XCHANGING is a business technology and services provider. We operate with three segments: Business Processing, Technology and Procurement. - PDF

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TECHNOLOGY AT OUR CORE Annual Report XCHANGING is a business technology and services provider. We operate with three segments: Business Processing, Technology and Procurement. Through innovation, technology,
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TECHNOLOGY AT OUR CORE Annual Report XCHANGING is a business technology and services provider. We operate with three segments: Business Processing, Technology and Procurement. Through innovation, technology, customer and market insight, we provide differentiated solutions that address our customers operational and processing challenges and add value to their businesses. FINANCIAL HIGHLIGHTS Adjusted operating profit of 55.8 million (2013: 55.5 million), representing a 21.5% underlying year-on-year improvement; Expected revenue reductions (Xchanging Transaction Bank, HR Services business, London Metal Exchange contract) partially offset by full first year revenue benefit from MM4 and first contribution from acquisition of Agencyport Europe * ; Year-end net cash of 13.7 million (2013: million) reflected 90.3 million of acquisitions and 43.4 million of capital expenditure; Board recommend an increase in dividend of 0.25 pence to 2.75 pence. NET REVENUE (illion) 2013 ADJUSTED OPERATING PROFIT MARGIN (%) 2013 CONTENTS Section 1: Strategic report 04 Xchanging at a glance 06 Chairman s statement 08 Our business model 10 Our strategic objectives 12 Key performance indicators 14 Xchanging s four key strengths 16 Our year in review 18 Chief Executive s report 18 Market review 24 Principal risks and uncertainties 28 Business review 34 Financial review 40 Corporate social responsibility STRATEGIC HIGHLIGHTS Achieved year s objectives of matching 2013 level of profitability despite businesses exited in 2013, and positioning the Company for growth in 2015; Our transformation is complete. Xchanging is now a business technology and services provider; Business Processing Services: further simplified structure with full ownership of German business, Fondsdepot Bank, and Xchanging Italy; Technology: accelerated strategic development of Xuber insurance software business with acquisitions of Total Objects ( 11.5 million) and Agencyport Europe * ( 64.1 million); well positioned to offer software products meeting international and standardised needs of our customers. Application Services business grew well; Procurement: now based around MM4 technology platform; refocused range of services; new leadership; good sales successes in the second half; acquisition of Spikes Cavell Analytic (in February 2015); Invested in Group s infrastructure to support future growth. ADJUSTED OPERATING PROFIT (illion) 2013 OPERATING CASH FLOW (illion) 2013 Section 3: Financial statements 82 Independent Auditor s Report to the Members of Xchanging plc 88 Consolidated income statement 89 Consolidated statement of comprehensive income 90 Consolidated cash flow statement 91 Consolidated balance sheet 92 Consolidated statement of changes in equity 93 Notes to the consolidated financial statements 137 Company balance sheet 138 Notes to the Company financial statements STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Section 2: Corporate governance 46 Chairman s overview 48 Board of Directors 50 Executive Board 52 Corporate governance report 55 Audit Committee report 58 Nomination Committee report 59 Remuneration Committee report 75 Directors report Section 4: Other information 142 Shareholder information 143 Glossary of terms View the report online at Xchanging plc Annual Report * The Agencyport Europe acquisition is currently under review by the Competition and Markets Authority. All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 29 on page 02 Xchanging plc Annual Report 04 Xchanging at a glance 06 Chairman s statement 08 Our business model 10 Our strategic objectives 12 Key performance indicators 14 Xchanging s four key strengths 16 Our year in review 18 Chief Executive s report 18 Market review 24 Principal risks and uncertainties 28 Business review 34 Financial review 40 Corporate social responsibility STRATEGIC REPORT In this Strategic report we describe our business model, strategy and performance during, and provide a review of the markets in which we operate and the risks we face. STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Xchanging plc Annual Report 03 Xchanging at a glance Putting technology at our core TECHNOLOGY PROCUREMENT BUSINESS PROCESSING SERVICES BUSINESS PROCESSING SERVICES USING TECHNOLOGY TO ENHANCE THE VALUE OF BUSINESS PROCESSING SERVICES We manage complex back and middle office processes enabling customers to focus on the growth of their core businesses. To support our customers, we offer flexible solutions supported by domain expertise and, increasingly, by innovative technology. Technology is changing the approach our customers take to their own markets: digitalisation is a significant driver. We help customers address these sometimes disruptive challenges and opportunities, including linking their digital and legacy environments by using technology-enabled processes. Whilst we have particular domain strength in the P&C Insurance and Banking and Capital Markets industries, we have customers in a variety of industries, including: Private Equity, Construction & Real Estate, Manufacturing, Retail & Distribution, Healthcare and the Public Sector. Our depth of insight into our customers markets and into their individual businesses enables us to provide differentiated innovative industry and customer-specific solutions in response to new challenges. Our delivery locations across 11 countries allow us to offer solutions that are delivered from on, near and offshore centres as well as across multiple geographies to address our customers processing challenges and add value to their businesses (see the Business review on pages 28 to 29). 04 Xchanging plc Annual Report TECHNOLOGY PROVIDING ENABLING TECHNOLOGY FOR CUSTOMERS BUSINESSES Technology is at the core of everything we do at Xchanging, but it is also a business in its own right. We employ over 2,000 technology professionals including project management teams, testing staff, solutions architects and software developers. Constantly innovating, Xchanging uses its market insight and understanding of its customers to help them to maintain a competitive edge in the face of rapid industry and technology developments. We are investing significantly in our capabilities to bring technology to the market either directly, for example in the form of software licences, or through technology-enablement of business processing services that we provide. Within our Application Services business, we build, test and support software applications for customers, many of whom are global leaders in their own field (see the Business review on pages 30 to 31). PROCUREMENT WRAPPING SERVICES AROUND A CORE TECHNOLOGY PLATFORM Our Procurement business remains a global leader in its field *. Across 48 countries we employ over 900 procurement specialists who, every year, manage over 13 billion of spend and help improve customers business profits by up to 30%. This global reach and strength of industry expertise allows us to add value to a wide range of businesses. Our Procurement business has been significantly repositioned in following the acquisition of MM4 in September The acquisition enabled us to put technology at the centre of our procurement offerings. MM4 can now be offered as technology in its own right, via a stand-alone licence to the MM4 platform; and as part of a newly re-focused set of four technology-enabled procurement services: Procurement Outsourcing ( PO ), Software-as-a-Service ( SaaS ), Procurement-as-a-Service ( PaaS ) and Tail-end Spend Management ( TSM ). In February 2015 we announced a further procurement technology acquisition, Spikes Cavell, to complete the procurement technology platform. The broadening of our offerings to span simple and low cost entry point SaaS licences through to complex technology-enabled services is allowing us to build our customer base more rapidly. We are also building our leadership position in the TSM market, addressing the 20% of organisations spend that typically goes unmanaged (see the Market review on page 18 and the Business review on pages 32 to 33). OUR PEOPLE At the end of we had over 7,400 employees globally. Our employees are spread across our global offices including the UK, India, the US, continental Europe, South East Asia and Australia. We actively promote adoption of Xchanging s Values across our global Company in a number of ways. The employee engagement survey showed that 88% of employees apply these values in the way they work (see page 40 for more information on the survey). This is a very encouraging step towards achieving One Xchanging (see page 10 Our strategic objectives). NET REVENUE (illion) Business Processing Services Technology ADJUSTED Procurement OPERATING PROFIT (illion) 2013 Business Processing Services Technology ADJUSTED Procurement OPERATING MARGIN (%) Business Processing Services Technology Procurement (2.5) (8.0) STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Xchanging plc Annual Report * Everest Group: Procurement Outsourcing (PO) Annual Report : Expanding New Horizons, June 05 Chairman s statement 2015 is the year we prove ourselves GEOFF UNWIN CHAIRMAN was another year of intense activity and the new Xchanging took further shape as a business technology and services provider. STRATEGIC DEVELOPMENT In last year s annual report I said that the new Xchanging was clearly starting to emerge. The last four years have been spent working to transform the Company according to a new business model (see page 8) and to position it as a strong competitor in its chosen markets. was another year of intense activity as the new Xchanging took further shape as a business technology and services provider. First and foremost, we took a number of organic and inorganic steps in pursuit of our strategy of putting technology at the core of our business. We further simplified the Company s structure. In Germany we drew to a close another legacy Enterprise Partnership, giving us direct control and full enjoyment of the benefits of future growth. We have made good progress addressing customer concentration and are starting to see the balance of smaller customers grow. 06 Xchanging plc Annual Report CUSTOMER CONCENTRATION AND MARGIN CUSTOMER CONCENTRATION AND MARGIN illion % Revenues from customer contracts greater than 10 million Revenues from customer contracts less than 10 million Margin on net revenue Critically, building on the work of 2013, our sales and marketing capability has gained momentum. We focused on putting our resources behind a prioritised range of offerings and were more selective about the sales opportunities that we pursued. The benefits are starting to show. Management changes have re-energised parts of our business, notably in Procurement and Application Services, and investment in a more efficient infrastructure is evidenced by the reduction in our operating cost. We said in last year s annual report that we expected to be a challenging year. We rose to the challenge, achieving our objectives of matching 2013 profitability, making up the additional ground from business exited in 2013, and positioning the Company for growth in We had our disappointments: Xuber contracts have proved slower to crystallise than we expected; the Agencyport Europe * acquisition was referred for CMA Phase 2 review; and we did not win the New South Wales Workers Compensation contract re-bid. Despite these, we achieved a commendable performance in a demanding year. We have concluded the year having met our financial objectives and having also further shaped the business in line with our strategic aims (you can read more on these themes in the Chief Executive s report on page 18). BOARD Our current Board composition has been in place for two years. This period of stability has enabled Board members to develop a deeper understanding of the Company and its operations. In turn, this has brought continuity to the Board s strategic thinking at a critical and demanding period in Xchanging s development. The benefits these factors are bringing to overall Board performance were reflected in the first external assessment which was conducted during the year. Other factors included the satisfactory resolution of legacy issues and stronger relationships between Board members. We have welcomed a number of new people at Executive Board and senior management levels. The appointments are a further measure of the transformation of our businesses, and an integral part of our repositioning for renewed growth in refocused markets. PEOPLE Once again in we made challenging demands of our employees, and once again they have responded with dedication and enthusiasm. After a strong improvement last year, it was very encouraging to see another good response to our annual employee engagement survey in. The results showed particularly strong engagement with our Values initiatives and Awards programme and with the Company s objectives (see more on page 40). Although cultural change is challenging and takes time, especially in a Company undergoing significant transformation, it is clear that the new One Xchanging culture is steadily taking root. I would like to thank all our employees for their continuing support and hard work without which we would not have been able to make the progress we have in such a short space of time. SHAREHOLDER RETURNS AND DIVIDENDS After a strong +23% performance in 2013, and a further 20% rise by autumn, the share price ended the year flat. This was disappointing. We believe the Competition and Markets Authority ( CMA ) decision towards the end of the year to refer the Agencyport Europe * acquisition for a Phase 2 review has had an impact. We have felt and, in the first half of 2015, will continue to feel the negative effects of the demands the CMA review process places upon the Company s resources, and on our ability to win new business in the insurance software market. We cannot predict the outcome of the review, expected mid-2015, however we remain confident that our own assessment at the time we made the acquisition in July, showing no competition issues, was sound. Given the year s performance, sales success in and the growth prospects for the business in 2015, the Board feels it is appropriate to recommend raising the dividend by 0.25 pence to 2.75 pence. FUTURE After four exacting years, we have completed the re-shaping of the Company and have positioned it for a resumption of revenue and profit growth in We have a much stronger senior management team and have started to demonstrate our ability to sell effectively. We are closer to our customers and are using the insights we gain to raise the value of the services we provide to them. Much still remains to be done, and in 2015 our challenge will be to prove ourselves and demonstrate absolute growth in the business. Our focus will remain on developing and deploying our sales capabilities; on stimulating and harnessing innovation; and on putting technology at our core. Having resolved the majority of our legacy issues, simplified the business, continued to progress our strategy and invested in strong offerings with improved sales capability, 2015 is the year we prove ourselves. GEOFF UNWIN CHAIRMAN 26 February 2015 STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION * The Agencyport Europe acquisition is currently under review by the Competition and Markets Authority. Xchanging plc Annual Report All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 29 on page Our business model Our business model Through technology, innovation, customer and industry insight, Xchanging develops and delivers differentiated solutions that address customers operating and processing challenges, thereby adding value to their businesses. WE UTILISE OUR CAPABILITIES TO DELIVER PRODUCTS AND SERVICES STRENGTHS Domain expertise Complex business processing and critical technology On/near/offshore flexible cost base Adaptability and flexibility BUSINESS PROCESSING SERVICES Chosen industries and markets Well-established, lower risk With a significant annuity element Cash generative Growing at a moderate rate Frequently we own the technology platform and the intellectual property VISIBILITY GROWTH POTENTIAL MARGIN POTENTIAL HIGH MEDIUM STEADY INNOVATION Defining business outcomes Adding value TECHNOLOGY Embedded in processes Creating differentiation Driving innovation CUSTOMER AND INDUSTRY INSIGHT Supports ability to innovate business outcomes TECHNOLOGY Based on a variety of types and lengths of contract Built around some specific applications In markets growing at 5-10% Benefiting from a base of well-established customer relationships Frequently we own the intellectual property Potential for higher growth and margins PROCUREMENT Building broader customer base In markets growing at 10% Offerings based around core technology Investing to enter new markets Global market leading position Traditional expertise based services refocused New Tail-end Spend Management offering in niche market VISIBILITY GROWTH POTENTIAL MARGIN POTENTIAL VISIBILITY GROWTH POTENTIAL MARGIN POTENTIAL LOW HIGH TO RISE MEDIUM HIGH TO RISE 08 Xchanging plc Annual Report HELPING OUR CUSTOMERS UNLOCK VALUE Our depth of insight into our customers businesses and their markets means that we offer more than solutions that simply address a particular operating or processing problem. We aim higher, and think instead in terms of our customers ultimate business outcomes. We combine the One Xchanging expertise we have across our three segments with our innovative skills to bring customers solutions that unlock value and realise the growth potential in their businesses. INNOVATION THAT UNLOCK VALUE IN OUR CUSTOMERS BUSINESSES INSIGHT TECHNOLOGY DIFFERENTIATED OFFERING CUSTOMERS VALUE AND GENERATE VALUE FOR OUR OWN SHAREHOLDERS OVER THE LONGER TERM RETURNS TO SHAREHOLDERS REINVESTMENT IN INNOVATION, TECHNOLOGY AND GROWTH POTENTIAL To achieve our growth ambitions we have invested in our existing businesses as well as in acquisitions, particularly where they bring technology capabilities that support our strategic objectives. Unlocking value in our customers businesses in turn enables us to deliver value to our own shareholders. STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION Xchanging plc Annual Report 09 Our strategic objectives Technology-enablement Xchanging has emerged from a four year transformation journey that puts technology at our core. In a business world that is rapidly digitalising, we address our customers most complex processing challenges through innovation. COMPETE TO WIN We compete in global markets for customers with diverse business needs. We have a refocused set of offerings and serve customers in multiple geographies. In recent years we have made great progress building our sales capabilities and redefining our go-to-market strategies to ensure they drive success. In doing this we continuously test three fundamental questions: What are we selling? Who are we selling to? Why would the customer buy from us? We have focused our legacy portfolio of offerings to concentrate our resources behind what we do best. We have focused on target customers that have a clear propensity to buy from us, and on those opportunities where we are confident we can compete successfully. We have focused our efforts to ensure that our offerings are clearly differentiated and increasingly technology-enabled. In particular, we are harnessing technology with a renewed focus on the development of offerings that are repeatable and scalable, and that capture valuable intellectual property. You can read more about the strengths that build our ability to compete on page 14, Xchanging s four key strengths. INCREASE REVENUE
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