Tag: EXL Service

Goldilocks-Sized Service Providers | Sherpas in Blue Shirts

Businesses today actively seek — and happily find — a different kind of service provider. Like the fairy tale Goldilocks sizing choices among the three bears, they find some providers are too large, some are too small, but others are just right. The just right players are growing spectacularly. But I believe it’s mainly due to shared characteristics beyond their size. It’s important to understand their value proposition, as they are a competitive threat to other service providers — even large ones that are currently doing quite well against the market.

So let’s start with the size of these high-growth just-right companies. They are tier-two, mid-sized firms ranging from $500 million to $2 billion. Often their growth is in the high 20s.

We’re seeing this segment outperform large providers across both IT and BPO. For example, EXL and WNS are growing faster than the big boys in BPO — Accenture and Genpact, Likewise in IT, Syntel and Virtusa are growing faster than the industry leaders, Cognizant and TCS.

I don’t want to take anything away from the “just right” firms’ hard-won performance in terms of aggressiveness in sales. But there is an important aspect to their growth. When we see a segment like this growing better than the large, mature firms that were driving growth and profitability, there is something about the segment that is beneficial, something beyond just well-run companies that have hit a niche or an air pocket where they’re going up.

That “something” driving their high growth is the change in the buying community. For the past five or six years, buyers rationalized their portfolios. They reduced the number of service providers they used. Now we’re in a climate in which they are looking for challengers.

It’s not that buyers are backing away from large service providers, but they seek more intimacy and less churn in their service delivery. The large firms have really pushed their factory model or offshore pyramid model hard to keep their margins up. They want providers that are smaller, more committed to addressing their needs and that will give personal (even CEO) attention. They are also looking for price challenges and rare skills. And they believe they can find all of these characteristics more easily in the companies among the providers in the $500 million to $2 billion range.

At $500 million, these providers are large enough to be highly credible, have deep benches, and have vertical industry expertise. And below $2 billion they still provide that personal touch to their customers. Their size is just right.

Another growth factor for the just-right size of providers is that they are growing off a small base. This is a dramatic contrast to a large provider such as TCS trying to grow off a base of over $10 billion a year. It’s much harder to grow a large base quickly than to grow a small base quickly.

Unlike the story of Goldilocks, there are more than three “bears” — midsized providers — in the market. And that’s a good thing, as they’re challenging the market with the attributes the buyers want at the moment (more commitment, less perceived churn, and more personal attention). And big profitable buyers with large spend are looking for these challengers.

Photo credit: Daniel Rocal

EXL Positions Itself for Growth with Acquisition of Blue Slate | Sherpas in Blue Shirts

Earlier this month EXL acquired Blue Slate Solutions and positioned itself for growth through transformation services. But the move also reflects a broader industry move.

Blue Slate is a consulting firm that drives operational transformation. The acquisition looks to be a move to buttress and increase EXL’s ability to add value to clients through driving large-scale transformational projects. It also improves EXL’s industry expertise in critical areas such as healthcare.

And it will better position EXL to compete. The Blue Slate acquisition matches Genpact’s investments to add similar capabilities and also allows EXL to compete more effectively with Accenture and IBM on large-scale transformational opportunities.

So it’s a nice acquisition. But it also has broader significance. As we think holistically about this, EXL is joining a broader industry move ­of players positioning themselves to transcend or add value beyond operational excellence.

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

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.

EXL’s Acquisition of The Hartford’s Trumbull Gives it a More Complete Portfolio of Offerings in the U.S. Insurance BPO Market | Sherpas in Blue Shirts

EXL Service announced on October 4, 2011, that it had acquired Trumbull Services, a specialized provider of Insurance BPO services in the Property & Casualty (P&C) segment in the United States. This acquisition is not large in terms of the additional headcount obtained (Trumbull is a less than 200 employee company) or the deal amount (not announced, but likely to be in the range of US$50 million). However, it is strategically significant, as it gives EXL Service a greater foothold and a ready-made technology platform to offer in the U.S. P&C Insurance BPO space in general, and the insurance subrogation BPO business in particular.

Even without the acquisition, EXL has been the dominant third-party BPO provider in the U.S. P&C market (excluding TPAs), with the highest scale in terms of FTE count. However, offerings in the Insurance BPO space are no longer just about scale – the increasing role of technology is becoming an important consideration. With this in mind, EXL had been looking for a suitable acquisition in the Insurance BPO space in the United States/Europe for a while now.

Going a bit deeper into the strategic value of the Trumbull acquisition, the addition gives EXL deeper expertise in the P&C Insurance BPO space with the important ability to offer subrogation BPO to insurers. (Subrogation is a process under which the insurer can pursue action against the party causing loss to the insured, in order to recover at least a portion of the claimed amount paid out to the insured. This also involves proportionately repaying the deductible paid by the insured to the insurer.). By offering this capability to insurers, EXL gives them a chance to lower premiums, lower deductibles, and, therefore, increase market share. In the U.S. P&C Insurance market, which saw consistently falling premiums and declining investment yields in 2008-10, this is an enticing offering.

The acquisition also bolsters EXL’s capabilities on the technology front. In May 2010, it acquired PDMA, the maker of LifePRO, a policy administration system in the Life Insurance BPO market deployed with 40+ insurers around the world. With the Trumbull acquisition, it also gets SubroSourcePro, a platform solution to maximize recoveries from claims. This bolsters EXL’s technology offerings, giving it greater ability to offer insurers flexible scalability and a transactional, pay-per-use pricing model that allows them to convert some of their fixed costs into variable costs.

With the acquisition, EXL also strengthens its onshore presence in the U.S. market. This is an important capability to have in an economic environment where regulatory requirements and customer preferences are mandating onshore presence for some processes. However, although EXL now has greater onshore presence in United States, it still lacks significant presence in the Western European and Latin American markets. Given that demand for Insurance BPO is rising in these locations, EXL will probably go for another acquisition in these regions in the near future, to ensure that when insurers go BPO shopping they can clearly see the store (vendor) with the most wares (capabilities).

Finally, EXL also gets a marquee client in The Hartford Financial Services with this acquisition. Trumbull had been a captive of The Hartford, and EXL has committed to honor existing service agreements. It will also tap into Trumbull’s existing client base, which includes a number of insurers with which EXL did not have any existing relationships.

However, EXL will face some challenges as it integrates Trumbull with its existing business. One is smoothing through cultural and operational style differences, as EXL is a global BPO major while Trumbull was a small captive held by a financial services major. Integration of Trumbull’s operational capabilities with EXL’s offerings will be another hurdle as EXL goes to market with a combined offering. Finally, there will be some drag on EXL’s margins, as Trumbull has an exclusive onshore presence while EXL’s own resources are largely offshore.

The bottom line is that  the Trumbull acquisition has given EXL not just a stronger foothold in the P&C Insurance BPO space, but it has also strategically deepened EXL’s portfolio of offerings, enhancing its potential in the U.S. Insurance BPO market.

EXL Service Acquires OPI: The Hunted Becoming the Hunters? | Sherpas in Blue Shirts

EXL Service announced yesterday that it had entered into a definitive agreement to acquire Outsourcing Partners International (OPI), one of the last standing pure-play Finance & Accounting Outsourcing (FAO) service providers.

On the face of it, EXL and OPI come across as fairly similar companies – pure-play BPO providers with strong FAO and analytics capabilities, both with strong capabilities in serving financial services clients. OPI will broaden EXL’s delivery footprint in Eastern Europe and South East Asia, but beyond this I don’t see any complimentary capabilities. So why this acquisition? I believe the answer lies in scale. With the FAO market maturing, it is becoming increasingly important to have sufficient scale to be able to serve large buyers and compete with the big boys, while at the same time having the economies of scale to be able to serve the mid-market effectively.

However, what is interesting to note is the effect of this acquisition on the already crowded FAO service provider landscape. In Everest Group’s recently concluded FAO Annual Report, we classified 20+ FAO service providers on our Performance | Experience | Ability | Knowledge (PEAK) matrix into the categories of “Leaders”, “Major Contenders”, and “Emerging Players” based on their market success and overall capability. We had noted in the report how competition was heating up in the “Major Contenders” category, and how service providers such as TCS, WNS and Wipro were mounting a strong challenge to “Leaders” on our FAO matrix. While EXL and OPI were individually showing strongly in the middle of the “Major Contenders,” pack, our analysis shows the combined entity will be propelled into the league of service providers strongly contesting for a coveted seat in the “Leaders” category.

Service providers on either side at the threshold of the “Major Contender-Leader” divide – e.g., Capgemini, HP, Infosys BPO, TCS, Wipro, and WNS – need to sit up and take note of this acquisition. There is now a new kid on the block with the scale and capability to give them a run for their money (this, of course, provided EXL manages to integrate the operations seamlessly considering both companies have very different corporate cultures.)

At the same time, buyers are bound to ask how this new entity will be different from the rest. The painful answer is, I don’t see any differentiation arising from this acquisition beyond the increased scale that will allow EXL-OPI to play in the “wannabe” big boys’ league.

FAO Capability Grid

Something about this pattern of acquisitions in FAO intrigues me. First, Genpact was being touted as a strong candidate for acquisition, with rumors doing the rounds that Cognizant was keenly interested. Genpact completely squashed all the rumor mills with back-to-back acquisitions of Headstrong and smaller cloud computing start-up Akritiv Technologies, virtually wiping off the “to-be-acquired” tag. Rumors abounded about EXL being on the bidding block after having gotten itself valued, and that HCL was emerging as a strong suitor. However, EXL reversed the scenario by acquiring OPI. Now that brings us to WNS, another pure-play BPO player that has been rumored to be on the bidding block for many years now. Any bets on whether WNS will go out on a limb and acquire, rather than being acquired, just so my carefully constructed pattern will remain intact?

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