Conservative Approach In IT Outsourcing And BPO - Joseph D. Foresi - Janney Montgomery Scott LLC
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Joseph D. Foresi is the Director of IT outsourcing, business process outsourcing and consulting at Janney Montgomery Scott LLC. He joined Janney in August 2004 and is a global services Analyst with a focus on outsourcing and consulting services. In this role, he focuses on providing comprehensive, in-depth, value-added information and makes frequent trips overseas where his covered companies operate. Before joining Janney, Mr. Foresi worked in private client portfolio management at Brown Brothers Harriman in Boston. He holds an MBA from Northeastern University and a B.A. in economics from the University of Massachusetts.
TWST: Focusing more on the BPO names you cover, what's your overall outlook for the space right now and why?
Mr. Foresi: Similar to some of the rest of our coverage, BPO is really a matter of people making decisions, taking the time to make decisions. If decisions get halted, it creates and has a negative effect on all businesses, but particularly on BPO. BPO is a longer sales cycle, and therefore requires a heavier commitment on the part of the client. I think the two things that I would point to as far as recent trend: one, we've seen a pickup, because organizations want to look at options for outsourcing to save money. The second one is that the sales cycles have remained longer than usual, but the pipelines have gotten larger, which is encouraging. And so net net, what that means is that the demand trends are actually pretty good. We should double dip when the economy gets worse - that, of course, would send those two factors into flux, but for the most part they are pretty healthy right now.
TWST: That looks like it may be a positive trend considering we're coming out of a recession and all the negatives the macroeconomic environment had for these companies.
Mr. Foresi: Yes. I think what we saw during the downtick was that the last recession was a situation where clients acted sort of deer in headlights. In that environment, it was tough for customers to make decisions. Now what we have is a stable environment, and as long as those companies can make the decisions, the tendency is to move more work offshore to take advantage of that. It really comes down to decision making and the ability to make decisions.
TWST: In terms of industry trends, is moving work and functions offshore still growing?
Mr. Foresi: Yes. It's a very fragmented industry, because there are so many different potential avenues that you can apply the labor arbitrage to. Some of the areas that my companies focus on are finance and accounting, insurance, but really it comes down to what function you don't feel is core to your business you can outsource. So I think the demand backdrop is a lot larger than some of the other industries that you deal with, and therefore, in aggregate, it's a lot larger.
TWST: Do you see any trends in terms of these companies' customers? Are there particular kinds of customers they are seeing more or less demand from or particular kinds of needs?
Mr. Foresi: I think that the more mature offerings like finance and accounting are probably the first to have recovered. So some of the more standard work is the first that's seen benefits of the economic recovery, but the space is pushing into areas that are a little bit more advanced, such as in the health care industry, dealing with more complex health care issues. For example, not necessarily hospital records, but insurance reimbursement that requires a nurse to look at what processes took place; some of the higher-end finance and accounting stuff on the risk-management side, higher-end analytics. It starts with the very basic functions that you can take out of an organization, and then over time, as you can imagine, as it matures, it moves up to the more higher-value stuff.
TWST: Among the companies you cover, what are some of your favorite names or top investment picks right now?
Mr. Foresi: I think it's not time to abandon some of the core, fundamentally sound companies. I think the way that you need to look at the industry is - if the GDP is going to have muted growth next year - you look for companies that fit into three categories that I think are going to be catalysts for growth, and of course, results. The first one is cost savings. In the cost-savings realm, you're going to find all the outsourcers, but particularly BPO, has been an area of strong movement, like what we've been talking about. In that regard, you're going to look at a company like Genpact (G) or Exl (EXLS). Building on that, you have a lot of regulatory work that's going to be done in health care and financial services. That's going to be done by a lot of the IT services companies that particularly have exposure to those areas - in fact, some of that's going on right now - and that would be a Cognizant (CTSH) or a Syntel (SYNT). And then on a larger scale, you have specific trends that are based on the new technologies, which would include mobile, cloud and analytics, and in that sense, you can play some of the larger consulting plays like an Accenture (ACN) or an IBM, which also pay you a dividend and buy back stock. There are a lot of different ways to look at what's out there in the market and where the catalysts lay, and then the derivative plays. It's gone further than cost cutting. And what we're seeing today that we didn't see in 2008 and 2009 - a lot of the conversation in 2008, 2009 was solely about cost cutting, but it was primarily about cost cutting - is with all these new technologies and new regulatory work that's out there, the conversation has moved to the income or revenue side of the equation as well.
TWST: Among the companies you have mentioned, do any stand out?
Mr. Foresi: Our bias had been toward some of those stalwarts, given that the economy has been shaky - an IBM or an Accenture pays you a dividend, buys back stock, great cash flow, good consulting practices. And we're starting to get more constructive on names that have higher betas if the economy should do better than expected, so you're dealing with a Cognizant in that regard. And then, we still are pretty confident in the growth trajectory of our core outsourcing/BPO companies like a Genpact or an Exl.
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