Last week this article was featured in Tom Bulford’s twice-weekly small-cap investment email The Penny Sleuth.
If you work for a big financial organisation, you will know that the back office is a place where the bosses fear to tread. It is ‘below stairs’, where the menial tasks of paper pushing are performed. Its exact workings are a mystery to many company chiefs.
My own experience of working in the back office goes back four decades. Apart from the absence of computers back then, I don’t suppose the scene has much changed. The back office is always a gaggle of bureaucrats, leaving awkward matters lying in the bottom of their in-trays, and watching the clock as it creeps up to 5.30pm.
All of this is presided over by the one guy who has been there all his life. He’s no creative thinker, but he’s the only one who truly understands what must be done, and he carries this crucial information around in his head. In short, it’s a quagmire of inefficiency and waste.
But now the mighty software industry is turning its attention to this morass of inefficiency. A leader in the field is EG Solutions (LON:EGS), which gave a positive report on current trading on Wednesday. Last week I went up to Stafford to meet EG herself: Elizabeth Gooch, a Deborah Meaden look-a-like with a distinct Midland accent and a breezy forthright manner.
She set up EG Solutions as a consultancy in 1988. She took the business public in 2005 and enjoyed a brief period as the darling of the AIM market. The business has had its ups and downs since. But today with big financial organisations finally deciding to get a grip on the back office, it is poised to benefit.
Promoting the most efficient workers to the top
EG sells programs that take those backward plans and dubious organisational skills out of the head of the departmental boss and lay them out on a computer screen in a structured manner. The necessary tasks are defined, and these are matched to the skills and availability of the staff.
To give an example, a mortgage application involves several distinct steps, like the gathering of the applicant’s credit rating, and getting a reference from his employer. There is about seven hours work here in all. But as anyone who has applied for a mortgage knows, the whole procedure can drag on for weeks.
Gooch argues that if a whole car can be manufactured on a production line in a matter of minutes, why should back office procedures take so long?
By breaking these down into a series of steps, each job can be assigned to the most appropriate individual and progress can be monitored. Thanks to EG Solutions, bosses can for the first time, determine whether the back office has the right capacity and skill set. Without exception, this revelation leads them to do things more efficiently.
The program tracks the efficiency of each worker, so bosses can see. I asked whether this caused resentment. ‘No’, said Gooch. ‘The Unions love us’. Because for the first time, the contribution of each member of staff is properly measured. As a result pay rises and bonuses can be based on genuine productivity and not a subjective opinion of somebody’s worth.
Last year EG took this a stage further when it bought XTAQ. This provides software that tracks exactly how an individual interacts with his computer, measuring the time spent on each page. This is now used by some banks to determine exactly how much work is being done by firms on the sub-Continent to which they have outsourced basic tasks.
Small firms court buy-outs in cost-cutting surge
EG had focussed on the banking sector. So it was inevitably hit by the banking crisis – indeed, even Lehman Brothers was a customer. But this is now working in EG’s favour. Now that banks are focussing on cost control EG is seeing an upswing.
EG’s shares have rallied from a crisis low of 8p to today’s 86p where they trade on a demanding twenty times forecast earnings and twice annual revenue. But recent deals in the sector suggest that this is not a fanciful valuation.
Last year, two small software companies that helped banks improve their front office operations were taken over. Portrait Software was bought by Pitney Bowes for £44m, which represented almost three times revenue and over thirty times annual profit, while Focus Solutions was acquired by Standard Life in a £42m deal that represented almost four times revenues, and nineteen times the latest annual profit. EG has a leading product in the back office arena that is rapidly becoming the centre of attention. It would be no surprise to see EG attract a buyer of its own in the future.
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• This article was first published in Tom Bulford’s twice-weekly small-cap investment email The Penny Sleuth.
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