Consolidation Continues; Smaller Clients Being Courted

As more companies embrace HR business process outsourcing, vendors are in a game of survival of the fittest, buying competitors, teaming up in joint ventures or dropping out of the business entirely.

    To distinguish themselves from challengers, vendors also are expanding internationally, offering one-stop outsourcing and reaching out to small and midmarket companies.

    The urge to merge has held steady for the past two years. The single biggest deal in the HR BPO vendor market remains Hewitt Associates’ $690 million acquisition of startup Exult, which became final in October 2004 and pushed Hewitt into the position of market leader.

    IT outsourcer Electronic Data Systems solidified its foothold in the HR market in January by forming ExcellerateHRO, a $600 million joint venture with HR consulting firm Towers Perrin. Two months later, Affiliated Computer Services, another IT outsourcer, strengthened its budding HR business by paying $445 million for Mellon Financial Corp.’s HR BPO unit, which that company had put on the block after failing to attract the clients it had expected. ADP, the established payroll outsourcer, acquired competitor ProBusiness in 2004 to kick off its own HR BPO offering.

    By most estimates, Hewitt remains the leader of the pack. Since acquiring Exult, Hewitt has signed deals with Pepsico, Marriott International, Wachovia Corp. and 11 other HR BPO customers, bringing its outsourcing client list to 30. In all, Hewitt’s HR outsourcing contracts cover a total of 800,000 employees. Hewitt is looking to further extend its international business, recently signing a joint venture in Japan to offer HR BPO services there.

    Convergys, however, is gaining ground. In November, it signed what might be the largest HR outsourcing deal to date: a 13-year contract with DuPont worth $1.1 billion. Convergys is providing customer care, human resources and billing services for DuPont’s 60,000 employees and 102,000 retirees worldwide. The two deals propelled Convergys from seventh place to second in terms of total contract value, according to Everest Group. Total contract value for deals since the end of the first quarter was $2.8 billion, with the DuPont deal alone worth $1.1 billion, notes Michel Janssen, managing research director at Everest Research Institute.

    Shortly after the deal was announced, rumors began circulating that IBM was in talks to take over Convergys. Neither company would comment, but Phil Fersht, global research vice president at NelsonHall, says that the DuPont deal could have prompted IBM to take a closer look at Convergys, given the size of the contract.

    Whether or not it acquires Convergys, IBM and another competitor, Accenture, are taking advantage of their global reach and product depth by offering to operate clients’ HR processes along with finance and accounting, IT, supply-chain management and billing in what’s known as multitower outsourcing. In July, IBM signed a 10-year, $1.6 billion deal to provide multitower outsourcing to NiSource, the gas and energy conglomerate. But not everyone is sold on the concept. Suppliers claim they can be more cohesive and economical if they run everything, but that removes a client’s ability to farm out individual processes to suppliers with best-of-breed applications, Janssen says. “To be frank, I’m not sure I buy it,” he says.

    Technology platforms are becoming a factor in vendor selection. Fidelity Human Resources Services Co., a division of Fidelity Investments, scored major coups in the past two years when it successfully signed second-generation HR BPO deals with Bank of America and BASF, two former Hewitt clients. But industry analysts wonder whether clients with legacy HR IT systems built around standard PeopleSoft or SAP operating systems will be interested in shifting to Fidelity, which built its own software architecture.

    As more small and midmarket companies broaden their HR outsourcing from payroll or benefits administration, vendors that traditionally served the small-business market are moving with them. In two years, ADP has signed 35 clients with an average of 11,000 employees. ADP tested the waters by offering HR outsourcing to larger accounts, but as of early October the company was targeting smaller clients with 50 to 1,000 employees. ADP could be a disruptive force, says Everest’s Janssen, who recently briefed 500 ADP salespeople on the market. “They’re coming out with price points and service levels for a market that’s been underserved. They have the potential to Wal-Mart this industry,” he says.

    While it’s too early to predict which suppliers ultimately will end up on top, it’s safe to say consolidation isn’t over. Says IDC HR outsourcing analyst Lisa Rowan: “We’re going to see more.”

Workforce Management, November 7, 2005, pp. 40-43 — Subscribe Now!