Where Concentrix stands:

Open Source Strategy

The number one question I get asked as a consultant is ‘what the heck do you do?’ This is then often followed up by ‘aren’t you just pawning off slide decks for a 23 year old to give advice to an industry veteran.’

That’s the meme of consulting.

The reality is, that’s partly true. Yes, the Mckinsey’s of the world do have young task rabbits churning out decks. And yes, they do bill a 22-year old graduate at $300-400 per hour despite paying them $50/hour (and no overtime).

But if it’s such a rip off, then why do businesses keep buying their services?

Business 101:

The goal of a business is not to make a lot of money. Rather, it is to make as much money as humanly possible for the shareholders. This is modern capitalism and what is taught in MBA 101 courses.

Now, McKinsey charges $1M per week for a typical 12-week engagement.

In order to be worthwhile, they need to engage with other large firms. Why?

If the client isn’t large enough then McKinsey needs to recommend and implement herculean changes for just a breakeven in fees. If the company makes $50M per year, they would need to guide a CEO to 25% YoY growth in a 12 week engagement. That’s hard!

However, if the company makes $500M per year, even a 5% improvement in that revenue would yield a valuable engagement. Everyone wins and McKinsey takes a victory lap.

In many ways, McKinsey isn’t even hired to increase revenue but to remain competitive in an ever-changing landscape. This is Opportunity Cost.

If competitors A, B, and C all hired McKinsey – they must really know something!

This accounts for far more than 50% of the reason they’re hired. Even if they’re not ‘worth it,’ there’s little you can argue against because you want to remain competitive in an ever-changing landscape.

Now, 99% of the world’s companies cannot hire McKinsey. And while you can hire my firm, I’d rather just share my knowledge every week on how I’d fix some of these bigger firms. They’re not going to hire me anyways, so consider this a savings of $12M for them.

Free strategy recommendations for all. Let’s begin. 

Concentrix:

Today’s company is Concentrix, a company that employs 440k. You’ve probably never heard of Concentrix but you know of them. They hire the customer support agent for all of your top brands.

Summary:

Concentrix Corporation is a global technology and services company specializing in customer experience (CX) solutions and business process outsourcing (BPO). Here is a summary of the key aspects of Concentrix:

Overview:

• Founded: 1983

• Headquarters: Newark, California, USA

• Public Listing: Became an independent public company on December 1, 2020, after being a subsidiary of SYNNEX Corporation since 2006 .

• Employees: Approximately 440,000 full-time employees .

• Global Presence: Operates in over 70 countries, serving clients across six continents

Industry Analysis & Catalysts:

A combination of inflation, higher wages, and the shift in ‘Work From Home’ has allowed BPOs to thrive. The industry is one of the fastest growing in the world, with 3.5% CAGR expected for the next 5 years.

Total revenue globally is ~$150-175B (estimates vary) and this should double by 2027. The clear catalyst for BPOs are average wages are slowly catching up to inflation.

But while most of the major Fortune 500 companies have used Concentrix et al, there’s been a strong shift in outsourcing for small businesses.

A 5 year Google Trends shows a slow but steady bump YoY.

Operating Costs:

This industry is particularly labor heavy. Anyone from afar would recognize the usage of AI - more on that later.

Now, unlike most industries, they can’t exactly outsource higher wages.

They are the outsourcer of last resort.

BPO companies have to juggle a ‘lowest cost worker’ with the cost/benefit of local risk. This includes:

• Geopolitical risk

• Infrastucture & Utilities

• Currency

• English language

• Local Knowledge

Still in 2024, the Phillippines and India tend to dominate call center labor. While you could move to a very low cost nation like Sudan, the risks mostly outweigh the rewards. With that said, Cambodia, Poland, and Colombia seem to be poised for BPO growth.*

Competitive Landscape:

Below is a list of some select Business Process Outsorucing (BPO) companies that are public. If you were to take a look at the chart below and just compare order, Concentrix is one of the top firms in the mix.

But while this might be true, relative to the broader S&P it is down ~100%.

Whenever you see a sector like this, expect consolidation. Companies riddled with debt obligations and overexpansion post-pandemic are likely to get acquired.

Concentrix

Let’s first look at the income statement, are they in a healthy position to weather the current market conditions?

They seem to be - yes. Most of their margins are moving up, though net profit shrank fairly significantly YoY.

Recommendations:

Alright, we understand the general industry along with Concentrix’s current business. While we can understand them a bit more thoroughly, there’s some obvious ideas to win.

1) Generative AI and the Road to SaaS-dom

This seems obvious. One of the benefits of AI is understanding semi-complex problems and answering them accordingly. Current language models are incredibly powerful and cost a few cents per 100 responses.

Think about the most simple of tasks, providing hours of operation. Today, there’s two options:

• Automated: Press 1 for Hours of Operation

• Human: ‘Hey, when are you open tonight’… ‘7pm’

There’s plenty of edge cases (holidays, busy line, changes in schedule) but it works 90% of the time.

Now here’s where it gets fun. Concentrix recently showed they can reduce customer calls by 50% (a 5-10x change) with their AI and ML chatbots.

Now, Concentrix can either make money from humans (time + materials) OR software. The former has margins of 35-45%, the latter closer to 80%.

If I’m Concentrix, I would aggressively build out my language models and capabilities. I’m immediately trying to reduce headcount over the coming 5 years (>50% of OPEX). From a demand perspective, you have the connections, the contracts are in place. You also have far more training data than just about anyone.

A new competitor would need to have billions in free cash along with trillions of data parameters to train on. The winner is someone who has the most amount of edge cases solved.

Much like the old rotary days, Concentrix AI should be routing edge cases to the smartest humans they have and then quickly patch answers in. A world where 80% of questions are answered is around the future, best to be #1 here.

2) M&A

There’s blood in the water. Remember this chart:

Anytime you see competitors all struggling during a strong year, there’s opportunity for distressed assets.

You could pick from the above OR adjust to focus on a more tech-specific set of companies, all of which seem to be private (ZenDesk, Intercom, etc).

I am leaning towards the latter, as it’ll be an acqui-hire play and gets you closer to Generative AI. Why?

Small percents really add up when you’re handling hundreds of millions of calls daily. Let’s do some math.

The average call center worker costs ~$5/hour. Each worker should spend 2-3 minutes with a customer, though edge cases tend to take 10-20 minutes.

Add in healthcare, CAPEX, and tech systems and you’re spending 25-30c per ‘solution.’ This means you need to charge your customer ~50c per response.

With a best-in-class AI system in place, the cost drops this by an order of magnitude. So Concentrix (with ~$7B in revenue) is answering about 14 billion support calls annually.

Rough math below but the cost to answer with AI system is hundreds of millions.

But SaaS yields higher margins! Your 5x P/E business is fine.

Well, SaaS firms are earning 4-5x that. Saving $1M to earn $4-5M in Enterprise value. That’s a win-win-win for everyone.

Today, I would consider holding off on buying another traditional BPO company at this point. The nice thing about this business is having best-in-class sytems mean the rest of the competitors will struggle.

Within 5 years, when your systems are answering 90-95% of phone calls - you should be able to buy a company like TTEC (50k employees, $2.4B in revenue) for a much lower multiple.

3) Your Biggest Challenge: Employees

Concentrix has 440k employees and certainly a vast amount of vendors. Approximately 5-10% of employees will leave on their own accord. So you need to figure out what to do with the remaining 400k employees.

Are you laying these employees off, winning new contracts to increase workload (likely moving down market), or re-training them on something else.

For precendence, in the past two decades the largest layoff in history was IBM with 60k jobs. You have 7.3x that amount!

Unlike the companies above, you’re not in a dire situation. Still, bolstering up your tech team and reducing your call center workforce is necessary.

If your systems handle 50% of responses today, we should expect 80% by 2027 and 90% by 2030.

On one hand, you could likely reduce workforce by 150k jobs over 5 years and you will be the leanest firm in the world.

But there’s certainly something you can do with well-trained, technical, and English speakers working for 80% less than Americans. What you do really depends on their skillset but I’d consider automation and sales to start, expanding over time to what customers need.

That’s it for today.

Stay Nimble,

Justin Abrams

*There’s a ton of data from the International Labour Organization here. Realistically, once you set up a call center with tens of thousands of workers - it’s very difficult to cut jobs due to 1-2% wage increases. Your job as a BPO is to hedge currency risk and slowly develop new centers across the world