Insurance & Procurement Should be Separated from Impending Xchanging Sale

It was just two years ago that HfS lauded the acquisition by Xchanging of procurement sourcing technology supplier MM4. Xchanging was acquiring a much-needed boost into the North American market while increasing its value for clients with its added e-sourcing platform capabilities. In short, Xchanging had arrived as one of the more progressive Procurement-as-a-Service providers in a market suffering from transactional, limited-value procurement services.

Fast-forwarding to today, Xchanging is a (very public) acquisition target for a variety of market players (CSC, Capita, eBix and perhaps Apollo Capital Management), which have some ties into the insurance market, but not procurement, outsourcing. Consequently HfS is looking at what this acquisition might mean for Procurement Outsourcing.

HfS believes an acquisition of Xchanging by CSC, Capita, eBix or Apollo should result in a spin-off sale of Xchanging’s procurement business to an existing market participant. We believe it would be a good pick up for Infosys, Capgemini or Genpact all of which have the transactional scale to complement Xchanging’s Procurement-as-a-Service potential and push forward a progressive transformation of procurement outsourcing.

Procurement outsourcing is rapidly changing to a technology based As-a-Service solution and delivery led market. We captured this in our HfS Procurement As-a-Service Blueprint this June, which assessed 18 major service providers and how they are performing and investing in this market from both an execution and innovation standpoint. Our analysis concluded that growth in procurement outsourcing is slowing, as the nature of the transactional procurement services, which had previously swelled the size of the market beyond sourcing and category management, were becoming more automated and smaller in size. We see a market where the leading “Winner’s Circle” service providers; Accenture, IBM, GEP, Infosys, Capgemini and Xchanging, have a differentiated position and scaled capability in sourcing and transactional procurement relative to other service providers with the possible exception of Genpact.

The competitive challenges for Xchanging lie predominantly in its relatively small geographic footprint and scale (Xchanging’s own recent financials put its procurement business at barely $20 million revenue through the first 6 months of 2015, although we believe that excludes related BPO work which is substantial and could be included in any potential disposal). Xchanging’s also has a much more limited presence in transactional procurement and contract management, than the other “Winner’s Circle” providers which it would have to address should it not be acquired and which none of the current potential acquirers bring either.

Xchanging does have great strengths in the hot commodity of strategic sourcing, tail spend management, regulatory experience and in starting to build a solution and commercial model for As-a-Service delivery around the core of MM4, albeit with significant cost over-runs. 

It is these very strengths of sourcing expertise, tail-spend management capabilities and solutions for building out an As-a-Service core, that have real value and future growth potential. In our view, these do not present much value for the aforementioned potential acquirers, due to their own lack of presence in this market but they would have enhanced tuck-in value for Infosys, Capgemini or Genpact. Each of those service providers has the transactional processing depth that Xchanging lacked, and the desires for sourcing staff and technology to compete more effectively in this evolving market. Hence, while the insurance business of Xchanging might be the jewel for CSC, Capita or eBix it is the procurement business that should be attractive to others.