Solving The Value Equation

YTD 2013 M&A Transactions Recap

YTD 2013 M&A Forecast & Landscape:

We anticipate M&A activity to be quite robust over the next 9 to 18 months as SaaS technology expands and as service providers consolidate to become solution providers.

 

Mergers and acquisitions in the B2B software, information technology and BPO services continued at a fast clip in Q1 2013 (# of 2012 deals rose over 2011 levels).

• Strategic acquirers have been focusing on complementary acquisitions, with the majority of transactions less than $100M and seeking complimentary assets/capabilities and also distressed or stagnant businesses without access to capital (stuck in the growth capital liquidity trap).

For companies with less than $10 million in EBITDA there is a shortage of financial acquirers as private equity firms have focused predominantly on companies with $10 million in EBITDA or more.

The Bottom line: The race is on for both IP and market share dominance as BPOs and solution providers as well as enterprise software vendors look to fill gaps in their product and service strategies.

 

Related articles:

2013 Marketing services M&A Valuations, Multiple Outlook

How Cloud Computing Is Redefining the M&A Landscape

PWC 2013 US technology M&A insights

Revenue Multiple Valuations: Company Valuation Resources for Solving the Value Equation.

Solving the Value Equation for B2B Technology, SaaS, Software, and Outsourcing Providers.

The primary valuation drivers for emerging fast growth B2B technology, SaaS, and outsourcing providers primarily include: a SWOT of the recurring revenues, operational & service delivery model KPIs (key performance indicators), and the assets and liabilities of the company. 

B2B BPO Outsourcing Market Landscape and Valuations:

The outsourcing industry sectors are highly fragmented across regions and industries, rich in opportunities for consolidation and therefore attracting both private equity investment and increasingly active corporate and strategic buyers. Transaction multiples are currently pegged around 4-8X times EBITDA (pretax profit) and 2-5X times revenue multiple for deals greater than $20 million for technology based firms and 1X to 4X revenues for smaller, growth oriented labor intensive firms (based on Ephor Group deal sources for private company transactions and public sources for public company transactions).

BPO Outsourcing Valuation Comparables:

 

SaaS Valuations by Industry Sector:

By 2014, $1 of every $5 that will be spent on software will be spent on cloud or SaaS solutions. 

 

Maximizing valuation and wealth creation “Yellow Brick Roadmap”:

2011 and 2012 saw a spike in revenue multiple valuations for SaaS and cloud software companies. In the future B2B technology, SaaS, and outsourcing companies that are growing aggressively with low customer acquisition costs and high retention rates with realize the highest revenue valuations.

 

Looking to increase your valuation? i.e. increase the value of your technology, SaaS, or outsourcing company?

For more information contact charles bedard at ephor [at] ephorgroup.com

The Adoption of HR Technology by Small Businesses

What percentage of small businesses have implemented an HR system?  (i.e. an  HRIS/HRMS (Human Resources Information/Management System), Talent Acquisition (Recruiting / ATS – applicant tracking system) or Talent   Management System?)

A little online research reveals the adoption rates of HR technology at mid-market and enterprise levels as follows:

• Enterprise level adoption rates have been forecast as high as 85% (although less than half are in an “intermediate” or “advanced” stage of talent management utilization).
  • “Talent Management Software (@ the Enterprise level) purchases were flat to slightly up in Q1, and we believe the market grew slightly (3-5% in Q2)”. 
  • “Only 14% of (Enterprise) buyers use their ERP or HRMS vendor for talent management.” Bersin Blog.
• Numerous “experts” (read: online bloggers) have speculated that approximately 60% of the mid-market has partially adopted an HR system.
• Thirty-five (35%) percent of companies with 2,500 employees  have adopted a module (www.unitedBIT.com) of HR technology.

Having worked with more than two-dozen HRO, HR consulting, and HR technology firms over the last few years I can verify first hand that less than 1 in 10 small businesses have implemented a ‘holistic Talent Management’ system.  Ephor’s primary research reveals that the  majority of small businesses have outsourced payroll and benefits, a third have outsourced recruiting at least partially, and firms handle the remaining components of ‘Talent Management’ with internal resources or not at all!

Some discussion related to the topic of why there has been lackluster adoption of HR technology by small businesses recently took place at  HRmarketer Blogpost on the state of small business HR technology adoption with Steve Boese (professor of Human Resources Technology at the Rochester Institute of Technology).  Steve attributes the lack of adoption to the following:

1. the perception that technology offerings are very expensive,
2. the perception that HR technology is complex, and
3. the fact that for companies with limited resources adopting a new technology can be a daunting task (i.e. people are unaware of what is available).

But rather than debate the adoption rates of small business perhaps a more interesting question is at what inflection point, on average, do growing and high potential organizations adopt HR systems?

Depends on the industry, access to capital (i.e. if they are venture funded the implementation of a ‘holistic talent management platform’ occurs much earlier: as little as $1M in annual revenues), and growth rates, but on average the starting point occurs around 300 to 600 employees and the tipping point depends on the complexity of the business and sophistication of the management team. I would further assert that less than 5% of the small business marketplace is getting the needed value from their “payroll/benefits plus” system highlighting a tremendous gap and opportunity.

A few notable small business players that service the less than 100 employee market to watch include:

Zoho (http://people.zoho.com/jsp/iamlogin.jsp), Taleo (www.taleo.com), PCRecruiter (http://www.pcrecruiter.net/home.htm), People-Trak (http://www.people-trak.com/), and Vana Consulting (implementation firm for Zoho)(http://www.vanaconsulting.com/). 

I am sure that I am leaving someone out?

2009 Top Ten Trends for Performance Improvement: #5 Outsourcing Adoption is Required.

Both the mid-market and large market have comparable overall revenue potential (50,000 small businesses in the US alone outsource more than one business function!) However, the mid-market produces higher margin outsourcers.

Buyer adoption varies across geography, industry, and company size however for $1M to $100M: nearly 10% outsource the HR function, 25% IT, and 40% part or all of accounting and finance.

The Value Proposition Demanded by Organizations is Expanding:

1. Buyers have moved far beyond cost savings.
2. Outsourcing must achieve strategic, operational, technology, human resources, and risk management benefits.
3. Pricing is changing to on-demand, pay-as-you-go models:
• Buyers moving away from “Per Hire Fees”
• Non-transactional pricing models such as BPO concepts with performance guarantees and earn out pricing will become prevalent
• In a slowing economy, buyers prefer a componentized model (i.e. pay-as-you-go) over a wide-scoping transformation model. Customer potential for multi-process or entire functions has low penetration, especially in the small and mid-market; but partial outsourcing growth is escalating.

 

Technorati Tags: outsourcing best practices,outsourcing adoption,HRO,BPO,human resources outsourcing,IT outsourcing,business process outsourcing,outsourcing trends,small business outsourcing,startup outsourcing

 

Signs That Your Company Needs Outsourcing

Successful corporations have higher revenue and profits-per-employee because they leverage technology, best practice processes, and capabilities of outsourcing providers.

The value-proposition of outsourcing (beyond 20 to 60 percent cost savings versus internal staff) is access to best-in-class capabilities, business processes, people, technology, and tools for a period of time until it makes cents and sense to bring the function inhouse.

If your organization would benefit from any of the below outsourcing benefits you should evaluate the specific outsourcing benefits and ROI for your firm.

1. Rising Costs: Rapidly rising costs in payroll, benefits, and workforce management continue to be the primary driver for HR outsourcing. While cost reduction is certainly a major consideration; access to expertise in the following areas can make a substantial impact on your firm a) market and competitor compensation and incentive studies, b) new manager assessment and training, c) leadership development and succession planning, d) workforce planning, and more! Average small business will save 30% by implementing HR best practices.
   
2. Resource Constraints: When tasks are beginning to overwhelm internal HR, IT, and management resources, it’s time to either invest in technology or at a minimum turn some of the workload over to a third-party outsourcing provider.
• It is typically more cost-effective to utilize an outsourcing provider’s technology rather than spend internal resources evaluating, implementing and managing on your own.
• Your employees only have so much time. Outsourcing will save managers and employees time to focus on core revenue-producing tasks.
  
3. Risk Management: Compliance, laws, and regulations are regularly updated and changed; do you want to pay your internal staff to attend conferences, seminars, and maintain their certifications or would you have more peace-of-mind by relying on trained professionals whose entire specialty is compliance?
   
4. Misaligned Work: The contractual obligations of outsourcing providers means that through SLAs (service level agreements) and scorecards work is prioritized in connection with the firm’s financial objectives. Mediocre work is also mitigated by the very nature of using a partner.|
   
5. Agility: Are your competitor’s more price or cost efficient? Ask around and find out what benefits your rivals are gaining from outsourcing work. You may discover that these same issues apply to your organization.
   

Technorati Tags: outsourcing signs,outsourcing trends

Outsourcing Market Adoption 2009 Update

A few facts for you to consider:

> The majority of businesses with more than 40 employees outsource at least two of the following functions: payroll, benefits, IT, recruiting, or accounting (Ephor Group Research).

> Nearly 40% of small business mangers subscribe to online software (Jupiter Research).

> The human resources outsourcing market (HRO) is a $2.9 billion (in terms of annual contract value) market in the US alone (Gartner)!

While outsourcing adoption varies across geography, industry, and employee segments there are trends:

> Outsourcing demand from Europe continues to rise;

> Manufacturing, high-tech, telecom, healthcare, and professional and financial services are the leading adopters of HRO in the US;

> Small and mid-market businesses are adopting at a faster rate than larger corporations (the mid-market and large market have comparable revenue potential and the mid-market has higher margins).

HR software and technology is growing within the mid-market at more than 20% per year. The fastest growing segments center around performance management with special emphasis on creating a “High Performance Workforce” (HPW).

Technorati Tags: outsourcing adoption,small business outsourcing,SMB outsourcing,HPW,high performance workforce,ephor group research

Ten 2009 Outsourcing Best Practices

1. Integrate Industry Benchmarking to Set Goals: Continual focus on raising the bar and setting new standards of excellence is a requirement for top-quartile performing firms.
   
2. Implement Workflow: Using workflow technologies streamlines and automates operations while eliminating redundant tasks.
   
3. Knowledge Management: Create a central repository and library of all your best practices, processes, documents, and data. Online technologies such as Wiki’s have made this cost-effective for small businesses.
   
4. Operational Metrics: Employees that know and measure themselves against operational metrics are more aligned with the businesses’ financial goals and objectives.
   
5. Labor Analytics: Reduce turnover costs, overtime, and PTO (Paid-Time-Off).
   
6. Change Management: Often overlooked, change management is the critical factor for adopting any new process or system.
   
7. SLA’s and Expectations: (SLA’s is the abbreviation for Service Level Agreements.) When one says “I got everything I wanted at the negotiating table," they lost. In successful negotiations there are winners only when two parties who have arrived at a mutually beneficial and sustainable arrangement.
   
8. Executive Oversight: Provide insight and visibility into daily outputs and results through reporting and analytics. 
9. Decentralization: Empower front-line staff and push down decision-making to the periphery.
   
10. Need for Integration Between Applications: For example, the financial accounting software shows the detailed picture of the financial status of the company. But often businesses need to analyze trends to see where improvements can be made in service and sales. Most businesses are forced to mine different systems, rely on Microsoft Excel, and thus always review historical / data (lagging indicators) as opposed to leading indicators (trends).

Technorati Tags: outsourcing best practices,2009 outsourcing best practices