Wednesday 21 February 2018

Outsourcing is yesterday's model, now it's time to 'reshore'

The only true lesson in business is that when something is fashionable, it is only a short wait until it becomes "old-hat" and an alternative is found.

In the past five or six years, "outsourcing" was the hottest thing around. Businesses could not wait to offload their manufacturing and services activities to distant lands as the demand of "bottom line" growth crowded out any other considerations.

But there are changes afoot. Jeff Immelt, head of General Electric, opined recently that outsourcing was "yesterday's model".

So he has whipped back to places like Michigan and Kentucky the extensive GE manufacture of fridges, washing machines and heaters which an earlier management had sent to China. He has also put an end to the scramble to ship jobs to the Far East and returned them to the US.

"Reshoring" is now a buzz word in the States, and may well become the new fashion in this part of the world. For the sake of the of Irish jobless, it can't happen soon enough.

These ideas got me wondering what, if anything, could happen to the great powerhouses of outsourcing that have grown up in the past decade. The one I was particularly interested in was the global enterprise G4S. It is the biggest outsourcing company in the world and is the third largest private-sector employer, with 670,000 employees in 125 countries. Today it is huge in port security, handles event management and is a major player in nuclear power security. As a result G4S has 8pc of the £90bn (€104bn) world security market, is quoted on the London Stock Exchange and is worth £4bn.

G4S shot to public notice last year for the fiasco of its 2012 Olympic Games contract. The exposure helped the public appreciate what a colossus G4S had suddenly become.

G4S is only eight years old, being founded in 2004 with the merger of Securicor and the Danish company Group 4. It is now structured into two divisions: secure solutions and cash solutions. Secure solutions markets are government and non-government business. This division accounts for 83pc of the group's £8bn revenue. Activities include manned security services, prison escorting, detention centres for asylum seekers, port and airport security.

It has contracts in 40 countries from Baghdad to Brussels.

The cash solution division (£2.2bn revenue) is concerned primarily with central and commercial banks. This division generates 65pc of the revenue from providing secure cash transport, cash management, risk consulting and management of ATMs.

What will happen to a company like this if outsourcing falls out of favour. Of course, it is hard to see the governments in the mature markets where G4S operates (it has half its business in Europe and 27pc in the US ) take things like airport security back into public ownership.

Company strategy expects emerging markets to deliver 50pc of group sales by 2019. But strategy is one thing, implementation another!

For eight consecutive years G4S as has shown growth in revenues and dividends and this year didn't disappoint with increase of 8pc in revenue and 5pc in dividends. Shares at 300p are up 20pc since the Olympics, dividend yield is 3pc and price to earnings ratio is 12.

Investors like BlackRock and Legal & General have big bets on G4S continuing to produce the goods, but won't have been enamoured by the recent 32pc drop in pre-tax profits to £175m. Is this a buying opportunity? Analysts have mixed views and the market being too high doesn't help.

There is nothing to suggest the group is worrying about 'reshoring', as it still plans to spend £200m on acquisitions.

I will be watching the apparently developing trend of bringing outsourced profits and jobs back home with great interest, as I am sure so too will G4S.

Dr John Lynch is a former chairman of CIE. Nothing published in this section should be taken as a recommendation, either implicit or explicit, to buy or sell any of the shares mentioned.

Irish Independent

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