SourceCorp and HOVS Services are two companies that rarely make the news. These are blue collar outsourcing organizations who have each been in the marketplace for over 20 years with deep specialization in backoffice transaction processing and document management automation.
However, the announced merger of two competitors into a new entity with combined revenues of almost $500m, a strong positive cash flow, 14,200 employees, and a combined customer segment of half the Fortune 50 is intriguing for several reasons.
Have no doubts – this merger is all about synergies, just as we said about the Patni –iGate merger. These are two remarkably similar organizations operating remarkably similar businesses, but with very few shared customers. There is plenty of opportunity to improve profitability of the combined entity. However, for the merger to be successful in the eyes of current and potential customers, the combined organization has to not only eliminate administrative redundancies, it has to rationalize its core transaction processing technologies in a manner that will improve the value of its clients.
From a competition perspective, this merger accomplishes two marketplace changes. First, it eliminates a tough competitor with a similar approach and cost structure. Second, it creates a $500m competitor to Xerox/ACS (itself dealing with post-merger headaches), Accenture and IBM, but with a simpler story to tell, as SourceCorp+HOVS is an accomplished pure play BPO provider and doesn’t have to talk about copy machines, consulting, or software. Importantly, the combined entity earns 27% of its earnings from the healthcare sector, making it a formidable provider for clients to consider. Also, the organization has almost 100 US domestic locations, which is a considerable footprint for regulated clients or clients that need a vendor located close to their operations.
From an industry perspective, there is little doubt that Xerox’s ACS acquisition was a partial impetus for the merger. Surely pure play BPO providers are an important aspect of the marketplace, but clients who have outsourced are now looking for transformation, and the newly combined entity will have to decide whether synergies and scale are sufficient to carve out meaningful market share, or they will need to reinvest savings into creating transformational market offerings that will compete with the big boys and keep existing companies happy.
One more aspect of the industry is worth noting: SourceCorp and HOVS Services have largely focused on transforming printed material into transactional data. As clients increasingly seek to eliminate manual paperwork and automate transactions, the marketplace for the bread and butter of these two companies’ services will erode. So, this merger may offer an insight into the impact clients’ internal investment activities have on the demand for BPO services.
Despite the promise of a strong future, there are plenty of risks. If core synergies are to be obtained, clients have to be migrated to new platforms as old ones are eliminated, and some clients may be resistant or slow to do so (buyers, you know who you are). Less tangibly, management teams that competed head-to-head for many years will need to learn to collaborate and build a new company. Lastly, potential clients may balk at working with a company deeply focused on internal merger.