Travel and hospitality are among the fastest-growing CX services sectors in 2023, with the market recovering to pre-pandemic levels. However, while vendors and clients are trying to adapt to the increased demand, they face higher costs, changing customer requirements, and more IROPs.

In February, Conduent was awarded a CX services contract by Virgin Atlantic to manage rebookings and provide customer support, including flight changes and cancellations. I spoke with Conduent to discuss the recent win, their sector-specific services, and the market evolution.

Pedigree in travel

Conduent’s longest-tenured CX services client is a U.S. multinational full-service airline it has supported since 2005. During the pandemic, Conduent reorganized and scaled down the operation for the client to accommodate the demand drop, but since 2022 has been ramping up the support structure again to handle the increased volumes. Conduent also supports a vehicle rental company, cruise lines, and hotel chains. Outside of pure CXS, it has transportation business worth $750m annually (FY 2022 revenues), which includes managed services and technology for road tolls and charging, curbside management, passenger payment, ticketing, boarding, and travel safety solutions.

Conduent’s CX services include different types of passenger support and customer care, technical support, sales, retention, collections, and specialized LOBs such as lost luggage management and upselling and cross-selling of ancillary services. For example, Conduent launched a white glove service for a cruise line for the premium customer segment with delivery from Guatemala.

Strategic domain offerings

Conduent’s travel and hospitality CX services are built on three foundations: standardization of operations, employee development, and addressing seasonal fluctuations.

The first foundation is standardization of operations, CX technology, and operational models across the multishore delivery network. With many travel clients expanding through M&A, the requirement to standardize disparate processes such as WFM, technology environments, and results is a high priority.

For example, for a cruise company in 2013, Conduent consolidated its nine locations into three in the U.S., LATAM, and Europe. It then unified the multilingual CX for 12 markets in nine languages. It regionalized the support structure to facilitate client communications and enable full visibility of newly outsourced guest services. Conduent also leveraged CX analytics to track agent productivity and customer activity across channels. The vendor also took additional LOBs, including sales and loyalty, to improve bookings, upselling, and cross-selling. Since the program started, Conduent has achieved 34% savings with $1m annual efficiency gains and has increased CSAT by 3%.

The second foundation is employee training, development, and engagement. Conduent’s Customer Experience Management practice has ~37k employees, including ~20k in WAH; the company’s talent recruitment, onboarding, learning, engagement, and retention best practices are key to attracting travel brands. For example, Conduent cross-shares its talent management know-how with a hospitality chain for its captive and third-party suppliers. This model of a collaborative outsourcing partnership is becoming standard.

During the pandemic, travel clients wanted to maximize WAH and looked to Conduent to offer rollout experience and tools such as gamification and especially security. For example, for an international brand of full-service hotels and resorts, Conduent built a CX services team of ~700 agents within two months. It streamlined the training curriculum to enable agent ramp-up and augmented the timelines with flex trainers. It also implemented WAH capability management and scheduling to complement the client’s four locations. As a result, Conduent reduced agent onboarding time from one week to two days, the customer curriculum reduced training from three weeks to 11 days, hiring SLA improved from 45 to 30 days, while quality scores in learning exceeded the target. Conduent teams also surpassed the client’s sales conversion performance for agents with the same tenure.

The third foundation is the ability to address seasonal fluctuations, with travel and hospitality clients struggling to maintain their CX resources throughout the year. Conduent uses its contracyclical clients in insurance, tax, healthcare, and the public sector to allocate travel support agents to other programs during the low season. When demand returns, it can ramp up 3x or 4x times. This flexibility eliminates the reduction following volume fluctuations, shortens the lead time for new agents, and reduces recruitment costs. It also improves eSAT through better work variability, with Conduent measuring 90% positive agent feedback across travel projects. An example of scaling for the current demand surge is for its longstanding airline client: Conduent grew from 50 voice agents to ~800,  and in 2021 it recruited and trained ~1k chat agents.

Bringing full BPS capability to the travel sector

Conduent accepts operational optimizations and knowledge sharing with travel accounts as part of the larger client relationship. Sharing training expertise for improved proficiency in the client’s delivery ecosystem and customer insights leading to reduced customer pain points in the overall travel product can be the basis for winning additional business in other areas such as F&A, procurement, HR services, and automated document management. For its flagship airline client, Conduent delivers HR services such as workforce admin, payroll, health & welfare admin, and other back-office services, with the deployment of employee self-service and full automation of HR processes.

Next on the CX services development roadmap, Conduent sees new requirements from U.S. travel clients for regional and multilingual support overseas. The company plans expansions in Europe and APAC, for example, in Conduent’s center in Kuala Lumpur, which offers multilingual support in Mandarin, Japanese, Korean, and Thai. The company is also exploring using a gig work model with a partnership platform to address the peripheral demand in the travel sector.

The company expects travel brands to take advantage of CX transformation levers more broadly, such as conversational AI for call avoidance. These investments are the sector’s response to growing cost pressures and higher cost of capital. Analytics is another investment area in travel, to gather insights into opportunities for operational improvements. An example is Conduent’s work for the cruise line mentioned above, for which the deployment of speech and sentiment analytics during the COVID-19 outbreak protected revenue and customer loyalty. Conduent reduced call refund volumes with IVR tuning and decreased the call backlog by 75%. As a result, Conduent became the sole analytics services provider for the cruise line.

Further, travel clients look for consumer insights to identify patterns and drive sales and marketing campaigns as well as product development, such as new destinations. To provide these insights, Conduent is now spending more effort on call transcriptions and after-call work to map upstream and downstream optimization opportunities; for example, around payments.

ESG and eco-travel next on the CX agenda

The topics of ESG and employee experience (EX) are becoming more prominent in Conduent’s discussions with travel brands. Sector clients add more KPIs for employee retention and satisfaction by benchmarking the performance of outsourced versus captive operations. This hyperfocus on quality follows the logic of better EX driving sales measures of success.

Sustainable travel is another emerging topic, but so far has little material impact on CX services. Consumers are cautious about spending more on eco-travel, with West European markets likely leading in this niche. Conduent executives see this space as highly correlated to macroeconomic trends but consider it capable of driving the creation of new CX models and white glove services.

A common theme in the upcoming NelsonHall CX Services in Retail & CPG report is the increasing need by sector clients to generate and operationalize insights from their customers. Technology has shifted the power to consumers who are less loyal to brands and change their buying behavior more frequently, creating micro-segments.

However, while having a wealth of data such as customer feedback, retailers are often prone to sitting on them without interpreting and driving their transformation programs. Comdata’s VOC analytics and customer feedback service, ConsumerLive, aims to assist companies in the end-to-end management of customer insights and has implemented it for several retail clients.

ConsumerLive: platform & service combined

Comdata launched the ConsumerLive platform in 2012 with a French luxury brand looking to streamline feedback surveys in the front office and improve re-engagement with customers. Today, it is a cloud-based PaaS tool comprising:

• Customer and employee feedback collection with alerts on aggregated performance
• Real-time reporting and dashboards, and KPI monitoring with mobile app access
• Engagement module to contact customers directly and prioritize targets
• Data analytics with supporting market research resources.

The company combines the platform with consulting services, where it develops the business model and ROI, maps the customer journey, mines the data on an ongoing basis, and designs, programs, and executes the surveys. It has developed a five-stage approach to implement VOC programs, covering:

• Winning executive support
• Structuring the governance of the program
• Consulting on change management
• Prioritizing target customer segments and moments of truth in the customer journey
• Deploying automation such as semantic analysis.

As a best practice, it focuses initially on quick wins to demonstrate the relevance of the VOC program, and then develops business cases for more transformational initiatives.   

ConsumerLive integrates with client CRMs such as Salesforce through an interconnector, building a single database across platforms to centralize customer feedback with other KPIs.

Customer insights is the DNA of CX in retail & CPG

ConsumerLive has ~20 implementations, spanning 50 countries in Europe, APAC, and Africa in 25 languages, and covers both traditional contact center VOC and wider customer journey and brand analysis. The latter is a focus area, particularly in retail, where clients look to monitor the performance of their physical network and e-commerce omnichannel.

Retail and CPG clients usually want to verify initially that the right customer profiles are interviewed and that a certain conversion rate for the campaign is achieved. Next, they are interested in matching KPIs such as customers’ overall satisfaction or intention to revisit against target sub-segments or geographic markets. Sector clients also filter the free-form comments by different topics such as stock availability or staff responsiveness to identify areas for improvement.

Another requirement is to compare customer satisfaction against market averages or across their network, and drill down to the salesperson or contact center agent level. The mobile app enables store managers to see in real-time the store’s performance and manage their staff or re-engage with customers directly through the platform.

For example, for a French retail chain specialized in home improvement with 300 outlets in the country and ~6.5k employees, Comdata developed customer satisfaction questionnaires, deployed monthly scorecards per store, made the survey results available 24/7, and analyzed ~40k verbatim customer responses in real-time. The client has the main KPIs displayed in its headquarters and stores. Since the program start in 2016, Comdata has conducted 1m surveys over email and SMS with 100k responses, and has contacted ~12k dissatisfied customers.

Improving data mining and expanding to social media

On the roadmap for ConsumerLive is a data mining module to correlate historical information such as purchases against customer feedback, and predict customer satisfaction results. It has already implemented the predictive functionality with one client and is now looking to industrialize it with a separate module.

Comdata also wants to expand to social media feedback, bringing online posts to the customer view. It currently works with Trustpilot to publish part of the user responses on social media and continue with more details in a private survey. While a number of ComdataLive clients have tested new survey channels such as SMS and QR codes, all still rely on email surveys which bring the highest conversion rate and the most reliable results.

Customer insights the foundation of retail transformation

In a data economy, retail and CPG clients have significant needs to map brand and CX attributes which actually drive loyalty and quantify customer behavior trends. These insights are the first step to supporting future investments in phygital, experiential retail, or new models such as subscription.

NelsonHall’s CX Services in Retail & CPG market analysis report and individual vendor profiles are available to clients of NelsonHall’s CX Services program.

For many years, the telecoms sector has been the dominant market for customer experience (CX) services providers. However, over the last few years, consolidation, flat performance, decreasing margins caused by market saturation, new digital models and competitors, and unfavorable regulations (e.g. Eurotariff) have eroded the significance of the telecoms sector for CX services providers. Indeed, a common boast among CX outsourcing executives is their success in diversifying away from the sector.  

And now, the $26bn acquisition agreement between T-Mobile and Sprint, announced last week, looks set to accentuate that trend. If approved, the deal will leave only three national wireless players in the U.S. and will put further pressure on their CX services providers.

Decreasing share & focus on telecoms

The communications industry remains the largest CX services sector at ~24% of the market in 2017 (NelsonHall estimate), but for most of the leading CX services providers it has been steadily decreasing in the last few years, both as a share of business and in absolute terms, as shown here:

Major telecoms brands such as AT&T, T-Mobile, Tele2, O2, Telefonica, BT, Three, and Telstra remain the largest clients for many CX services providers. However, in times of fluctuating volumes, this telecoms top-heavy client base has adversely impacted several providers in their core markets, though typically the overall growth in other sectors has offset the steady decline in communications. Additional factors such as the high level of self-service, where the sector has been a pioneer, simplification of offerings and product ranges, and demand for cost savings through offshoring, have further impacted the size and profitability of the segment.   

Digital opportunities in other, high-growth industries

The telecoms sector has been leading in the adoption of emerging digital channels such as messengers, in the implementation of contact center RPA, and the use of customer-facing automation through bots. However, partially due to the sector’s success in adopting these digital models internally, and partly due to smaller innovation investment funds, many of the most innovative and largest-scale outsourced CX implementations have been in other industries; for example:

• Videochat and messengers support in the e-retail, banking, and travel sectors
• Contact center and back-office automation in financial services, healthcare, and energy & utilities
• Big data analytics for revenue generation in BFSI, e-retail, and consumer electronics
• Remote diagnostics and self-healing for tech support in high-tech and automotive.

Major tech players such as Amazon, Alibaba, Apple, Facebook, Google, JD.com, and Netflix have now reached the scale of outsourced CX operations previously seen only in telecoms. The added benefit for these companies is their global nature, being able to offer multi-market prospects.  

But evolving telcos can be very attractive clients

Nevertheless, the constant evolution of telecoms’ business models, exemplified by Vimpelcom’s new strategy to reinvent itself as a global tech company, or the recent M&A surge to create telco-media behemoths such as the proposed AT&T Time Warner merger, unlock new opportunities. A great example of telco evolution has been AT&T’s purchase of DirecTV in 2015, which consolidated the outsourcing network but also provided new markets and service lines for AT&T core vendors.

The shift to 5G and IoT and the evolving telco’s end-user needs require proactive support, heavy use of automation and machine learning in the contact center, and always-on digital engagement. All these are current investment areas for CX services providers and, even if not straight away, telecoms will eventually reap their benefits.    

NelsonHall’s pending Global CXS Market Forecast 2018-2022 report and self-service forecasting facility provide industry breakdowns by service line, sector, geography, and vendor. For access, please contact NelsonHall Client Services Director Guy Saunders

I recently attended HGS’ forum on the trends and challenges in CX for the European Consumer Packaged Goods (FMCG) market. In the company’s West London center, clients and prospects including Colgate, Danone, L’Oréal, Nespresso, Nomad Foods, and Mars discussed the ways customer service can drive ecommerce and augment sales.

Digital as a force for disruption and opportunity in CPG CX

As with other sectors, the CPG market is disrupted by digital economy newcomers using direct-to-consumer models via ecommerce. Added to a stagnant mass market, decreasing customer loyalty, and hybrid shopping, this environment increases the importance of good customer experience. HGS’ Lauren Kindzierski, VP of Solutions and Capabilities, highlighted several approaches to enable digital customer experience, which the company has implemented across different verticals:

• Activate proactive chat to counteract abandoned shopping carts
• Roll out mobile chat to increase accessibility
• Launch self-service resources to minimize costs and improve the customer support journey
• Use SMS notifications for immediate gratification
• Build predictive analytical models on chat to segment customers.

A best practice for the company has been to ringfence the launch of a digital channel around a single brand to optimize the processes and technology.

CPG companies are also moving along this digital roadmap, with examples such as Nespresso’s own mobile app which allows users to buy coffee capsules, machines, and accessories on the go; or Nomad Foods, which began by fixing its knowledge base before trying self-service, and is currently trialing webchat in the Swedish market.

CPG’s distinctive challenges with digital CX

In addition to the typical riddles of evolving customer preferences and rapid technological life cycles, CPG manufacturers have industry-specific challenges with the adoption of digitally focused CX. For example, the competition for digital placement, including from vertically integrated brands, can limit product visibility and even narrow online shopping lists to selected brands. At the same time, CPG companies must balance their relationships with retailers and the opportunities for direct sales.

Another aspect is ownership of the online customer experience on retailers such as Amazon, where customer issues can stem from products and service. A solution is for companies to use a tool such as Bazaarvoice to analyze reviews. A different set of challenges come from shared product control within the organization, with marketing and product development departments often not tapping into the insights accumulated in the customer service functions, whether inhouse or outsourced. In HGS’ practice, a great approach is to have the customer care team visit the manufacturing plants and share feedback with the engineers firsthand.

Enabling digital channels for Danone and L’Oréal

In 2016, HGS began supporting L’Oréal from its London office, providing customer care for L’Oréal brands for the U.K. and Ireland markets over mail, phone, webchat, email, and social media, where it listens, moderates and responds to users. Over the last two years, the client has gradually shifted ~33% of all interactions to chat, which has higher CSAT compared to voice. By implementing a feedback loop for updates of the website with insights captured in the contact center, the client lowered the complaints rate from 51% to 39%. On social media such as Twitter, Facebook, Instagram, and YouTube, HGS supports 14 L’Oréal brands ranging from ones centered on a teenage demographic to the premium segment. Immediate benefits of the channel are extended hours of operation, and more proactive management, with efforts now focusing on social network influencers.

Another example of the use of digital channels for CPG companies is Danone. HGS has been supporting Danone since 2014 in the U.K. and Ireland, providing customer care, level 1 and 2 technical support, and social media services. Based out of the London center and also with work at home agents, the program supports expecting and new parents with early life nutrition consulting on a 24/7, 365 basis. The team of midwives, a healthcare practitioner, nutritionists, and counselors with experience in child care and first aid cover multiple channels, including phone, proactive and inbound chat, email, and WhatsApp. A separate quality management team ensures the program is compliant with WHO regulations and with the brand’s own requirements for data control and marketing communications management.

The decision to enable WhatsApp came after marketing research with mothers identified it as a relevant channel across all demographics. In July 2016, HGS launched the channel, and within the first hour registered the first five chats. The service is set up to allow users to add Danone’s contact number and initiate the chat sessions. Users can also push images and videos to the agent and, due to the asynchronous nature, can stop and continue the session over time. WhatsApp volumes have already exceeded those of live chat, with lower AHT compared to webchat.

Advancing on the digital journey

For L’Oréal in 2018, HGS is looking to continue to increase its social media teams, is already piloting Sprinklr as the new social media platform, and is building upon the self-service capabilities. Together with the client, HGS is identifying processes suitable for the implementation of chatbots. The company did a trial in 2017 with a hair dye product line, with a chat avatar advising users on color choice. It is also looking to expand live agent support into social messaging. A major question here is between launching with WhatsApp or Facebook Messenger, with the latter already used by the client in France.

For Danone, HGS has recently switched its platform for WhatsApp, with improved reporting and contact management, and is now planning to pilot video conferencing to act as a triage service for healthcare inquiries. Another pilot is underway to replace mailed paper vouchers with e-vouchers. 

In April 2017, TeleTech acquired healthcare BPS provider Connextions for $80m. The acquisition makes healthcare the second largest vertical for TeleTech, expected to reach ~21% of their annual revenue at ~$300m. I spoke with TeleTech recently to discuss the acquisition and their focus on the healthcare space.

TeleTech’s Healthcare Business at a Glance

TeleTech’s healthcare clients include payers, providers, pharma and medical supplies, medical devices and wellness brands. The company supports these clients from 20 domestic, nearshore, and offshore centers and with ~10k associates, including work-at-home. The size of the support population has grown eightfold over the last four years, adding ~2k roles in 2016 alone, including 900 licensed agents to support Medicaid and Medicare open enrollment.

For the top U.S. healthcare plans, TeleTech offers services in consulting, platform design and integration, revenue generation, and member care services. With its long-term client relationship in the space, TeleTech provides enrollment, sales support, member services, provider, and dental and vision services, and wellness outreach. For example, on the consulting side, TeleTech has helped a healthcare payer redesign their training curriculum to reduce the training time and improve the speed to proficiency, bringing cost savings and being utilized by TeleTech staff and the competing vendor agents.

The Connextions Value Proposition

Connextions was part of Optum since 2011 and offers member acquisition, retention, and customer care services to healthcare plans such as Medicare, Medicaid, individual and group, healthcare providers, and pharmacy benefits managers. The acquisition added new logos for TeleTech to reach ~20 core clients in the sector.

The company gains ~4k agents across the U.S. TeleTech expects the deal to add approximately $115m in revenue annually and to be EBITDA accretive in 2017, bringing the total customer management services business to ~$1.2bn by 2018 from the 2016 level of ~$924m (total company revenue was $1.275bn). Connextions also brings its proprietary healthcare CRM bConnected with embedded workflows, HIPAA compliance and security features, and capability to send the caller a microsite with plans comparison. It also extended the services portfolio with healthcare financial member services, back office and claims support, and telehealth.

U.S. Healthcare is the Most In Need of Customer Experience Improvement

The U.S. healthcare industry is behind the leading sectors in customer experience, with customers facing a limited and complicated enrollment process, lack of visibility of benefits, and disconnected support for member services. TeleTech leverages its experience in other industries to identify opportunities for improvement in healthcare. For example, for a medical and health network in L.A., it provides a single hub for information with a unified phone number for patient access to the hospital, clinics, and doctors, with ~40-50 agents offering concierge level services by locating providers based on proximity and past performance.

The open enrollment for Medicare and the private healthcare exchange, which are inherently seasonal, require quick ramp up of licensed agents in January to facilitate the shopping experience and convert leads until mid-February when the period ends. To license an agent for all 50 states costs upwards of $5k, in addition to training. TeleTech addresses this challenge by placing licensed agents to other programs in the off season, offering a work-at-home model, and working closely with schools of licensing agents. As a result, it is able to scale and bring back experienced agents who require less time to train, at a fraction of the cost of a new hire, and have on average a 25% improvement in their conversion rate year over year.

Another approach is employing new channels and technology in the telesales process. For example, for a healthcare client, TeleTech deployed a private chat channel for outbound call agents to offer customers the option to connect on a mobile device or desktop PC and continue the interaction on the digital channel with co-browsing functionality to draw, highlight on the screen, and send documents. On webchat, TeleTech has added historical information for past interactions with the customer, e.g. time spent on the website, pages viewed, and plans selected – thus giving context to the agent. With these chat capabilities, TeleTech experienced an NPS improvement of ~10-15%, better conversion rate than phone sales, and an increase in self-service adoption.

Remote Support Opportunities & Wellness Outreach

The requirements for healthcare providers and insurers are moving gradually to a more comprehensive view of the healthcare experience with strong use of analytics and digital technology. For example, six months ago, TeleTech started a program to provide video support for patients discharged to their homes to deliver a decrease in readmission rates and improvement in patient satisfaction with their healthcare experience. The patient gets a tablet with a video call button directly connecting with an agent who can see the patient in their home and on the CRM platform carry out an inventory of their medications, vital signs measurements, and check on the patient status and notify a care team if required. Beginning with a dozen agents, the company is looking to combine the current onshore and work-at-home model with offshore support.

TeleTech is also looking to wellness outreach as a strong opportunity to increase the value of healthcare and close some of the gaps for healthcare customers. For several clients, it delivers medication adherence, which includes data analysis for gaps in maintenance medication, and engaging the member with a phone call to understand the issue and offer alternatives. In turn, the medication adherence impacts the 40 metrics forming the healthcare plan star rating.

Under this changing perception of the market, and empowered by senior executive support, TeleTech is actively pursuing similar opportunities for a more holistic approach to healthcare services.

NelsonHall’s principal Customer Management Services analysts take a look at how the CMS market will shape up in 2017, with predictions for CMS delivery & transformation from Ivan Kotzev, and industry-specific predictions from Vicki Jenkins.

1. CMS Delivery & Transformation Predictions

For CMS, 2016 marked a substantial shift in the global market. Several high profile acquisitions reshuffled the global top 10 providers. Client requirements shifted towards higher value, comprehensive customer experience offerings. There was continuing growth in both offshore and onshore centers, and entry into new delivery markets. And the ongoing advance of analytics and automation, both technology and application, further changed the front-office.

In 2017, several of these trends will proceed at a greater pace, while external factors such as political risks have the potential to disrupt growth plans in specific delivery countries or client industries.

Consolidation: more of the same, bigger

In 2016, most of the M&A activity in CMS was strategic growth. Delivery scale still matters, and in 2017 vendors will continue to buy market share and contact center seats. A steady trend towards transformational customer experience is forcing clients to narrow their list of CMS suppliers, pressuring vendors to grow their footprint in the U.S. and key European markets and offer a global service in APAC and LATAM. Likely acquisition targets include U.S. and Indian providers.

Development and targeted acquisitions of digital marketing capabilities

In 2016, CMS vendors bought analytics, automation, and industry-specific capabilities, but some of the newest targets have and will be in the area of digital marketing. The main reason for this is the greater blending of sales and support in a predominantly digital customer experience. In turn, this causes buyers of contact center services to spread further among customer services, marketing, and sales departments. As a whole, clients are more ready to look at the end-to-end customer experience, which requires pure-play CMS providers to offer digital services beyond just support.

Automation of the desktop and more examples of virtual agents

The current investments in desktop automation and next-best actions for the customer-facing agents are gradually spilling over to more verticals, more services lines, and hybrid and fully automated virtual agents over text channels. By the end of 2017, the majority of the global top 10 CMS providers will have at least one fully automated virtual agent implementation.

Investment focus on machine learning and NLP resources

This level of automation is based on machine learning and NLP resources which vendors will add aggressively in 2017, either through in-house team development or partnerships in the AI start-up space. Machine learning algorithm developers, predictive modelers in R, and language analysts, all with industry experience, will be even more highly sought after than in the last year.

Self-service will mature to a separate revenue stream, while support over messengers will reach N. American and EMEA customers more decisively

In 2017, CMS vendors will continue to make more than three-quarters of their revenues from voice channels but, driven by client requirements, self-service will develop to a key channel in their offerings.

The new year will also finally deliver multiple outsourced support examples over Facebook Messenger, Viber, and WhatsApp for N. American and European customers.

Political risk will replace security concerns as the biggest external threat to the industry

The plans of the new U.S. administration for the healthcare sector, the Brexit terms, and the policies of the Prime Minister of India and President of the Philippines have the potential to disrupt entire delivery markets and industry sectors making multi-shoring, diversified vertical portfolios, and FX hedging vital.

Conservative growth

NelsonHall predicts 2017 year-on-year global CMS market growth to be ~4.5%, with factors such as increased adoption of digital services and stress on improved customer experience to drive demand for higher value services and revenue generation service lines, while automation and self-service will cannibalize part of the revenues.

2. CMS Industry-Specific Predictions

Retail Banking

• Use of RPA and cognitive technologies will increase, initially in support of agent assistance. Automation will be utilized in the front office, reducing cost and improving interaction turnaround times. RPA and cognitive also impact processing services, e.g. facilitating speed of origination for banking products
• Revenue generation will continue to increase in importance as a driver of CMS in the retail banking sector, driven by use of analytics and cognitive technologies, though cost reduction and the need for increased CSAT will continue to be key drivers for retail banking CMS
• Voice interaction will remain high due to the complexity of many retail banking interactions, though there will be a reduction over the next few years due to deflections to webchat. Email will continue to be used for sharing of documents. Social media and video chat will increase in importance.

Retail & CPG

• Revenue generation will continue to increase in importance as a driver of CMS in the retail and CPG sector. CMS will increasingly be used in support of proactive sales and enhanced two-way communication with customers
• Customer retention will continue to be a major focus for retail and CPG organizations, and loyalty program support needs will grow
• Webchat and social media will overtake email in channel usage, and website content, including video, will become a more integral part of service delivery
• Analytics usage will continue to grow, along with the need to better understand buying patterns, with AI beginning to be incorporated into service delivery.

High Tech

• Increasing CSAT, cost reduction, and process improvement will remain primary drivers of CMS in high tech, and revenue generation will increase in importance through paid technical support programs, to service out of warranty and out of warranty scope customers
• Customer retention will increase in importance as more high tech clients offer VIP and white glove customer care to customers, and the high tech sector continues to grow competitively. Cost reduction will increasingly be driven by ensuring that only complex calls are routed to highly skilled technical support agents, while less complex calls are routed to level 1 agents
• As high tech organizations increase adoption of video chat, the channels will shift and customer experience will be enhanced; customers will be able to show agents complex issues they are experiencing, and will be provided with faster service which is more likely to resolve issues in the first call. Video chat and online ‘how to’ videos will also reduce expensive truck rolls. Analytics and video chat will increase in use, to aid efforts to reduce product returns
• Risk-reward models will increase in use, particularly in sales/renewals of subscriptions.

Vicki Jenkins is NelsonHall’s lead analyst for industry-specific CMS markets, and Ivan Kotzev is the lead analyst on CMS delivery and transformation. To find out about NelsonHall’s extensive research plans for CMS in 2017, contact Guy Saunders.

EGS is a portfolio company managed by One Equity Partners (OEP), a middle-market private equity firm. Post EGS acquisition, Alorica will employ over 91k people in 154 locations across 16 countries in five continents. Lee will be CEO and Chairman of the new organization, based in Irvine, California. He will also be the majority shareholder. The companies expect to complete the transaction by early Q3 2016. The purchase price is not being shared at this time but Alorica plans to release this information over the next few months.

Lee founded Alorica 16 years ago with $10k and a vision. Fast forward to 2015, and Alorica had beome a $1.2bn company with the West Corp. Agent Services acquisition. And with EGS, Alorica will be generating ~$2.3bn in global revenue, behind only Teleperformance and Convergys as a pure play CMS BPO provider. In CMS BPO, scale is critical; clients want fewer partners, for one. By acquiring EGS, Alorica also avoids becoming a consolidation target.

Beyond the increased scale:

• EGS will expand Alorica’s healthcare sector business, reducing its dependence on the communications sector (currently its largest sector, accounting for ~28% of global revenues), healthcare, media/entertainment, financial services, and retail. It is also looking to grow its business in the technology, energy/utilities, travel and hospitality sectors. Alorica supports payers, providers, PBMs, pharmacies, and (to a small extent) medical device companies, providing primarily customer care and technical support services. EGS brings a number of healthcare industry accounts and pharmacy business. Alorica’s healthcare business currently represents ~9% of its total company revenue; it anticipates that this will increase to ~14% post-acquisition
• Alorica will benefit from the EGS collections business which will be branded under Alorica Financial Care. The focus will be first-party collections in the 30 to 90 day time period
• EGS also brings in some customer analytics capabilities offerings.

Just over a year ago, Alorica doubled in size with the acquisition of West Corporation’s Agent Services. The integration has been smooth, and Alorica claims that it has not lost any of the clients it obtained from West. One of the lessons learned from that acquisition was the importance of not over burdening its operations, HR, technology, and communications teams with integration work. With the EGS acquisition, it will have personnel dedicated to the integration, supported by McKinsey consultants.

Alorica and EGS have a limited delivery overlap. The network IP will be Alorica branded. It took one year to integrate West Corporation’s Agent Services business and the same amount of time is anticipated for the EGS integration.

Client overlap is 10-12 clients, from the communications, retail, and technology sectors. Post-acquisition, Alorica will serve ~600 clients, supporting ~30 languages. It will employ 52k people in North America (including 6k work at home agents), 26.3k in the Philippines, and 11.8k in Latin America.

EGS is Alorica’s second key acquisition in two years. In integrating West, it has learned to manage business integration smoothly, handle significant growth, and retain clients. Far from being a consolidation target, Alorica is becoming a consolidator.

One year on from my chat with Andy Lee, it’s good to see a leader articulate a clear goal and successfully lead a team on the road to making it a reality.

Postcript: This deal was completed on June 30, 2016.

The report also reveals how voice interactions are increasingly being deflected to non-voice channels, primarily webchat, by high tech organizations. Complex interactions tend to remain in the voice channel, though some high tech organizations have moved entirely to a digital, non-voice, customer care and technical support framework. High tech organizations are experiencing reductions in product returns as a result of utilizing video chat and online videos for product installation. 

The report identifies the following shifts in channel usage for outsourced CMS in the high tech sector between now and 2020:

• Voice/IVR usage decreasing from 87% to 65%
• Email decreasing from 23% to 15%
• Webchat increasing from 17% to 33%
• Social media increasing from 5% to 15%
• Video chat increasing from 1% to 10%.

The scope of outsourced CMS activity in the high tech sector has moved beyond customer care and retention, technical support, and collections/credit management, with increased emphasis now on revenue generation through paid-for technical support, analyzing end-to-end processes to reduce product returns and truck rolls, and enhanced installation support.

The report shares a variety of case examples quantifying how CMS vendors have delivered the benefits sought by high tech organizations from outsourcing. It also includes details of the current and future shape of CMS in the high tech sector, outsourcing drivers, vendor delivery capabilities, channel usage, market size and growth, and critical success factors.

‘Targeting CMS in High Tech’ is now available, along with a NEAT vendor assessment tool which enables sourcing managers to assess and compare the performance of vendors offering CMS services to high tech organizations. For more information, please contact Guy Saunders at [email protected]. You can also view a brief video with highlights from the report 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.

Founded in 1993 and headquartered in Jeffersonville, IN, Accent has 2.3k employees and delivers services from six locations in the U.S. and Jamaica. It has 18 clients in the telecoms, technology, retail, financial services, and consumer products sectors. Current annual revenue run rate is ~$67m, hence the $16m purchase price indicates that it is not a profitable company.

The acquisition is expected to close by the end of May, and STARTEK expects the majority of the integration to be completed by year end 2015. With the addition of Accent, STARTEK will have ~50 clients and ~14k employees operating in five countries.

This is an important acquisition for STARTEK. Not only will it broaden its client base and sector mix, it will reduce its heavy dependence on the telecoms sector, which has accounted for ~80% of total revenues, and where it is exposed to vendor consolidation and reduced contact center volumes in the industry. Just three clients (T-Mobile USA, AT&T and Comcast) account for nearly 60% of global revenues, and in Q1 2015 STARTEK was impacted by a 30% revenue reduction from AT&T. STARTEK has been close to bankruptcy several times in the past four years, and has had to close several of its call centers, most recently in Oklahoma and Costa Rica.

The acquisition will boost global revenues by around 26%, and enhance STARTEK’s omni-channel customer engagement offerings. Accent’s customer engagement agency model will complement and enhance the analytics capabilities gained with the acquisition of Ideal Dialogue in 2013.

STARTEK has clearly been focused on diversifying its client base, having signed $10.5m of new business in Q1 2015 across clients in healthcare, financial services, and consumer products. However, it is the acquisition of Accent that will be the key determinant of STARTEK’s future success as it looks to shake off its dependence on the telecoms sector.

In total, 24 languages are supported, and the center is able to draw upon London’s rich cultural mix to recruit students and recent college graduates with broad language capabilities.

In the government sector, HGS runs a multi-channel helpline for the U.K. Visas & Immigration department, supporting people in 222 countries in 21 languages through voice, e-mail, webchat, and self-service. It provides customer care as well as market insight and reporting for this client.

In the automotive sector, HGS agents utilize video chat in addition to traditional channel support such as voice, e-mail, webchat, and social media, to provide sales and road-side assistance to the European and Middle Eastern divisions of a luxury automotive client. HGS has found that customers consider webchat to be impersonal, and is planning to extend the use of video chat beyond the client’s U.K. customers to Europe over the next year.

The Chiswick center supports several bespoke client programs that go beyond traditional customer care. For example, HGS is conducting on-site product testing as part of complaint handling for a global client in the CPG sector. In a recent instance, HGS tested one of the client’s consumer products (bottled bleach) in order to determine whether the product cap was defective as part of a customer complaint; on this occasion it was able to establish that the product was not defective, though tests on other similar products have necessitated changes to product packaging in the past. HGS is at liberty to recommend product changes, replace damaged items for the client’s customers where warranted, and send the customer complimentary products based on inconvenience caused.

HGS is supporting Danone U.K., a provider of early life nutrition, water, and fresh dairy products, with customer care by providing nutrition and health information to new parents. The care is provided through voice, email, and webchat, with plans to provide video chat support within a year. HGS supports this client through a 30-strong agent team which includes five qualified midwives and nutritionists. It also has a group of agents with experience caring for children, handling complaints, and providing out-of-hours support for the early life nutrition line.

In the healthcare sector, HGS is supporting a healthcare provider, Virgin Health, that offers parents the ability to have their babies’ stem cells collected at birth and stored, preserving them for research and potential treatment of serious illnesses. HGS is involved in the entire process, from initial inquiry to stem cell collection to the final checks which take place six months after the birth of the child. HGS coordinates the work of medical professionals, arranges the distribution of the collection kits to hospitals, and organizes the delivery of collected samples to the storage unit. This program has multi-lingual capabilities as it supports customers in the U.K and the Middle East.

The HGS Chiswick center is a good example of a vendor effectively leveraging the language diversity and high education standards of a location to offer strong multi-language, multi-country, and multi-channel support, and to develop bespoke support programs that add value to the customer relationship.

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.

Alliance Data's Epsilon division has ~$1,5bn in revenues; Conversant has ~$600m. 

Alliance Data is acquiring Conversant to enhance its Epsilon business. Epsilon generates revenues primarily from labor based, offline: data acquisition, analysis, and marketing services. Conversant generates revenues primarily from automated processing, on line: data acquisition, analysis, and marketing services. Alliance Data believes that Conversant is in a faster growing segment of its market, with solutions that provide higher operating leverage. 

Each company brings technology capabilities which will be integrated after the merger. These capabilities include:

• Conversant:
  • In-house data set combined with client acquired data 
  • CommonID, which identifies an individual consumer across multiple devices (e.g., desktop, mobile, tablet) and channel
  • Ability to dynamically send personal ads to the correct device ant the correct time
• Alliance Data: Agility Harmony, a digital messaging platform with the artificial learning and analytics to inform a digital marketing campaign, combined with the ability to manage and execute a digital marketing campaign.

The acquisition will provide more purchase data (from additional channels including: display, mobile, and video) to put through Epsilon's marketing analytics platform, Agility Harmony. The increase in data throughput will develop greater insights by Epsilon into consumer behavior. Conversant also brings a greater number of clients to Epsilon, to whom Epsilon hopes to sell additional services. 

Conversant is an excellent acquisition for Alliance Data. The ability to engage consumers across multiple channels and devices, while also maintaining identity awareness, is not generally available today. Most of today's on-line marketing organizations are facing consumer push back and brand deterioration the more they continue to make identity errors and push the wrong offerings, to the wrong people, at the wrong time.

Alliance Data is also aware of its limitations. It intends, according to its CEO Ed Heffernan, to continue to pursue opportunities in niche markets rather than take on major payments vendors in major markets. Its specialty areas include:

• Geographic: Canada and Brazil
• Industry: travel, SMBs, and specialty retail

Successful integration of these two offering sets will create a unique database of transaction level data in some of the fastest growing, high margin markets in consumer buying. As long as Alliance Data can successfully integrate the two cultures, the businesses should succeed. It is a good sign of what the Conversant management thinks about the merger that the CEO of Convergent will tender his shares for all Alliance Data stock (not taking the cash option). 

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. 

• Revenue £4,288.1m up +5.6%, up +6.7% at constant currency (CC)
• Operating profit was £143.8m, a margin of 3.4%, down 330 bps

The decline in profits was anticipated with a warning given by the company to this effect only a few weeks ago. In this period, Serco reported a net exceptional charge of £90.5m, reflecting principally the Electronic Monitoring settlement and one-off costs, together with an estimated £21.0m of other indirect costs in relation to the UK Government reviews.

As forecast by the company in its H1 announcements, growth slowed down, in H2 2013. In fact it halved.

Contract wins in H2 2013 included an ITO contract extension for the EU and an FM contract with the Canadian defense. But BPO contract wins completely dried up in H2 2013. This perhaps reflects the problems of Serco’s Global Services division which was most impacted by the electronic monitoring debacle, reporting -350bps decline in operating margin.

Serco admits that clients did not want to talk to it until the issues had been resolved. New contracts have started to come in once again (such as the Lincolnshire Council contract) since Serco settled the matter with the U.K. government.

Apart from the MoJ expenses, divisional margin came under pressure from upfront expenditure on existing contracts. These included:

• A ~£15m working capital investment in transformation for Shop Direct in 2013 and further anticipated but smaller outflow in 2014. Returns are expected to begin from the contract in year 3 (FY15).
• Suffolk Community Healthcare redundancy cash costs of c£5m; no effect expected in 2014.  

It has not been an easy year for Serco in some of its international businesses either. In Australia, a change of government and policy has resulted in revenue attrition in its contract with the Department of Immigration and Citizenship for which Serco runs a number of detention centers.

In America, the outlook remains uncertain due to Federal funding challenges around programmes and contracts, but Serco has won a number of new contracts in the region, including the $1.25bn 5-year federal Eligibility Support (ES) contract by the United States Department of Health and Human Services' Centers for Medicare and Medicaid Services (CMS) but this is likely to be at relatively low margin.

Serco has done well to achieve topline growth despite its annus horribilis. 2014 will be a year of repair and rebuild for Serco. The new CEO, Rupert Soames, and a number of new non-executive board appointees, are likely to go to start with a major review of the business. Serco's strategy of diversification should help with this activity, providing it with a broad set of options for rebuilding the business.

Serco has updated its guidance for 2013 and 2014 following its clearance by the U.K. government to bid for new contracts.  Serco expects a mid-single digit percentage organic decline on 2013 revenue due to:

• Lower levels of incremental work won across the group to date
• Attrition from contracts lost such as electronic monitoring
• Volume reductions in its Australian immigration detention services contract
• Assumptions as to the extent to which it will be successful in securing further rebids and extensions as well as new bid opportunities during the year
• Adverse currency movements in 2013.  The impact of this has reduced revenues in 2013 by ~£50m and profits by £8m.

Adjusted operating margin is anticipated to decline by ~50 to 100 basis points on 2013 due to greater than previously envisaged margin reduction resulting from the revenue impacts described above, and the incremental costs of the agreed corporate renewal programme.

Serco's ongoing portfolio management resulted in further non-core disposals in 2013. These businesses contributed £43m of revenue and £7m of profit up to the point of disposal last year and will not contribute to revenue and profits in 2014.

In 2014, Serco expects:

• Continuing additional costs of £10m a year related to the corporate renewal programme within its adjusted operating profit
• One-off costs incurred in 2014 of ~ £15m for external advisers and other directly-related costs of programme implementation, including initial training and systems set-up
• A further restructuring charge estimated at £10-£15m will be incurred in 2014 to implement reductions in headcount and related costs.

Market consensus for 2014 Adjusted operating profit is currently £277m but Serco anticipates a result that could be 10-20% lower than this for ongoing activities, on a constant currency basis.

The profit warning came on the same day that Serco announced clearance by the U.K. government to bid for new contracts. Serco announced that it expects a mid-single digit percentage organic decline on 2013 revenue due to a number of factros including:

•     Lower levels of incremental work won across the group to date
•     Attrition from contracts lost such as electronic monitoring
•     Volume reductions in its Australian immigration detention services contract.

Adjusted operating margin is anticipated to decline by ~50 to 100 basis points on 2012 due to greater than previously envisaged margin reduction resulting from the revenue impacts described above, and the incremental costs of the agreed corporate renewal program.

In 2014, Serco expects continuing additional costs of  up to £40m related to the corporate renewal programme, external advisers and further restructuring.

Market consensus for 2014 adjusted operating profit is currently £277m but Serco anticipates a result that could be 10-20% lower than this for ongoing activities, on a constant currency basis.

Serco's financial woes have been compounded by a change of Government in Australia, its second largest market. Tony Abbott, the new prime minister, has pledged to stop the flow of boat people into the country by shifting the work to overseas centers. This has resulted in a decline in volumes in the detention centers that Serco manages under contract for the Department of Immigration and Citizenship.

On another front, in January, Serco's health provision in Suffolk was criticized after a four-month NHS review found services were being provided safely but improvements were needed. The areas for improvement were reported to include staff morale, recruitment and retention, communication with GPs and commissioners, equipment stores and procedures at the Ipswich care co-ordination centre.

Serco has been implementing a major corporate renewal plan as part of its negotiations with the Cabinet Office. As well as extensive management changes, and a renewed and refreshed code of conduct and governance, Serco has committed to creating a  separate division for its U.K. Central Government work to increase focus and openness for Government as a collective customer.

Other key measures include:

• Enhancing transparency and access, with reporting of operational and financial contract KPIs, and greater engagement of customers at contract and departmental level.
• Establishing formal Ethics Committees and Ethics Officers in each division, accompanied by the redesign of its whistle-blowing process to the highest international standards
• Measuring the progress of attitudinal change throughout the organization with ongoing independent culture and ethics reviews.

Looking at signings:

• Full year 2013 signings were up 20%, with BPO and ITO renewal rate at 92%, above the target range of 85% to 90% and 7 points higher than 2012. And new business signings was up 9% in BPO and up and up 23% in Document Outsourcing (DO)
• In Q4 2013, overall signings TCV was flat y/y with fewer renewal opportunities in the quarter, though renewal rate was a strong 92% and new business signings were up 5%. For BPO, TCV of signings in the quarter was up 20% y/y, with strong growth in healthcare payor, healthcare provider, F&A, and Europe (the latter presumably driven by recent M&A activity in Europe). However, TCV of DO and ITO signings were down. In its ITO business, Xerox is focusing on executing on some large deals and improving margin.

Revenue growth in Services (DO up 4%, ITO up 2%, BPO down 3% in Q4) has decelerated, as expected. BPO revenues had a 1.5% impact from the student loan contract run-off. And Xerox has not had the benefit of acquisitive growth, which has traditionally contributed 2%-3% of Services revenue growth (under the former ACS model).

But Xerox continues to be challenged in its attempts to improve Services operating margin, once again lower than planned. As late as November 2013 (half way through Q4), in its investor conference, Xerox was guiding on achieving full year 2013 segment margin of 9.8% to 10% for Services … in fact, it achieved 9.76%, just getting into the bottom end of this. And it missed guidance for Q4: segment margin was 9.6%, below the targeted 10%.

Management acknowledges “although (margin decline was) driven by known issues, this is an area where we need to make more structural progress”.  So what were the contributory factors for the 160 bps y/y decline? The following factors have been given as major factors contributing to the y/y decline in Q4:

• The student loan run-off, which had a 60 bps impact on segment margin – but this was not an unforeseen event!
• Unforeseen extra expenses on healthcare platform contracts (MMIS, also healthcare exchanges), where Xerox allocated additional resources to projects. Given the newness and complexity of building a Healthcare exchange, and the challenge of doing so within a tight time constraint, one cannot fault Xerox for taking action to avoid the type of debacle seen in the federal exchange project. Having to do so also on MMIS projects indicates longer standing execution issues
• Slower than expected ramp ups in wireless customer care, leading to volume pressures. It is not clear whether this is delayed or lost work.

This is the third quarter of sequential margin decline, and in a year when Xerox said it was increasing its focus on improving profitability of Services. Services segment margin has now declined every year since 2010. Xerox is now guiding on a margin improvement of 50 basis points in 2014, with this improvement becoming evident in H2 “as near-term margin pressure dissipates and the impact of our margin improvement actions accelerate” Q1 2014 margin is expected to be flat y/y, at around 9.3%.

In the November investor conference, Xerox outlined a five plank strategy for Xerox Services. Some of the initiatives to improve margin – for example further offshoring – are initiatives that the former ACS was talking about even before its acquisition by Xerox.

Xerox needs to demonstrate in 2014 that it is getting a firmer grip on improving profitability of Services, ideally with no more unexpected expenses.

Acquisition spend in 2013 was substantially below the plan of $300m to $500m for the year. The $60m Invoco acquisition closed in January. In 2014, Xerox expects to spend up to $500m in acquisitions (including Invoco). A focus of recent acquisitions has been expanding its customer management services BPO capabilities in Europe: will we see in 2014 acquisition activity that brings in IP in other areas of its portfolio?

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. 

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:

• Its revenue has more than doubled (from £1,081m full year in 2003 to £1,891m in H1 2013 alone)
• The share price has increased by > +316% over the last 10 years, compared with the FTSE (>+52%).

Pindar leaves the company in good shape, with:

• £2.9bn of major new contract wins so far this year
• An anticipated organic topline growth of 8%
• An operating margin that is expected to stay steady at 12.5% to 13.5% for the foreseeable future.

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.

Business rationalization and expansion will be a tougher nut to crack. Organic growth cannot deliver the overall growth required to grow revenues and margin at acceptable rates. Xerox will need to acquire, but any large acquisition program will incur failed acquisitions. Xerox intends to keep the damage down by acquiring businesses at low prices, which is likely to cause it to miss big wins, but avoid big losses.

Finally, culling businesses (such as the student loan processing business, which is shrinking fast and reducing margins because overhead has not shrunk as fast as revenue) will be necessary for Xerox services to focus on its winning businesses. It is not clear anyone would want to buy the student loan processing business, making a cull impossible, and downsizing the only option. Xerox will need to focus on segments of its financial services BPO business that can be grown rapidly to offset the shrink in the student loan part of the financial services business. Other sunset businesses will have to be handled the same way if there are no bidders.

Xerox will succeed at bring its services operational performance up to its operational expectations, but it will take 3 years to accomplish.