After a torrid couple of years, the full year 2011 numbers for the UK’s second largest business process services (BPS) provider Xchanging were unsurprisingly bleak. For the year ended 31 December, adjusted revenue (excluding discontinued operations and before contract settlements) declined 4.7% to £650m (vs. 4% headline growth in 2010), and the adjusted operating margin (before amortisation and acquisition expenses) fell 160 basis points to 6.6%. Including these costs, the statutory operating margin was just 1% vs. -0.5% in 2010. Nontheless, CE Ken Lever's 'rosier outlook' in Xchanging having been 'stabilised', helped re-assure investors, and push its shares up 10%.
We think there is still more to be done. The big problem areas are technology and procurement and other BPO, which both notched up double-digit revenue declines (15.8% and 13.3% respectively). Xchanging exited the low margin IT reseller programme during the year, which impacted the revenue performance significantly, but even so this didn't help the adjusted operating margin, which more than halved to 7.2%. Procurement and other BPO was impacted by lower volumes from a key UK customer, and the termination of pensions service contract in its HR business in 2010. Profitability meanwhile was hit by start up costs relating to its recent procurement BPO win with BAE Systems in the US (see here) - the margin fell 140 basis points to just 3.9%.
Of course, Xchanging also recently lost its anchor HR client BAE Systems in the UK to Logica worth £18m p.a to Xchanging (see Logica scores BAE Systems HR BPO deal), which will further dent performance in 2012. We met Chris Sutton, MD for global BPO at Logica yesterday to discuss this win, and how they will make it a success. As we have said before, business process platforms are playing an increasingly key role in BPS.
2011 will go down as the most difficult year for Xchanging following the departure of founder and CEO David Andrews last February (see Xchanging founder falls on his sword (update)). 'New' CE Ken Lever embarked on a major restructuring programme – or Four Part Action Plan (see here) - ‘to stop the bleeding and stabilise the business’. This is still a work in progress. The appointment of IT industry ‘heavyweights’ Geoff Unwin as chairman (see here) and Bill Thomas as non-exec (see here) late in 2011, were certainly an endorsement of Lever's strategy. However they must be prepared for the fact that returning Xchanging to success is going to be a long and hard road.
We will provide further analysis of the performance and prospects for Xchanging in UKHotViewsExtra later, for TechMarketView subscribers.