The takeover of Heinz by powerhouse financiers Warren Buffet and Jorge Paulo Lemann highlights how private equity (PE) groups continue to play a major role in reshaping some of the world’s largest corporations.
The goal of PE firms is generally to take on businesses that have fallen from past glories or are in need of a new direction, to give them a nip, tuck and a polish and sell them off for as high a return as possible.
But how often does this process involve outsourcing?
Should the sales organizations of IT and business process outsourcing firms target businesses such as Heinz after they are taken over by private equity firms – after all, a new PE owner will have efficiency savings high on the agenda – or should they focus elsewhere?
A look at PAC’s Deal Tracker tool (which records all major publicly-disclosed outsourcing contracts) suggests that, contrary to what one might expect, focusing elsewhere is probably the wiser course.
If we look back at the 200 largest outsourcing deals announced in 2012 (focusing just on those contracts in the commercial sector), we find that just 4% of those deals was signed by a company under private equity ownership.
The largest example was Shop Direct’s contact center outsourcing contract with Serco, while others included deals signed by Europcar, Phones4U, Canadian retailer Comark and motorway services group Welcome Break.
Another way of looking at it is to take the biggest PE deals in recent years and see how many of them have subsequently outsourced their IT. Of the 15 biggest buyouts to date, only three (Hertz, Hilton and Energy Future) have since announced major outsourcing programmes, with another implementing a major in-sourcing strategy (Alliance Boots).
PE firms like to cut the excess fat out of their acquired businesses, but this tends to focus on disposing non-core operations, simplifying management hierarchies and trimming assets such as office space.
Because most PE firms enter into a business with a clear plan to exit within three years (five at the outside), most are reluctant to commit to long-term outsourcing deals where cost benefits will typically be back-end loaded.
Their approach to IT tends to be to lock-down discretionary spend, shelve non-essential long-term projects, give greater control to the finance/operations chief (often someone that is dropped in to the business by the PE firm) and focus on reducing operating costs.
That said, PE-backed firms have been the source of some large outsourcing deals in recent years. Just two years after Energy Future was the subject of a $44bn buyout by KKR, Goldman and TPG in 2007, the Texan utility committed to a major infrastructure outsourcing deal with HCL and a seven-year HR outsourcing deal with Northgate.
But these examples are few and far between. And although there are signs that PE activity is picking up in 2013, IT outsourcers should not put too much focus on chasing buyout targets as their potential is likely to be limited.