Quindell – Is Procurement in the Insurance Sector Competent?

If you follow the financial markets at all, you may have heard the Quindell story over the past year or so. The firm was built up rapidly through acquisition by Rob Terry who had a previous track record with a failed quoted company (Innovation Group). Earlier this year, Quindell was valued at £2.7 billion.

But then in April US research firm Gotham – which stood to gain from a Quindell share price fall - issued a report saying that Quindell’s performance was built on sand and that they basically did not believe the numbers. Quindell sued for libel and won but it has proved a pyrrhic victory. There have been a number of issues, culminating in Terry and two other directors resigning after a complicated deal in which it first looked like they were buying more shares in their firm, but then turned out to look more like they were selling. Quindell shares are now valued around the 70p mark, having been as high as 660p.

One point though that has not been commented on much in the reports I’ve seen anyway. If we go back to their last quarterly report, Quindell said they made profit (EBITDA) of £83 million on revenues of £198 million – a margin of 42%! Now they describe their business like this:

Quindell is recognised as No.1 in insurance technology in Europe, a leader within Usage & Behaviour Based Insurance globally and is the largest technology enabled claims outsourcing business for the UK insurance industry and the only organisation ethically addressing the total cost of claims including personal injury and rehabilitation.

But can you see the issue here? Their clients appear to include large insurance firms – L&G, RSA, etc. and other large businesses. But generally, the insurance industry has some pretty smart procurement functions and people these days. If Quindell were and are supplying these big firms, how on earth can they make such huge profit margins? Do they have a monopoly? Seems unlikely in these areas. Are they super efficient – and the buyers very unobservant in terms of the margins?

I know if I saw a supplier, any supplier, making margins at this level, I would be straight in, looking at the competitive situation and thinking about how we might get significant price reductions – now please. The only exception I can think of is when there is a genuine monopoly situation; Microsoft comes to mind.

Anyway, we will see what happens next with Quindell. But two points to take away. Procurement people should be looking at the financial performance of suppliers, as well as carrying out financial stability type risk analysis, of course. And city analysts should ask themselves how buyers perceive a supplier’s results, and whether firms making huge margins can really sustain that.

And any readers who are clients of Quindell – hope you found our free consulting service useful! I’ll happily take 10% of your negotiated savings ...

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