How the King of the UK back office plans to keep his business growing

IT is fascinating to listen to David Andrews talk about his business. For most of us, back offices may seem deadly boring &ndash; but when you discover Andrew&rsquo;s passion for Xchanging, the FTSE 250 back office outsourcing giant he founded 10 years ago, you suddenly realise just how true it is that finance and corporate success doesn&rsquo;t end at the front of the house.<br /><br />&ldquo;There are three questions businesses ask themselves before they use us&rdquo;, Andrews says. &ldquo;First, shall we do it ourselves or let someone else do it? This is the classic make or buy manufacturing decision. Next, do I have the size and scale to do this myself? Even the very biggest companies ask themselves this, because back office functions are rarely any firm&rsquo;s core competence. And lastly, do I actually want to do this myself? A firm has to answer this last question on its own, we can&rsquo;t force it to come to a decision over this. But the key thing is, these factors are at play irrespective of the economic cycle.&rdquo;<br /><br />Initially, Xchanging &ndash; which manages human resources, accounting, procurement and technology back office functions for blue chips &ndash; looked like it might buck the downturn. In March, the business, which employs 9,000 staff in nine countries, posted 2008 pre-tax profits up 16.7 per cent to &pound;49.2m, on sales up 19 per cent to &pound;557.8m. At the time it said much of its growth came from selling extra services to existing customers, which include Deutsche Bank, American Express and BAE Systems. Xchanging has a market capitalisation of &pound;408m and half of its sales are made abroad.<br /><br />Andrews said at the time: &ldquo;The business processing market continues to grow despite the difficult economic environment and our strong cash position will allow us to be responsive to opportunities as they arise.&rdquo; However, by May Xchanging warned in a four-month trading statement that it expected its 2009 pre-tax profits to be &ldquo;slightly down&rdquo; on market expectations of &pound;60m because of lower trading volumes in banking, falling claims in the US insurance market and lower IT spending.<br /><br />Analysts wonder if Xchanging is in a worse position to weather the downturn than rivals Serco and Capita over the next 12 to 18 months, because these companies target local and central government customers who have the cash to continue spending through a recession.<br /><br />However, Xchanging is in a solid position to tough out a slowdown in revenues. It has &pound;118m of cash in the bank, and last year it extended its credit facilities with Lloyds to &pound;90m from &pound;35m.<br /><br />Andrews sits in the communications room of the firm&rsquo;s bright, modern Hanover Square headquarters and is bullish about the longer term prospects of the firm he founded in 1999 and which only came to market in 2007.<br /><br />Essex-born Andrews is wearing a beautifully cut three-piece pin-striped suit and has distinguished greying hair. He regularly plays squash and tennis and manages to look nothing like his 59 years.<br /><br />He says: &ldquo;Only around 3 per cent of the Fortune 500 companies outsource their back office functions. This is a very young market, and there is plenty of scope for growth in an industry that is already worth &pound;100bn a year globally.&rdquo;<br /><br />Behind Andrews are three big-screen TVs able to link his HQ with three of its biggest operations &ndash; the City insurance market in Leadenhall, banking in Frankfurt and a key processing centre in Gurgaon, near Delhi. The communications room sits on the first floor of the two-storey office and is surrounded by four glass walls. Transparency is a big part of what Andrews has built the firm on. Staff, himself included, work in open plan offices. And customers can wander anywhere in any of the firm&rsquo;s buildings across the world.<br /><br />He says: &ldquo;Relationships between businesses do not always have to be adversarial. You can arrive at a win-win situation. But for that to happen you have to open your books to your customer. He knows how much you are making, and he has to recognise that you are entitled to a fair profit.&rdquo;<br /><br />Andrews says as a result the contracts he usually signs with clients are lengthy, lasting between seven to 10 years.<br /><br />He says: &ldquo;We often invest in new technology with our partner. They respect that commitment and are prepared to sign long contracts with us.&rdquo; Last year the business said its capital spending topped &pound;39m on items like bespoke software.<br /><br />Andrews also continues to buy rivals in the downturn. Last October it bought a 75 per cent stake in Indian outsourcer Cambridge Solutions for &pound;83m, because of its extensive operations in America. And last month it said it would buy FondsServiceBank, the investment funds administration business of DAB Bank for &euro;21.4m (&pound;18.5m) to strengthen its stake in the German banking market, where it already holds a 20 share.<br /><br />Andrews was 50 before he decided to strike out on his own, even though his father had been an entrepreneur who owned a chain of department stores based in Dagenham. Andrews left school in 1965 after O-levels and joined a City firm of chartered accountants. After five years of this he went back to college and completed an MA at Sheffield University.<br /><br />He is from a church-going family, and he spent the next three years helping to run a church hospital in the Congo.<br /><br />When he returned to the UK he joined accountants Arthur Andersen where he worked his way up to head of its West Europe unit based in Paris. During his time there he was responsible for the launch of the Xetra trading system at the Deutsche Borse. It was around this time that Andrews got the idea of taking on the back office systems of the major firms he had spent his life working for.<br /><br />He said he spent seven years weighing up whether to make the jump. An unusual source tipped the balance for him. Andrews says he was listening to a sermon in the Ebenezer Baptist Church in Atlanta in the mid-90s where Martin Luther King Jr had preached 30 years before. The minister quoted a passage from Luke about having the courage to wade into deep waters. Andrews said: &ldquo;That passage struck home to me, and I decided to take the plunge.&rdquo;<br /><br />He left his job and took six months to raise $50m (&pound;30.2m) from US investors to start the business. When it floated in London two years ago he made &pound;13m from selling part of his stake, though he still retains a 10 per cent holding in the business worth around &pound;40m.<br /><br />Andrews maintains that the turbulence the business finds itself in is temporary, and he is determined to spend cash on rivals to make sure his firm it is a strong position when the global economy emerges from recession. Andrews is betting companies will soon turn in a big way to outsourcing back office operations as a way to cut costs.<br /><br />His investors will hope he is right.<br /><br /><strong>CV DAVID ANDREWS</strong><br /><strong>Age:</strong> 59<br /><strong>Work:</strong> After training in an accountant&rsquo;s office, he took a break to do an MA and then helped run a hospital in the Congo. He joined Arthur Andersen where, after a number of posts, he rose to become head of its Western Europe business in 1994. In 1999 he set up Xchanging <br /><br /><strong>Education:</strong> Caterham School and Sheffield University where he completed an MA in finance and administration<br /><br /><strong>Homes:</strong> Mayfair and Branscombe in Devon<br /><br /><strong>Family:</strong> Married with four children<br /><br /><strong>Hobbies:</strong> Squash, tennis and medieval history