Weekly Update

ISS to seek $1.47B IPO, and the third wave of outsourcing

ISS is one of the world largest private employers, with over 530,000 employees worldwide, but is largely unknown except to its workers and client companies. It is an outsourcing company, offering businesses with non-core services like cleaning, catering, security and building management.

The company plans an initial public offering of $1.47 billion dollars on the NASDAQ exchange, and will use the funds to retire various lines of credit. The company posted revenue of 78.5 Danish kroner ($14.45 billion) in 2013.

My interest in this is less about ISS, and more principally around the fundamental concept of outsourcing work.

At one time a large company like AIG, NBC, or IBM would hire its own cleaning staff, cafeteria workers, and security guards. But starting in the last decades of the 20th century, company started to outsource such services to specialists: Wackenhut for security, for example. After all, AIG doesn’t have enough of a need for security services to become expert in the field, and Wackenhut can scale up to the point where those working at the company can have meaningful careers, not just dead-end jobs.

But this has led inexorably past the ranks of blue collar services, like security and cleaning, and the second phase of outsourcing came along and started to move from non-core to core work. A company like AIG might outsource claims processing to a firm specializing in that based in the Philippines, or IBM might outsource chip manufacturing to ARM.

And in parallel with that, as companies began to look more closely at their obligations to employees, we saw the fraying of the social contract. Many folks that formerly worked as full-time employees were let go, or converted to freelance consultants. Some of this is simply cost-saving — reduced benefits, etc. — and some was to allow companies to be more flexible. If it is expensive to pay accountants who live nearby your New York City headquarters, why not move the jobs to Minnesota, or Des Moines?

I suspect that we are headed for a third wave of outsourcing. The first was blue collar hourly employees being spun out to companies like ISS. The second was back office workers: the accountants, planners, and designers that supported company operations, but were the cost centers, not the profit centers.

In today’s entrepreneurial companies, only those capabilities that are strategic to the business really need to be staffed with full-time employees. In principle, everything else could be outsourced.

The rise of placeforms (marketplace + platform) like oDesk, Work Market, and Elance has shown how this can work with designers, developers and other creatives that most businesses need on a project basis. My sense is that this demonstrates a trend: businesses are discovering what their core is by a process of outsourced elimination.

So one hotel chain may discover that it’s real core strength is marketing and customer service, not building management, so they might totally outsource the management of the physical side of the hotels: engineering, renovation, groundskeeping, etc. The economic downturn has accelerated this trend, as detailed back in 2009 in this Economist piece, that took a close look at InterContinental Hotels Group, which has sold off most properties to franchisees. Or a consultancy might find their core skills do not include the research side, so they might spin out a network of small research boutiques, skilled in various sectors, who also get work from other sources as well.

The decrease in friction in work because of the low cost and power of modern work technologies is making this more possible, and the decline of long-term employment and the resultant disengagement of workers gives everyone added incentives for these sorts of cooperative ventures. Companies may spin out everything but the one thing that matters, the one thing that defines the company.

I wonder how much, if any, of ISS’ IPO will be directed toward the third wave? Well, if not that money, there’s plenty of cash out there looking to be invested.