Turning your shared services operation into a gold mine
August 17, 2009
A shared services type of operation is often looked at by their owners as a cost center rather than a potential gold mine. However, as a recent McKinsey Quarterly article has pointed out, divesting such an operation may not only reduce cost and improve service quality, it has the potential to raise a literal boatload of cash that can be invested elsewhere. So just how valuable could a captive shared services operation be?
According to McKinsey, their research into more than 30 transactions has shown that on average, the divesting company had an immediate cash injection of 250% of book value and an immediate cost savings of up to 40%. This was followed by annual cost savings of 2% or more and in most cases, there were improvements in service quality. Furthermore, the acquirer not only obtains a new client and perhaps an attractive global footprint, it also obtains a business whose value may in fact be great than a five-to eight-year outsourcing contract.
To show just how successful a divestiture can be, some successful divestitures worth noting include:
- WNS. Begun in 1996 as a shared services operation for British Airlines, 70% of WNS was sold to Warburg Pincus for an undisclosed amount in April 2002. In July of 2006, WNS issued 11.2 million American depositary shares at US$20 each – raising US$224 million in what became the first initial public offering (IPO) by an Indian BPO company. Today, WNS has a global delivery network providing outsourcing solutions across industries.
- Amadeus Global Travel Distribution. Begun in 1987 as the ticketing arm for four European airlines, Amadeus was acquired in 2005 by private equity firms Cinven and BC Partners in a deal worth close to US$6 billion. Cinven worked to enlarge the business and in 2007, they recapitalized Amadeus and earned 1.6 times its original investment. Today, Amadeus is a leading provider of IT solutions to the tourism and travel industries.
- Indigo. Begun as a captive shared services operation providing financial services and Sarbanes-Oxley compliance services to Unilever, a 51% stake in Indigo was sold to Capgemini in 2006 for an undisclosed sum. Since then, Indigo has served as an integral part of the global IT platform that Capgemini has sought to build.
- Genpact. Begun in 1997 as the Indian shared services operation for GE Capital, a 60% stake in Genpact was sold to Oak Hill Capital Partners and General Atlantic Partners at the end of 2004 for US$480 million. In 2007, Genpact raised US$494 million in an IPO for a total market value of nearly US$3 billion. Today, the company has a truly global presence with more than 35 operations in 12 countries and offers a wide spectrum of outsourcing services.
Nevertheless, McKinsey cautions that selling a shared services type of operation can be tricky as it is the equivalent of negotiating a divestiture and an outsourcing contract at the same type. Moreover, not all shared services operations are mature enough for sale while any seller must ensure that a buyer will stand by their service agreements and maintain overall service quality.
Hence, and according to a 2006 article in CFO magazine, companies seeking to divest their shared services operation might want to consider maintaining a stake in it. If third party commercial operations prove to be successful, the stake will provide added profits to the parent company’s bottom line. Moreover, CFO magazine pointed out that experienced employees are increasingly leaving smaller captive operations to work for bigger operations where there are more opportunities and hence, such operations can provide better service quality. Thus, its time to move beyond just thinking about a shared services type of operation as just another cost center and to start thinking about how to turn one into a gold mine.