Q Outsourced Business Services Sector Review

Transcription

1 Q Outsourced Business Services Sector Review 6010 Executive Blvd., Suite 802, Rockville, MD

2 Table of Contents Outsourced Business Services (OBS) Sector Overview 4 Revenue Cycle Management (RCM) Industry Overview 6 Customer Relationship Management (CRM) Industry Overview 7 Accounts Receivable Management (ARM) Industry Overview 8 What are Some of the Things We DO Know? By Patti J. Dunn, President of The EDGE Consulting 9 2

3 Outsourced Business Services Sector Overview Q The OBS sector continued to enjoy an active M&A market during the first quarter of 2013, despite the roller coaster trends unfolding throughout the global economy. But, as we all know, statistics alone do not tell the whole story about a sector s M&A performance. In this report we will dig into each of the OBS industries and discuss what key trends are unfolding and how they may impact the OBS M&A market throughout 2013, and beyond. This report includes a guest article from Patti Dunn, What are Some of the Things We DO Know? In this article, Ms. Dunn provides a detailed and insightful overview of what is to come with the CFPB supervisory rule. Although much is still up in the air, Ms. Dunn provides valuable insight on what has been established thus far. We will continue to track the trends that are impacting the OBS sector, and look forward to keeping in touch with you throughout the year. If you have any questions or wish to confidentially discuss your business interests, please contact a member of our strategic advisory team at hq@kaulkin.com or visit 3

4 Deal activity in the first quarter once again exceeded our expectations, with 16 transactions completed in Kaulkin Ginsberg s outsourced business services (OBS) sector (accounts receivable management, customer relationship management, and revenue cycle management), representing almost $300 million in total deal value. While not as robust as the first quarter of 2012, which generated 22 OBS completed transactions and almost $700 million in deal value, the data shows that the OBS merger and acquisition (M&A) markets are active and buyers and sellers remain highly interested in doing deals. Typically, the first quarter of a year is a relatively quiet M&A period as executive teams are focused on getting off to a good start and implementing their growth plans. However, due to volatile economic conditions over the past couple of years, larger OBS companies (many of which are publicly traded or private equity backed) have been eager to acquire other large OBS companies that can serve as a platform in a new market or smaller strategic add-ons that can augment their share of existing markets and/or expand their service offerings. In Q1 of 2013, the vast majority of the deals fell into the latter category as 75% of the transactions were less than $10 million purchase price, representing larger OBS companies acquiring smaller ones. This is not surprising, given that there have been numerous platform acquisitions completed by both strategic and financial buyers within the revenue cycle management (RCM) and customer relationship management 4

5 (CRM) industries over the past two years, and acquirers are typically eager to continue to grow new platforms both organically and via additional add-on acquisitions. The OBS M&A market continues to be aided by several economic and market trends, including: Aging populations in several of the larger consumer markets (e.g., United States) that are requiring more services, particularly healthcare and government services Companies continue to seek ways to better manage their costs, looking to outsource non-core services Gradually reducing unemployment rates and improving economic conditions, motivating companies to invest in growth opportunities and consumers to begin spending more, perpetuating a growth environment Stricter government and client compliance requirements are also causing a consolidation in certain markets (e.g., financial services), and forming barriers to entry that will enable surviving incumbents to grow in a less competitive environment over time Expected implementation of ObamaCare provisions effective January 1, 2014, which will increase costs for companies and make it more challenging for smaller OBS businesses to remain independent Fear of increases in capital gains tax rates in 2014 Size of Acquired Company ($ Revenues) H Multiples/Structure Small* (<$2M) Mid-Sized* ($2-10M) Large** ($10-20M) Platform** ($20M+) Multiples 2-4X SDE 3-6X Adj. EBITDA 5-8X Adj. EBITDA 8-10X Adj. EBITDA Structure 25%-100% cash 50%-100% cash 80%-100% cash 80%-100% cash * SDE = Seller s Discretionary Earnings (Seller compensation + expenses combined with EBITDA) ** Adj. EBITDA = Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation + Amortization adjusted for non-recurring expenses that would not exist post-transaction) Deal multiples for Q are relatively consistent with previous quarters except for the Large category, which is showing a slight decline in its range. However, this is being driven by the reduction in platform acquisitions as opposed to a market trend change. Overall, we expect the merger and acquisition (M&A) market to remain fairly active in the OBS sector for the rest of 2013, particularly in the RCM and CRM industries. We believe M&A activity in the accounts receivable management (ARM) industry may remain fairly sluggish because of the uncertainty caused by regulatory changes. Although we do believe that these changes will motivate an ongoing consolidation effort throughout the year (e.g., Encore Capital s pending acquisition of Asset Acceptance). The only areas of interest in the ARM industry will be in market segments like: healthcare, student loans and government receivables. These are the markets that are currently holding strong and are headed for growth, despite ongoing concern around the industry. 5

6 RCM Industry Overview The revenue cycle management (RCM) industry has enjoyed double digit growth since 2010, a level that has outperformed most of the rest of the OBS sector. This market growth has continued to motivate strategic and financial buyers to seek out platform and/or add-on acquisition opportunities. Industry analysts are forecasting the RCM market to grow at this level through at least 2016, and believe that the healthcare reforms introduced by the Obama administration are going to be a primary driver of new business opportunities in the healthcare outsourcing market. These growth trends drove RCM M&A activity to a new high in 2012, and Q results confirm continued interest from strategic and financial buyers. 7 transactions were completed in Q generating just under $100 million in deal value, compared to 10 transactions and $130 million in deal value during the same quarter last year. All but one of the deals in Q involved larger RCM companies acquiring smaller ones, a trend that we believe will become more of the norm going forward given the high level of platform acquisitions completed from 2008 through As we move forward into 2013, we expect RCM M&A activity to be driven by consolidation of vendors in maturing markets (e.g., Coding and Medical Billing) and strategic acquisitions in newly established and strong growing markets (e.g., Pre- Registration/Registration Outsourcing and Patient Eligibility). Financial buyers will still be actively seeking platform acquisitions, but strategic buyers will most likely dominate the M&A market activity for the remainder of this year. 6

7 CRM Industry Overview Despite the fact that most industry analysts project the global CRM industry to grow at a compound annual growth rate of 5-8% for the next five years, and the U.S. CRM industry, which represents half or more of the global CRM industry, at a lower rate (2-3% per year), the CRM M&A market experienced tremendous growth in 2012, particularly (and not surprisingly) in the international markets, and 2013 is getting off to a similar start. 5 transactions were completed in Q representing $190 million in total deal value, compared to 5 transactions in the first quarter of 2012 that generated only $60 million in total deal value. Strategic and financial buyers are acquiring both large and small CRM companies to gain access to new services and markets with significant growth potential. South America experienced a hotbed of M&A activity in the CRM sector last year, and this year Europe seems to be the flavor of choice with three substantial acquisitions completed in Q1. We anticipate continued M&A activity in this industry, driven primarily by strategic buyers who will be acquiring smaller add-ons and platforms in niche geographic markets they wish to penetrate, particularly within the international markets. 7

8 ARM Industry Overview The global ARM industry experienced a significant downturn in M&A activity in 2012 driven by a growing level of uncertainty in the U.S. market, coupled with stagnant liquidation results across the globe, and 2013 appears to be continuing this trend with only 4 transactions completed in Q1 representing $16 million in deal value. All of these transactions involved a larger ARM company acquiring (consolidating) a smaller one. For most strategic and financial buyers, the desire to complete transactions in the ARM industry still exists but they need to find good performing companies that are focused on growth markets and are fully compliant with federal/state government and client requirements. We believe the following markets will drive M&A interest in 2013 and 2014: Healthcare Strong performing healthcare ARM companies remain attractive to other types of ARM companies and financial buyers. Student Loans The new Department of Education contract is currently in the RFP process, and the winners should be confirmed later this year. Government Local and state government opportunities continue to grow, motivating strategic and financial buyers to seek out platform and add-on acquisition opportunities in order to access new geographic markets and service capabilities. The regulatory environment and business volume changes will continue to influence M&A activity in the ARM industry, and fully compliant, growing ARM companies will continue to generate significant attention from buyers seeking to growth opportunities. 8

9 With ongoing regulation and scrutiny from the government, the ARM industry is headed for change. As consolidation continues in the industry, we don t know much about what the future holds, but there are a few questions that have been answered thus far. Patti Dunn takes a dive into the information we do know about new the CFPB regulation. What are Some of the Things We DO Know? By Patti J. Dunn, President of the EDGE Consulting Since the Consumer Financial Protection Bureau (CFPB) announced that they would be asserting a supervisory role over accounts receivable management (ARM) companies that generate $10 million or more in revenues, many questions have been posed and frequently the answers are preceded by the phrase we really don t know yet. So here is an interesting look at what we do know when thinking about CFBP supervision and the changing environment in the ARM industry. The key concept for ARM companies to think about first is establishing a culture of compliance and embedding it in the organization. With the CFPB s new regulations, it is a priority for all ARM companies, large or small, to adapt these new guidelines. This is not something that should be approached casually or with the thought that this is an easy undertaking. Changing a culture can take considerable time and requires an absolute commitment from everyone, starting with top management. So what we do know is that every ARM company should carefully evaluate its culture of compliance, beginning with where the Chief Compliance Officer and the compliance department will be located within the organization and what their span of control will be. From there, all policies and procedures need to be reviewed by the compliance department with new ones added or updated as needed. Most importantly, all policies and procedures will need to be evaluated as to how they are/will be implemented across the organization. Recurring and documented training and validation that your staff can speak about the policies fluently, are also essential components to creating this culture of compliance. We also know from listening to and reading CFPB communications that customer experience is very important in evaluating an ARM company s practices. Understanding customer experience starts with looking at every consumer interaction - phone, letter, website, recorded messages and s. The communication between your company and the consumer should be clear and concise. You want to gauge how easy it is for the consumer to understand the communication, how easy is it to file a complaint or ask to have a phone number removed or obtain additional information. Not only, should your communication to the consumer be clear but a way for the consumer to respond should also be accessible. Company websites should provide consumer education as well as convenient methods for the consumer to communicate with your company. All communications and activities should be open and transparent as well as compliant. Owners and executives should be evaluating their company s current practices from this perspective. We also know that the CFPB will be looking for a strong compliance management system as part of their initial assessment. Components of a strong compliance system include proof that compliance involvement occurs at all levels of the organization (including the Board) and that compliant polices exist, are documented, are trained to staff and are followed. Auditing all compliance policies, procedures, and processes is essential to verify understanding by staff, implementation in practice and identifying nonconformities. Auditing both internally and using external resources seems advisable. It 9

10 is important to keep in mind that the CFPB would view auditing practices as strengthening a compliance management system. But CFPB staff have also stated that any audit internal or even by an external vendor, no matter whom that firm may be, is not going deter the CFPB from making their own determinations of the compliance management system in place. As another example, the same thought process would apply to voice analytic systems. Voice analytic systems are able to analyze all calls for predetermined words and phrases in order to evaluate compliance levels of calls. They are an important tool in managing call compliance but that will not exclude examination of compliance with applicable laws and regulations just because that technology is in use. In all of this, being overly dependent on either technology or people to assume compliance levels is a huge misstep. When performing audits and reviewing operations over the last year, it is fairly common to find nonconformities and miscommunications are occurring. In the all-important area of consumer communication and legal compliant disclosures, I have seen a number of instances where there were differences between documented policy, training materials, quality monitoring, and actual practices in the collection operation as to how disclosures and verifications were to be performed. It is important to keep both measures in practice, so that all communications are cross-checked. Another thing we do know is that the CFPB will interview staff. It is a documented part of their exam procedures. They will be looking for the quality of staff training and understanding of documented compliance policies and procedures. They will be looking for incidences of stated practices not matching documented work standards. When looking at ARM operations through the possible eyes of the CFPB, it is concerning when, for example, collection management cannot explain transactions posted on consumer accounts or system posted actions did not actually occur. I have encountered both of these examples recently. This is not to say anything was materially being done wrong but it is important to insure, not take for granted, that staff members at all levels can speak in depth and knowledgeably about processes within their span of control. This benefits the organization as a whole not just CFPB supervision preparation. We know that attention to detail during the compliance review process is critical; no process should be overlooked. Another example from a recent audit was: necessary disclosures were not occurring on some inbound calls. Those calls were being recorded as all calls but the Quality Control Manager was not listening to them because they were inbound and, therefore, not considered a high risk. This mistake could have easily been prevented if the appropriate measures were in place. There will be more to learn in the future but we do know enough to be making important and critical decisions regarding our organization s compliance culture and compliance management systems. All areas of compliance should be undergoing a continual process of improvement. Some areas for immediate review include: disclosures and legal compliance in consumer communications, time- barred debt, unfair acts and practices, pre-arranged payments and Regulation E, ECOA and scoring models, levels of complaint response and tracking, quality of documentation used to collect debts and credit bureau reporting/inaccurate information. What I do know is that, many ARM service providers have approached CFPB supervision in a very proactive manner and have found the internal examination to provide beneficial opportunities and insights. About THE EDGE THE EDGE Collection and Recovery Consulting Services LLC was formed in 2003 to provide consulting services to credit grantors, debt buyers and ARM service providers. From accounts receivable call center management to collection agency network management, THE EDGE can provide expertise in nearly any aspect of the collection and recovery process. In April, 2004, THE EDGE entered into a strategic alliance with Kaulkin Ginsberg. This partnership provides the opportunity for clients to use the combined resources of Kaulkin Ginsberg and THE EDGE to meet their needs. For more info: 10

11 About Kaulkin Ginsberg Since 1991, Kaulkin Ginsberg has provided value-add strategic advisory services tailored specifically to outsourced business services (OBS) companies. Our client-centric approach covers almost every stage of a company s lifecycle and enables us to maintain longstanding and intimate relationships as trusted and reliable strategic advisors. Service offerings include: M&A Services We have completed over 130 transactions representing north of $3 billion in aggregate deal value. We are deeply experienced in advising owners and acquirers of mid-market firms in buying and/or selling a business. Strategic Consulting Kaulkin Ginsberg is the leader in providing strategic consulting services to the ARM industry where our services are valued and utilized from the board room to the court room. Valuation Services For nearly a quarter century Kaulkin Ginsberg has been the leading authority on the valuation of privately owned companies within OBS. Litigation Support and Expert Witness Services Kaulkin Ginsberg litigation support professionals have a track record of success; our findings have never been invalidated in any court or formal proceeding. Market Intelligence & Analysis We believe that executives should be armed with the most relevant and timely information enabling them to make informed decisions. To that end, we provide a number of free resources to assist you. Executive Search Services We utilize our top-notch recruiting team to help identify and hire the talent you need; delivering focused executive search services that are well integrated with your business strategy. Read more about Kaulkin Ginsberg at Executive Blvd., Suite 802, Rockville, Maryland Phone: Fax: hq@kaulkin.com 11