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.

CSS Corp’s roots are in supporting the high tech sector, and while its focus remains on high tech, it is positive to see it branching out to closely aligned areas such as consumer electronics, retail, and telecommunications.

CSS Corp has two business units for its technical support services: enterprise and consumer, both primarily providing level 1 technical support, with some level 2 and 3 support. The consumer technical support business also includes an element of up-sell and cross-sell, and the company also has a small number of agents providing level 4 technical support.

When NelsonHall attended this conference in 2014, CSS Corp was developing a mobile and desktop application Active i to allow for easier consumer use of premium technical support. It had launched its Active Insights suite which includes real time feedback of findings to a client facing dashboard, support of voice to text analytics and machine learning, predictive analytics and performance management, and voice and video analysis. Currently, it has two clients using the full Active i suite. 

CSS Corp continues to focus on analytics, launching its new analytics offering, Analance, during the conference this year. This offering uses structured and unstructured data to drive real-time feedback and simplify the customer experience. It recently signed a multi-year contract worth several million dollars for the use of cloud and analytics insights, which Ramesh believes will position CSS Corp as a key player in the market. 

CSS Corp continues to aggressively market multi-device, white-label paid-for premium technical support (PTS). It is piloting an ‘Internet of Things’ (IoT) PTS contract with a networking client, and this technical support add-on service is an important part of its growth strategy. Its PTS platform integrates proactive support.

CCS Corp is looking to grow its PTS offering in the following ways: 

• By partnering with OEMs to grow its technical support and premium technical support services. In Europe and North America it plans to partner with point of sale manufacturers (retailers) and carriers, to get paid technical support bundled with the device when sold
• By providing support for all devices sold by OEMs
• Through platform manufacturers, to integrate devices (develop products on platforms/use common protocols)
• Through partnerships with retailers and carriers, to provide premium technical support for all devices purchased from a store/carrier, as one ecosystem, in an effort to support the entire smart home.

While many vendors are focused on supporting the entire smart home, CSS Corp is slightly ahead of many of its competitors for its focus on platform manufacturers as well as how it plans to partner with point of sale manufacturers to get paid technical support bundled with the devices when they are purchased. 

CSS Corp is putting a lot of emphasis on its analytics offering to enhance customer experiences for its clients’ customers, including piloting video submissions of trouble tickets with a high tech client (with customers submitting a video recording online in an effort to better explain issues to agents). It is also looking to use video support to assist with installation needs, which it plans to offer in future once a pilot has been secured. Instead of providing a generic video, agents will be able to provide support by having access to the same device as the customer in an effort to show how to install the product through a personalized video for the customer, and answer questions in real-time. The use of video communication puts CSS Corp ahead of the curve among many of its peers as it works to simplify the customer experience – though many of them are considering it to support high tech clients, they have yet to take action.         

Company background

CSS Corp is a private company headquartered in Chennai, India. Currently, it provides technical support for enterprise and consumer products, manages IT infrastructure, provides remote infrastructure support including mobility solutions and cloud enablement, and provides carrier network support. It has ~5.5k employees across four continents, has 13 delivery locations, and supports 25 languages. NelsonHall estimates CSS Corp’s CY 14 revenues to be ~$220m, of which ~90% is from U.S. based clients. Last year, it began focusing on growing its business in EMEA.

In March 2015, privately held Alorica acquired West’s Agent Services business for $275m in cash. In 2014, the Agent Services business generated ~$580m in revenue. Alorica anticipates $1.2bn in combined revenue for 2015, making it a top 10 CMS player globally.

West will continue its focus on the healthcare sector, and on analytics and technology, retaining its specialist agent services businesses, Health Advocate (a health plan advocacy services provider which utilizes agents, purchased in June 2014 for ~$265m), and its business-to-business, and cost containment services.

Alorica’s acquisition of West’s Agent Services business will:

• Expand its services offering, adding receivables management and direct response, outbound business, and consumer sales services
• Enable it to enter new sectors including healthcare, utilities, and government, and enhance its presence in the communications, retail, travel, financial services, and consumer products sectors
• Increase its delivery capabilities: Alorica will gain ~25.3k employees from West’s Agent Services business, of whom ~1.5k are nearshore (Jamaica and Mexico), ~5.4k offshore (in the Philippines) and ~18.4k in the U.S., of whom 5k are work at home agents (WAHA).

Over the past 5 years, Alorica has completed two other transformational acquisitions. They were:

• In 2010, Georgia-based Ryla, Inc., a provider of outsourced customer care. Alorica gained a significant number of employees from the acquisition
• In 2010, Florida-based PRC, LLC, a provider of outsourced customer care. Alorica increased its global footprint and gained ~10K employees from the acquisition.

Five months into the West acquisition, Alorica CEO Andy Lee described how he founded Alorica 16 years ago with $10k and a vision, back when it was ‘all about surviving’. Fast forward to 2015, and Alorica has gone from a ~$600m to a $1.2bn company with the West acquisition, and is launching a new brand campaign to create a new corporate identity.

Looking ahead, Alorica is aiming for 5% revenue growth in the next year. Lee’s goal is for Alorica to become number one CMS vendor (by revenue) serving North America.

Alorica highlighted its four core competencies as revenue generation, customer care, technical support, and receivables management, the latter being integrated from West into some of Alorica’s legacy clients. Alorica anticipates receivables management to be its highest area of growth over the next year. In future Alorica may also consider offering full revenue cycle management to its clients.

Entry to New Industry Sectors & Increased Delivery Footprint

The acquisition of West Agent Services allowed Alorica to enter two new industry sectors: healthcare and utilities. In healthcare it obtained contracts with two of the three largest healthcare insurance payers in the U.S. Coincidentally, both vendors were shortlisted for one of those healthcare deals, West having come out on top. The utilities business it acquired from West includes small contracts only, but Alorica plans to grow its utilities business.

The acquisition included a small amount of client overlap, mostly in the telecommunications/cable/satellite industry sectors. However, Alorica has been able to provide benefits to the overlap clients such as new site options and additional WAHA delivery. 

Alorica’s WAHA delivery footprint was enhanced significantly through the West acquisition, growing from ~800 to ~5.8k home agents. All of the agents are currently based in the U.S., but based on client demand, Alorica may consider WAHA delivery from Mexico as well. Alorica will leverage the West at Home platform, Spectrum, to manage and grow its WAHA agent delivery capability, allowing agents to create their own schedules.

There are few overlaps in terms of delivery. In most cases, the acquisition has created an opportunity to fill open capacity. Jamaica and Mexico were new delivery locations added through the acquisition, and Alorica now has 48K employees working from 72 locations.

Summary

This is a pivotal growth move for Alorica, and the company was able to point to several examples of clients benefiting from the move, including:

• A legacy U.S. retail client is now adding WAHA services from West to solve e-commerce staffing peaks, and is also taking advantage of West’s more sophisticated collections offering
• A legacy U.S. telecommunications client is now using the WAHA delivery to cover peak times, starting with a small pilot
• Another large U.S. telecommunications client, finding itself out of capacity with West Agent Services, was able to add brick and mortar capacity through Alorica.

This acquisition has more than doubled Alorica’s revenue, increased its headcount especially for WAHA delivery, added new service offerings such as direct response and receivables management, increased its delivery footprint, and expertise, and allowed for entry into the healthcare and utilities sectors. 

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.

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.

Honduras, and specifically the city of San Pedro Sula, have battled negative perceptions which stem from statistical data indicating high murder and kidnapping rates as well as a military coup and near civil war in 2009. The Honduran government understands that they still have work to do to reduce crime rates, and believes education and job creation are key components to making this happen.

Honduran President, Juan Orlando Hernandez, studied in New York and is aiming to put the Honduran education system on a par with the U.S. His educational initiatives include a bonus system for teachers meeting the curriculum, and a target student graduation rate of 98%.  Currently 80% of the country’s public schools have computers and internet access. In November 2014 the Honduran government signed an agreement supporting a program to train English teachers, in which 116 trainers will train 1,000 teachers. High school students (preferably 9th grade and up), contact center and BPO employees, and mono-lingual high school or college graduates are targets for this program.

The centerpiece of hi-tech business in San Pedro Sula is Altia Business Park, the first class A sustainable technology park in the region, which includes smart city amenities. This was the brainchild of Yusuf Amdani, CEO of real estate and textile company Grupo Karim, whom I met during my visit. His vision to create a smart city in San Pedro Sula began in 2007, starting with $25m of investment. To date, the smart city has created ~19,000 jobs.

Amdani has focused on creating opportunities in contact center services, initially targeting the telecommunications industry due to its maturity in contact center outsourcing. 

Grupo Karim operates the services Altia Business Park offers to its tenants, including recruitment, support with all legal processes to start operations, floor plan designs, and construction support.  Its tenants’ employees have access to a variety of social facilities and a shopping and lifestyle center in the smart city. From a contact center perspective it has a strong foundation, with current tenants including several large U.S. based organizations such as Alorica, Convergys, and StarTek.

Altia Business Park currently has three office towers, is planning to build a fourth tower for completion by the end of 2015, and then a further two towers thereafter. Altia also plans to replicate the smart city in Tegucigalpa, the capital of Honduras, in 2015. Nicaragua and El Salvador are also being considered by Altia for smart cities. 

UNITEC University is located in the smart city and is affiliated with Laureate, an international private network of universities. It offers graduate, undergraduate, and vocational programs. At the end of January 2015 it plans to launch a vocational program to prepare students to work in the contact center industry, focusing on English, IT, empathy, and soft skills.  It will take students a year to 18 months to complete the program and it has a goal to enroll 500 students.  A scholarship program is in place for students from public schools.

According to the Asociacion de Maquiladores and the Altia Business Park, in the region of forty U.S. companies are conducting business in San Pedro Sula, including Texaco, Holiday Inn, McDonald’s, Hilton, Tommy Hilfiger, Office Depot, NCR Corporation, Marriott, Fruit of the Loom, Lear Corporation, Burger King, and Citi Bank. 

The following outsourcing vendors are operating in San Pedro Sula (with estimated headcounts): Allied Global (~2,000), StarTek (~1,000), Collective Solutions (~1,000), Convergys (~600), KM2 Solutions (~350), Myron (~150), Alorica  (~120), Zero Variance (~100), Levanter Global (~85), and Serve 5 (~50).

Alorica opened its contact center in San Pedro Sula in May of 2014. It has the capacity for 630 seats at the site. It currently has ~120 filled and looks to bring the site close to capacity in 2015. It is primarily targeting clients in the telecommunications, cable, satellite and hi-tech industry sectors.

Companies that have already made the decision to outsource contact center delivery to Honduras include Kyocera, Time Warner Cable, Sirius XM, Straight Talk Wireless, Tracfone, Blue Fusion, Greyhound, AT&T/AIO-Cricket Wireless.

In summary, Honduras (and specifically San Pedro Sula) is making strides to become a viable location for contact center services. Specifically:

• It is currently a viable delivery location for Spanish-speaking services
• With its focus on accelerating English-speaking capability, it promises to become a more viable location for English language contact center services in the near future
• Security and crime remain areas for improvement in Honduras, but the government’s focus on education and job creation, particularly in the hi-tech services industry, with some early successes, suggest that the country will emerge as an attractive nearshore service delivery location.

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.

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.

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