The UK outsourcing industry is one of the most mature in the world, with an enviable track record in supporting complex organisations. But with increasing pressure on margins where outsourcers are being asked to do more for less, what strategies should be considered to fuel the long-term growth and profitability of this important part of the UK services sector?
Chris Sood-Nicholls, Managing Director and Head of Global Services at Lloyds Bank Commercial Banking, argues that the maturity of the local market means UK outsourcers are in prime position to take advantage of opportunities abroad.
Challenging times for UK outsourcers
The UK outsourcing sector is facing a challenging cocktail of headwinds. Low growth, a series of profit warnings from some of the major players and geopolitical uncertainty are combining to make it a tough environment for the industry’s C-suite. Those in the hot seat of the chief executive’s chair have a limited time to impress. The focus on quarterly and half-yearly results, along with much more vocal investors, means company boards are under constant pressure to deliver shareholder and media friendly results quarter after quarter.
Against this demanding backdrop, we’re seeing a sector that is, in certain parts, going through a cycle of introspection, reflection and restoration. The outsourcing industry is no stranger to this, however, having been through a couple of periods of upheaval, following the widely publicised challenges in the justice, security and healthcare sectors, where a number of high profile public sector contracts came under scrutiny. As a result, a number of companies are refocusing on their core business and divesting non-core services. The challenge for many is that to grow that core business demands a new revenue stream, because the UK outsourcing market is so mature and margins remain under pressure. However, the picture is not entirely bleak. Sentiment has been positive since the EU referendum and companies continue to signal they intend to cut costs in 2017-18, which presents opportunity for outsourcers where new models can offer new savings.
Globally in-demand skills
The trading environment may be tough, but the UK’s outsourcing sector is a strong one. It accounts for 8 per cent of the UK’s economic output and employs more than 1 in 10 workers.* The depth and breadth of expertise the sector boasts across its core business areas, in complex operations such as healthcare, justice, utilities, transport, IT and security, are in demand around the globe.
One route UK outsourcers should be considering to bolster revenues at home, is to seek opportunities abroad.
Successfully expanding abroad
Key to a successful international strategy is identifying those countries with a similar operating environment to the UK, and where there is likely to be burgeoning demand for outsourcing. Labour laws should be comparable and the country should have a track record in outsourcing being an acceptable part of its business economy. For example, the DACH (Germany, Austria, Switzerland) region of Europe has an established outsourcing industry in similar sectors to the UK. We saw Capita make the most of this back in 2015, when it acquired Avocis and, together with its existing operations in this region, formed Capita Europe, delivering customer contact management services.
In 2014 we saw Babcock International, the engineering and defence support firm, make a similar strategic acquisition, purchasing helicopter firm Avincis to enhance its international footprint. The deal gave Babcock a platform in Europe and the ability to bid for, and in 2016 win, France’s Direction Générale de l’Armement (DGA) contract to provide and maintain a training platform and related services for the French Air Force (l’Armée de l’Air). The contract win came as a surprise to some, as it was expected to go to a native French company. But it was Babcock’s experience in the defence sector, combined with the right assets and local expertise through its acquisition of Avincis, which gave it the ability to win such a strategically important piece of business.
Fertile M&A ground
Clearly there is opportunity for UK outsourcers to export their expertise abroad, and acquisition can be a more effective entry strategy than making a greenfield investment based on purely organic growth plans. Encouragingly, the conditions for merger and acquisition (M&A) activity remain very fertile. Economic and company fundamentals are relatively strong, and the cost of debt is at near historic lows. In many cases the valuations of companies are still attractive, particularly for foreign buyers given movements in exchange rates. Despite geopolitical uncertainty, companies are showing an appetite to look at ways to complement organic growth through expanding into new geographies. And although companies are keen to ensure they continue to nurture their core business, there is a desire to increase their capabilities and diversify away from an over reliance on UK revenue sources through M&A activity.
Restoration or transformation?
For some UK outsourcers, the focus will be entirely on restoring the business and considering new, or any additional, opportunities overseas will be very far down the Boardroom agenda for now. But for others who have already moved through that period of restoration, the time will be right to look at ways to transform the business. Given the UK’s extensive experience in key outsourcing service areas like contact centres, e-commerce and IT, alongside complex frontline public sector support in healthcare, justice and defence, there is undoubtedly the opportunity for some to use international expansion as a route to transforming the business and boosting the bottom-line. Moreover, sentiment surrounding the economic impact of Brexit seems relatively balanced among UK corporates for now, and this should be positive for the provision of business-to-business services. The UK is about to embark on one of the most significant political and economic projects since the end of the Second World War, and whilst this undoubtedly presents risk, it could also present opportunity to outsourcers.