Sink or swim

THEOC&CB2B200INDEX2015 SWIM SINKOR WhytheTidehasTurnedfortheGlobalBusinessServicesSector 4% KEYFIGURES AveragegrowthrateofB2B200in2014,vs11%in2010 75% 34% GrowthcomingfromAsianHQ firmslastyear 3X USfirmsgrowthratecomparedtoUK AveragegrowthrateofEuropeanHQ’edfirms 0% Firmsthathaveseenrevenuedeclinein2013,vs19%in2012 £420BN RevenuelostbyB2B200ifunderperformancecontinues AC nded187,Odigobcolgrtscearhoteoxisse atay’saaeeneeofsstespdompstht tebusinervesetirgoods,meateeuietr inrefheaotirectorirrtawllasnstots 01AnOC&CInsightSinkorSwim OC&C’SB2B200INDEX2015 Toomanyoftheworld’sleadingB2BServicesfirmsareatriskofrevenueandmargindecline–andonlyafewareactingwithsufficientaggressiontopursuetheirnextwaveofprofitablegrowth. BusinesstoBusiness(B2B)Servicesisoneoftheworld’slargest,andyetmostunder-reported,markets.Howeveritprovidesthefoundationsofasubstantialpartofthebroadereconomy–asitincludesconstruction,outsourcing,marketing,workplaceservices–andhenceitssheerscalecansurprisetheuninitiated.Despiteoftenoperatinginhighlyfragmentedmarkets,the200companiesthatwefocusoninthisreportalonehavecombinedrevenuesof£1.5trn($2.3trn). FortheUKandmanyEuropeanplayers,thesectorisdisproportionatelyimportant.Formanyyears,Europeanfirmshaveledtheworldindeliveringinnovativeoutsourcingpropositionsandsustainablecompetitiveadvantage.Thesectoraccountsforalmost30%oftheUKeconomyandoverhalfofitsgrowth.ItisoneoftheUK’sprimaryexportsanditsmediumtermvitalitywillbecriticaltocontinuedeconomicrecovery. TraditionallyB2Bhasoutperformedothersectors.ResilienceduringtherecessioncatapultedB2Bstocksontoeveryseriousinvestor’sagenda,accompaniedbyincreasingrecognitionofthecertaintyprovidedbycontract-basedbusinessmodelswithhighvisibilityofforwardrevenues.YetinthiseditionofOC&C’sannualB2BIndexwefindthatthesectorhasfailedtorespondtothe‘GlobalWarning’weissuedinlastyear’sB2BIndexreport: 1.THETIDEHASTURNED Risingwiththetidewillnolongerguaranteesuccess.Toplinegrowthhasslowedeveryyearsince2010andisnowover60%lowerthanitwas4yearsago,andmarginsarebeingeroded.StocksnolongeroutperformtheS&P500,andsincemid2013havefallenbehind. MatureEuropeanfirmsheadquarteredintheUK,FranceandGermanyarethedragonthesector.Bycontrast,Asian-basedfirmshavedriventhreequartersofgrowth,andareincreasinglytheprimaryengineofthesector,withChineseconstructionfirmsinparticularexperiencingphenomenalgrowth. 2.CHOPPYWATERS SowhyisbeingasuccessfulB2Bprovidernolongerplainsailing? Forus,thereareseveralfactorsmakinglifemorechallenging: Customersaremoresophisticated,demandingmoreforlesseachyear Competitionisfiercerandprovidersneedtoprovedifferentiationnotjustscale M&Acannolongerbereliedontopropuporganicgrowth However,thesignificantgapbetweenwinnersandlosersinB2BServicesdemonstratesthatthisisnotjustamarketfactor–rather,somebusinesseshavenotadjustedquicklyenoughtotheseheadwinds.Continuedoutperformanceinmaturingmarketsdemandsfinely-honedstrategy. 3.SINKORSWIM? Therearestillsomeverystrongperformersinthissector,andwefoundcommonthemesthatrevealthatthe“winningformula”inB2Bischanging: Spottingthenextwaveandinvestingingrowth Givingcustomersmoreofwhattheywant Makingthemostofhomemarketsbeforeventuringoverseas Forallofthese,havingtherightpropositiondevelopmentandoperatingplatformiskey,andthebestinnovators inthesectoraredevelopingaleanapproachto‘manufacture’services. 4.FULLSTEAMAHEAD Weremainoptimisticforthesector–thefundamentalsofcustomerdemandanddesiretousethirdpartyprovidersremainhigh,andthenormalrulesofmarketcompetitionaretakinghold,withahandfulofleadersshowingtheway. Thereforewewouldexpectareturntooutperformanceforthecompaniesthatfollowafocused,customer-centricstrategyandhaveanoperatingmodeltheyareconfidentcandeliverprofitablegrowth. Theprizeissubstantialhere–acollectivereturntopreviousgrowthratesfortheB2B200wouldmeananextra£420bn($650bn)addedtothetoplineby2020. 1.THETIDEHASTURNED WorldleadersinB2BServiceshavehistoricallyoutperformedothersectors,bothduringandsincetherecession.Inthepast,WesternEuropeanfirms–andparticularlythoseintheUK–experiencedrapidgrowthasthepioneersofbusinessmodelinnovation.Sharesregularlyoutperformedthebroaderequitymarkets. EXHIBIT1:SHAREPRICE,B2B200VSGLOBALINDICES,2008-15 IndexedtoJan08=100 However,morerecently,thetidehasturned.Historicalsharepriceoutperformanceisadistantmemoryasmainstreamstockscontinuetorecover.SharepricegrowthoftheB2B200fellbehindtheS&P500in2013and2014,andthishascontinuedintoQ12015. 160 140 Recessionresiliencedrivesoutperformance Valuationsmaintaineduntil2013 ButS&P500hasnowclosedthegap B2B200 S&P500 120 100 80 Eurostoxx50 60 40 20 0 1Jan2008 1Jan2009 1Jan2010 1Jan2011 1Jan2012 1Jan2013 1Jan2014 1Jan2 1Jan2015 Source:Datastream,OC&Canalysis Thisreflectsacontinueddampeningofrevenuegrowth,withtheindexasawholegrowingat+4.4%in2013,comparedwith +8.0%in2012and+9.3%in2011.Earlyindicationsfromamorelimitedsampleofcompanieswhosereportingfor2014is EXHIBIT2:B2B200PERFORMANCEEVOLUTION RevenueGrowth,2010-14 % complete(90companies)suggestsacontinuedslide,to+3.7%growthin2014.Compoundingth