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Monday, 9 September 2013
DealNet Capital finds success with recurring revenue strategy and BPO unit
DealNet Capital Corp. (CNSX:DLS) bills itself as having a “flexible investment mandate with a strategic focus on recurring revenue businesses” and it is one of these, subsidiary OC Communications Group (OCCGI) -- a recent acquisition in the business process outsourcing (bpo) space -- that is bringing home the bacon.
The last month alone has brought news of OCCGI winning a $10 million contract over five years; a 3 year contract of up to $3 million; and another $10 million deal over 10 years. That’s $23 million in recurring revenue from inking multiple long term contracts with significant brands, all of this on top of the existing backlog.
So just what is the secret to OCCGI’s success?
Reputation is crucial to OCCGI’s winning strategy, or as CEO Michael Hilmer puts it: “We win because we are nimble, secure, attentive and take our clients’ interest to heart .”
The CEO, who founded OCCGI in 2005, now sees his creation enjoying global relationships with some very big names, and key to those relationships is the fact that the company has “a reputation for doing what [it says it’s] going to do.”
Indeed, many of these recent wins have had their origins in existing relationships and referrals – fitting for a company that does “virtually no marketing” and has no dedicated sales people. Years ago, Hilmer partnered with key global service provider brands that are specialists in their space, but lack the delivery capability of OCCGI and those complementary relationships have matured, driving considerable backlog for OCCGI.
While customers tend to stay and extend contracts, Hilmer says “in addition to that we’re getting a lot of referrals coming to us directly and through our business partners as their internal organizations catch wind of our mutual successes together.”
And no wonder, OCCGI carries little overhead and is thus “very competitively priced,” meaning it can compete with offshore solutions. As Hilmer points out, while many are drawn by the notional cheapness of off-shoring, it is a scenario fraught with peril. OCCGI infrastructure and G&A can support over $30 million in annual revenue without a G&A increase, yielding healthy profits on new business and competitive pricing for new bids.
Hilmer speaks of the “extra overhead” imposed on customers who send their work offshore, in the form of diminished quality, increased supervision and high turnover necessitating continual training, which can do much to offset the dollar amount putatively saved by off-shoring.
“[Once these additional aspects are factored in] the labour rates are kind of comparable,” before even the additional factor of oversight is added – that is, personnel “flying to India or to the Philippines every quarter” as well as those stationed onsite full-time tasked with “babysitting” the operation.
A more pernicious, but less tangible and more difficult to measure hazard of off-shoring is “what the consumers think when they call.” As Hilmer points out, the lack of satisfaction that can accrue from this kind of exchange, particularly in instances in which the outside agent is inadequately trained, or the caller runs up against a language barrier, can lose even the biggest brands customers. “People will literally switch banks and carriers because of a poor offshore experience.”
“When you add up all those costs and the costs of say 2.5 per cent of your customer base leaving because they’re annoyed with a poor experience, off shoring isn’t cheaper; it can actually do more damage to the brand.”
Additionally, as Hilmer points out, poor brand equity can result from off-shoring of jobs, citing the high profile example of a Canadian financial institution, which suffered some appalling publicity as a result of 45 Canadian employees losing their jobs when the bank moved to outsource the back office support of its investor services to an offshore IT specialist.
“They’re already taking heat in a depressed US job market. If I’m a US financial services customer and unemployed, how do I feel about them sending 1000 jobs to India? I don’t feel good about that and I express that in the only way I can – I move my accounts.”
At even the level of its most bottom line essentials, the practise is ceasing to be as competitive as it once was: “The reality is 15 to 20 years ago it was a very cheap solution, but the Indian economy has taken off, people are more sophisticated, they’re spending more money and have expectations of a certain income bracket, so the costs of off-shoring in India and South America continue to increase.”
With other developing economies that might once have taken their place, such as Egypt, experiencing political instability, Hilmer says “all those risks make it a pretty serious question as to why you would even gamble on offshore [for a comparatively small saving].”
Not only does OCCGI offer “the brands [it[ supports the comfort that [it’s] onshore”, it also proffers its clientele the even more reassuring fact that it “knows how to protect the data.”
In a world galvanized by consumer fear of identity theft, the prospect of information breaches freezes the blood in consumers’ veins and does much to erode the value of the brand associated with it, as recent well-publicized blunders by marquee names prove. “Email lists that have gone out to the public from some major brand by accident -- those are massive security breaches that impair brand equity for our customers. We’ve never had such a breach,” says Hilmer.
“We have a very tight methodology for controlling where the data is, how it’s stored, what data can be transferred back and forth what cannot be, and all of those security processes are audited regularly by the customers. Before we launch a deal, we adhere to their internal policies to make sure we’re compliant.”
Indeed, OCCGI not only accommodates the security measures of its clientele, it welcomes their scrutiny. “Our claim to fame -- and I say this to customers -- is we give them transparency,” says Hilmer. In practical terms, this means the client can track the minute by minute operations of the contract in almost every particular. “They can log into our calls, they can see how many calls are in queue, they can do all kinds of things that they can’t even do internally and they can do it in real time. We operate on a ‘we-have-nothing-to-hide’ basis.”
And it is this attitude that seems to be a factor in winning over larger clients, despite a reluctance to outsource oftentimes from big companies afraid of losing control.
“We want them to have more control through outsourcing to us rather than less,” leading to a more dynamic, real time relationship where “things happen when they need to happen.”
Another positive OCCGI offers to the massive businesses that so often make up its clientele is the focus it can provide to a line of business that might otherwise be lost in the crowd. One of OCCGI’s most recent $10 million wins is a perfect example: a large American bank charged OCCGI with administering certain service aspects relating to its credit card loyalty programs. While the bank itself certainly had the option of running such a program internally, its operation was so big, that both the attentiveness and the cost of doing so would impact its ability to generate quick results,” says Hilmer.
“This is a significant project, but it’s very hard to get internal resources rallied around, so we’re finding more and more of these lines of business have already found the budget to go outside of the organization.”
And OCCGI owes much of its current workload to large companies finding a home for relatively small offshoots.
“Huge clients outsource small deals,” says Hilmer – for example, the $10 million generated by one of the most recent deals, “that’s a pretty small transaction for a fortune 500 company,” which is not to say it is an unimportant one as “it touches every one of their credit card customers.”
The relative smallness of OCCGI also makes it more nimble.
“We can move on a dime. The customer calls me directly if needed but our exceptional team ensures that rarely happens. We’re extremely responsive as everyone in this company works 24/7, and we can make decisions really quick. For a relatively small company, getting into these massive brands is quite impressive and it’s highly referenced client base certainly helps.”
But DealNet’s focus on recurring income doesn’t stop there. In fact, coming down the line is DealNet’s next business, One Dealer, set for a “massive” launch in the month of September, which Hilmer says is set to make OCCGI “a drop in the bucket” within the space of two years. One Dealer will provide a host of financing and other services to heating, ventilation and air conditioning (HVAC) dealers and their customers, underpinned by the controls and processes of OCCGI to serve its own consumer financing customers.
“We think we have enough unmet demand to deploy $100 million in paper a year, every year, for the long term. Our only barrier to growth in that business is making sure we have enough underwriting and we have significant interest in this arena due to the infrastructure and banking systems we have put in place over the last 12 months.”
It is a model that shares OCCGI’s strategy of recurring revenue. “A 10 year loan means for 10 years, there is recurring revenue and EBITDA and every month, more high quality loans are added. Say you add 2,000 more loans, that’s 2,000 more payments added for another 10 years. That’s how we create value in the business and our origination methods ensure less than 3% defaults so all parties are protected while significant value is being provided to the consumers.”
“And we’re vying for a lot of investors’ money. We’re custodians of a lot of trust from dealers and large corporate brands, so I personally get wound up about making sure that the [hundreds of people in the company] are all delivering on my promise which in turn is their promise.”
This brings us back to reputation. “My whole success has been based on doing what I say,” says Hilmer.