Tag: Europe

Capita Goes for Accelerated Growth with Xchanging Bid | Sherpas in Blue Shirts

This week we heard that Capita and Xchanging had agreed on the terms of a recommended cash offer of 160 pence per share. The offer values Xchanging at approximately £412m. If it goes ahead, the acquisition would be Capita’s largest ever; it is 260% bigger than its previous largest acquisition, that of avocis for £157m in February 2015.

Capita’s newly found appetite for larger acquisitions marks a noticeable change in approach between the current CEO, Andy Parker, and his predecessor, Paul Pindar. While Pindar went for niche acquisitions, Parker is going for accelerated inorganic growth.

If this bid goes through, it will impact Capita’s business in the following ways:

  • Significant leg-up in Insurance BPO: Xchanging is something of a jewel in the insurance sector due to its golden relationship with Lloyds of London as well as insurance sector specific technologies such as Xuber. Insurance services accounts for the larger part of revenue at circa 60%. For some time now Capita has been talking about growth in the insurance sector, setting the scene for more of its M&A activity. It has previously stated, “Where premium growth remains modest, (insurance) firms are focused on improving operational efficiency and organisational flexibility, areas Capita is well placed to help them address.” Before it made the offer for Xchanging, Capita had expanded its insurance capabilities through the acquisition of SouthWestern. This brought it 700 skilled, multi-lingual FTEs at two sites, Krakow and Lodz, providing services to insurance, finance and legal administration, and customer management across Northern Europe. Another relevant and recent acquisition was that of tricontes in 2014. The £6.2m acquisition of the Munich-based company in June 2014 brought Capita specialist contact centre services for various sectors including the insurance sector in Germany.

  • Bigger play in the private sector business: The split between Capita’s public and private sector business has always stayed roughly around 50:50 with annual variations of plus or minus 5%. In 2014 Capita’s private sector business was £2273.6 and accounted for 52% of revenues. With revenues of £406.8m in 2014, Xchanging could boost Capita’s private sector business by as much as 18% – a significant growth.

  • Entry into potentially lucrative BPO segments: Xchanging has good capabilities in the fast growing Procurement Outsourcing (PO) and Capital Markets BPO. Our analysis shows that both market segments are growing upwards of 10% CAGR. Further, these are specialized BPO segments and hence less prone to commoditization. However, to fully capitalize on the potential, Capita would have to address recent issues with Xchanging’s PO business.

  • Geographic diversification: This acquisition would help Capita expand its market presence beyond the UK. Some of the key countries where it could help Capita are Italy, Germany, and the U.S. While the scale may not be big, it can provide Capita a base upon which to build its international business. Further, continental Europe is a specialized market, which may not be the easiest to penetrate for an external service provider. Xchanging, with its multiple contracts in Germany, can help Capita in its entry in that geography.

  • Greater global sourcing leverage: Capita has around 5,000-6,000 FTEs in offshore location. This acquisition offers the potential of increasing this number by 20-25% primarily in India.

Clearly, this acquisition can help accelerate Capita’ growth and capabilities in multiple ways. However, as with any acquisition, successful integration will be key to harness the potential including effectively addressing recent issues.

Capita is not the only service provider to be eying growth in the insurance sector. With this bid, Capita’s acquisitive culture is set to give it an edge over the others.

For our previous coverage of Capita’s growth strategy see “Capita’s German Gambit.” 

Capita’s German Gambit | Sherpas in Blue Shirts

Over the years we have seen Capita successfully expand from one market sector to another in the UK and Ireland. Since 1984 when it only served the UK local government sector, it has expanded into seven major verticals and over 15 segments of those. The latest expansion plans take it beyond the UK and Ireland borders into DACH, with Germany being a primary target market.

Acquisitions

Capita’s new geographic growth strategy has seen it make three acquisitions in the DACH region (Germany, Switzerland and Austria) in the past year:

  • tricontes – the £6.2m acquisition of this Munich-based company in June 2014 brought Capita specialist contact centre services across the retail, telecommunications, utilities and insurance sectors in Germany
  • SCHOLAND & BEILING – a customer care consulting company also based in Munich, Germany
  • avocis – announced in February 2015 and if successfully completed, at £157m, avocis would be one of the bigger Capita acquisitions. It would bring Capita 6,500 employees and a portfolio of customer contact management services contracts in DACH. Although headquartered in Switzerland, Germany is avocis’ biggest market, accounting for 53 percent of revenue. The rest comes from Switzerland.

Capita has a formulaic approach to acquisitions with a budget of £200m to £250m per annum. It considers many potential acquisitions each year, selecting a dozen or more that fit its formula to:

  1. Increase scale
  2. Add new expertise to enhance its propositions
  3. Take it into new markets.

In addition, the acquisitions have to make a Return on Capital Employed (ROCE) of 15 percent post tax return after 12-months integration into the group.

Capita recently also acquired 700 skilled, multi-lingual FTEs in Krakow and Lodz, thanks to its acquisition of SouthWestern in Ireland. It can tap into these centres to further boost its presence in DACH for outsourcing services, including insurance, finance and legal administration, and customer management.

The Drivers for DACH expansion

The key drivers for Capita’s German gambit include:

  • Small growth in the UK market – we estimate that contact centre outsourcing (CCO) to be growing at circa 5 percent. Capita posted decent growth in this business, but given the overall market conditions, Capita must be looking for an alternative growth trajectory outside its comfort zone
  • Continental Europe is growing – Everest Group research shows a rise in CCO adoption within Continental Europe. Germany has the largest economy in Europe with an under-penetrated and fragmented market, and only in certain verticals such as utilities, retail and telco. Germany, therefore, presents ample room for sustainable CCO growth for Capita
  • The DACH region represents a large CCO market with 110m German speakers. Yet there is only small levels of outsourcing. Capita sees good opportunity for a transformational CCO partner in the region
  • Ability to engage existing UK clients – this also provides Capita with opportunities to extend its existing contracts within UK with firms that have European parents and subsidiaries and vice versa
  • Access to the in-house contact centre market through SCHOLAND & BEILING’s existing portfolio of enterprise clients, enhancing the breadth of Capita’s footprint in the broader contact centre market.

The three acquisitions add scale to Capita’s existing customer management services in the service-line’s key sectors of retail, telecom and utilities. We expect to see some sharing of resources and skills across country units, driven by multi-country client requirements.

The combination of both customer care outsourcing and consulting services represented by these acquisitions also bodes well for CCO clients, who increasingly look to their service partners for guidance in strategic areas, such as the deployment of multi-channel services, enhanced uses of analytics and stronger vertical industry specificity.

Expansion into German local government is a possibility with avocis that has a number of contracts in the sector. This is Capita’s founding market and Andy Parker, the CEO, has already said that he sees much similarity between the UK and German local government sectors. However, expansion into this sector will be after that of avocis’ bigger private sector market. It is unlikely to target the German local government for the first 12 months after the acquisition.

Challenges

Capita’s biggest challenge is integration of these companies along with all the other acquisitions that it has made recently. In recent years Capita has spent:

  • £271m on 13 acquisitions in 2013
  • £310m on 17 acquisitions in 2014
  • £199m spent on 4 acquisitions to date in 2015

These have been in a diverse set of companies, ranging from software and data for utilities and transport sectors to residential and commercial mortgage administration. The company is also expanding its services portfolio into new verticals such as agriculture and science services.

Managing this expansive empire while building efficiencies into services and workforce management is not going to be easy.

Yet Capita continues to deliver growth year after year. In previous years, it managed to significantly boost its CCO business with the acquisitions of Ventura and Vertex in the UK. In DACH, it has to deal with challenges of a different culture and languages as well as the usual aspects of integrating businesses, so we will be watching this space with interest.

There is no doubt that Capita is a master at business expansion. Service providers that want to expand into new service lines and geographies would do well to follow Capita’s German gambit.

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