Xansa travels far on its ambitious offshore outsourcing
posted in Outsourcing News and Top Outsourcing deals |Source: www.telegraph.co.uk
Anyone looking for proof of the offshoring model that shifts work to low-cost countries need look no further than the contrast in fortunes between IT services companies LogicaCMG and Xansa.
Logica recently came tail between legs to tell the market that revenues from its UK business slid 15pc in the first quarter. As well as some contract-specific issues, chief executive Martin Read conceded that the company had not pushed its model of blending on and offshoring hard enough, and that it was struggling in the face of increased competition from the Indian outsourcing giants.
Smaller rival Xansa tells quite a different story and reported a 7pc increase in sales in the first half.
Xansa considers that its success is driven by the fact that it was the first British IT company to realise the potential of moving staff to India back in 1998.
While 99pc of its business comes from UK clients, more than half of its 8,000 employees are now based in India, from Pune to Chennai. Logica, on the other hand, has just 10pc of its workforce outside Europe.
It has not, however, been an easy ride for Xansa. The company suffered declining revenues from 2003 as it transformed its business model, with the inevitable impact on the share price.
From a low-growth, low-margin business of managing applications, Xansa has moved into the high-growth, high-margin business process outsourcing market.
With its finance, accounting and human resources operations, it now competes with the likes of Accenture for big corporate customers, from the Royal Mail to Boots.
As well as an impressive commercial client list, Xansa is building its public sector business, which now represents 21pc of sales. This is exactly the kind of long-term steady contracts Xansa needs. They are almost all with central government, which is more comfortable with Xansa’s offshoring model than local government. And the work is unlikely to dry up as outsourcing quickly and quantifiably achieves the kind of cost-cutting every government wants and needs.
The key factor to boost this company’s share price performance in the near-term is the profit margin improvement that should follow its shift to more business process outsourcing work. Xansa reported margins of 7pc in December and management is confident it can push this up to high single digits. That may be too conservative as margins elsewhere in the sector are in double digits.
Chief executive Alistair Cox is suitably ambitious. As well as winning market share from some of the major players, he reckons the industry itself is growing.
Increasingly clients want help with their human resources department as well as IT support. On that premise Mr Cox considers there is still massive untapped potential in the UK before Xansa even begins to look overseas.
The shares are trading on around 16 times forecast earnings. While Capita is almost 15 times the size of Xansa the two are not dissimilar, and Capita is trading on around 27 times forecast earnings. Buy.
