UK nearshore contact center annual operating costs: cost arbitrage among delivery locations is largely driven by compensation and facilities costs
UK nearshore contact center location selection risk/reward assessment
The CCO service provider market in the UK is considerably more consolidated than the global CCO provider market, and recent acquisitions are driving further consolidation
Scotland accounts for over half of all FTEs serving UK contact centers
Record-to-report adoption has doubled in APAC, tripled in the UK in recent years
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:
Secondly, the strategic directions of the two companies are diverging:
Interestingly, both companies have also announced changes to their boards:
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.
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.
Steria has reported strong growth in public sector revenues in the United Kingdom, significantly outperforming its other markets in Q3 2014. This is set to continue as the company gains new public sector clients thanks to its joint ventures with the British government.
Overall, Steria’s Q3 revenue grew by 7.3% organically year on year to €454.4 million.
In the same period Steria’s UK revenue grew by +24.7%, driven largely by its shared services joint venture, Shared Services Connected Limited (SSCL) with the Cabinet Office and also by NHS Shared Business Services (SBS) with the Department of Health.
Revenues for the same period declined by -5.4% in France, and by -15.1% in Germany.
Steria reported organic growth in its other Europe zone region including Scandinavia in Q3 2104 of +8.1%, boosted by strong growth in the public sector of +14.2%.
Business process services has been an engine for Steria’s revenue growth. It accounted for 53% of the revenue in the UK, and recorded a stellar growth of +52% in the period.
The growth in UK public sector is set to continue as the much anticipated move by the UK’s Ministry of Justice (MoJ) to award the running of its back office shared service to SSCL was confirmed last week. The contract brings with it the Home Office which uses MoJ’s shared services. These are major government departments which join SSCL’s 18 existing clients including Department for Work and Pensions (the UK’s biggest government department), Department for Environment, Food and Rural Affairs, and Department for Education. Steria also reported growth in other segments of the UK public sector including +7.6% in Defense and +37.4% in Homeland Security sectors.
Steria’s approach to growing its shared services operations follows the pattern of first expanding the client base and then adding more services to its portfolio. The NHS SBS operations, for example, started with F&A and payroll and has expanded into primary care services and procurement.
This is a pattern that I expect SSCL to follow. The contract with the Cabinet Office allows for scope and service line expansion as well as adding new clients from both public and private sectors. There are a number of factors that will drive other government agencies to move to SSCL. One is the lack of capital funding for legacy upgrades. Another is the government requirement that existing departmental shared service centers have to operate on par with commercially run centers. This is not easy to achieve by civil servants with limited funding and without service providers’ experience of standardizing and industrializing services.
These factors combined with strong encouragement by Cabinet Office will mean that the majority of central government departments and their agencies will move their shared services either to SSCL or its main rival ISSC1 (run by arvato) over time. There is plenty of business for both service providers. Steria estimated a TCV of circa £1bn (€1.3bn) over 10 years at the time of the contract announcement in 2013 and is likely to achieve this.
Q3 results did not show the operating margin. Steria stated that owing to operational issues, largely in Germany, it will be unable to meet its operating margin target for 2014 and anticipates a slightly negative net attributable profit for the financial year. The outcome-based nature of the SSCL deal with the UK government is likely to negatively impact the bottom line too initially with investment in activities such as client on-boarding and consolidation.
Finally, a word on Sopra with which Steria is merging in a friendly tie up; For the same period, Sopra announced smaller revenues of €341.5 and also a smaller growth of +0.5%. In France Sopra’s revenue grew by 2%, highlighting the complementary nature of the two merging businesses. Sopra’s revenue in Europe (excluding France) grew by +4.1% to €63.1. Between them, the two companies will have profitable businesses in multiple regions of Europe: UK, France and Scandinavia. Additionally Setria’s broad portfolio which includes BPO and IT infrastructure management enhances Sopra’s application and system management services. The two companies will have to address some common growth challenges too e.g. lack of growth in Germany and also the financial services sector.
Look out for more commentary on this merger from Everest Group in the coming months.
The ideas are not new – for many years people have been sharing spare capacity or capabilities with each other, for example carpooling, holiday home swaps. etc. New channels, such as Airbnb, which enable sharing on a larger scale, have drawn the attention of governments, which in turn are looking for new ways to boost their economies. For example the UK’s Department for Business, Innovation & Skills (BIS) is currently running an independent review of the sharing economy led by Debbie Wosskow, CEO of Love Home Swap. I expect some aspects of the model to be deployed by BIS to help startups.
The question is can the sharing economy get a foot hold in the business-to-business (B2B) world? Other concepts such as e-commerce marketplaces have crossed the business-to-consumer (B2C) and the B2B divide. We have had sharing of resources and capabilities in the enterprise world for decades too, from shared service centers to shared office facilities. Cloud computing and the various “-as-a-service” models are also about sharing. What is different about the sharing economy is the many-to-many relationships. For example, through Airbnb many home owners offer rooms to many guests. While there will be some many-to-many examples of sharing in the enterprise too, the prevailing model in outsourcing is one-to-many, one service provider pooling its resources and capabilities to deliver services to many clients.
The sharing economy concept could lead to enterprises doing more sharing among themselves, offering their spare capacity and resources to each other. This could potentially reduce demand for outsourcing to service providers, in certain scenarios, for example sharing of resources for common business functions with partners. The trouble is that setting up such arrangements could be complicated and there would need to be solid governance procedures in place to ensure performance. It would be different if there were channels through which formal sharing arrangements could be made easily. This represents an opportunity for outsourcing service providers to augment their own services by providing such a channel.
There is already one operating in the UK: The Liberata owned Capacity Grid connects 140 local authorities in the UK to provide spare revenue and benefits processing capacity to each other. Liberata provides the network and the connectivity and charges a fee on the transactions performed. It also offers its own processing services to local authorities on or off the grid. It is looking to expand its Capacity Grid portfolio.
Looking at the company’s financials, it has got over a pension-liability black hole which dragged it down for a few years before it was acquired by Endless in 2011. Today it reports steady revenues of circa £90m per annum and an operating profit margin of 7% based on its 2012 and 2013 results. Capacity Grid has helped it maintain its revenues and Liberata is looking for complementary acquisitions that add to it. In September 2014 it acquired Trustmarque, a UK-based IT services provider. The additional IT capabilities are likely to boost Capacity Grid’s infrastructure. The acquisition also boosts Liberata’s public sector clients, including UK government and the National Health Service (NHS). There are many common services across swathes of the public sector, e.g. primary care administration in the NHS, where the enterprise sharing economy is likely to get more traction than in other sectors.
The Capacity Grid shows that a sharing channel can work in the government-to-government (G2G) setting where the parties are not in competition with each other. There are also many complementary businesses in the private sector, such as partnerships, where the model could work in a B2B setting. This could see large enterprises, or their global in-house centers, or new entrants create a marketplace for overflow business capacity. Many service providers already have the network connectivity and the platforms to enable this kind of capacity or resource sharing. The model could also open the market for services to small and medium companies that make up more than 90% of businesses.
The traditional outsourcing market is already under pressure from other disruptions such as the business process as a service model (BPaaS) and automation. Pricing and delivery models are already changing and the enterprise sharing economy could add an alternative to the mix.
With digital transformation helping an increasing number of portions of the economy better match demand with capacity through sharing mechanisms, it would appear to be only a matter of time before enterprises are applying this to some of their business needs.
Photo credit: Carlos Maya
Over the last 18 months, we have seen a significant shift in the global in-house center (GIC) location strategy of UK-based firms, with many more embracing Central and Eastern Europe (CEE) over offshore countries for their GICs.
Factors driving the growth in nearshore locations include:
Some of the popular nearshore locations being leveraged for IT, F&A, and call center (CC) services are depicted in the diagram below:
While some companies are leveraging their existing nearshore offices and expanding them into GICs, others are setting up greenfield centers. Recent examples of new GIC set-ups by UK firms in nearshore locations include:
What are the implications of this trend? Are we saying offshore locations will lose their draw for UK-based buyers? Certainly not! Although the CEE region will continue to maintain its growth momentum, several factors will still drive GIC activity in offshore geographies among UK buyers:
Beyond the traditional offshore locations, there is increasing acceptance of South Africa, Egypt, and Mauritius as delivery locations for UK and other European buyers due to accent similarity and strong cultural affinity. But the battleground is now definitely becoming hotter between nearshore and offshore locations.
For more insights into the GIC space, please see the following additional Everest Group research:
Photo credit: Charles Clegg
Though the UK remains the largest market, buyers on the Continent are increasingly seeking the benefits of FAO
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