Procurement Outsourcing Firm Xchanging – Releases Odd and Worrying Results

Last week, business process outsourcing firm Xchanging announced half-year results to the City (the shares are quoted on the main London market) that raised a few eyebrows. The net immediate result was a 20% fall in the share price. Part of that concern was the news that Ken Lever, the CEO, is retiring at the end of this year, but the other causes were all around the procurement business.

We wrote about the results in some depth on our subscription site, Spend Matters PRO. But in summary, whilst profits and revenues were pretty much in line with expectation, some apparent problems in the procurement outsourcing division spooked the market –even though procurement only accounts for around £13 million in revenues, or around 6.5% of the total.

We say “apparent” problems because the description of what has gone wrong did seem a little odd. The firm started pushing “tail spend management” as a major product line only last year, as we reported here when we interviewed the MD of the procurement business, Chirag Shah, but the results say that an “onerous contract” in that area was proving difficult – and that was blamed for an adjusted operating loss for the procurement division of £6.8 million.

It just seems very odd for something to go that wrong that quickly, and how on earth can you lose so much, half the annual revenue of the division? Now if it was major set-up costs, we could understand that, but you would recover that over the contract period, so surely it wouldn’t all be taken as a major up-front loss? And wouldn’t cost and income flow have been planned in advance and known to the bean-counters?

The other factor was a write-off of £40 million of goodwill – coming from some old acquisitions, not the recent MarketMaker4 (MM4)and Spikes Cavell buys, they point out. So was that the buy-out way back in 2007 of the stake that BAE Systems held in the original joint venture partnership, when Xchanging first started? But why now for the write-off?

But what will be most concerning for clients must be the comments on the future. The procurement division will be split up, so the outsourcing element goes into the general Xchanging BPO division, which focuses mainly on the insurance market. And the technology goes – yes, you guessed – into the existing Technology division. (It is worth saying that the procurement technology side of things is performing well, the report states).

We don’t know what this means for Shah personally or his vision of an integrated offering, a provider being able to support customer requirements across outsourcing, software and consulting. (Shah joined when Xchanging bought MM4, his firm, two years ago). The announcement also talked of “significant cost reductions”, which is not language that reassures clients.

We don’t want to be prophets of doom here – we need to know more about the plans of course, and there is still much that is good within Xchanging’s procurement offering. But last week’s communications were not particularly encouraging.

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