What Can We Learn from the EXL-Travelers Contract Termination? | Sherpas in Blue Shirts

Posted On November 14, 2013

If you follow the news, you probably saw last week that three people working for EXL used some operational process materials about EXL’s client Travelers with a competitor of Travelers. Travelers found out about it and terminated the contract. We see companies terminating for cause all the time, but terminating a contract for breach of confidentiality is very unusual. I’m not aware of another situation with as abrupt, Draconian and significant action as Travelers took.

This was a longstanding relationship, and we know from public releases that this will have significant impacts on both companies. But let’s look at the bigger picture of the impact on the industry at large as well as EXL’s other clients and the impact to both companies. What can we learn from this unfortunate incident?

The facts

We don’t know how the confidentiality breach was brought to light, and both parties are being appropriately very tight-lipped about it. EXL appropriately took disciplinary action and fired the employees involved. The provider also apologized, is undertaking a process to review its policies and procedures and is retraining all its employees to ensure this won’t happen again. They are obviously taking this breach very seriously, as they should.

The contact termination is a significant financial hit to EXL. Its stock plunged 20 percent. The provider’s biggest vertical is insurance, and Travelers was EXL’s largest customer, accounting for 9.6 percent of EXL’s total revenue for the quarter ended September 2013. The termination likely will impact EXL’s 2014 revenues by US$14-$28 million. EXL also must bear the cost of transitioning the services from Travelers over the next 18 months.

The situation certainly speaks to the importance of confidentiality. We speculate that the termination also may be combined with Travelers’ strategic intent, as the contract was coming up for renewal.

People being people, they will make mistakes and will use materials inappropriately. In fact it happens to every organization, internally as well as with its vendors group. I’m not excusing EXL, but I’m saying there are only two types of companies: those in which a confidentiality breach has happened and those in which it will happen.

How the situation impacts stakeholders

EXL stockholders — These stakeholders have been hit the hardest. Last week we saw a pullback in the EXL stock and also saw EXL respond to that by announcing a stock buyback. In the short run, they have suffered a loss in value.

But over the long run we predict that this value will recover quite quickly because of the buyback situation and also because EXL is a strong company. Although losing a customer that represents nearly 10 percent of revenues is serious, EXL’s pipeline is strong, its reputation is strong and its other customer relationships are strong.

This is not the first time for a provider to lose a large customer. For example, HP is in the process of losing GM (although not for a breach of contract but, rather, a change in strategic direction by GM), which has a similar or larger proportion of impact, and it is recovering from the loss.

So we anticipate that EXL will recover and be back on a strong growth trajectory. BPO is an attractive space; the market holds a promise of further growth, and EXL is well positioned in this market. It is disappointing to have this setback, but its stockholders will recover over time. 

EXL management team — Clearly management is taking this very seriously. It is asking: How did we get here? It has already taken steps to make changes in policies and procedures and implement a robust education program within its employee base to ensure that this never happens again.

EXL employees — The approximately 2,000 EXL team members won’t immediately be moved out of Travelers; it will take time to transition. Given EXL’s strong growth prospects, it should not be difficult for them to find other positions. Certainly other EXL clients are in need of talent, and the Travelers team was a talented and mature group. The talent for insurance BPO is a scarcity, and we expect that all of them can easily find work inside or outside of EXL. 

EXL’s existing customers — This unfortunate situation could be a bonus for EXL’s other clients. EXL is redoubling its efforts in confidentiality. Also, the scarce talent that will come out of Travelers will give great opportunities for existing or prospective EXL clients. A new talent pool of 2,000 people with mature experience is a huge boon for EXL customers. 

Travelers — It clearly sent a very strong, powerful message to its own organization and its third-party communities that it will not tolerate breaches in confidentiality at any level. We expect this message to resonate through its organization and its provider organizations for years to come.

It seems likely that other interests were combined with this message. Although we have no actual information, it is very unusual to go to such lengths to make this statement, and it’s very costly in terms of time and effort, even if not paying formal transition fees. So it’s possible and, in fact, probable that Travelers was thinking of making some significant change in any event and has combined this object lesson with the need for that change.

The change will be significant. Approximately 2,000 EXL FTEs will need to be moved into other delivery vehicles. Something of that scale is likely to last between 18 months to two years. Travelers could take this work in house or distribute it among other providers. So there will be significant realignment going on at Travelers. The good news is that clearly Travelers feels confident in its ability to transfer this work and provide the same delivery at a similar level of quality.

Services industry —Obviously confidentiality is very important, and this incident is a wake-up call for the industry. Confidentiality breaches can never be tolerated, and all companies need to be vigilant with confidential information and manage it like security breaches.

Another important observation is that this contract termination also says something about the maturity of the insurance BPO industry. That a company of Travelers’ size and sophistication would feel comfortable that it can replace delivery capacity at this scale speaks to the fact that Travelers believes that the industry has gone beyond small pockets of rare skills to the point that these skills are more widely available than they were five years ago. And no provider is indispensable.

Again, this is a very unfortunate situation. But it’s not the end of the world for EXL. The company will move on, learn from the experience and prosper. EXL’s clients and employees will be well served. Travelers also will go forward. They undoubtedly feel confident that they can replace the delivery that EXL was providing, whereas a few years ago they could not have done so.

To date, BPO has been highly sticky in work not shifting to other providers because clients did not want to run the risk of not being able to duplicate expertise in another provider. Travelers now is willing to do that. There are now multiple delivery options where there used to be only a few, so we may see other clients switching providers. BPO may turn from purely a greenfield environment to both a green and brownfield environment, much like IT.

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