It is rare for a whole host of irate customers to spawn a wave of M&A activity. But such is the case in the call center market place. When outbound call center companies found that the telemarketing systems they produced had annoyed so many people sitting down to a quiet evening meal that their customer base had a ‘don’t call’ list longer than the ‘call’ list, vendors knew it was time to look for fresh markets for revenue growth. Companies developing inbound calling systems, the sort used when booking flights or checking bank balances over the telephone, were an ideal acquisition target since they offered the prospect of being able to target additional products and services at an audience who are more willing to listen.
The first seeds of market consolidation were sewn back in 1995. EIS International, the then market leader in outbound so-called predictive dialing systems, embarked upon an ambitious expansion strategy by acquiring three businesses: work flow management company Cybernetics, call center integration firm Pulse, and Surefind a small concern specializing in PC disk backup.
EIS’s acquisition spree created a slow but sure ripple. Within a few years, its competitors had also expanded out of their respective niches through acquisition. In October 1996 Digital Systems International, a call center and CTI (computer telephony integration) house, merged with ViewStar, a business process management and workflow software supplier, to form Mosaix, in an $80m stock deal. And in May 1998 the rising star of the sector, Davox bought in-bound calling vendor, Answersoft for $65m.
Through acquisitions these vendors hoped to chase a growing and lucrative market. Analyst Frost & Sullivan, estimates the US call center market will see a compound annual growth rate of 16.6% for the next five years, creating a $10bn market by 2004. EIS, Davox and Mosaix all want a piece of the action.
Unfortunately, poorly executed acquisition strategies have left their mark. When Mosaix, EIS and Davox made acquisitions it was the point they ran into trouble, says Victor Halpert, an analyst at BancBoston Robertson Stephens. Certainly, none of the companies seemed to have gained an edge. Each vendor will achieve no more than $100m in revenues for fiscal 1998 – roughly level annual revenues. And their merger distractions over with, in many ways the companies are now left having to recover the ground they’ve lost in their bread and butter predictive dialer business.
EIS, in particular, has had difficulty integrating the companies it bought. In fact, it closed down the Cybernetics business. And then went on to sell off SureFind, one that had always been seen as a questionable purchase for a call center company. EIS still has too many products. This has made service and product support a problem for the company. Keeping up with the product release cycle has also proved to be a drain on resources, says Kevin Volpe, a CTI analyst at the Gartner Group. EIS’s strategic mistakes have reflected in the top and bottom line. In its most recent quarter, the third quarter 1998, the company saw deepening losses and shrinking revenues, reporting net income down to $2.1m on revenues down at $13.4m.
Mosaix has fared little better. As one of its competitors commented: Mosaix did a stupid thing. It bought a workflow business (effectively the software that tracks the flow of calls through a call center) but continued to focus on the outbound call business when that market was shrinking. The company also took its eye off its core dialer business from which it gains the majority of its revenues.
Mosaix is now showing signs of recovery, however. With an integrated call center suite now out in the marketplace, and a set of quarterly numbers that have shown the company in a state of recovery and moving on from the $1.8m loss on $24.1m revenues posted in the second quarter 1998, Mosaix is now positioned for growth. The early concentration is always on the technology – how to get as many calls through the system as possible so that no customer is ever lost. Post-merger, Mosaix has done well with its predictive dialing and call blending products that allow the agent workload to be controlled with some success, says Steve Barrie, principal analyst with ComputerWire’s Enterprise Systems Management Tools Bulletin, who has made a close study of the Mosaix product.
Davox is nearing a launch of its own. Having purchased Answersoft for its Concert line of in-bound calling products some ten months ago, the company is about to deliver an integrated outbound/inbound calling system, with the announcement of Ensemble later this week. Ensemble combines Davox’s outbound system, Unison, with Concert tied in at the repository level, plus some agent scripting software, Lyricall, which also came from the Answersoft acquisition. SixthSense software, which also came with Answersoft gathers customer information which is then displayed in one view using Lyricall. The product will ship at the end of the second quarter.
The Answersoft deal did not provide the anticipated spurt in revenue growth Davox had first anticipated. The Answersoft business contributed a small $6.7m in sales for 1998, although the outbound specialist paid $65m for its inbound counterpart, leading Wall Street to conclude that it had paid way too much. Davox issued a profits warning at the beginning of January, stating that fourth quarter numbers would be ‘below expectation’. Its results, which were announced last Thursday, were in line with the revised figures with earnings per share down to $0.07 compared to $.33 in the same quarter last year on revenues down to $19.4m compared with $23.7m last year.
In a bid to appease investors, Davox has announced a share buy- back program in an effort to breathe some new life into its deflated share price. The company will purchase three million common shares, or about 21% of its 14.3 million shares outstanding. The program goes into effect today.
The net effect of the consolidation in call centers has been that smaller players who have retained their focus have actually leapt ahead. Melita, a company the same size as the rest of the mid- tier vendors, concentrated its attentions on the outbound market when its competitors were busy diversifying. The result? It has shown the best growth in the sector with a string of eight profitable quarters and revenues that have consistently grown to reach $24.3m for its most recent quarter, the third quarter 98. Melita showed the best growth in 1998 and took market share away from everybody, says Halpert of BancBoston Robertson Stephens.
But the mid-tier vendors face a further threat from the call center heavy hitters of Rockwell, Lucent, Nortel and Aspect Telecommunications. The call center market has moved away from being purely telephone based to incorporate fax, email and web chat services and these top tier vendors have the resources and technology expertise to service this technology shift. Furthermore, enterprise customers require implementation and support services that these big players are able to provide. That said, Genesys is regarded as the best in terms of services and support in the mid-tier market. It provides implementation services through partnership agreements with Andersen and KPMG.
Offering comparable levels of services from within their own ranks is a far harder task for Davox, EIS and Mosiax. The high headcount required to build up a consultancy business places a heavy burden on the bottom line, which takes time to recoup. The likes of Aspect or Lucent, therefore, still remain more attractive to enterprise accounts that want to deploy a large scale call center.
There is another emerging technology threat from vendors that are developing call center technologies that use Internet Protocol (IP) telephony in place of the traditional PABXs. A small UK- based company known as Ubiquity Software has been developing low cost IP telephony software that uses IP and Java to allow call center agents to operate re
motely. By dispersing calls to agents outside of the call center it means remote or virtual call agents will receive the same automated prompts from the system as their call center based colleagues. This move addresses several weak spots of the traditional call center offering. It would mean call center capacities could be adapted to fluctuating requirements without having to physically increase or reduce the size of the call center. It brings call centers within the reach of small and mid-size enterprise who do not have the call volumes or the budget to make it cost-effective to run a fully staffed call center. And it could help combat high staff turnover among call center agents, a perennial industry problem.
This small Welsh software company located in Gwent, has some heavyweight backers. Terence Mathews, CEO of Newbridge Networks, sits as chairman on the Ubiquity board. If this signals any intention for Newbridge eventually to but the company, then it would have the necessary clout to make quite a big impact on the call center market.
