November 2001
 

BY MIKE ROWLAND, PACK FANCHER, AND BRYAN JOHNSON, MATRIX CAPITAL MARKETS GROUP

'This transaction expands Solectron's presence in customer relationship management (CRM) services, a sector we have specifically targeted for growth. Stream's expertise extends our industry-leading service offerings. The capability to add full CRM services will provide our customers with a complete and fully integrated 'end-to-end' solution. This will improve our customer's product support and service delivery in substantial and innovative ways.'

This quote from Bill Mitchell, EVP and president of Solectron Global Services, references the electronics manufacturing firm's recent acquisition of Stream International, a $322 million in revenue provider of CRM services to computer makers such as Compaq and Hewlett-Packard. When the acquisition closes, Solectron will be one of the 10 largest CRM outsourcing providers in the world and will compete with the likes of ICT Group, Sitel and Tele-Tech. Consider also Spherion Corporation, a Fortune 500 company that announced a major change in its corporate strategy this summer, de-emphasizing its core business -- staffing -- with the goal of doubling its outsourcing business, which currently handles 50 million customer contacts annually and operates call centers in nine countries.

As traditional CRM and teleservices firms scramble to bid on the next telecom or credit card RFP, a number of well-capitalized, well-managed outsourcing firms like Solectron and Spherion have been quietly watching the industry. These companies are global, integrated outsourcing companies offering a variety of outsourced business processes, including electronics manufacturing services and staffing, as well as IT consulting, accounts payable management and printing, and they are increasingly looking to acquire or develop CRM and teleservices capabilities to round out their service offerings. Acquiring or developing customer interaction capabilities would complement the services these firms already offer, allowing them to create a one-stop solution for all of their clients' outsourcing needs. In essence, these firms have the capacity to become the industry's new '800-pound gorilla.'

The emergence of these global, diversified outsourcing companies and their entry into the customer contact marketplace could have far-reaching implications for traditional CRM and teleservices firms, not the least of which is an entirely new competitive dynamic. For the traditional teleservices firm, competing against a nontraditional outsourcing firm, which integrates customer interaction capabilities on a global basis with an entire suite of other outsourcing capabilities, may become more difficult than ever, particularly when it comes to winning large, new contracts.

For the nontraditional firms, the benefit is two-fold. Not only will they be able to capture business away from traditional CRM and teleservices firms, but the increasing depth of their outsourced business services will give them new ammunition in targeting the in-house operations of firms that have until now refused to outsource any customer interaction services for fear of relinquishing the crown jewels of their companies: their customer relationships. This ability to penetrate the in-house market may, in fact, be the opportunity that nontraditionals are most excited about.

These new industry participants are also in a position to dramatically alter the current pricing dynamics within the teleservices industry. Currently, pricing is more or less dictated by the large telecom and credit card companies, which pit CRM and teleservices firms against one another by dividing their inbound, outbound and eCRM contracts among a dozen or more firms. In fact, some of the larger telecom and credit card companies have recently gone so far as to pit companies against one another in a reverse auction to drive down pricing. The net effect is contracts with demanding clients and thin margins, leaving CEOs scratching their heads at night wondering why they ever agreed to take on the new contracts.

For Solectron, which currently generates roughly $18 billion in annual sales, Stream International represents the company's third acquisition of an after-sales, customer support business. Stream operates 22 contact centers in North America, Asia and Europe and employs approximately 10,000 people. Solectron provides a full range of global manufacturing and supply-chain management services to numerous technology and electronics companies, including new-product design and introduction services, materials management, product manufacturing, product warranty and end-of-life support. Solectron Global Services provides a full range of post-manufacturing services, including product repair, upgrades, re-manufacturing and maintenance, help-desk support, logistics and parts management, asset recovery, returns processing, warehousing, engineering change management and end-of-life manufacturing. As evidenced by the Stream International acquisition, Solectron has now extended its outsourcing services to include after-sale customer support.

Spherion, one of the largest worldwide staffing firms with more than $3 billion in annual sales, has traditionally been focused on providing temporary staffing solutions to large corporations, a position that was bolstered through its acquisition of Atlanta-based Norrell in 1999. Spherion's core service offering has since been expanded, however, and now includes a variety of additional outsourced services. The company now operates through a network of more than 1,000 offices throughout North America, Europe, Asia and Australia. The firm still generates roughly 45 percent of sales through traditional temporary staffing, however, expansions into managed staffing, software development, IT consulting, search and recruitment and call center outsourcing now comprise the majority of Spherion's revenue.

Spherion's emphasis on leveraging its growing suite of outsourcing services to drive growth and capture multi-year outsourcing contracts is evidenced by its recent announcement that it would expand its outsourcing relationship with Sprint PCS to provide customer support at Sprint PCS' new customer interaction center in Puerto Rico. Spherion signed a multi-year outsourcing agreement with Sprint to outsource the management of this center. When announcing this deal, Spherion President and CEO Cinda Hallman stated, 'Spherion will continue to look for opportunities to add value to our customers' businesses through leveraging our experience in call center outsourcing.'

These are but a few examples of global firms buying or expanding their CRM capabilities to offer a one-stop solution for their clients' outsourcing needs, wherein traditional customer interaction services represent just one component of a much larger service offering. These new entrants in the CRM and teleservices industry could shift the pricing dynamic back into the hands of outsourcing companies. By bundling customer interaction services with a number of other outsourced business services, the outsourcing firms will increasingly win the large, multi-year contracts that have characterized other outsourcing industries, such as the electronics manufacturing services industry, resulting in enormous growth. As this occurs, the fragmented contracts of the large telecom and financial services companies are likely to be consolidated by a much smaller pool of large outsourcing firms with significantly more clout than traditional CRM and teleservices firms, shifting the pricing dynamic away from the customer and back into the hands of the service provider.

Granted, none of this will happen overnight, and may in fact take years to unfold. However, what is clear is that it will happen. What is also clear is that there will be winners and losers. Nontraditional outsourcing firms are acquiring or developing high-quality CRM and teleservices firms, with the end goal of integrating their capabilities and expertise into a broader suite of outsourced business services. Traditional teleservices companies have a choice. They can either embrace the change by becoming part of it, or be overwhelmed by it. The owners and CEOs of traditional firms need to recognize the threat posed by these new, well-capitalized competitors and begin to think in terms of how they can either ally themselves with them, or position themselves to compete effectively with them by broadening their own service offerings.

Mike Rowland, Pack Fancher and Bryan Johnson of Matrix Capital Markets' Outsourced Business Services Group all contributed to this article. Matrix Capital Markets Group can be reached at 804-780-0060.

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