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December 12, 2006

United Utilities: Vertex sale imminent

United Utilities has put its business process outsourcing unit Vertex up for sale, following months of speculation about such a move. The imminent sale comes after Vertex failed to overcome competition from Indian outsourcers. It also provides a casebook example of a utility company dabbling with non-core businesses and then selling them off at the highest price when the market is buoyant.

By CBR Staff Writer

After months of speculation, United Utilities has formally put its Vertex arm up for sale.

Utility business process outsourcing (BPO) specialist Vertex has finally been placed on the sale list by its parent United Utilities, bringing to an end a venture which has struggled to gain market share in the UK utilities market. The company, which had a turnover of GBP405 million for 2005/2006, is thought to be valued at around GBP400 million.

Vertex was created by United Utilities in 1996, with the explicit aim of improving customer service and generating savings from non-core support services. It aimed to win new BPO contracts in the utilities sector and, by 2000, had a won the largest BPO contract in Europe, worth GBP650 million, with TXU Europe.

In 2001, in partnership with CapGemini, Vertex won its first contract outside of the UK with Canadian electricity company Hydro One. It has since built on this experience, winning a $1.6 billion contract with US multi-state energy company NiSource to provide business transformation services in 2005, in partnership with IBM.

However, in the UK in the last few years, Vertex has found it more challenging to win contracts with utilities and has instead focused its attention on the public sector. Most significant have been the successful BPO deals with Westminster and Thurrock councils and with the Department of Work and Pensions.

Vertex has failed to make significant inroads in the UK BPO utilities sector partly because of the growing reticence to offshore front office roles to India, but more importantly because of the trend to offshore back office processes to India, an activity in which other companies have more experience and capacity.

In the future, Vertex faces burgeoning competition in the BPO space from specialist Indian outsourcing companies, so it seems any future growth story centers on winning further public sector contracts that offer more stable but modest returns to potential investors.

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