Public or Private: What Works for an Outsourcing Supplier?

June 13, 2007 | Phil Fersht

An interesting article from tenacious HRO journalist Jessica Marquez at Workforce Magazine got me thinking more about the impact of private equity in outsourcing.   In mature markets, for example IT Outsourcing, the leading suppliers are all established longtime publicly traded entities (IBM, Accenture, HP etc).  The suppliers have established a critical mass of clients, all have vast offshore and onshore resources, and tend to compete more on reputation, innovation and established relationships.  Being publicly traded, they need to keep a close eye on maintaining acceptable profit margins, their contract strategies are more visible (especially when closely analyzed by Wall St) and there is less "secret sauce" around how they won the deal.  In BPO, however, the ball game is entirely different. 

The HR, Finance & Accounting and Procurement Outsourcing markets are all in rapid growth stage, suppliers are still attempting to get to a critical mass as fast as possible, while picking up referenceable name clients.  The HRO market accelerated too quickly for its own good after 9/11 and too many suppliers entered into situations where they allowed themselves to front-load deals to entice CEOs ambitious to demolish costs as quickly as possible.  Industry mammoths like IBM and Accenture can handle taking a few "at cost" deals to gain market share, but for smaller suppliers they simply cannot prosper from losing money on deals to grow a business if they are operating in a publicly-traded environment.  Wall Street is not tolerant of money-losing ventures unless the future upside can be quickly demonstrated.  Hence - why not find a private equity investor who genuinely understands the long-term upside of investing in an outsourcing supplier in growth mode?  They can ensure their incubated supplier is operating away from the Wall St radar and can cherry-pick the business they believe will be incremental for the future success of that firm by subsidizing operating costs to take out the competition.  ACS is one example of a firm which has enjoyed the early highs of the BPO boom and is now suffering from too much public exposure as it battles in ingest a huge array of global clients across several outsourcing towers.  The Dallas-based firm will surely benefit from an incubation period where it can ready itself for its next wave of growth away from the public spotlight.  The firm certainly has the business volume, brand and experience to rebound from its current predicament, and time away from the public spotlight is surely what it needs as it gets its act together.  Other firms like the ones mentioned in Jessica's article (i.e. Ceridian) also have tremendous potential to refocus, re-arm and come out fighting - and need the shield of their private ownership to provide the time, resources and management acumen needed to take their business to the next level.

Perhaps the most interesting example of a privately-held BPO which fully maximized its private status has been Genpact - the firm went on a huge tear, picking up over 35 major F&A BPO clients in the space of 3 years before announcing its public intentions this year.  It took full advantage of healthy investment from its parent investors to price aggressively, while combining this with a powerful offering based on its GE heritage and Six Sigma and LEAN methodologies.  This company came from practically nowhere to become one of the top tier of firms as a result of shrewd management in a privately run environment.  It will be fascinating to see how the firm continues to perform now it's operations will be far more exposed to Wall St.

So all-in-all, one can argue that being private in a high-growth and highly competitive industry like BPO is far more beneficial, provided the company is being carefully groomed by a team of investors who really know what they are doing - and really believe in the future potential of their industry.  Conversely, in fully mature industries like ITO, where everything is broken down into components parts to help investment analysts salivate at the profit margins, it makes more sense to be in the public domain where scrutiny is king.

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