As Buffett Invests in IBM, NCO Group Announces Results & Strategic Shift

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NCO Group, Inc. (“NCO”), a leading provider of business process outsourcing (BPO), announced today that for the quarter ended September 30, 2011, it generated net revenues of $304.0 million and Adjusted EBITDA of $37.1 million. As compared with the year ago quarter, NCO increased revenues from $292 million and EBITDA from $32 million

More interesting that the results was the announcement that NCO has effectively discontinued its receivables purchasing arm, Portfolio Management. According to the announcement, NCO sold substantially all of the remaining portfolios of accounts receivable.

NCO CEO Ronald A. Rittenmeyer noted,

During the third quarter NCO continued to execute on its plan to better position NCO in the overall BPO market.  We were able to exit the Portfolio Management business and continue to restructure NCO to better support NCO’s long-term growth initiatives.

The move to exit the accounts receivable purchasing business indicates a continued shift towards business process outsourcing services. It also leaves a large hole in the accounts receivable purchasing industry from a demand perspective, surely to be filled by the likes of Encore Capital, Portfolio Recovery and Asset Acceptance. NCO seemingly always treated Portfolio Management as a side project, and the announcement that it is closing the unit shows that business units treated as side projects rarely deliver outsized results.

From a financial perspective, NCO is shifting from a riskier business (investment in distressed assets) to a more predictable and consistent business (outsourced services). This very shift has allowed IBM to weather the recent financial storms and recently led to Warren Buffett’s investment in the business. Buffett’s announcement that Berkshire Hathaway has invested more than $10 billion in IBM is an implicit confirmation of IBM’s strategic shift towards business process outsourcing (BPO) from its traditional hardware business. Buffett pointed to strong leadership and a shift from hardware to services as the driving factors in his purchasing a more than 5% stake in the company.

Both companies are moving to more predictable and consistent businesses with a focus on services over product sales or risky financial investments. As two of the largest outsourced services providers make this transition, it will be interesting to see if others follow.