CAS Anticipates Robust M&A Market for Outsourced Business Services in 2021

Despite the horrific impact caused by the pandemic, the U.S. Tech-Enabled Outsourced Business Services (OBS) sector fared surprisingly well in 2020. This can be attributed in part to support from stimulus funding, combined with client and government willingness to allow vendors to provide their services remotely.

While the current virtual work environment will not entirely replace brick and mortar, I strongly believe we have seen the beginning of a transformation in our corporate culture that will allow for a hybrid remote/commercial office existence going forward. This will have both short- and long-term ramifications for the Tech-Enabled OBS sector.

In the short-term, OBS companies will be able to more effectively manage their cost structures while they work through the challenges associated with inconsistent client business volumes. In the longterm, it may create a more competitive labor environment vs. near and offshore resources.

Another critical market trend is the ongoing development of artificial intelligence/machine learning solutions. Chatbots are currently the rage. When combined with improved data and speech analytic solutions, they are starting to effectively replace “butts in seats” for certain client interactions. This trend, too, will have short- and long-term ramifications for the OBS sector. In the short-term, vendors with these solutions will hold a competitive advantage over those who do not. In the long-term, these solutions will likely change the OBS landscape leaving potentially fewer vendors supporting reduced staff. Surviving vendors will be larger and more profitable. Financial and strategic buyers are actively aware of this trend and are proactively seeking to acquire strong platforms to reap the benefits.

As we move on from the tumultuous impact of our new President’s inauguration, we at CAS are focusing our attention on upcoming changes that may affect the OBS sector. While we believe tax rate increases are likely during this new Administration, we do not foresee them being implemented this year.

Most likely, President Biden and his team will focus on getting our country through the pandemic during 2021. The new administration will wait to reach some level of economic stabilization before introducing tax rate increases. We anticipate the new administration will pursue rate increases for the wealthier portion of the U.S. population (specifics not defined yet), including a capital gains tax increase. While it remains unclear how ambitious they intend to be in this regard, we could see a rollback to Obama era levels.

Another area of focus involves changes to regulatory compliance requirements. With a new CFPB director, Rohit Chopra, expected to follow Acting CFPB Director Dave Uejio, we are interested to see if he and the CFPB will pursue further regulatory changes. Also, certain states such as California have been pursuing their own CFPB regulatory compliance framework, the results of which have yet to be determined. We suspect other states may follow suit if it is determined California has produced positive results for its constituents and its financial statement.

Regardless of how events unfold in 2021 and beyond, the OBS sector has and will continue to adapt to upcoming changes. We saw this in 2020, when despite all the economic and financial uncertainty, the M&A market remained highly active.

We at CAS closed six transactions last year and have several more currently in confirmatory due diligence. In addition, we helped a top 20 financial institution sell its first non-performing credit card portfolio. We strongly believe the M&A landscape will remain active in 2021, and buyers will become even more competitive as the economy eventually reaches a “normal” state post-pandemic.

Read our latest report for a more detailed update by market sector.