Xchanging – a steady recovery, more expected from procurement outsourcing

Xchanging, the outsourcing service provider with a substantial procurement practice, announced their half year results recently.

The firm went through a tricky period in 2010/11, and founder David Andrews stepped down after some disappointing results in early 2011. But the last two years has seen a recovery under Ken Lever, previously the CFO.  The share price, at 250p in flotation in 2007 hit a low of 55p in 2011, but is back around 130p now.

That recovery has included some strategic changes of direction. The firm initially grew on the back of a few very large strategic partnerships, often joint ventures, in core markets such as insurance, back-office and procurement outsourcing. Now, the firm is developing a wider contract and client base – contracts still tend to be fairly substantial, but Lever recognised the risk needed to be spread more widely, and that they had to be in the market for the mid-sized contracts, not just the mega-deals.  As they say:

The loss of the current London Metal Exchange contract, now due to end in May 2014, underscores the rationale for the transformation of our business model from one based on a small number of large contracts to one based on a large number of smaller contracts.  Reducing customer concentration will lower business risk’.

There’s also more focus on innovation and developing some of their own technology, both to use in the outsourcing arena and also perhaps as stand-alone products. We featured one such concept in the procurement space here in the recent paper co-written by Ed Cross, leader of the procurement outsourcing business at Xchanging, and me.

So the recent results overall showed a continuation of an unspectacular but steady recovery.  Revenues were up 7.6% to £347 million in the half year and, even better, statutory operating profit was up 66% to £23.3million. Cash flow was positive at £23.5 million and net cash is up to £90 million. All in all, a sound set of figures.

However, less positively, the results talked about “procurement sees a disappointing first half” but there is a “strong pipeline building for second half”.  One factor mentioned was “the impact of the lower margin, new, three year contract with BAE Systems in the UK”. Obviously a good bit of negotiation there by the BAE Systems folk!

 I’d add to that  a personal comment - something I’m hearing a lot at the moment . Whilst there is fundamentally strong interest in procurement outsourcing, and indeed in procurement software  investment,  buyers are taking their time and being very cautious. Selection and contracting processes are being measured in years, not months or weeks, in some cases.

Xchanging have also been investing, not just in technology as we mentioned above, but in building the infrastructure in the US and marketing activity. That includes the procurement business, which Lever certainly seems to see as one of the core elements of future progress.

(DeclarationXchanging have worked with Spend Matters on the paper mentioned above and on a couple of other small pieces of work. I also have a few £ thousand of Xchanging shares in my SIPP pension fund that I bought when they floated and before we launched  Spend Matters  UK/Europe. Regular readers will know of my track record on the stock market and buying because friends work for a firm is one of the things I’ve learnt over the years to be a particularly daft idea.)

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