to transition some of the CMS support for U.K retail client Shop Direct from onshore to offshore locations in India and South Africa. Serco has built up a thriving center in Cape Town, and currently has ~700 FTEs deployed on the Shop Direct contract. 

When Serco originally entered South Africa its sole aim was to provide offshore support to U.K. and potentially Australian clients; this strategy has since undergone a rethink with the upheaval of its U.K. reputation following the e-tagging scandal in 2013 which, although happening in a different part of the Serco Group impacted the ability of its private sector BPO business to win new deals. Serco is now also actively courting domestic South African clients in the telecoms, media, BFSI and retail verticals. It is currently running a customer care webchat pilot for a domestic telco and is also in talks with a local retailer to provide in-store e-commerce support. If all goes to plan Serco should have ~700 FTEs providing domestic support in its Cape Town operation by end of Q2 2015.

Serco’s agent acquisition program in Cape Town has a very personal flavor with the country MD Fagri Semaar, conducting radio appearances as well as University and school presentations in order to acquire talent. Currently the company has 64k applicants on its database. 45% of applicants are inexperienced in contact center delivery, though the vast majority are from a previous customer service background. Serco has moved away from a purely skills-based hiring approach in its Cape Town operations with applicants initially completing a psychometric evaluation that is weighted towards the vertical, service line and end user position the applicant is applying for. Currently Serco is hiring one in five applicants in its Cape Town operation. 

Now with Serco’s recently announced strategy review, what does this mean for its South African operation? As part of Serco’s private sector business, it will be one of the units to be sold off. Whilst this will result in uncertainty in the near term, the dropping of the Serco brand should help the U.K. private sector business in its go-to-market efforts which potentially means increased work for South Africa.

CSS Corp has traditionally focused on the high-tech sector: this is now expanding beyond organizations in the high-tech industries, to retailers and telecoms organizations which market electronic devices.

The company’s annual revenues are currently ~$200m, of which  ~90% from the U.S.  Its attention is now turning to EMEA. Currently CSS Corp has 13 delivery centers with ~5,500 FTEs supporting 20 languages. Around 3,000 of these employees are based in Chennai, India. All domestic U.S. agents are U.S. citizens (besides a handful of traiers). The company is looking to open additional centers in the U.S., Canada, the Nordics and the Middle East but has not given a timeframe on this.

CSS Corp is willing to take on small contracts of less than 50 FTEs, a strategy that has previously proved effective with many of the company’s largest clients starting out in this manner. Tiger repeatedly emphasized CSS Corp’s goal of remaining agile.

The company’s has two business units for its tech support services: enterprise and consumer.

In its enterprise tech support business, most activity is level 1 support with a small degree of level 2 and 3 support. The company also has a small number of agents providing level 4 technical support. CSS Corp has recently opened two monitoring centers in India which track client’s products and look to anticipate support queries by identifying threshold violations, etc. This service is labelled Active 360 and will be bundled in with other enterprise tech support offerings but will also be offered as a standalone service. CSS Corp’s aim is to move into end of life support and grow its level 4 support business.

Its consumer tech support business encompasses level 1, 2 and 3 support including an element of up and cross sell. As with its enterprise business, most activity is level 1 tech support, with level 3 the smallest element, handled on client site. CSS Corp also offers social media support; at this stage, this is limited to monitoring services. The company has centralized its workforce management support in India.

CSS Corp is aggressively marketing a multi-device white-label paid for tech support offering Premium Support.  It currently has three clients using this service. CSS Corp is currently developing a mobile and desktop application “Active i” which will allow for easier consumer use of Premium Support. The aim of this application is to make consumer interaction across the service easier, also to continuously make consumers aware of the service, increasing the likelihood of them extending their service contracts. It enables to consumers to schedule a call back, chat with agents, hand over remote control of device and email agents. “Active i” is set to go-live in six weeks; the future aim is to sell this directly to consumers.

CSS Corp is also offering analytics as a separate service. Labelled “Active insights”, this offering is currently in its first iteration: at this stage reporting is delivered on a scheduled basis, quantitative data only is measured and the service is hosted. The plans are for the service to develop over the next 18 months as follows:

• Active 2.0: this will include real time feedback of findings to a client facing dashboard including alerts for outlying results. Analysis will also expand to include SMS and social analytics
• Active 3.0: the service will support voice to text analytics and machine learning
• Active 3.1: will include predictive analytics and performance management
• Active 4.0: will include self-healing support to devices and voice and video analysis.

With current annual revenues of $200m, CSS Corp has an ambitious goal of becoming the largest tech support provider globally. A refresh of the management team and a focus on the high growth market of consumer technical support is setting the tone. Nevertheless, in order to reach the scale needed achieve its lofty ambition, inorganic growth will be necessary.

This is TDC’s largest foray into outsourcing its CMS function by agent number and by total value, with headcount representing approximately one third of total CMS capacity. The contract includes the transfer of 800 agents from TDC’s five captive operation in Copenhagen, Aarhus and Sondenberg to Sitel as part of a larger initiative to eventually outsource all 1,850 in-house CMS roles.

TDC’s primary business need in outsourcing is a desire to increase CSAT, followed by reducing costs and to focus on core competencies. TDC had experienced sharply declining CSAT scores including a 37% call answer rate within 60 seconds.

Sitel will initially transfer roles from four centers in Copenhagen and Aarhus to a single center in Sonderberg followed in spring 2015 by the opening of an additional center in Kingston, London. By year end 2015 Sitel expects to have ~150 agents supporting TDC in London. London was selected as a near shore delivery location over more typical destinations such as Bulgaria due to the high number of native Danish speaking undergraduates in London. Having native speaking agents was viewed as a priority in order to improve CSAT, despite the obvious price disparity in near shoring selection, London should still deliver a 10%-15% cost reduction over onshore delivery.  London agents are to provide simpler billing and customer care support with higher complexity customer care and up and cross sell services kept onshore.

Service delivery will include an overall of internal processes and work flow management. All current workflow management will transition to Sitel’s proprietary system. A hybrid IVR system will be introduced with all call avoidance incentivised via a cost reduction gainshare pricing model. Sales, including up and cross sell functions, will be supported via specialist agents while customer care and level 1 technical support will transition to cross trained agents in order to reduce AHT and improve CSAT.

This contract is indicative of Sitel’s wider strategy to focus on higher margin activities in order to address nagging and severe profitability concerns. Sitel has actively branded and marketed its SaaS offerings over the last twelve months and this contract bears the fruit of those efforts. This drive to focus on higher margin activities including transformational CMS contracts (such as this one), SaaS offerings, WAHA, multi-channel and social media support could well be make or break for Sitel as its parent company Onex seldom holds on to investments for as long as it has with Sitel and will undoubtedly be looking for an exit should ROI not improve.

Its Brazil business is contending with a stalling economy and a sharply depreciating currency, although it is still profitable and remains a core focus for Teleperformance. The currency fluctuation in the Argentinian peso (with the currency depreciating by ~40% this year) has continued to dent Teleperformance's reported Ibero-LATAM revenues for the third consecutive quarter. The Mexican and Portuguese businesses continue to perform well this half.

Teleperformance's Chinese operations are seeing y/y growth of nearly 30% y/y, albeit from a small base with revenues approaching €30m annually. Much of the contract wins in this region are with local operations of U.S. multi-nationals. The Aegis acquisition, expected to close by August 1, will increase the company's revenue contribution in its English Speaking & Asia Pac business from 39% to 45%; it will also increase the proportion of revenues from offshore/nearshore delivery from 29% to 32%. This region has also benefitted this half from new contracts won in the U.S. in the healthcare, banking, insurance, and retail sectors during 2013.

The Continental Europe and MEA region experienced the greatest growth this half in spite of France continuing to be an area of concern due to volume reductions in the telecoms sector - although France is no longer a major market for Teleperformance, who now has just around 4k agents in France (plus around 5k in Tunisia). The company made a loss of ~€14m in the country during 2013; this is expected to decrease to a net loss of ~€10m in 2014, New sales initiatives, likely aimed at diversifying vertical spread, should start to bear fruit by the end of the year. The region has grown significantly in the Netherlands, Russia, Italy, Greece and Turkey. The "TLS Contact" account is not only enjoying revenue growth of over 100%, it is also generating significantly higher margins than other Teleperformance business units, although due to the spring time bias in this market's seasonality, this growth should soften slightly in H2.

Teleperformance has uprated its EBITDA margin outlook for the full year to at least 9.7%; this is likely largely due to the acquisitions of Aegis and City Park Technologies as the company has previously been unable to make a significant impact on margin improvements in H2.

The City Park acquisition, a move to build U.K. market share, will push Teleperformance into the top three U.K. CMS BPO vendors by headcount, ahead of Serco and Capita (both of whom have grown in the U.K. through acquisition in recent years). City Park Technologies industry focus in BFSI, telecoms, retail, travel and utilities is broadly similar to Teleperformance's current U.K. vertical presence. City Park is expected to add $26m to annual revenues.

Aegis will bring to Teleperformance the following operations:

• The U.S: nine sites with ~5,300 total seats
• The Philippines: six sites with ~11,500 total seats
• Costa Rica: one site, with ~800 seats.

This acquisition fits in with Teleperformance's long-established, but until recently stalled, strategy of inorganic expansion. As a result of this acquisition Teleperformance should achieve annual revenues of ~$4bn, (2013 revenues: $3,236m) further cementing its place as the largest CMS BPO provider globally, and putting clear water between it and 2013 number two player Atento (2013 revenues: $2,821m) and Convergys, which this year has overtaken Atento as the second largest CMS BPO provider with expected 2014 revenues of ~$3bn. 

What does this mean for Aegis?

This disposal represents around half of what was left of Aegis' global revenues (~$800m) after the inter-company transfer of AGC Networks to Aegis' parent organization the Essar Group.

Post-disposal, Aegis will have 37,000 agents across 37 centers and will look to continue to grow its portfolio in India, Malaysia, Australia, Middle East, Europe and LATAM. Aegis indicated its intent to remain in these markets with the acquisition of Malysian based Symphony BPO in January 2014.

What does this mean for Teleperformance?

This acquisition will boost Teleperformance's onshore, nearshore and offshore  support to the U.S., which it has been indicating as a priority for acquisiton (followed by BRICS markets): 

• Onshore, Aegis' footprint in the U.S. complements Teleperformance's current geographic footprint, in particular bringing in centers in the west and central regions, increasing its geographic coverage across the nation
• In terms of U.S. offshore, Aegis' centers in the Philippines are largely in the delivery hubs of Manila and Cebu, in proximity to Teleperformance's operations, and will increase its delivery capabilities in this key CMS delivery geography (where Teleperformance has been expanding) to nearly 34,000
• And nearshore, in Costa Rica, Aegis will bring in a second delivery location in San Jose, augmenting Teleperformance's existing capability in Santa Ana. 

Secondly, the acquisition will mean a slight change in sectorial mix for Teleperformance's business in the U.S., reducing its dependence on the telecoms sector, and increasing its revenue contribution from the BFSI verticals (from 13% to 14%), from healthcare (more than doubling, but only to 5%), and the travel sector (from 4% to 6%). The U.S. BFSI and healthcare verticals in particular are attractive sectors for CMS BPO service providers, as they provide opportunities for higher margin services. 

Overall, this acquisition is more about geography than it is about client vertical or portfolio enhancement. Teleperformance is targeting higher margin verticals and services: will we see futher, smaller, inorganic growth to boost its onshore presence in these verticals? It has to be a possibility.

Most of the acquisitions so far this year have been to enhance, and in some case establish, geographic presence, for example:

• Webhelp acquiring SNT Netherlands in February
• TeleTech acquiring the Bulgaria based Sofica Group also in February
• arvato acquiring five contact centers in Germany from Walter Services in April

Whereas what we have seen in the couple of acquisitions in 2013 and in a number of the acquisitions in 2012 was a definitive move to enter new verticals and enhance technological capabilities.

While the acquisitions noted above are essentially business as usual in within the CMS space, two other recent transactions are truly representative of the consolidation that is beginning to take place in this market.

Firstly we had IBM divesting its ~$1.2bn CMS business to Synnex Corp. in September last year for $505m. This bumped up Synnex Corp. to one of the top ten largest CMS BPO vendors by revenue at the time.

Then we had Convergys acquiring stream for $820m (an impressive 26.7 times expected 2013 EBIT) in January this year. This expanded Convergys’ geographic presence from being heavily weighted towards a U.S. client base, to a more balanced North America/EMEA split following the acquisition. This transaction propelled Convergys to become the second largest CMS BPO provider with revenues of ~$3bn. This deal had being in the pipeline for a number of years and represented a key milestone in the company’s multi-year turnaround that included the divestment of its Information Management business in 2012.

The big news as we move into the second half of 2014 is that the Essar Group is looking to sell off Aegis. Aegis is headquartered in Mumbai, India and operates 55 call centers in 13 countries with 55,000 personnel and 40,000 seat capacity. The company has a diverse portfolio with clients in the telecoms, high-tech, healthcare, BFSI, manufacturing, travel & tourism, and retail verticals. This potential transaction is a particularly interesting development as Aegis has recently closed the acquisition of Symphony BPO to expand its presence in Malaysia and has since increased capacity in the country from 1,000 to 1,600 seats. This move looks to confirm reports that the organization will look to retain its domestic APAC operations and divest its U.S. and offshore Philippines centers. Aegis’ domestic APAC operations account for ~45% of its revenues (~$360m). The Essar Group is reporting to be looking to raise ~$600m from the sale, approximately 136% of annual revenues.

Who might look to purchase Aegis?

There is a possibility that a private equity firm would pick them up, as happened with Aditya Birla Minacs (acquired by CX Partners and Capital Square Partners in January), and Atento (acquired by Bain Capital in December 2012).

What is more likely however is that a competing vendor will look to acquire the Indian headquartered firm. If we had to examine a few of the top CMS BPO providers:

With CY 2013 revenues of $1,264m, Sykes was one of the top 6 CMS BPO providers by revenue for the period. The companies EBIT of $53.5m (4.2% EBIT margin) for CY 2013 coupled with its $212m of net cash available could make it a likely candidate for this acquisition. Although following the acquisition of Alpine Access in July 2012 and its move to rationalize a portion of its bricks and mortar U.S. delivery, it is unlikely that Sykes would look to acquire Aegis’ sole bricks and mortar capabilities.

Sitel achieved CY 2013 revenues of $1.4bn although profitability is a key concern, the vendor is currently in the midst of a turnaround in order to address this (see also: Evolution of Outsourced Social Media Services) and is therefore not in a position to make an acquisition of this size.

Convergys is currently the second largest CMS BPO vendor by revenues although with its $820m acquisition of Stream this year an acquisition the size of Aegis is not likely to be on the cards.

Teleperformance achieved CY 2013 revenues of $3.2bn making it the largest CMS BPO vendors by revenue. The company achieved an EBIT of $265m (giving a margin of 8.1%), had a net cash position of ~$117m at the end of 2013 and also has access to further credit. The firm has also continued to reiterate its intention to acquire in 2014, something it has not done since January 2013 (TLS Contact). Of the top CMS BPO vendors Teleperformance is therefore the most able to take advantage of this opportunity and cement itself as the largest player in this market.

Having put an emphasis on social media, Sitel has become a leader in the delivery of outsourced social media services (NelsonHall, NEAT, Social Media Services 2013). Like any winning formula, the need to keep the service up to date is crucial, and it is doing this.

Sitel is in the process of changing the look and feel of the organization, now branding as a customer experience management provider, and categorizing its offerings into five areas:

• Engagement services
• Omni-channel services
• Cloud services
• Insight services
• Advisory services.

Sitel’s new social media service, launched last month, fits into the omni-channel services category, although aspects of it also creep into engagement, cloud and insight services. The offering is broadly split into two service lines:

• Social monitoring services: involves the analysis of trends, sentiments, and actionable opportunities and presents these to clients in a dashboard format. The majority of CMS BPO providers are now offering these services
• Social engagement services: agents interact with consumers to facilitate customer care, technical support and sales. A more advanced offering than social media monitoring, this is more differentiated, and is where Sitel is focusing.

So besides a change in structure, how has Sitel’s social media offering changed?

Sitel’s focus on this service has changed from mainly monitoring to active engagement, which now also includes lead generation and up- and cross-sell activities, something that was missing in the previous itineration of the service. Notably, Sitel has switched the core of its social media platform from Oracle RightNow to Lithium’s social media platform. One of the key drivers for this transition is the need to engage in close to real time as possible across social channels, something that the Oracle platform was not geared to provide, only updating its feed every 15 minutes; whereas Lithium uses twitter FireHose to update feeds in close to real time. The Lithium platform also offers a smoother transition to private messaging than Oracle, something that is key to improving response times and, of course, increasing agent efficiency. This platform now integrates in the same way as other channels in Sitel’s Intelligent Desktop. Sitel is now also the sole reseller for this Lithium platform. Given Sitel’s new structure now including cloud services, this indicates Sitel’s intention to also move into the SaaS market.

Sitel’s target focus for social media has also changed, from a primarily U.S. focus with a small degree of EMEA exposure to a much more balanced U.S./EMEA split. Two key signings that have dramatically ramped up recently include:

• A global media company looking to expand its multi-lingual social engagement throughout Continental Europe in support of its retail stores. FTE count has increased from three FTEs, initially conducting listening to 20 FTEs providing both listening and engagement
• A U.K. high street fashion retailer, for whom Sitel has increased its social media headcount from two last year to 25 currently. This number is set to grow further as Sitel rolls out a personal “concierge” or personal fashion advice service across twitter and Facebook later this year. This is something that has been proposed by many vendors, though there is little evidence of it actually been rolled out.

This development of its social media offering and its focus on cloud based and advisory services reflect Sitel positioning for higher margin services –profitability has been a long-term concern for the company. It’s still early days for Sitel’s cloud services, but its social media service is booming. While these services will not rectify profitability issues, they will certainly help. 

Growth in the English-speaking market & Asia-Pacific SBU was led by new contracts in North America, and China where Teleperformance has won business to support multi-nationals’ expansion in China, also domestic and locally based foreign government agencies in China. Teleperformance has been rapidly expanding operations in China, including through its acquisition of TLS Contact in January last year.

Ibero-LATAM was hard hit by negative exchange rates, turning moderate constant currency growth to a 6.4% negative growth as reported. The Brazilian real lost 20% of its value against the Euro while the Argentine Peso lost a staggering 40% compared with Q1 2013. Colombia, Mexico and Portugal reported the highest growth while the Brazilian business continues to experience reducing volumes, a reflection of Brazil’s economically challenging periods in Q1 and Q3 last year. Brazil is an important market to Teleperformance: all the delivery is domestic, and it has ~13,000 agents in the country, its fourth largest country operation, with nearly 10% of the global agent headcount.  The Brazilian economy is once again growing relatively strongly this year, 0.7% in Q1 2014 and expected growth of 1.62% in Q2 2014. However, much of this growth is due to the temporary GDP injection from the football World Cup starting in June; whether this will transfer into growth in the domestic CMS BPO market, other than temporary contract expansions during the tournament, remains to be seen.

Within the Continental Europe & MEA SBU, there is a return to growth in several Continental European countries including Italy, and three countries - the Netherlands, Greece and Turkey - which have benefited from a refresh of the sales force. The telecoms vertical in France continues to be a challenging market.

Teleperformance has reiterated its desire to acquire during 2014. It is looking to enhance its higher margin capabilities in developed regions such as the U.K. and U.S, probably including capabilities in automated services and e-commerce, with a possible foray into the paid-for tech support market.

Teleperformance’s 2014 EBIT guidance of between 9.5% and 9.7% is a major improvement from the 8.1% margin achieved in 2013. The firm is looking to exit some unprofitable contracts and focus on higher margin activities although recent contract activity does not indicate a big take up by clients as yet. Acquisitions undertaken from this point on in the year would be highly unlikely to dramatically shift margins in the time available. Topline like-for-like guidance for 2014 is more conservative then the company’s margin aspirations with growth of between 5% and 7% expected for the full year; this is a softening of what the company has achieved since Q1 2012 and indicates a shift towards margin expansions over out and out topline growth. 

This acquisition will give Webhelp a significant Dutch presence and will bolster its global agent headcount to ~21,500, and increase its annual revenues to €450m.

This announcement signals that Webhelp is continuing with its aggressive acquisitive strategy, aiming to become the third largest CMS BPO provider in Europe by 2015. Last year the firm:

• AcquiredHeroTSC in Februar
• Annunced its intentoin in September to invest £100m in further acquisitions in the U.K. over the following 24 months 
• Established a South African operation in Johannesburg and Cape Town.

South Africa is occasionally used to deliver offshore support to the Netherlands due to the similarities between South Africa’s native Afrikaans dialect and Dutch, but this is rare (accent differences). Webhelp has decided to establish onshore support in the Netherlands and use its South African centers to service U.K. and domestic clients.

Webhelp is clearly making progress in its ambition to become the third largest CMS BPO provider in Europe by 2015. Currently the company has ~18,000 agents throughout 37 centers supporting European clients and is the 2nd largest CMS BPO provider in France and the fourth largest in U.K.

Telecoms and media, Firstsource’s dominant sector (44% of revenues this quarter, around $56m), was the slowest growing vertical. The fastest growing was healthcare, with 15.8% y/y growth to ~$41m. This vertical was a contributor to the 17% growth in the U.S. Growth in the U.K. (15.3%) has been fuelled by the BFSI sector.

Attrition has decreased considerably in offshore centers in India and the Philippines (49.2% from 57.3% in Q2 FY 2014) and especially in onshore centers in the U.S. and Europe (33.8% from 47.4% in Q2 FY 2014); although these figures are still dramatically higher than its European and U.S. based peers. Attrition in its domestic serving centers continues to be a concern (92.8% from 85.6% in Q2 FY 2014).

Guidance for full FY 2014 remains upbeat:

• Moderate revenue growth fuelled by expansions from current customer management contracts, continued growth in the healthcare vertical and expected ramp up in BFSI collections
• Operating margin expansion of 150 to 200 bps, due to ongoing consolidations of low margin accounts, increasing efficiencies across business units, growth in offshore delivery and increasing collections business in Q4. 

This marks a turnaround for Arise after what was a difficult 2013 marked by loss of volume in some key contracts and delays in new signings. These hires will represent a 26% increase in headcount on Arise’s current network of 25,000 WAHAs. Arise is targeting topline growth of 20% and 30% this year.

So where is the growth coming from? Arise’s growth plans are both geographic and vertical in dimension

• Arise intends to add to its current geographies of North America and U.K/ Ireland through hiring schemes in Continental Europe, starting in France, Italy and Germany
• Arise is looking to penetrate the financial services industry in the U.K., where it intends to move up the value chain by offering services such as collections and claims query handling in the insurance sector.  Provided as an onshore WAHA service, this is significantly lower cost than traditional onshore CMS BPO. It will address security concerns through a combination of its proprietary security platforms which include data encryption, desktop lockdown, “thin” operating platform, multi-factor authentication and IVR data collection, with a client’s in-house security measures.

In the U.S. Arise is aiming to secure further deals this year in the healthcare industry for services including physician referral, survey handling, centralized scheduling, switchboard management, and complaints and grievance processing.

Over the last six months we have seen a marked upswing in the adoption of WAHA. Notable examples include Sitel's hiring of 400 WAHA's in December last year and Transcom's development of a WAHA delivery model; this announcement from Arise marks the single largest WAHA hiring by revenue to date. This hiring is also notable for the large number of agents hired outside of the U.S., traditionally the stronghold of WAHA delivery. As acceptability of this model continues to gain traction in areas outside of the U.S. it is likely we will see acquisitions of smaller WAHA specialists by tier-1 CMS BPO providers.

The purchase price of $820m represents ~80% of Stream’s annual revenues but an impressive (NelsonHall estimated) 26.7 times projected 2013 EBIT. Stream has been improving its margins this year on the back of acquisitive-led revenue growth: Q1-Q3 2013 EBIT margin was 3.1% (up 167 bps y/y). Convergys has also been improving margins, achieving a significantly higher EBIT margin in Q1-Q3 2013 of 6.5% (up 748 bps y/y). However, the company expects ~$0.35 incremental non-GAAP EPS within the first year.

Convergys funded this acquisition through $400m of cash, and $420m of credit, of which $150m from existing credit facilities.

The main drivers behind this acquisition incllude:

• Expanding Convergys’ geographic presence from being heavily weighted towards a U.S. client base (~85% of revenues). Stream has a large client base in EMEA and LATAM: when the acquisition is complete Convergys will derive ~20% of its revenue from these two regions, which currently account for just ~7%. Convergys expanded its geographic footprint in 2013 with the acquisition of Datacom’s contact center operation which expanded its presence in Malaysia and the Philippines. The Stream acquisition will involve the transfer of ~40,000 employees across 56 contact centers in 22 countries.
• Building Convergys’ capabilities beyond customer care support. Stream has established technical support and revenue optimization capabilities (enhanced in 2013 through the acquisition of LBM)
• Reducing Convergys dependence on three telco clients (currently account for ~47% of revenues; following the acquisition this client concentration will reduce to ~33%) an diversifying Convergys’ client portfolio in terms of vertical penetration. Currently telecoms accounts for ~62% of Convergys’ revenues with high-tech accounting for ~9%; the acquisition will increase high-tech to ~18% of revenue. And the high-tech sector presents possibilities for higher-margin CMS BPO services.

This is a key milestone in what has been a multi-year turnaround for Convergys. Since its divestment of its Information Management business in 2012; it has been aggressively taking out cost. This acquisition will help accelerate topline growth coming from a broader offerings portfolio with enhanced technical support and revenue optimization capability, and more global delivery capabilities that allow for multi-shore delivery, and improved language skills in LATAM and EMEA. This acquisition will result in a company with a well-rounded service line capability and an extensive global footprint with expected revenues approaching that of the current market leader Teleperformance.  

The purchase price of $820m represents ~80% of Stream’s annual revenues but an impressive (NelsonHall estimated) 26.7 times projected 2013 EBIT. Stream has been improving its margins this year on the back of acquisitive-led revenue growth: Q1-Q3 2013 EBIT margin was 3.1% (up 167 bps y/y). Convergys has also been improving margins, achieving a significantly higher EBIT margin in Q1-Q3 2013 of 6.5% (up 748 bps y/y). However, the company expects ~$0.35 incremental non-GAAP EPS within the first year.

While multi-channel is increasingly important, not all multi-channel CMS delivery is created equal. NelsonHall has identified three distinct multi-channel delivery models:

• Unlinked multi-channel, the most simplistic form of multi-channel delivery, entails delivery of a service in various channels by separate agents, with no connectivity between the channels
• Linked multi-channel; here services are delivered by different agents but they are able to view a customer’s lifecycle of interactions across all channels
• Unified multi-channel, the delivery of a multi-channel interaction by a single agent. As with the linked model, the agent has a complete view of previous customer interactions.

In 2014, we can expect to see a slowdown in the growth of the unlinked multi-channel model, but much greater growth of the linked multi-channel delivery model as a consequence of the increased focus of customer experience enhancement. This model is effective at delivering a better customer experience, greater conversion rate, and a reduction in customer churn for larger scale interactions. The telecoms and retail sectors will lead this adoption, particularly in support of customer care and up/cross sell strategies.

The unified multi-channel model will also grow during 2014 although at a slightly slower rate than the linked model. This model will continue to be used for lower volume, higher value engagements. While the adoption of this model is unlikely to match that of the linked multi-channel platform, due to its limited application in high volume engagements, organizations are recognizing the potential of this model for strategic applications. Some voice-only contracts are now being won and lost on a vendor’s ability to provide this unified agent model of delivery. Vendors who we see capitalizing on this include Sitel, Serco, Teleperformance and Sutherland.

Vendors offering wraparound desktops to adapt client’s legacy systems to multi-channel delivery will continue to lead the growth in the multi-channel CMS market during 2014. The majority of the leading CMS vendors will have launched their multi-channel platforms by mid-2014.

One of the key channels of this multi-channel CMS delivery model is social media. The growth of this channel during 2014 will be huge with growth outstripping any other area of BPO, albeit from a small base. The drive behind this adoption in 2014 will be the need for increased customer experience enhancement although social media will also increasingly be adopted for revenue optimization strategies. The high-tech, manufacturing and retail verticals will lead growth in the social media management BPO market in 2014. Manufacturing will continue to focus on using social media BPO for gaining market insight and competitor intelligence while the retail & consumer electronics sectors will use it for customer care and lead generation opportunities.

So what are the trends in global delivery?

Nearshore destinations have previously mainly handled voice interactions. We are now seeing these destinations also being increasingly used for non-voice services such as webchat, email and social media.

There is a seismic shift in the CMS BPO vendor landscape, with M&A activity leading to the emergence of two new heavy hitters:

• Concentrix’s acquisition of IBM’s CMS business will shift it this year into the top ten global CMS vendors by revenue
• Convergys’ acquisition of Stream will create a pure play CMS organization with annual revenues of ~$3bn, making it number two in size globally, behind Teleperformance. The deal has been in the pipeline for a number of years. The acquisition will bring together two well-performing organizations with complementary capabilities in terms of global delivery and offering portfolio which will result in a company capable of winning high-value, transformational contracts, including outside the U.S.

Looking at some other CMS BPO vendors who are ones to watch in 2014:

• Xerox continues to grow its European footprint with the imminent acquisition of Invoco, a German CMS vendor. And it is still only January! Expect to see further M&A activity in 2014: LATAM is a region of interest for several major players, both because of growth in the domestic market and also to serve the U.S.
• Sitel has made significant headway in addressing its profitability also in developing its multi-channel and social media capabilities. Holding company Onex has now held a majority stakeholding in Sitel for 15 years; given vendor consolidation, could this situation change in 2014?
• Transcom is still going through a transitionary period. The firm made divestments in unprofitable locations including Canada, Chile and France in 2013 and has begun to divest its credit management services division. In spite of these divestments, topline growth has been promising with Transcom averaging double digit growth over the last five quarters.

Much of the growth from this region is fuelled by demand from the domestic Brazilian market, as well as the continued high uptake of near shore support to the U.S. from the likes of Argentina, Mexico, Colombia and to a lesser degree Peru. Currently there is a degree of domestic support from Latin American countries outside Brazil although this is vastly overshadowed by support to the U.S. Teleperformance alone has opened six centers in Latin America during 2013, expanding current capabilities in Brazil, Colombia (2), Mexico and the Dominican Republic. Other major players such as Transcom, Atento and Convergys have also opened new centers in the region over in 2013.

How does support to the U.S. from Latin America differ from offshore U.S. support from the Philippines? The Latin American market is unable to compete with the Philippines for price but where Latin America does come up trumps is in Hispanic support, the ease of management of the region, due to close time zone matching and shorter flights, and the ability of agents to engage in a non-scripted environment.

The vast majority of support to the U.S. from Latin America is for customer care services distantly followed by sales and then lastly technical support.

Recent contract activity has highlighted the push for higher complexity, multi-channel contracts in support of the domestic Brazilian market and the near shore Hispanic U.S. market. In addition to the opening of further centers in the region, Teleperformance has established a social media center in Brazil. Aegis is another vendor with established social media presence in Latin America; although current uptake of social media outsourcing in the domestic Latin American is limited, NelsonHall does expect growth in this sector approaching that of EMEA and North America.

Most nearshoring to the U.S. market has been in support of the telecoms sector, Teleperformance has invested $22m in the construction of the two centers in Colombia. These centers are providing multi-channel customer management services to a large U.S. telco.

According to NelsonHall’s recent CMS market analysis, the top three major players in the Latin American CMS BPO sector, and market share are Atento (24%) then Teleperformance (11%), distantly followed by Teletech (2%).

Atento continues to be the dominant player in Latin America with a 40% market share in Brazil. Atento currently employs ~126,000 agents across Latin America with ~84,000 of these providing domestic support to the Brazilian market. Atento is currently providing a small degree of offshore support to Brazil out of Portugal representing a clear divergence from the standard flow of services between the two nations.

Teleperformance’s continued investment in the region is indicative of what can be expected in terms of growth and level of service delivery from Latin America. Investments have focused on the development of higher-end support capabilities such as social media, multi-channel interaction as well as R&D facilities.

As the region continues to mature, nearshored support to the U.S. and domestic support in Brazil will begin to replicate that of Europe with the emphasis placed on higher end delivery models increasingly driven by the need for improved customer experience as opposed to just cost reduction. The domestic market in the region outside of Brazil will continue to be driven by more commodity based services in the near term.

With Brazil’s growing population (currently ~199m) and increasing purchasing power (GNI per capita grew by 8.7% between 2011 and 2012) the domestic Brazilian CMS BPO market should continue to grow at a faster rate than the rest of Latin America. 

Sitel has split its sales team into two distinct groups:

• A business development team: main aim to sign new logos with a specific geographic and vertical focus
• Relationship management team (farmers): these sit in on the client’s operational meetings and work in a consultative role in order to both improve service delivery and drive higher margin sales.

Primary regions targeted, specifically due to higher margin potential, are the U.S, Australia, New Zealand, the U.K and Germany. Secondary regions of focus include Brazil and LATAM with the rest of EMEA simply aimed at maintenance of current volumes. Germany is mainly being served onshore although nearshore support from Serbia and Bulgaria is growing in popularity.

Following on from the sales restructuring program, current sales priorities, in descending order of importance, include:

1.      Expansion of existing business into open capacity in centers and WAHA (U.S.)

2.      New logo business into open capacity and WAHA (U.S.)

3.      Enter into new sites only in most profitable regions and engagements

4.      Create dedicated sites for multi-year engagements.

Sitel is driving its WAHA offerings. Currently the majority of WAH agents are based in the U.S, with a few agents in Canada and the U.K. Towards the end of 2013 Sitel is increasing WAHA delivery in the U.K. and Germany. Sitel piloted its WAHA model in 2008 with 50 FTEs this then increased to 600 FTEs in 2012 and currently Sitel has 1,100 FTE equivalents providing WAH services.

Sitel’s initial WAHA model was named Secure Plus and was solely a hub and spoke delivery model. Sitel noticed unfavorable NPS levels off this model mainly due to incorrect profiling of hires and migration of previously exemplary in center agents to a WAH who then didn’t deliver in this model.

Sitel is now restructuring and renaming its WAHA model to Secure, this will be a fully virtual model. Sitel is also changing its profiling of WAHA hires to agents of 35 years plus, college educated with at least ten years of industry specific knowledge. The aim of this is to offer WAHA as a premium offering with higher NPS levels and conversion rates. According to testimonials by a current emergency services client, this new WAHA structure is proving effective at delivering better NPS levels. Sitel is changing its training of WAH agents to a live video interaction with trainers using Adobe Connect. Secure will have an agent to supervisor ratio of 15:1. By Q4 2013 Sitel aims to have:

• Fully established its Secure WAHA model
• Fully deployed a BYOD model
• Established WAHA operations in Germany.

By 2014 Sitel aims to have:

• Developed and deployed its WAH agent portal

Growing WAHA by ~40% over 2013 figures

In another recent development, in July 2013 Capita was awarded a customer contact management services contract extension by Vale of White Horse District Council, part of a shared service with South Oxfordshire District Council. In this contract, Capita is taking a different approach to customer contact management. It is deploying kiosks in the council’s offices for visitors to use with one receptionist (real/not virtual) at hand should help be needed. A traditional appointment system will be available for visitors with more complex or urgent queries.

We have had automation and self-service in customer contact management, e.g. via phone (IVR) and web channels, for some time. We have seen the odd kiosk in council front-offices too - but always as an alternative to manned reception areas. These latest developments differ in a number of respects:

• Shanice brings a virtual presence and automation into the council’s real/physical front office
• The kiosk is the main customer interaction channel within council offices, no longer a 'nice to have alternative'.   

The evolution of self-service and automation was inevitable given advances in technology. However, adoption of these alternatives by local authorities that are typically risk averse, has been speeded up by budget cuts.

The willingness of councils to accept such alternatives under cost cutting pressures, gives suppliers a green light to incorporate more automation in their CMS offerings to the sector. Capita has already taken the kiosk approach. Other alternatives include a more sophisticated version of Shanice supported by a well curated knowledge-base that would enable it to go slightly beyond the basics to provide more detailed answers within the context of the visitor’s enquiry.