Monday, 3 August 2009

Xchanging needs steady hand on its US course

(By Anthony Miller – Monday 3rd August 2009 8:30am). After its surprise revenue warning back in May (see Xchanging ‘triple whammy’ revenue warning), ‘the other’ major UK-based BPO player, Xchanging, was rather starting on the back foot with today’s voluminous interim results report (see here). It took a step forward again a couple of days ago with a major procurement deal (and go-to-market alliance) with RPO (recruitment process outsourcing) player, Alexander Mann Solutions (see Xchanging cements alliance and deal with Alexander Mann Solutions) but of course that couldn’t help first half.

Nonetheless, Xchanging still managed 9% 1H09 organic revenue growth to £367m, with the remaining 29% top-line growth coming from its acquisition of Indian partner Cambridge Solutions (see Xchanging looks to feast on Indian take-away). Underlying operating margins grew 15 bps to 5.5%. The company has changed the way it reports the numbers and I have some more work to do on these, but at first blush they were a bit of a mixed bag. UK (29% of group revenues) looked good, now with Capita-like near-13% margins, up over 3 pts. Continental Europe (22% of revs) margins dropped 1.4 pts to 7.1% as securities processing volumes and Business Support revenues declined. But it was the US (20% of revs) that was the real problem, with margins crashing to 2.9% as the acquired US BPO business went into loss.

Where once I was enthused, there’s now things that start to concern me about Cambridge in particular and Xchanging’s US aspirations in general. In principle, buying its offshore partner seemed sensible. But Cambridge has 500 customers and delivered £131m in revenues in the first half, i.e. an average of £260k per client. This is way under Xchanging’s per client average and I doubt it can be fixed by cross-selling alone. Surely there’s got be a lot of customer pruning too. And the US BPO market may well be the largest globally, but for that very reason it’s also the most cut-throat. Let’s not forget, not only are the US-based BPO suppliers well established there, but also the India-based majors too.

It’s great that a UK-based player is making waves overseas but many have drowned in the attempt, especially in Atlantic waters. CEO David Andrews is known for having a firm hand on the tiller, so let’s hope he can steer Xchanging on a steady course.

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