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September 24, 2008

Convergys gambles on possible division spin off

US-based Convergys has recently proposed the separation of its information management division from the rest of the firm. Although this move runs counter to the consolidated business process outsourcer approach, two separate business units may work together effectively. However, the possibility of such a new entity being acquired, certainly in the long-term, is a potential threat.

By CBR Staff Writer

Recent statements from Convergys have suggested the spinning off its information management services division (which broadly takes into account billing solutions and charging services to clients) into a separate and independent entity. As a result, many outsourcing observers have considered the implications of such a move. Datamonitor notes that, commercially, information management has been a strong performer within Convergys, accounting for 25% of company-wide revenues in 2007, with increases in both profit margins and operating income.

One of the principal concerns that has emerged since this strategy was mentioned is that such a move would run counter to current procurement trends among contact center outsourcing clients. Clients such as these have shown an interest in working with a small number of third-party providers that can offer broader functional capabilities. This trend is more economically viable for businesses in the long-run, as the alternative – engaging multiple niche outsourcing players across numerous functions – requires significant overhead in terms of contract procurement and management.

The main issue is whether spinning off its information management services would place Convergys at a competitive disadvantage. Datamonitor believes that this is not necessarily the case. For example, it is reasonable to assume that any new information management services entity would be run by the same individuals that have made it an increasingly-profitable division of Convergys. Furthermore, it is unlikely that said executives would want to distance themselves from the former parent firm: indeed, Convergys has the potential to incorporate the new entity into multifaceted business process outsourcing (BPO) contracts which require the companies’ services. If positioned properly in the outsourcing marketplace, the two Convergys divisions could continue to bid and fulfill contracts together on broad BPO engagements.

The move could also position Convergys more broadly in the BPO marketplace. Currently, the firm is primarily known for its work in the contact center services space. By separately marketing a new entity that is higher up the outsourcing value chain, Convergys may expand its list of potential clients for broader-based engagements.

However, as has been noted by some industry experts, information management is a growth area within BPO and positioning a new company in this market could lead to possible acquisition attempts by players looking for entry into the market. This kind of move could lead to confusion among prospective and existing clients, as it would raise questions about how an information management provider with another formal layer of separation from Convergys could fulfill end-to-end contracts seamlessly. In addition to the new entity’s potential to act as a foothold in the market, interest from outside parties would not come as a surprise given the strong performance of this division within Convergys to date. Although these kinds of corporate movements would take some time to organize, Convergys would be advised to prepare for such a possibility.

Peter Ryan

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