Outsourcing company Xchanging said it is making progress with its cost-cutting drive and stood to benefit from companies looking to save cash in the economic downturn, sending its shares up 12 percent.

Xchanging, which runs back-office activities such as invoice processing, paying staff and procuring office supplies, said on Monday its operating cashflow was ahead of its expectations after implementing a series of cost-cutting measures since March in what it has described as a year of transition.

Its shares, which have shed around 39 percent of their value since the company issued a profit warning in February, were leading the FTSE Smallcap <.FTSC> index, up 12.8 percent to 79 pence at 12:14 p.m.

In our view, steady progress continues to be made by management simplifying and de-risking the business, Espirito Santo Investment Bank analyst David Brockton said in a note.

Chief Executive Ken Lever said the outsourcing market was faring quite well, adding the economic downturn was providing opportunities for companies like Xchanging, which won contracts with French cosmetics maker L'Oreal and a seven-year U.S. procurement outsourcing contract with BAE Systems during the period.

Growth in the developed economies is hard to come by for companies so they are looking at ways of taking costs out and where businesses are trying to take costs out, that always provides opportunities for people like ourselves, he said.

Lever said Britain's attempt to eliminate its budget deficit offered Xchanging opportunities to provide outsourcing services to the public sector.

I do not think there's any question that there are lots of growth opportunities out there -- it's a question of us making sure that we see those opportunities and that we're considered for those opportunities, he said.

Lever said Xchanging had met the initial cost reduction targets it set itself in March as part of the four-part plan for recovery it announced after posting a 56 million pounds operating loss for 2010.

There will be further areas of cost reduction but not on the magnitude that we've seen in the current year, he said.

Lever said the company had already held some discussions about the possibility of renewing its human resources and procurement outsourcing contracts with BAE Systems in Britain -- due to expire in 2012 -- and said he expected Xchanging to continue to win smaller contracts.

Xchanging -- which sponsors the annual Boat Race between Oxford and Cambridge universities -- said its Insurance and Financial Services divisions had performed slightly better than expected but Technology Services had been disappointing this year, although it was confident this business would improve.

Last week Xchanging said Geoff Unwin, a former Capgemini chief executive, would take over as chairman on Jan 1.

(Editing by Rosalba O'Brien and Mike Nesbit)