Wednesday, 3 December 2008

TIG 'gains traction’ but loses profits

(By Anthony Miller) Also reporting FY results today (Wednesday), though far more disappointing than Sage’s, was The Innovation Group (see here). I must say up front, and at the risk of upsetting the sensibilities of friends good and true, that I have ever been sceptical about TIG’s ability to conquer the insurance BPO market, as venerable readers of our Olde Holway Hotnews may recall. Indeed, as we pointed out when the company issued a profit warning late September (see here), more than a touch of acquisition indigestion may be involved.

The problem is, TIG always seems to be a company “gaining traction” but never really surging forward, at least from a profit point of view. TIG returned to operating profit in FY05 (1.8% margin), and peaked the following year at 9.3%. Margins slimmed to 7.8% last year before going south again this. The current problem lies in TIG’s £107m revenue BPO division; profitability in its software business actually improved to 12.6% (FY07: 10.4%) albeit on 7% lower revenues (£32m). The current downturn clearly had a part to play in TIG’s BPO woes. But I do worry about the long gestation period for ‘Project Enterprise’, TIG’s ‘multi-year global project’ to rebuild its BPO platform, which started in 2007 and which they say promises ‘the most technically advanced capability in our sector’ ... when it is finished, I assume.

And perhaps to cap it all, TIG’s operations seem rather thinly spread geographically, with 50% of its £140m revenues coming from Europe, 24% from Africa, 19% from the Americas, and the balance from Asia Pacific. It’s really hard to see how they can gain critical mass in any market without hugely more focus. To put this in perspective, Capita, the UK BPO market leader, will probably get 10% of its expected £2.5bn revenues from the UK insurance sector alone this year, i.e. 80% more than TIG’s entire global revenues.

May be I "just don’t get it” with TIG, but I must say I never have. Neither have investors, by the way, who have seen the value of their shares fall 85% this year.

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