Westcon outsourcing exercise turns into a costly lesson for Datatec

DATATEC rose more than 6 percent in early trade on the JSE yesterday, after reporting that revenue from its Westcon operations decreased 1.5 percent to $2.32 billion (R29bn) for the year ended on February 28.

Datatec chief executive Jens Montana yesterday said that the transition to the business process outsourcing at its subsidiary Westcon proved costly and led to poor customer service.

Montana said Westcon’s previous management failed to respond adequately to the outsourcing, especially in Europe, the Middle East and Africa.

He said that Datatec’s immediate focus was to improve the Westcon balance sheet and revenue. “We had taken a big bet with the previous Westcon leadership on business process outsourcing transformation to improve our cost base and execution around SAP. It did neither,” Montana said.

“In fact we ended up with greater costs and poorer service. We learnt a lot in the process.”

Datatec yesterday said that its gross profits slumped 10.6 percent to $227.4 million during the period, with Westcon accounting for 59 percent of the losses.

Montana said Westcon lost functionality and compromised customer service quality in its pursuit for ambitious administrative and support-cost reductions.

He expressed confidence in the company’s move to build internal shared services capabilities in South Africa and the Philippines to service Europe, the Middle East and Africa and Asia-Pacific regions.

He said Westcon’s performance was disappointing, especially in Europe, Middle East and the Africa region. “Our plans to return Westcon International to profitability and growth are progressing and the central cost base is being actively addressed,” said Montana.

Datatec said in a statement that the transition to business process outsourcing in the last two years had been disruptive and costly and had affected Westcon International’s level of customer service and financial performance. The company that said it decided to bring back the work currently outsourced to improve customer experience.

The company’s other business, Logicalis, experienced a solid year, which could have been better had it not been for weak contribution from North America. Logicalis, which accounted for 40 percent of Datatec’s continuing revenues, increased revenues from continuing operations from $1.5bn to $1.6bn. Revenue increases in Latin America, Europe and Asia-Pacific were partially offset by a fall in North America. Gross profit from continuing operations increased 10.6 percent to $391.7m. Operating profit increased 10 percent.

“For Logicalis, it was a pleasing year. All regions grew, except North America, which was disappointing. Actions to address this are ongoing,” said Montanana.

Datatec sold Westcon Americas for $630m and the non-core Logicalis SMC for $42m during the period.

“This has been a landmark year for Datatec during which we generated exceptional value for shareholders through the successful sale of Westcon Americas and the disposal of Logicalis SMC. We remain focused on closing the valuation gap through strategic initiatives and other corporate actions,” said Montanana.

Datatec shares increased 0.92 percent on the JSE yesterday to close at R20.81.