HRO Holiday Gifting

What do you get the company that is hard to buy for? How about a new niche acquisition? As we ready for the holiday season and the end of the year, I wonder if there will be any interesting, prettily wrapped presents. If you are shopping to buy or sell all or a portion of an HRO business, here are a few gift buying guide pointers.   

Look at the Bow on the Package

Attractive acquisition factors:

•  State-of-the-art technology infrastructure with low operating costs and great end-user experience

•  Integrated service centers in desirable locations, good regional coverage for languages, deep subject matter expertise and knowledge of local regulations

•  Reputation for service quality and relationships

•  Compatibility in values and culture

•  A well-rounded book of current clients

•  Strong revenue stream with a high percentage of multiyear contracts

•  No/low debt

•  Small enough to be affordable and benefit from the leverage of a larger partner

Shake the Package

While the above characteristics are the ideal, it’s much more likely a potential acquisition candidate will have a mix of elements, some more attractive, some not so much.

Extra due diligence is required if the main asset is a current slate of contracts. If the potential acquisition is friendly, take a look at the customer termination clauses to see if there are easy outs. Larger clients often have Change in Control terms that work both ways, including covering what happens if the provider is acquired. Check the penalties for Termination for Convenience. If the penalties decline over time, how near end of term are the largest clients? Are there signs some of the major clients are already on their way out the door?

Last April, Empyrean Benefits Solutions, Inc. made a bid to acquire ING’s Health and Welfare Unit. By June the deal was dead. According to my information, a key to the deal was keeping the majority of the clients intact as Empyrean already had its own new technology platform. When it became increasingly clear that the full book of clients would likely not be retained, the deal fell apart. As a result, Empyrean decided to stay focused on its own organic growth path. (Which, by the way, Empyrean has successfully done, almost doubling its client base by adding 14 new clients so far this year.)

There are providers looking for the right acquisition, and there are those who would like to sell. A match in the HRO space requires the same level of mutual due diligence required in a major provider and client long term contract. A match in the HRO community is also a matter of attractive elements and compatibility.

Happy holiday due diligence and gifting.

Linda Merritt, Research Director, HRO, NelsonHall

Training HR Business Partners – Breaking New Ground for HRO Relationships

My August 27 blog focused on the importance of training recruiters – both in-house and outsourced – on how to leverage new school recruiting techniques, platforms and mediums in order to prepare for the hiring uptick that’s expected in 2010. This training is vital, as it not only aids the recruiting effort but also enables HR to help support the company’s strategic and competitive business objectives.

Broadening our view here to training which helps enable attainment of business objectives and better relationships between HRO buyers and HRO providers, a variety of HRO service providers hold user conferences which include educational components. For example, Ceridian has an academic program that offers resources and some training for client HR teams, and its user conferences always offer a few very well attended sessions that qualify for continuing education credits.

So I was very interested in Kenexa’s announcement earlier this week of a training initiative it launched for E. ON U.K., an integrated power and gas company. Kenexa’s new one-day developmental training program is helping E. ON U.K.: 1) embed HR guru David Ulrich’s business partner model – the intent of which is to “help HR professionals to integrate more thoroughly into business processes and to align their day-to-day work with business outcomes… focusing more on deliverables than doables…Instead of measuring process, business partners are encouraged to measure results’’ – and 2) assess the development needs of its staff.

The training simulates an HR business partner’s workday, in which participants are observed and given immediate feedback including career advice, developmental recommendations and a full assessment report.

To underscore the significance of this type of training, let’s define HR business partner. Internally, HR business partners support the business leaders and teams of each division/ business unit of their company to manage implementation and execution of HR processes such as workforce planning and performance management. When involved in an HRO engagement, the HR business partners in the retained organization – at least at the top ranks – have added responsibility for managing the relationship with the HRO provider in conjunction with the governance team, and ensuring results are achieved and qualitatively and quantitatively measurable.

HR business partner training, if engineered to specifically address best practices in HRO provider relationship management and objectives achievement, represents a monumental boon to HRO buyers and providers alike.

While I think it will take a while for this type of training to catch on and for success stories to arise in the marketplace, I thoroughly expect buyers beyond E. ON U.K. will take notice and look for their providers to provide similar training. Further, I believe other forward-thinking HRO providers will begin evaluating how they can offer this type of training. 

I hope both parts of the equation do, as it will help strengthen the relationship and extend the strategic partnership between HRO buyers and providers, and more easily enable the realization of business objectives expected from the engagement.

Gary Bragar, Lead HRO Analyst, NelsonHall

Hewitt Gets Back on the Bicycle

I listened to Hewitt’s Q4 and fiscal year 2009 earnings call last week. It was rolling along in the same vein as others this quarter: explaining declining revenues, the impact of foreign currency, being cautiously optimistic that we have seen the bottom of the recession and offering conservative guidance of low to mid single digit growth in fiscal year 2010.

Then the call started to get more interesting. First, there was relatively good news on the HRO front, with a loss for Q4 of only $2 million. That is quite good when in the same quarter last year its loss was $21 million. (For more on Hewitt’s earnings analysis, see this week’s NelsonHall HRO Insight newsletter.) Then Russ Fradin, Hewitt’s CEO, mentioned in his highlights segment that the company had just signed a major new multi-process HRO (MPHRO) client.

My ears perked up. MPHRO? Hadn’t Hewitt pretty much backed away from this space after spending much time and effort to terminate, restructure and renegotiate problem contracts it had inherited from its acquisition of Exult? As if that hasn’t been enough of a challenge, it was also hit with the liquidation of two major retail clients, Mervyn’s and Circuit City.

In addition, Hewitt dropped that it has quietly onboarded several new clients in 2009! Now I was sitting up straight. And it was a good thing I was sitting, because Russ went on to say Hewitt was “getting back on the bicycle,” and were targeting adding three to four new MPHRO clients per year.

By the way, in a follow-up call I found that the new MPHRO deal is a competitive win and the client is a major global beverage company.

The news disclosed during the Hewitt call reminded me of one of the premiere U.S. Olympic-level velodromes for bicycle racing and the home of gold medal winner Marty Nothstein.

Some of the cycle races are just what you would expect, all out speed races from start to finish. Other races are as much about strategy, positioning, timing and knowing your competitors moves as they are about stamina and speed. And in racing at this level, top technology in equipment is a must. These bikes bear little resemblance in features or cost to the Scwhinn’s many of us had in childhood.

This is good news, not just for Hewitt, but for large market clients. A robust field of viable providers ensures choice and spurs competitive pricing and innovation. Welcome back, Hewitt.

Make room on the field and let the racing begin. May all the competitors win!

Linda Merritt, Research Director, HRO, NelsonHall

The Places We Will Go to Grow HRO

The players in the multi-process HRO field have been changing. As we ready for economic recovery, will there be new entrants? Who is leaving? Who is for sale? And who is on the hunt for an acquisition?

As we have at least a few minutes before the recovery takes off, let’s have a little fun speculating.

Tidbits

I recently interviewed several of the new India-based HRO provider entrants. Each said that while they were not explicitly looking for acquisitions they would consider the “right opportunities.”

The United States remains the largest market for HRO, and there is more than one non-U.S. based player looking to grow business in the U.S.

The Economic Times reported this week that Infosys BPO CEO Amitabh Chaudhry talked to reporters on the sidelines of the World Economic Forum in New Delhi, India. While Infosys already has eight delivery centers around the globe, including in Mexico, it does not have one in the U.S. According to the press coverage, Infosys BPO is reportedly planning to set up a new delivery center in the U. S. before the end of this financial year. In addition, “Infosys also said it is eyeing acquisitions worth USD 50-200 million in areas where the company has a small presence. ‘The acquisitions will be funded through cash in areas we have a small presence,’ Chaudhry said.”

While the above reported comments are about Infosys’ broader BPO, it is a safe leap to assume the interest is there to further expand its HR business as well.

Is NorthgateArinso also looking to expand its share of business in the U.S.?  If the two most recent new experienced executive hires are any indication, the answer is yes.  In September, Trey Campbell was brought aboard as President of the Americas. And in October, Troy Workman joined as VP of Service Delivery in the Americas.  

Trends

We have been seeing acquisitions and partnerships to fill out service and coverage footprints to provide expanded services to multi-national companies, and that activity will continue.

Growth into emerging markets is regularly predicted and will happen in due time.

Given the anticipation of a slower recovery in Europe, combined with its less mature HRO market, it is not likely to lead the way in growth.

So the U.S. will remain a growth target magnet for HRO, in everything from applications to discrete processes to multi-process HRO.

Are you a small-to medium-size niche HRO provider with state-of-the-art technology, specialty services with deep subject matter expertise or coverage in a desirable geography? Be ready to answer the knock of opportunity.

And buyers, good news. There are providers who want to be where you are and where you are going, whether it is in North America or around the world.

Linda Merritt, Research Director, HRO, NelsonHall

Learning Outsourcing: Smart Companies Preparing for Competitive Advantage Post-Recession

A recurring theme in a variety of our more recent blogs is an expectation of increased HRO activity in 2010 and beyond for a range of HR processes. This uptick – yes, just uptick, not monumental increase – is evidenced by smart organizations’ preparation for competitive post- (or edging toward post) recession stance.

Take learning outsourcing. A recent Workforce Management magazine article, in which the soon to be released results from a joint Bersin & Associates/Workforce Management study of more than 1,400 U.S.-based organizations were discussed, found that nearly four in 10 large companies outsourced learning support functions to compensate for staff cuts.

NelsonHall’s 3Q09 HRO Confidence Index found that pipeline growth for outsourced learning increased from 2.3 on a scale of 1 – 5 in Q1 to 4.0 in Q2. Why this up-swell in outsourced learning, despite dreary near-term economic conditions? Let’s remember that learning was one of the faster growing areas of HRO with a strong list of benefits, including:

•  Ability to focus on the critical importance of developing high potential employees and leadership with the reality of significantly reduced in-house training staff

•  Reduced training expenses, ranging from 10 to 15 percent for administration-only outsourcing contracts to 30 to 50 percent for full learning BPO arrangements utilizing offshore content development and/or administrative resources

•  Increased visibility and control over learning spend

•  Improved learning evaluation and measurement through access to learning analytics and customized reporting facilities

•  Reduced time to competency in jobs with high turnover

•  Ability to deliver global learning programs at a lower cost through established provider networks

•  Ability to more effectively track and integrate both formal and informal learning networks

•  Improved post-training support and analysis, e.g., evaluations three months after course events, and mentoring programs for new employees

The new Bersin/Workforce Management study indicates that training student hours, budgets and staffs were all cut during the downturn. As companies prepare to return training to the forefront, they are unlikely to return to the previous levels of spend and staff in the near term due to continued uncertainty. Learning outsourcing can help bridge the gap and bring its own advantages, as noted above, to buyer organizations.

Gary Bragar, Lead HRO Analyst, NelsonHall

Multi-Country, Single Provider RPO Contracts Gaining Traction

Recruitment Process Outsourcing (RPO), just like all other HRO process areas, has been impacted by the recession and lower hiring volumes. And revenue recovery and growth will be further impacted by the lagging nature of hiring after a recession. However, those RPO providers with multi-country capabilities are better positioned to tap into today’s limited opportunities, and will have the opportunity to fare better than their single-country counterparts when hiring volumes return.

NelsonHall’s 2007 and 2009 RPO Market Analysis studies found that multi-national buyer organizations are increasingly seeking single-provider RPO solutions for reasons including: 1) Standardized technology and consistent processes, which results in increased efficiencies and reduced cost; 2) Consolidated reporting from one system, which results in better data quality; and 3) Reduced provider management efforts.

While RPO providers can gain global delivery capabilities via partnerships, as discussed in my July 22 blog, we are also seeing individual providers win multi-national RPO deals. Their ability to win these contracts are due to a number of factors including increased local presence and knowledge of where and how to attract local talent, technology to support multi-country recruiting efforts and ability to provide onsite support.

Examples of recent multi-country RPO deals include:

•  Kenexa on October 26 announced it was awarded an RPO contract by LSG Sky Chefs, a corporation with 30,000 employees in 49 countries. Using a hybrid model of onsite and service center delivery, Kenexa will provide LSG with global recruitment services which are expected to reduced costs due to centralized recruiting and deliver a better candidate hiring process.

•  PeopleScout on November 2 announced it won a multi-million RPO contract with Covance, a global drug development company with 9,600 employees in 20 countries. PeopleScout will perform hiring services for professional and hourly positions for Covance in North America, South America, Australia and Asia.

•  Pinstripe on August 18 was awarded an RPO contract by Agilent Technologies for the provision of complete end-to-end RPO services from job requisition through on-boarding for exempt and non-exempt employees in the U.S., Canada, Mexico and Brazil.

To underscore providers’ acknowledgement of the importance of single provider multi-country and global RPO capabilities, Manpower on October 30 announced a realignment which combines its HRO and RPO groups into a dedicated business unit, Manpower Business Solutions (MBS), to strengthen its outsourcing service offerings. RPO services are delivered in 20 countries today. As part of the combined group, MBS can further leverage Manpower’s reach, in 80 countries today, to increase its RPO delivery footprint.

I believe this is the tip of the iceberg in that we will see more global RPO contracts being awarded over the next several years. Providers with the capability to support multi-country RPO will see increased opportunities to win new business and expand existing domestic-only hiring contracts for multi-national and global clients.

Gary Bragar, Lead HRO Analyst, NelsonHall

The Jigsaw Puzzle of Absence Management

Absence may make the heart grow fonder, but it causes employers angina. Companies are, of course, used to dealing with a certain amount of absence, both planned and unplanned…it is part of the cost of doing business. But the triple whammy of current economic pressures, leaner than ever staffs and unplanned absences, combined with planned absences, can cause a disproportionate impact on the total cost of labor.

In the just released 2009 Cybershift Trendline Survey of 1,200 American Payroll Association members, 76 percent of respondents estimated that up to 10 percent of their organizations’ absences were unauthorized. Add in the planned absences for vacations, the medical cost of absences and leaves due to illness and the cost of covering for those absences, e.g., overtime or use of temporary workers, and it adds up to real money. And we have not even estimated the impact on productivity or customer satisfaction.

Managing absence is a complex topic with many facets, some of which change depending on the characteristics of the industry and workforce, like one of those jigsaw puzzles with no clear, sharp edges. To isolate the puzzle patterns, the first step is to know the actual impact as soon as possible so issues can be addressed. The second is to apply absence and leave policies in a fair and consistent manner to balance employee care, regulatory compliance and the impact on productivity and cost. The third step is to proactively work to lower the total cost of absence.

As the Cybershift survey indicates, while many organizations are now using commercial time and attendance applications, others are still using older methods, including manual spreadsheets. Modern time and attendance systems are used to ensure correct and timely payroll. When a time reporting system is consistently used and time is properly coded, you also have a cornerstone piece of the absence management puzzle in place. 

The second piece is leave administration. There are an increasing number of tools and services available in this newly hot area, but many are limited to automating the process and processing the transactions. Important support to be sure, as this is a compliance area that can lead to grievances, lawsuits, audit problems and fines. And with regulations changing and varying from state to state and country to country, strong tools and HRO provider expertise will help organizations meet compliance requirements.

As noted above, the third major piece of the puzzle is proactively managing the total cost of absence. That role today largely falls to the company’s own managers and HR team. I think there is an opportunity here that lends itself to the world of multi-process HRO. The right set of integrated services, analytics capabilities and subject matter expertise to manage the total cost of absence could represent a new service offering that directly impacts the bottom line – a new piece of the absence management puzzle well worth figuring out.

Linda Merritt, Research Director, HRO, NelsonHall

HRO Can Help Companies Play the Employment Spread and Avoid its Pitfalls

The Consumer Confidence Index, earnings reports, unemployment rates, housing starts, inventory levels, non-farm productivity rates – we are all scanning leading and lagging surveys, reports and indexes for signs of where recovery will first start to occur and where the recession’s impact will linger longest.

To shed a little light on the outsourcing terrain, our September 2009 BPO buyer survey and 3Q09 HRO Confidence Index both indicate increased contract activity in 2010. All the providers we’ve been speaking with are excited about pipelines that are filling up with potential deals at every stage, from lookie-loo’s to those nearly ready to sign on the dotted line.

As reported this week by USA Today, more companies plan to hire rather than cut workers in the next six months. Most report no change (57 percent). Still, 24 percent said they planned to grow their workforce, up from 18 percent in July. Only 20 percent plan to trim further, down from 28 percent in July.

When hiring activity does increase, the service industries like retail, professional services and healthcare will lead with 31 percent expecting to add jobs in the next six months and only 3 percent cutting staff. Manufacturing will likely lag, with only 12 percent expecting to hire and 31 percent still anticipating further reductions, according to the National Association for Business Economics.

In our above-mentioned survey of 480 BPO buyers, the highest ranking current business metric was customer retention, followed by cutting costs and increasing revenue. Staff retention came in only 5^th out of 6 in business metric importance. The gap in importance could be because employers are still playing the productivity spread. Productivity has been rising as companies have been able to produce what they need with fewer workers. According to the Labor Department, non-farm productivity rose 6.4 percent in the second quarter, even as unit labor costs fell by 5.8 percent.

And while we need not yet prepare for a grand hiring extravaganza as employers are likely to milk the productivity spread as long as they can to put off hiring, organizations must start playing their cards right in terms of staff retention and hiring plans, or they will be one-upped by their competitors.

As my colleague Gary pointed out in his recent blog on staff retention, ignoring rising indicators of employee discontent could leave employers not only adding hires to meet increased demand, but facing a more disruptive rise in turnover in high performers and hard to replace positions.

HR’s HRO partners must be forward thinking. For sales in the pipeline, HRO providers need to show how their services will help prospects prepare for and manage workforce changes. And for current clients, providers must be proactive and help them prepare for recovery by holding early discussions on using their available centralized data and analytics to anticipate needs – needs they can then gear up to help their clients meet.

Linda Merritt, Research Director, HRO, NelsonHall

HRO Provider Acquisitions Heating Up

If you thought that pure-play HRO provider acquisitions were out of vogue – as compared to the recent flurry of M&A activity among broad-based BPO providers and technology-oriented companies, ala HP/EDS, Xerox/ACS – think again, per two significant acquisitions announced this week.

First, Adecco, headquartered in Switzerland, is acquiring U.S.-based MPS Group to strengthen its professional staffing services capabilities and expand its delivery footprint, especially in the U.K., Canada and the U.S. Under the terms of the agreement, Adecco will acquire MPS Group for €782m or $13.80 per share in a cash transaction, a 24 percent premium over the October 19, 2009 closing stock price. The acquisition is to be completed Q1 2010. MPS Group will bring to Adecco professional staffing services to businesses with functional focuses in IT, F&A, law, engineering, marketing and healthcare. This is all good for Adecco, its existing clients and potential buyers. It’s also good for employees of both companies as they will benefit from increased career opportunities.

This acquisition could also be a big boost for Adecco’s RPO business and its clients, as MPS Group has its own integrated talent management platform which includes recruitment, learning and performance management systems, as well as compensation management and succession planning. Our research demonstrates clients have shown increased demand for leveraging talent management platforms, both with RPO and other single line HRO services such as payroll.

This transaction makes good sense as it eliminates the two providers from fighting for the same customers, and $50 million of synergy savings gained by combining the companies is no small potatoes.

Second, NorthgateArinso has acquired Randstad HR’s payroll outsourcing division, CIAN, to strengthen its Dutch payroll outsourcing business. CIAN reported 12 million euro in revenue in the past year. Though small in comparison to Adecco’s purchase, this acquisition is still significant in strengthening NorthgateArinso’s position in the Netherlands. With Randstad deciding to exit the payroll business in the Netherlands, CIAN’s five large and 32 mid-sized clients will gain business continuity benefits by moving to a provider that remains committed to payroll outsourcing. CIAN employees will also benefit, as they will be working for a global provider of HR and payroll services, likely resulting in increased career opportunities within and outside of the Netherlands. This acquisition also makes sense as it strengthens NorthgateArinso’s employee base, enabling it to better service its clients, and adds additional clients to its portfolio.

In my analysis, these acquisitions signal two important HRO industry trends:

•  Acquisitions will continue to support geographic expansion and service delivery capabilities

•  Partnerships between HRO providers – which far outpaced acquisitions this year – will continue for the same reasons as acquisitions, such as access to better technology. But the partnerships will be more focused on areas in which the providers are not directly competing for the same customers, e.g., to service existing multi-country clients that have employees in a country they do not currently service when building that capability organically may not make sense if there is not enough scale of clients and employees to service

What do you think will happen in the HRO acquisitions and partnerships arena?

Gary Bragar, Lead HRO Analyst, NelsonHall

Knowing the HR Dance and your HRO Dance Partner

As an analyst, as I conduct my market analysis of multi-process HRO – which will be completed in November – one of the questions I am asking service providers is how buyer expectations are changing.

And we should all be asking how HR as a profession is changing.

HR is under pressure on every front. It is struggling with reassessment and repositioning of its role within the corporation. It is scrambling to address rapidly changing business needs in an increasingly global environment amid shifting corporate structures and a heightened surround of regulatory complexity. At the same time, it has had to reduce its own operating costs and impact overall spend and business results.

How do you meet the needs of an organization driven to address short-term issues while it faces dramatic transformation challenges that do and will impact the future of the enterprise’s capability to compete? How does HR perceive its own issues, and how does that align with realistic expectations for outsourcing?

Check out Hewitt’s Managing HR on a Global Scale. This 2009 HR survey of 85 global organizations highlights several key challenges facing HR which also impact outsourcing opportunities.  

For example, as an advisor or provider I would want to note how HR is sorting itself out to be more global. HR is organizationally balancing when to be local (by country), regional and global. Per the Hewitt survey:

•  30 percent described their HR model as global with CoEs and HR operation groups that address policies, designs and delivery on a global level

•  43 percent indicated they are two-tier, with some accountabilities at corporate and others at the divisional or regional level

•  27 percent were still in some other form, including in traditional functional models with duplication by division or region

Getting buy-in from the key decision makers inside and outside of HR has always been key. It is also important to understand the organization’s capability to manage its portion of the transition.

Think about what services are being considered and where are they managed today. If this is going to be an organization’s first major effort to move key HR services from local control and many legacy systems/vendors to a global control and an outsourced platform in a company that is still largely managed by division and region, service providers and advisors alike know what they are getting themselves into! But the potential client may not be as aware of the level of change management for which it will be responsible. If an advisor is involved in the deal, it can be very helpful in educating new buyers on realistic expectations for outsourcing and in building an understanding of their role in success. No advisor? Be ready to lead some basic HRO dancing lessons.

Know the HR profession, its issues and pressures – know the dance. Know the specific client and their issues and pressures – know the dancer. Assessment of potential client readiness is of increasing importance in determining which HR prospects to pursue; it is also key to structuring deals that deliver and meet the goals of both parties.

Linda Merritt, Research Director, HRO, NelsonHall