Tag: Serco

UK Outsourcing Giants Take Diverging Paths | Sherpas in Blue Shirts

Last week both Serco and Capita announced their interim results. Not only did the two companies show a widening gap in terms of financial performance, but they also highlighted diverging business strategies.

Firstly, their financial performance in H2 2014 to date was very different:

Operating margin:

  • Capita has managed to stay on track to achieving at least 8% organic growth, net of attrition, for the full year 2014 (2013: 8%). It also stated that it expects to maintain its operating margin in the range of 12.5% to 13.5% for the foreseeable future
  • In contrast, Serco announced that the 2% organic growth in H1 2014 has turned into a mid-single digit decline in H2. This has been primarily due to reductions in volume of work in the Australian immigration contract but also due to contract losses and reduced volumes elsewhere. Serco expects to shrink significantly by 2016, with revenue reaching a nadir of £3 billion to £3.5 billion from a forecasted adjusted revenue of £4.8 billion in 2014. It expects to return to growth in 2017
  • Serco also announced a proposed equity rights issue of up to £550 million in the first quarter of 2015 to strengthen its capital structure
  • Capita announced that it has secured £1.63 billion of major new deals to date in 2014 (nine months). This is down by £1.27 billion year-on-year (largely accounted for by the signing of the £1.2 billion O2 mega deal in 2013). At £4.1 billion the bid pipeline is also lower on a sequential basis compared with £5.7 billion announced in July 2014. However Capita reports a strong win rate of one in two
  • Serco reported £900 million of contract awards since the half year to date. It also said that its current pipeline and win rate are considerably weaker than before

Secondly, the strategic directions of the two companies are diverging:

  • With its strategic review still ongoing, Serco announced that it is going to focus entirely on business to government (B2G) in the areas of justice and immigration, defense, transport, citizen services, and healthcare
  • In contrast, Capita aims to grow its private sector business and in particular in the customer management services (CMS) arena. Like Serco, it made a number of CMS acquisitions in the past few years including Ventura and parts of Vertex. Another growth target is its burgeoning legal business with the acquisition of Eclipse Legal Systems. It is also expanding its presence beyond its UK stronghold to countries such as Ireland and Germany
  • Serco will be divesting a number of businesses that are now non-core to its strategy. These include the Environmental and Leisure businesses in the UK, Great Southern Rail business in Australia, and the majority of its private sector BPO business which are mostly CMS businesses delivered by two companies that it acquired in recent years: Intelenet and The Listening Company
  • Capita has made 13 acquisitions to date in 2014 for £285 million, with more likely as it continues to expand or enhance its capabilities

Interestingly, both companies have also announced changes to their boards:

  • Alastair Lyons, Serco’s chairman has resigned
  • Capita’s CFO Gordon Hurst is stepping down following a 27-year stint at the company

Serco’s tale of woe began in 2013 when the British government discovered that it had been overcharged by Serco for offender tagging services to the Ministry of Justice (MoJ). The company is still recovering from the fallout more than a year after the issue first came to light, and having repaid more than £68 million of fees and gone through several reviews and management changes. It is ironic that Serco’s new board has chosen to focus on B2G services only, given that the troubles began in a government contract. That said, front line government services is and has always been at the core of the company’s business.

Serco has suffered from failures of governance and risk management. As it rebuilds itself, it will seek to enhance these significantly. In terms of business strategy, it will target growing opportunities in the government sector, as the pressures from aging populations and rising demand for services pushes governments to outsource more. Serco will seek to differentiate itself with its international approach, as part of which it will give its businesses a portfolio of services to go to market within specific regions of the world, to share experience and expertise.

Capita boasts of robust financial and governance structures and highly selective approach to opportunities that it pursues. Robust governance is highly needed given Capita’s aggressive acquisition strategy that has seen it take over more than a dozen companies a year for many years. Even with robust governance problems can still occur. For example, in its eagerness to win more government clients, in 2012 Capita acquired Applied Language Solutions (ALS), which had been awarded responsibility for courts interpreter services in England and Wales. For a while service delivery was less than smooth leading to the MoJ withholding fees in some instances and bad publicity in the press. Overall though Capita has benefited from many niche and strategic acquisitions that it has fully internalized, and which have largely created value and revenue.

Serco and Capita

There are lessons to be learnt from the performance of the giants of UK outsourcing. Today, one thing that is common to both is the belief that bid and governance structures have to be robust and maintained at all times.

More New Faces at Serco to Help Turn the Company Around | Sherpas in Blue Shirts

Serco’s H1 2014 results were poor but in-line with expectations. Adjusted revenue was £2,433m, up 1.1% year on year but adjusted operating profit was down 59.1% year on year to £50.7m.

Profits were impacted by £30m from reduced volumes of work for the Australian Government Department of Immigration and Border Protection (DIBP) and other contract attrition (principally Electronic Monitoring and U.S. contracts).

Changes in other contracts impacted profits by an additional £25m. These included work with AEGON and Shop Direct  moving from transformation into run and maintain phases.

A further £30m was wiped off profits due to two other troubled UK government contracts, COMPASS (for the provision of accommodation for asylum seekers) and PECS (Prisoner Escort and Custody Services) and the internal corporate renewal program.

Serco fared better in other geographies with 10% revenue growth in AMEAA and 7% in Americas.

The focus on fixing major contract problems in the UK has taken management attention away from sales. The pipeline declined by £4bn year on year down to £8bn. Furthermore, Serco has lost eight major new bids and two major rebids in this period.

To help the company turn around, Rupert Soames, Serco’s new CEO, has brought in a number of new executives. These include:

  • Liz Benison, soon to be the new Chief Executive Officer of Serco UK & Europe, Local & Regional Government division. Benison joins Serco from CSC where most recently, she was VP and General Manager for the UK business, managing a £1bn business and its 8,000 employees, with over half of its revenues coming from government customers. Her experience of working with the public sector is key. She has also worked for Capgemini and Xansa plc (now Steria)
  • The latest executive appointment to be announced is that of Angus Cockburn as Group Chief Financial Officer as from the end of October 2014. Angus is currently the interim Chief Executive Officer at Aggreko plc, having replaced Soames who joined Serco in May this year.

A strategic review is underway and in the coming months we expect to see:

  • More money put into strategic and targeted bids to improve the poor win rate and the pipeline
  • Better qualification of opportunities to focus on returns and not revenue alone
  • Further reorganization to simplify the business – the company operates in 47 different business segments, some of which are loss making – more divestments are very likely
  • Steps towards eliminating loss making contracts
  • Reduction of internal costs through improved internal functions, managing a troubled transition to shared services, and better management information.

Serco left its outlook for 2014 unchanged and expects revenue attrition of circa 5% in 2015.

The company is on a turnaround path to rebuild itself, its reputation and its pipeline. The strategic review is bringing out some clear weaknesses that it can address. With fresh faces on board to support the turnaround, Serco also needs to reenergize its workforce and, as Soames said, become a magnet for top talent.

Soames of Serco and the Plummeting Profits | Sherpas in Blue Shirts

Today is a big day for Serco as Rupert Soames OBE takes the helm as the new CEO of the British outsourcing giant. Soames is coming on-board following a turbulent year for Serco. Found to have overcharged the Ministry of Justice for its offender electronic monitoring services, Serco was barred from new UK government contracts, until the matter was investigated and settled. The settlement cost Serco a charge of £111m. The UK government also demanded a major change of organization and senior management to allow Serco to compete for its tenders again. To add to its woes, a change of government and policy in Australia saw Serco’s revenue from one of its largest customers, the Australian Department of Immigration and Border Protection, decline too.

On Monday, April 28, just days before the new CEO was to take up his post, Serco gave an unexpected profit warning. Unsurprisingly, the next day, shares in the company plummeted by 19%, and there is press speculation about a rights issue. Serco had already set expectations for lower organic revenue growth and profitability in 2014 when the latest profit warning came on April 28. At the end of 2013 the company reported a margin of 5.6%, which was a 68 basis point decrease compared with the prior year. The company is already restructuring, having reported related costs of circa £15m in 2013. Workforce reduction is also on-going. It reduced its workforce by 400 in 2013.

Serco has also disposed of a number of businesses, some at a loss:

  • UK transport maintenance business – net profit of £23.2m
  • Occupational health business – net loss of £3.9m
  • Ascot College – net loss of £0.1m.

It is against this backdrop of strained relationships and declining profits that Soames takes the helm. Another challenge that he faces is to close the gap that has opened up between Serco and its competitors. For example, Capita, its biggest rival, has been winning major contracts as well as making new investments in technology through acquisitions. Neither company has been quick to embrace the latest technology but Capita appears to have changed tack recently to bolster its IT services capabilities. Since March 2014 Capita has acquired:

  • AMT-SYBEX which provides mobile technology and data management capabilities
  • Updata for its network connectivity services
  • Network Technology Solutions, an IT security reseller and managed services provider.

Another competitor, Agilisys, has invested in front-office process automation tools.

The new CEO faces a number of challenges from day one, but it is not all bad news. In 2013 Serco had a revenue of £5.1bn up 7.8% at constant currency. This represented a healthy organic growth of 5.9%. Furthermore, in 2013 it achieved contracts wins to a value of £3.7bn despite the on-going issues with its relationship with UK central government.

After the Ministry of Justice contract debacle, Serco had to go for a CEO who brought more than just good business acumen. As well as a successful track record as CEO of Aggreko, Soames brings with him good connections with the establishment, being the grandson of Winston Churchill, and brother to Nicholas Soames, Conservative MP. While Soames is positioned well to rebuild the company’s relationship with the UK central government, the painful task of restructuring the company will have to continue. We expect more divestments which may include some of its many joint ventures. We also expect Soames to continue Serco’s strategy of diversification by pushing into other sectors such as retail, and other geographies such as the Middle East, where it has won a number of contracts recently.

Photo credit: zeitfaenger.at

Thumbs Up to Serco Acquiring Intelenet: Is 2011 BPO’s Year for Acquisitions? | Sherpas in Blue Shirts

Serco Group plc, a U.K.-based international services company with diverse interests in both the public and private sectors, yesterday signed an agreement to acquire Intelenet, a leading Indian BPO services company serving clients around the world and in the domestic Indian market, for up to £385 million (~US$635 million.)

This is the fourth big-ticket acquisition so far this year in the Indian ITes industry, following on the heels of iGATE-Patni, Genpact-Headstrong, and most recently EXL-OPI. I see two key forces driving this acquisition spree. First, and more relevant, is the need for service providers to expand scale and capabilities in an increasingly competitive market. Second is the potential attempt by private equity investors to exit their stakes in Indian ITes companies now that the valuations are attractive with the market bouncing back from the recession.

Serco’s acquisition of Intelenet is an outcome of both these factors in play simultaneously. On one hand, this move will add to Serco BPO’s scale and depth of capabilities, and provide access to attractive markets; and on the other hand, this marks a successful exit for Blackstone, which four years ago invested ~US$200 million to stage a management buy-out of Intelenet.

Interestingly, Serco’s entry into the Indian BPO market was through its acquisition of InfoVision towards the end of 2008, whereby it established Serco BPO. The acquisition of Intelenet marks a significant step change in its global capability and capacity in terms of:

  • Access to attractive markets –Intelenet has a strong customer base in the international markets and is a leader in the fast emerging domestic Indian BPO market. These markets are expected to grow at ~15 percent and ~20-25 percent per year, respectively. That a U.K.-based company has acquired BPO assets in India to target not only the international but also the domestic market underscores the growing importance of the domestic Indian BPO market. India has seen GDP increase by 7-8 percent per year over the last decade, with rising incomes driving demand from customers for services and increasing use of third parties to deliver them. In addition to this growth in the commercial BPO market, there is also emerging demand for process outsourcing within the Indian public services market.
  • Added scale and depth of capabilities – The combined BPO-related operations will have 40,000 employees (~32,000 coming from Intelenet) providing services across seven countries. While Serco BPO was previously a pure customer-centric BPO provider specializing in CRM support, the acquisition brings a wealth of expertise in a broad range of middle- and back-office services, including transactional, finance and accounting, and business transformation offerings. Serco will also benefit from Intelenet’s capabilities in the financial services, travel, and healthcare industries.

Intelenet’s scale and expertise, backed by Serco Group’s financial muscle, should create a formidable player in the third-party BPO space.

On a witty note, the year 2011 adds up to the number 4 (2+0+1+1=4) and we have already seen four major acquisitions this year. Will 2011 create history via more acquisitions, or will numerology play a spoilsport? Any guesses?

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