The global market leader in contact centers, Teleperformance, has made the first bold move to shake up an industry in desperate need of a shakeup. But is this merely buying growth out of desperation, or a strategic shift to sell the full OneOffice proposition to enterprises?
While Teleperformance has clearly overpaid for the India-centric BPO firm – now on its fourth change of ownership – the leading call center firms are running out of breathing space to reshape a market beset by legacy labor-centric delivery models and under massive threat from automation and AI technologies.
In our view, there are four reasons for acquisitions in the BPO space:
- Keeps the growth perception alive. The easiest way to keep the firm growing and appease anxious investors is to buy more revenue. And there’s nothing like a nice big merger to take the quarterly heat off for a year under the guise of the integration.
- Opens up new industries for penetration. In this case, Intelenet brings its flagship Barclays account in the banking space and a plethora of online travel firms. With banks slowing down their interest in offshore centric services, and the travel industry already highly penetrated, we do not see this as a major addition to the combined entity.
- Adds automation and digital capabilities. In our view, this would be the prime motive for investments, where most of the call center industry is seriously lagging. The ability to add robotic process automation capabilities to customer processes, implement virtual agents with cognitive capability, and integrate both voice and digital customer communication channels make up the critical next stage for survival in the customer experience services business. While Intelenet does bring some added capability to the table, it is not as developed as other BPO providers in terms of talent-depth, recognition and lacks client use cases.
- Adds additional horizontal capabilities. In order to enable digital CX most effectively, companies need to integrate their supporting business operations to the customer processes, in order to cater for their needs in real-time (what we term OneOffice). Hence, for providers offering back office processes, twinned with customer experience services, there should be a strong opportunity to deliver both front to back office services for enterprises. Intelenet brings some solid capabilities in the finance and accounting, HR and transactional processing in financial services and healthcare that can help broaden the overall Teleperformance front-to-back portfolio, however, past attempts to deliver both call center and back office (notably Convergys and Conduent) as hybrid solutions have largely failed.
Dissecting the deal:
- BPO valuation in 2018 similar to 2011. Intelenet was acquired by Serco in 2011 at a revenue multiple of 2.3, then bought back by Blackstone in 2015 at price nearly equal to its revenues, and now acquired by Teleperformance at a revenue multiple of 2.2 (See exhibit 1). Now Intelenet has grown by 7-8% over that time period but it is not a very different company than it was 7 years ago from a capability perspective – the core value proposition continues to be India / offshore centricity. We were surprised to see a revenue multiple similar to that 7 years ago, especially for an asset that is broadly similar in its core value proposition. But this is sheer brilliance from Blackstone to make these returns, not once but twice on the same asset!
Exhibit 1: Intelenet Acquisitions 2011- present
Source: Public Records
- Traditional BPO is slowing down. HfS has downgraded its BPO growth forecasts over the last 5 years (See exhibit 2). Most of the growth over the next 5 years is expected to be generated by rise of as-a-service / platform driven offerings, greater automation that cannibalizes traditional outsourcing but can add more scope, increasing expectations from customers to demand for less (or at least same price).
Exhibit 2: HfS BPO Forecast 2012-2021
Source: HfS Research, 2018
- Offshoring heydays are over. While most enterprises were contemplating 20%+ increase in offshoring 4-5 years ago, today the expected increase in offshoring is less than 5% and negative in certain areas (see Exhibit 3.) Labor arbitrage has been the backbone of the growth and value proposition for BPO services, but it is a one-time impact. Most large organizations with mature shared services or third-party provider relationships that have been running on an arbitrage-led model are now searching for the next “silver bullet” to find that next 30% to 40% of cost or value impact from managing their operations. Also, arbitrage has proven to be one dimensional; consequently, the BPO market has struggled to drive significant value creation beyond cost reduction. Service providers figured out how to create a low-risk model to move as-is processes into a more affordable delivery model, where some modifications were made to standardize processes and procedures. But, once the new model has been operationalized, there is little or no incentive to make further changes without cannibalizing the revenue of the service provider. Simply reducing the number of offshore employees to manage work is not to their advantage when that is their sole source of revenue generation. Moreover, the increasing protectionist sentiment in the west and the associated politics also do not augur well for this model, at least in the near term.
Exhibit 3: Enterprise intentions for Offshore Slowing as Focus shifts from “Cost” to “Value”
Q: To what extent is your use of offshoring/nearshoring is likely to change in the next 2 years across the following functions? (Combined outsourcing and share services results)
Source: HfS Research in Conjunction with KPMG, “State of Operations and Outsourcing 2018, May 2018
Sample: Global 2000 Enterprise Leaders = 381
- Emerging technologies are the key to growth in third-party business services. A range of new change agents is emerging that offers credible value to the tired value proposition of BPO services. The rise of digital as-a-service platforms such as Concur, Tradeshift, Blackline, Trintech, and OmPrompt is changing how we think of traditional value chains and associated service deliver as cloud-based solutions increasingly provide an end-game getting work done with vastly reduced needs for intensive labor and technology fixes. The rise of robotic process automation (RPA) has also been nothing short of spectacular. In our recent study, investments in RPA easily surpass investments in outsourcing across all industry segments (see exhibit 4). Elements of artificial intelligence (AI), especially machine learning (ML), natural language processing (NLP), and computer vision are starting to find their feet. And Blockchain, or distributed ledger technology (DLT), is starting to offer a disruptive future vision for business services.
Exhibit 4: 2018 Investment intentions: “Humans-plus-Bots” now the norm
Source: HfS Research in Conjunction with KPMG, “State of Operations and Outsourcing 2018, May 2018
Sample: Global 2000 Enterprise Leaders = 381
- Intelenet is a decent service provider, but far from being a beacon of hope. As mentioned earlier, Intelenet has grown at a pace above market average but has not evolved its core value proposition away from offshore cost savings. Most of this growth is highly correlated to headcount increase (38K FTEs in 2011 to 55K FTEs in 2018 – approximately 5.5% CAGR). It has not made any notable acquisitions in this period. Its investments in emerging change agents such as RPA and AI are basic at best. It continues to be strong in its traditional areas of strengths (e.g., travel) and has not substantially cracked open any new verticals in a big way over the last 7 years.
The Bottom-line: Not the greatest acquisition out there for Teleperformance, but options are limited in this climate
This isn’t a poor acquisition for Teleperformance – far from it – but having to invest such a large amount of money in a firm which at best adds more transaction BPO capability, extra revenue, profit and scale, is surprising. HfS believes Teleperformance should focus more heavily on adding world class digital and intelligent automation prowess to really take the initiative as a Digital OneOffice market leader. However, the options here are few and far between – a firm such as EXL would add greater depth and automation capability (but would have been over $2 billion) while an automation boutique, such as Symphony, is too small to have a major impact. Syntel would make a very interesting addition, boasting both IT services and automation ability – and may yet prove to be a strong addition as the market shakes out further. Sutherland Global Services would also be worth adding to the conversation, bringing additional call center dominance, the healthcare vertical in spades and proven RPA depth.
The core rationale of this acquisition is to double down on ‘specialized services’, which has been Teleperformance’s highest growth area over the last couple of years. In a less bold but much more strategic play earlier this year, Teleperformance announced the birth of its Praxidia offering, a discrete consulting capability that also falls under the specialized services umbrella and fills a major gap in the market. It’s clear the intent is to diversify beyond traditional contact center services while sticking as close as possible to its DNA. But the Intelenet impact is minimal beyond a greater diversification of more transactional BPO services and a paltry 1% growth impact. Adding 200 process consultants and data scientists certainly can’t hurt, but that’s just 200 people out of a 55,000 employee entity. Teleperformance experiences healthy growth and financial performance, but is still vulnerable to the threats of automation and AI, which most of the large players in the market say they are embracing but can’t seem to monetize. Teleperformance will now really need to connect the dots with this acquisition, and carefully examine future investments, in order to shift to meet the customer needs for a OneOffice proposition.
