Diversification into new industry verticals and service offerings is going to be key to WNS riding out the economic downturn.
By Samad Masood
25 May 2009
India’s WNS has risen rapidly to prominence as a UK- and US-focused business process outsourcing (BPO) player heavily involved in the travel and insurance markets. However, reduced business volumes in both these industries threaten to halt growth in 2010. Diversification into new industry verticals and service offerings is going to be key to WNS riding out the economic downturn.
WNS Global Services reported growth of 32.9 per cent for the year ended 31 March 2009, pushing its annual revenues to US$386 million. Most of this new revenue came from the acquisition of Aviva’s back office and the related $1 billion, eight-year deal. Excluding all acquisitions and accounting for currency fluctuations, WNS’s organic revenue growth was only 5.5 per cent.
The Aviva acquisition doubled the size of WNS’s banking and insurance sector business – now its largest vertical – but its second largest, the travel sector, shrank by 2 per cent. While there was strong growth (21 per cent) from the ‘emerging services’ business unit, this was cancelled out by a 21 per cent decline in revenues from industrial and infrastructure clients.
WNS’s management doesn’t see much improvement ahead either, forecasting flat revenue growth at best for the coming year – if the USD/GBP rate stays between 1.4 and 1.45. On the positive side, profitability is expected to improve. Staff attrition is falling and competition in the Indian labour market is cooling. WNS also has the opportunity to further reduce costs ahead by integrating acquisitions made in 2008, such as Aviva and Call 24/7.
Operating margins before tax currently stand at only 3 per cent. However, net income, adjusted to exclude share-based compensation, related fringe benefit taxes and amortisation of intangible assets, was 12 per cent, and is forecast to reach around 13 per cent in 2010.
BPO not always ‘counter-recessionary’
WNS has faced significant ‘headwinds’ in terms of currency fluctuations holding back growth. This is an ongoing issue affecting offshore players across the industry. The depreciation of both the dollar and the pound versus the rupee over the year will have hurt WNS particularly badly given that 62 per cent of revenues are paid in British pounds, and it reports its results in dollars.
However, currency is only part of the problem. WNS is also heavily involved in BPO services that are particularly prone to the credit crunch. Thanks partly to Aviva, insurance processing represents more than 45 per cent of WNS’s business. Alongside this, WNS is also heavily involved in travel sector services thanks to its origins as British Airways’ offshore back-office operation. All in, three-quarters of WNS’s business comes from these two sectors, where volumes of business have been affected by lower consumer spending.
This is a particular issue for the third of WNS’s revenues that are based on transactional volume, in areas such as claims handling and ticketing. Volumes here have been affected by the economic downturn, and WNS’s management is muted about expectations for volume growth in these markets in the year ahead.
Growth from diversity for WNS
WNS is faced with a classic BPO vendor conundrum. For a vendor of its size, it is too narrowly focused on too few verticals to enable sustainable growth. Successes in the travel and insurance sector have rapidly turned WNS into a global challenger. However, this over-reliance is now threatening to hold it back at a time when BPO rivals that are more diversified in horizontal services, such as Genpact and Capita, continue to post double-digit growth.
This is why WNS is increasingly emphasising its horizontal service propositions in finance and accounting, research and analytics, and customer services. WNS’s acquisition last year of Bizaps, an F&A-focused SAP integrator and consultancy, is a particularly interesting new string to its bow, possibly opening up new doors in this horizontal market. Meanwhile, WNS is expanding the range of verticals it targets to increase the focus on media, pharmaceuticals, retail and manufacturing.
Ultimately, WNS needs to build a business that is not overly reliant on single verticals, but it also needs to focus more on developing revenues that are based on outcomes rather than volume inputs. That change will involve a significant realignment of WNS’s client engagement model, and Bizaps and the research and analytics capabilities will be key here. WNS understands the challenge ahead, and knows that it needs to build its credibility in horizontal services. However, it will take time before this results in a significant return to top-line organic growth.
