A New Option for Fans of Outsourcing

By Staff Report

Jan. 21, 2005

Hewitt/Exult might have to start watching its back. Towers Perrin and EDS have joined forces to create a new human resources outsourcing company, and observers say it could be a formidable competitor to Hewitt, the current top dog in the business.

EDS, with more than more than $20 billion in annual revenue, has deep roots in technology outsourcing. Towers Perrin, meanwhile, is a brand name in benefits administration. EDS will own 85 percent of the company, and Towers Perrin will hold the remaining 15 percent. EDS will pay an estimated $420 million to Towers Perrin as part of the agreement, which if approved by Towers Perrin shareholders would close by the end of the first quarter.

The new company, not yet named, will be an appealing option to some senior executives, says Stan Leteak, a director at Equaterra, which advises companies on in-sourcing/outsourcing decisions. “It’s certainly a step in the right direction,” he says. “EDS is not known for human resources outsourcing–EDS gets human resources knowledge and a human resources brand.”

Towers Perrin, Leteak says, needs EDS’ infrastructure. “This would be a good fit.” Also, he says, some customers who outsource their IT work to EDS might be able to negotiate a bundled price.

Still, Leteak says, there are always question marks when two companies marry. “I think it makes them more appealing on paper. But obviously they have to execute. They have to go make it work,” he says.

Steve Bohannon, currently with EDS as its vice president of HR services, will be CEO of the new company. He says the firm will be stronger globally, particularly in Europe, than its competitors. He also says that Towers Perrin “has better depth and quality” than other vendors.

Towers Perrin managing director Don Lowman expects the company to be one of the top three or four largest human resources outsourcers, with $600 million in revenues from its inception. He says that senior executives in workforce management who want to outsource will benefit because “they can go to one provider now” for all services. As for competitor Hewitt, Lowman says it “doesn’t have the same technology capability. EDS is a world-class technology provider.”

That’s news to Lisa Rowan, an analyst with IDC. “That’s their take, and they’re welcome to it,” she says, “but Hewitt’s been managing benefits administration for eons.” Bryan Doyle, who heads up Hewitt’s outsourcing business, also begs to differ, saying that Hewitt has “more HR technology than anybody else.”

Rowan adds that EDS has scaled back its workforce and doesn’t have the legions of people it had two to three years ago. Last fall, EDS announced that it was reducing its workforce by the thousands, partly through early retirements. It has opened up a 12-person in-house workforce management office to get a better handle on whether the employees it is keeping on board have the skills they need to carry out EDS’ business plan.

Still, Rowan is very positive about the EDS venture, saying that it’s another option for workforce management executives and a great sign that big money is flowing into the human resources field. “Bottom line, I think this is a good thing,” she says.

—Staff report

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