Consider the Source

Private Equity Sees a Pony

By Peter Allen, Partner & Managing Director, TPI

I wonder if others have noticed the recent activity levels of private equity investors. They have internalized the idea that innovation emerges from recessions.

There are a fair number of initiatives underway where PE investors have proposed carving out back-office functions from companies in certain industries, combining them with technology enablement investments, creating platform companies to service a broader market.

Of course, what I tend to see are situations in which the carved-out operation continues to provide services to the parent company.  The service agreements take the form of outsourcing contracts, but also have the characteristics of a joint venture or other shared go-to-market activities.

In my discussions with private equity players, they are sensing that the current economic dip is the ideal time to set up new creative businesses that benefit from a large cornerstone client and leverage new technological capabilities.  The result?  We’re likely to see some interesting new industry-specific BPO offerings emerge.

I think we should monitor these occurrences to help gauge how the outsourcing market will look when the return to growth arrives.

What’s a Private Equity Owner Gonna Do?

Today's blog on private equity firms comes from Peter Allen, Partner and Managing Director, TPI.

Doing nothing is not an option.  With a cloudy horizon for IPO activity of size, outsourcing and offshoring seem to be gaining favor as tangible courses of action for the active investor to insist upon.

Outsourcing and offshoring were often seen as a transformation of back-office functions that require a protracted program of change. They were never an area of focus for private equity firms looking to reintroduce their portfolio companies to public markets. That paradigm is now long-gone.

In the good old days, a private equity firm would buy a company with an eye towards giving management the runway to make structural changes. Without the burden or scrutiny that comes through public disclosures, acquired companies were “flipped,” often possessing a very different cost profile or set of products/services.

A Private Affair

Much has been written and said about the potential benefits to a company that chooses to exit the spotlight of the public markets and go private. But what about that company's clients?

It's a particularly important question for the customers of publicly traded service providers. And the happy answer is: Customers can win, too, provided management of the going-private company takes the opportunity (afforded to it by the deal) to further focus its business.

One of the biggest "wins" for the newly private service provider is a redirection of the financial mindset: Instead of chasing top-line growth by selling more services to clients -- who may be looking to cut costs -- the provider can instead look to build the bottom line by truly matching its offerings to its clients’ needs. Bingo: Both the service provider and its clients benefit.

At my company, we think that a focus on profitability over revenue growth is just one of the gains to be made in a going-private deal now being considered by a major global service provider.

Of course, there are risks to the clients of outsourcing providers, too, in these cases. One is that the service provider, perhaps with the urging of the private-equity backer, will look to transition its clients to common delivery systems rather than continuing to offer custom solutions that truly tackle the clients' needs.

But it doesn't have to be that way, and our experience is that private-equity firms understand the best practices of sourcing solutions.

Clients can and should do their part by rigorously examining their sourcing relations in light of any change in ownership status at their sourcing provider. Here's where a good consultant can help. At TPI, our "punch list" for such a transaction would encourage the clients of a service provider going private to do the following:
       • Review change-of-control provisions in the contract to determine whether they may affect your relationship.
       • Engage the service provider to set expectations on service continuity and improvement going forward.
       • Protect your rights to review and change key delivery personnel working on your account.
       • Demand ongoing attention. Require that service providers' senior managers undertake more frequent governance check-ins with the client.