Hewitt Struggles in Quarterly, Annual Figures

By Staff Report

Nov. 13, 2006

Hewitt Associates’ woes continued Friday, November 10, when the HR services company reported disappointing financial results and more trouble in its outsourcing operations.

The Lincolnshire, Illinois-based firm posted revenue for the quarter ended September 30 of $727.6 million, up 0.9 percent from the same quarter a year ago. Hewitt’s net income for the quarter was $23 million, down 43 percent from a year ago. At Hewitt’s outsourcing unit–which accounts for more than half of the firm’s business–revenue, income and profitability all fell during the quarter.

Jim Wilson, equity analyst at investment firm JMP Securities, said Hewitt fell short of Wall Street analysts’ expectations for the quarter. But the company, which acquired HR outsourcer Exult in 2004, may not be any worse off than competitors in the HRO arena such as IBM and Accenture, Wilson says. The field is still just a few years old and marked by extremely complex arrangements, he says.

“It’s not clear who, if anybody, has found a way to make money on these deals yet,” he says.

Hewitt is among the leaders in comprehensive HR outsourcing, which involves a company farming out tasks such as benefits enrollment and compensation. The firm ranked first this year on Workforce Management’s list of the top end-to-end HR outsourcing providers, with more than 30 such clients.

A study published last month by research and consulting firm EquaTerra found signs of growing demand for outsourcing services overall, which can include information technology tasks and finance and accounting duties. But the report also said outsourcing service providers face challenges including increased competition and a tight supply of skilled workers.

Hewitt, according to EquaTerra’s report, appears to be slipping in the outsourcing market. More than 35 percent of EquaTerra advisors saw Hewitt as losing market share during the third quarter of 2006, while slightly more than 10 percent considered Hewitt to be gaining market share during the period.

For the year ended September 30, Hewitt’s outsourcing revenue fell 3 percent to $1.98 billion and it registered a loss of $77.9 million, compared with income of $177 million in the prior year.

Hewitt recently appointed a new CEO, Russell Fradin. On Friday, Fradin said the year ended September 30 was “challenging” on many fronts, and he pledged to work on fixing the HRO unit. “Despite solid performance in benefits outsourcing and consulting, we significantly under-delivered on our financial objectives for the year, reflecting deterioration in the expected profitability of some of our HR BPO [business process outsourcing] contracts,” Fradin said in a statement. “Looking ahead, we’re refocusing on the areas that will drive greater value and more consistent, predictable results. Our attention in the near term will be on accelerating the growth of the benefits outsourcing and consulting businesses, and redefining our approach to the HR BPO business.”

Also Friday, Hewitt said it had “higher performance-based compensation” compared with a year ago. Analyst Wilson finds that puzzling given the poor financial performance. “It doesn’t make a lot of sense,” he says.

Hewitt could not immediately be reached for comment.

Ed Frauenheim

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