What’s Happening to Xchanging’s Procurement Solutions Offering? An Interview With the Top Team

Xchanging, the business technology and services firm quoted on the London Stock Exchange, has had an interesting couple of months, so it was good to get the chance to speak to Ken Lever, the CEO, and Jim Reesing, global sales and marketing director, earlier this month. Ken has announced his retirement, and his successor, Craig Wilson from HP, will be starting this month to have a handover period before he takes over fully from Ken in 2016.

The half-year results from Xchanging announced in late July were generally not bad at the corporate level but contained a trading loss and a goodwill write-down for the procurement division. That also saw the departure of Chirag Shah from his role as head of procurement services, as the firm decided to split the division and move the activities into two other existing divisions within the business. Shah only took on that job in July 2014, after joining Xchanging when the firm bought his software business, MarketMaker4 — MM4, as it is now known — in late 2013.

Since the announcement that the procurement division was being split, the official line is that Shah is "advising" the senior team on the restructuring of the procurement division into its two components. Is he in the office, we asked? Not exactly. Is he on the beach? No comment! Our suspicion is that he will remain on the books until his earn-out is complete and no longer.  

Back to the results — the losses in the procurement division were attributed largely to an "onerous contract" to provide tail spend management services to a major customer — we hear it is a major global consumer goods business. There was also a significant write-off of goodwill attributed to the  procurement business.

To address these issues, the board decided to split the procurement division, with the business process outsourcing elements going into the core Xchanging business process outourcing (BPO) division, run by Adrian Guttridge, while the procurement software business, principally MM4 and Spikes Cavell, the spend analytics business acquired a year ago, are now sitting in the technology division under Andrew Binns.  

The day of Xchanging’s results, the share price dropped some 20%, perhaps an overreaction given that the procurement division only accounts for some 6% of revenues. But the market does not like nasty surprises, and whether or not the drop was justified is no comfort to shareholders who suffered that decline.  

We asked Ken why Xchanging didn't simply sell the procurement business if things were going wrong there? While that might have been seen as a change of strategy by investors, it is hard to imagine it could have been any worse for the share price.

"We still believe in the potential of the procurement business," Ken said. "But we had to take some steps to make sure it is profitable. Having come out of a number of contracts in the past few years, we needed to grow revenue in procurement rapidly to justify the historical level of overheads in that division."

But with much of that growth expected to come from the tail spend related to "onerous contract," which then took longer than expected to gear up in revenue terms, "that did not happen,” Ken said.

“So now we have taken this ‘split and fix’ approach, as we call it, which removes some of those infrastructure and overhead cost burdens from procurement and makes the existing contracts more viable."

Certainly we have heard of staff leaving, but Ken says these are people in that "overhead" area rather than front-line delivery folk. So what is the outlook for the traditional procurement outsourcing business going forward, we asked? Is that still a priority for Xchanging? Ken is very open here.

"Our historic model for big procurement outsourcing was flawed — the combination of a gainshare approach to fees and long deal periods has not necessarily been good for us or the client. We don't think it is a good model for either party.”

Selling these big deals is also tough. "It is a highly competitive sell, with long timescales," and — this is our view rather than Ken's comments — the firm faces some tough competition from Accenture, IBM, GEP, Proxima and others.

That means the central offering around outsourcing will see more of a "procurement-as-a-service" approach, where Xchanging can provide people Ken calls "market makers" to clients — category experts who can work on a shorter-term basis. Ken expects that to be sold principally where a software relationship already exists, so our interpretation is that the MM4 product is probably the key entry point for Xchanging now, and the firm will look to build on that by offering further services to those MM4 clients, without getting into tough competitive bidding situations too often.

Interestingly, Ken does not rule out more tail spend contracts. "We still believe in it as a proposition," he said, and indeed the firm has learned from the current experience. Smart use of automation and offshoring is probably the key to making such contracts a success for the client and the provider, he thinks. Better planning of implementation costs versus revenues might help too, we would suggest, as that seems to have been at the heart of the onerous contract problem.

What can we read into this? Well, it sounds like the days of Xchanging competing for the biggest and broadest procurement outsourcing contracts are probably over, unless perhaps it is a client with whom it has a strong relationship already. But clearly, the firm will be more selective in choosing where to bid. But that doesn't mean that existing outsourcing clients won't be well served or that they should worry; the changes have not affected delivery of existing contracts, Ken stressed.

On the technology side, we suspect that much will depend on how enthusiastic the senior management of that division are about the MM4 and Spikes Cavell products. For what it is worth, we think both products have their strengths, and there is no reason why Xchanging should not be successful with those, but they will compete for management attention and resources with the core, largely insurance industry-focused products now.  

Whether Xchanging can leverage those software relationships and upsell to procurement-as-a-service (PaaS) contracts remains to be seen, however. The concept of PaaS is fine, there is a demand, although the cynic in me wonders whether it is really much more than a trendy expression for category based consulting or interim assignments! But providing the resource for that may be a challenge, as clearly there is no desire in Xchanging to have an under-utilized team of category managers sitting around waiting for the call. So how easy will it be to find those capable PaaS people when a client does want that service?

The next year or so will see whether the reorientation pays off, with a more stable and profitable procurement offering, or whether the recent changes herald the beginning of the end of Xchanging as a force in the procurement solutions world. Watch this space for more observations and analysis.

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