A Closer Look at Benefits Administration in H1 2012: Part 1

Amy L. Gurchensky, HRO Research Analyst, NelsonHall

Earlier this year, I wrote a two part blog about how the benefits administration market was poised for a good year. Part 1 highlighted Q1 earnings results and part 2 focused on other signs indicating success such as acquisitions, hiring, and surveys.

Halfway through the year, signs are still indicating that 2012 will be a solid year for many benefits administration service providers.

 Aon Hewitt: For Q2, its Outsourcing segment reported organic revenue growth for the third consecutive quarter. In fact, the 6% reported was the company’s highest organic revenue growth rate for Outsourcing in several years. While Outsourcing revenues consist of more than just benefits administration, much of its growth was for benefits-related point services such as dependent eligibility audits. Its active employee exchange is set to be launched in Q4, which will begin to realize revenues in 2013.

Towers Watson: Towers Watson’s Benefits segment has been consist with positive organic revenue growth beyond the last four quarters. It’s Technology and Administrative Solutions segment revenues grew mid-single digits for the period ending June 30^th and its pipeline is very healthy. The company’s Exchange Solutions segment, which was created after the acquisition of Extend Health, has had strong sales with a record number of participants enrolling, exceeding the 30% previously forecasted.

Mercer: Organic revenues for Mercer’s Outsourcing segment had another positive quarter, but were lower than reported in Q1. The suite of health care exchanges it launched earlier this year, which includes a retiree medical exchange, is expected to have ~500,000 employees enrolled across all three exchanges in 2013. 

Morneau Shepell: Canadian-headquartered Morneau Shepell has reported double-digit revenue growth for the last four consecutive quarters. In Q2, its pension and benefits outsourcing segment, which makes up ~25% of its revenues, had the largest contribution along with its health management business. Its growth is from new client wins, and its acquisition of SBC Systems has led to new business in the U.S.

According to the NelsonHall HR Outsourcing Market Forecast: 2012 – 2016, the projected growth rate for the benefits administration service line is modest compared to areas still experiencing rapid growth like RPO. Since benefits administration is the largest revenue generator in HRO, even moderate single-digit growth will add billions more to its total.

Later this week, look for more benefits administration mid-year updates from TRO and H&W service providers in Part 2.

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HRO Continues Growing and Going

As we near the halfway point, 2012 is going well for HRO. As support, here are choice tidbits from our HRO news coverage and analysis.

First quarter revenues were solid for most vendors. RPO and PEO led the way with continued strong growth in the mid-to-high teens even as new job growth has stalled. Clients are increasingly using HRO services to help manage and balance workforce talent needs. Lower but steady mid-single digit growth is rolling along for benefits and payroll in the traditional HRO service areas.

There was plenty of new business to go around by service line, vendor, geography, and in both the private and public sectors. There was even a very nice smattering of large deals with TCVs in the hundreds of millions!

Logica was awarded a 6-year multi-process HRO contract by BAE Systems to support its 33,000 U.K. employees. Included is implementation and management of a single-tenant, hosted Oracle HR platform, along with payroll, and adminsitrative services in support of talent management functions including recruiting and learning. This is Logica’s second significant sized multi-process HRO win in six months. This is a good indicator of its success as a major preferred partner of Oracle for HRO in Europe.

Speaking of Europe, HP has been awarded a major 15-year multi-process HRO contract by Italian financial services firm UniCredit Business Integrated Solutions SCpA. A major driver for this deal was the need for a platform to support globally standardized HR and payroll processes across the countries in scope (Italy, Austria, plus a third country), serving ~98,000 employees. The HRO services in scope include payroll, time and attendance, workforce administration, learning and development administration, mobility, and ex-pat services.

The U.K. was the hottest area for the public sector. These deals are long wave sales with lots of competition, and there were even incumbent upsets. The services are naturally very important, but the promised cost advantages must be delivered. Lots of hard work and strong partnerships will be needed by the client organizations and the vendors to ensure success.

• Capita was awarded a £250m contract by the Cabinet Office to exclusively manage the Civil Service’s training services. It will both directly deliver training and manage a competitive network of other training suppliers.
• Capita was awarded a £440m contract by the British Army for recruiting services. The Recruitment Partnering Project contract is for 10 years and Capita will also deliver supporting technology for the Royal Navy and the Royal Air Force. It will partner with Kenexa for assessment and recruiting technology.
• Almost at the finish line is CSC as it has been selected as preferred bidder for a £400m, 7-year contract by the MoD to provide pay and pensions administration services to the Service Personnel and Veterans Agency (SPVA) for the U.K. Armed Forces.

Let’s all hope the rest of the year keeps HRO growing and rolling along!

Linda Merritt, HRO Research Analyst, NelsonHall

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Benefits Administration Poised for a Good Year: Part 2

Earlier this week, I highlighted revenue growth reported by benefits administration service providers. In addition to the positive earnings reported, there are other signs indicating that 2012 will be good to benefits administration including acquisitions, hiring, and surveys.

There have been a few strategic acquisitions that will boost benefits administration revenues for vendors this year. For example, ADP’s benefits administration business will see a nice increase from SHPS, which had annualized revenues of ~$80m. Morneau Shepell’s acquisition of SBC Systems Company will modestly increase its revenues, and more importantly will strengthen the company’s presence in the U.S. Finally and most recently announced is Towers Watson’s acquisition of Extend Health, which will enhance its benefits administration offering by adding exchange services for retirees.

Another positive sign of expected future growth is the hiring of personnel. Towers Watson announced that it will be hiring employees within all of its segments. The benefits segment, specifically, will get an additional 172 employees, 60 of which will be for technology & administration solutions (TAS).

Finally, regardless of the constitutionality of the PPACA, benefits administration will likely flourish as compliance becomes increasingly complex as new regulations are issued or as older ones are amended for other federal laws such as COBRA, HIPAA, FMLA, etc.

A recent study by ADP cites that health care reform and compliance complexity are expected to lead to more benefits administration outsourcing. The survey, which included input from 504 HR and benefits decision makers in the U.S., found that ensuring compliance is one of the top reasons cited for outsourcing benefits administration.

In a recent article, Mercer is also advising employers to act to ensure compliance and to implement cost-control strategies now regardless of health care reform. It recommends the following, which are all dollar signs for benefits administration service providers:

• Managing the cost of dependent coverage, which will strengthen demand for dependent eligibility audits and verifications
• Shifting to CDHPs, which will lead to an increase for reimbursement account administration services including FSAs, HSAs, and HRAs
• Offering cost-competitive health coverage, which will boost demand for private health care exchanges for both active and retired employees
• Encouraging a healthier workforce, which will lead to the implementation of wellness programs (i.e., health assessments, biometric screenings, etc.).

Benefits administration is one of the oldest foundations of HR business process outsourcing and it is also one of the largest segments in revenues and yet it remains vital, adaptive, competitive, and ready for continued growth!

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

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The Fertile Ground of HRO Innovation

Kelly Services’ recent announcement of its new Office of Innovation was fascinating as the company has long been a leader and innovator in the staffing services field. Go global, check. Provide MSP, check. Add RPO, check. Add consulting, check. Launch mobile access applications, check. Supply chain management, check. Its success shows in the results, with 2011 revenues totaling $5.6 billion, a 12% increase over 2010.

To find out more, I had a lively discussion with Kelly Services’ Senior Vice President and Chief Innovation Officer Rolf Kleiner. Basically, Kelly Services has already done so much that it is focusing on new solutions and capabilities to remain ahead of the competition and keep up with its many Fortune 500 clients.

According to Kleiner, the company has always done well with the “little I” incremental innovations that improve and enhance its current services and capabilities. Kelly Services is also looking for new “big I” innovations, those that can move the needle on results and set precedents within the company and in the marketplace. It was felt that by adding more visibility and vetting larger scale opportunities, the Office of Innovation will be able to identify, develop, and bring new innovations to market faster.

Kleiner plans to set up a “pull” process for ideas that includes many stakeholder groups including employees, clients, suppliers, and other industry experts. He likened the process to farming. It will take working with the communities of interest on an on-going collaborative basis to develop a harvest of ideas.

There were several items I found especially interesting. One is using this effort as an opportunity for talent management. Some proof of concept and development projects will be managed by the Office of Innovation and will provide highly visible opportunities for those assigned. When projects are managed outside of the normal lines of business, integration and communications will be maintained which brings reality to planning and brings market needs and innovation participation deep into the infrastructure and culture of Kelly Services.

Also, there is a very crisp vision for the strategic initiative and clear criteria for the kind of innovation opportunities that are being sought. There is solid alignment with the goals of the company, scale for sizing market opportunities, and an openness to solutions that could include internal developments, partnerships, supplier networks, etc.

Finally, the selection of Kleiner as head of the Office of Innovation is a strong indication of Kelly Services’ seriousness with this endeavor. He reports directly to the CEO and his previous assignment was as Senior Vice President and General Manager for the KellyOCG group, which provides consulting and outsourcing services. The pulse of the market, the voice of the customer, and the operational beat of the business are all fresh and fertile ground for Kleiner’s new challenge.

Our NelsonHall HRO team always advises clients to look for service providers that can meet today’s needs as well as offer partnership for meeting the needs of tomorrow. How is your HRO vendor focusing on the future?

Linda Merritt, Research Analyst, HRO, NelsonHall

Interested in reading the latest HRO news from NelsonHall? Subscribe to our newsletter by emailing amy.gurchensky@nelson-hall.com with “HRO Insight” as the subject.

A Double Dose of Kenexa

Last week, Kenexa announced Q3 revenues and held its annual analyst relations meeting. Revenues for Q3 2011 were $75.7m, up 59% year-over-year. Subscription services were up 38% to $55m, professional services increased by 102% to $22.2m, and RPO was up 26% at $20m.

The top 80 customers averaged $1.6m in annualized revenues, up $.4m over Q3 2010. Sixty new “preferred partner” clients were added during the quarter (each with over $50k in annual spend), up 50% Y-o-Y. Three large client deals closed in the quarter including Baker Hughes and a life sciences company, all of which Kenexa won against multi-vendor partnerships with its breadth of talent management services available from a single vendor, a differentiating factor.

In addition to increasing its revenues and client base, Kenexa is integrating aquisitions, setting up new partnerships, and doubling down on the pace of new service developments and introductions. The integration of Salary.com is ahead of plan and some of the largest compensation deals in Salary.com’s history were just signed. Its new alliance with SkillSoft provides an enriched option for learning as part of an end-to-end talent management solution, adding to its coverage of one more key talent management base.

The latest “2x” service, Kenexa’s 2x Perform, was launched for early adopters. It is an integrated, enterprise-level performance management, succession, and compensation planning system. The new SaaS service joins the likes of 2x Brass Ring, 2x Onboard, and 2x Mobile. In 2012, 2x Perform will be expanded to all markets and 2x Assess will add to the growing survey and assessment product line. The feature and function basics are also a development priority with enhancements to the user experience underway.

We also heard live from several clients and while each had very different recruiting and talent challenges, each saw the same strengths in Kenexa. The right technology and service bells and whistles are there, but as one client said, “the technology makes you productive, the relationship makes you successful.” And it was the relationship aspects that each client highlighted including a focus on client success from the executives to the account teams.  Part of Kenexa’s high revenue growth is coming from an increase in the number of services sold in new contracts and service additions by existing clients. How do you really know you have great customer satisfaction? When they trust you with a greater share of their wallet.

With good news on all fronts, the management team mood was expansive and the conversations wide-ranging at the analyst event. From the presence of four generations in the workforce and the shortage of talent when and where needed, to the global impact of the economic crisis in Greece, talent management ties in one-way or another to much of what we see happening around us. Expect to see Kenexa there, on the front lines, helping clients around the world create improved business results through the many elements of talent management.

Linda Merritt, Research Analyst, HRO, NelsonHall

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HRO Get Ready for the Human Age

ManpowerGroup reported its 3Q 2011 earnings last week, a bit more on that later. First, I want to highlight a “big idea” approach to talent management that the company has launched. Speaking at the 2011 World Economic Forum in Davos, Switzerland, Jeffery Joerres, ManpowerGroup Chairman and CEO, announced that we are on the cusp of “Entering the Human Age.” According to Joerres, in the Human Age, talent is the key differentiator for business success and technology becomes the great leveler, allowing skilled individuals to vault the restrictions of national borders, and increasingly, of when and where they work.

Many of the elements ManpowerGroup addresses are already known in the world of HR and HRO. The impact of the technology-enabled globalization of talent, the need to simultaneously deal with an aging workforce while engaging a mobile new generation, and the growing mismatch in available labor versus skilled talent. All of these lead to the need for a new strategy and approach to attracting, developing, and retaining talent.

The future of talent envisioned in the Human Age is both hopeful and daunting as we are only entering the transition period with a long road ahead. It is a future in which employers would benefit from a consulting/outsourcing partner with the scale and scope of ManpowerGroup, with $22bn in revenues and a presence in 80 countries.

I love big ideas that come from HRO service providers showing that HRO can be more than transaction, technology, and contact center cost and efficiency management. Big ideas can also lift and differentiate a company’s brand.

One of the keys to brand management is consistency and constancy of messaging. IBM is doing a very good job of taking a big idea phrase, i.e., smarter planet, connecting it to its brand, and naturally to its consulting and services. Going one step further, IBM makes the concept a central theme running throughout its strategic initiatives. For example, the HRO team had to show how its investment initiatives supported one or more of the six imperatives for a smarter planet.

ManpowerGroup is making a good start. The speech in Davos was backed by a special ManpowerGroup website for more information on the Human Age, including a 58 page booklet outlining the concept and providing research and experienced insight on changes that will be integral to the new age. Other 2011 white papers from ManpowerGroup are picking up the phrase and it was also used in its 3Q 2011 earnings report. Further use across the external website, news releases and other collateral, as well as internal use will strengthen the connection to ManpowerGroup.

For 3Q 2011 ManpowerGroup reported revenues of $5.8bn, up 16% overall and 9% in constant currency. EPS were $.97, up 43.5% from $.62 in the prior year quarter.

Linda Merritt, Research Analyst, HRO, NelsonHall

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RPO Continues Its Stride in Q2 2011

If you didn’t pay attention to the news and only looked at the recent financial results reported by staffing and RPO providers, you’d think that everything is fine with the global economy.  Let’s take a look at a few of the highlights including year-over-year revenue growth in Q2 2011 compared to Q2 2010 and some numbers of contracts awarded:

• Talent2 (fiscal year 2011 for period ending June 30) +26%, RPO +57%
• Kelly Services +16%, KellyOCG + 22.5%, and RPO ~+50%
• Kenexa +59%, RPO + 45%
• Manpower + 24%, ManpowerGroup Solutions +21% with 37 RPO deals closed in Q1 and 31 new RPO contracts awarded in Q2
• Pinstripe won or extended 15 RPO contracts in H1 (revenue not reported)
• SeatonCorp +20%, PeopleScout +95% with 9 new RPO contracts signed.

Why was growth and the number of contracts awarded so high when the sad reality of the news headlines is that there are debt problems, slowdown in GDP growth, and a continually high unemployment rate?   Well, that is precisely why!  There are several reasons including:

• Organizations who have had to downsize are turning to RPO because they don’t want to invest in hiring recruiters and associated staff only to potentially downsize again (i.e., it’s better to outsource recruitment to a vendor that can provide variable pricing and who can scale up or down quicker than the client)
• Obtaining  better quality of candidates and quality of hire from an outsourcing specialist
• Allowing HR to work as a strategic partner and in-conjunction with the RPO vendor to engage employees and retain talent (instead of focusing on hiring)
• Wanting to get out of the technology management business, which isn’t usually a client’s core competency
• Reducing time to hire, improving hiring manager satisfaction, etc.

In addition to revenue growth from new contracts and renewals, growth comes from existing clients that have increased their hiring volumes. Other sources of growth are from contracts won in prior quarters that take several months before fully ramping up.

RPO does not look like it is going to slow down anytime soon.  In NelsonHall’s HR Outsourcing Confidence Index, published in June, pipeline growth reported in the prior quarter was higher for RPO than all of the other HRO services.

At NelsonHall, we’ve seen an increase from buyers wanting to know who we see as the leading RPO providers by country and region. Buyers, are you evaluating outsourcing recruitment, if you haven’t done so already?

Gary Bragar,  HR Outsourcing Research Director, NelsonHall

Mercer 2011 Analyst Forum – Style and Substance

I enjoy HRO analyst forums, particularly the in-person presentations and the chance for casual conversation with service provider executives and fellow analysts. Live events showcase the personality of the host company. Personality comes through in who is invited, what is said, what is not said, and the venue itself. All have a tone that subtly provides context for content. Some are very nice and some are almost austere. None are luxurious parties.  Apparently HR BPO analysts do not rate that high!

Mercer’s session was on the high-end of venues; the meeting was seemingly casual and relaxed while still guiding attention where desired. The analyst meeting and accompanying client conference was well-prepared and well-presented, providing a consistent profile of Mercer, its style, and confidence. Even the smallest touches reinforced the company’s image of management competency, teamwork, and expertise in HR benefits.

Mercer is a $3.5bn benefits service provider with 27k clients and 20k employees with offices in over 40 countries, serving large market clients primarily based in the U.S. and mid-market clients worldwide. Consulting services bring in the greatest revenue at 2.4bn, followed by outsourcing at $700m, and investment services at a rapidly rising $400m. The largest outsourcing client segment is DC, followed by DB, and H&W. The company has seen significantly more interest in the last 18 months in its newest segment, absence management, with a small but growing base of clients. Mercer Q1 2011 revenues were $922m, up 9% year-over-year, 5% in constant currency compared to Q1 2010, outsourcing was flat in constant currency.

Strategically, Mercer is focusing on increasing revenues and building scale by leveraging existing client relationships to cross-sell, expand into select adjacent market opportunities, and build bundled solutions. These are not uncommon HRO strategies, but it is ability to execute that sets apart the leaders.

Reliance on its ability to work collaboratively across its business segments will be a critical success factor, a style that was amply present throughout the Mercer sessions and is also seen in its several new product offerings.  One is a new solution called Human Capital Connect, which is bringing together consulting and research expertise, software and web technology, and various forms of education to address metrics and analytics in a way that will help HR teams establish the needed foundation of HR information, data and report access, and understand and provide a roadmap to more advanced levels.

According to the soon to be published Mercer 2011 “What’s Working” report, employees are putting more importance on the value of benefits in the mix of total compensation. And we know that employers continue to be very cost conscious even as they return focus to talent management.

With a crowded field of top-tier benefits providers, including Mercer, which one will be able to best capitalize on the opportunities?

Linda Merritt, Research Director, HRO, NelsonHall

Staffing and RPO Surpassing 2010 Y-O-Y Results

As bullish as I’ve been on RPO, results reported to date for staffing and RPO providers have exceeded even my expectations.  As we all know, 2009 was a down year for hiring, but then there was a big turnaround in 2010 and in RPO, most vendors I interviewed for my recently published RPO report said that revenue and hiring are back to pre-recession levels. Although hiring has picked up in the U.S., I don’t think any of us would say it is going gang-busters yet.  But in comparison to overall staffing results for Q1 2010 that averaged ~12% revenue growth, Q1 2011 has about doubled thus far.  Let’s take a look at some Q1 2011 results to date and how they compare year-over-year to Q1 2010:

• Manpower up 24%
• Hays up 18%
• SeatonCorp up 25% and its RPO business PeopleScout is up 103%
• CTG up 22%
• SFN up 6% and its RPO business in SourceRight Solutions is up 83%
• Randstad up 22%
• Kenexa up 59% and its RPO business is up 56%.

I do believe that the rest of the year will be strong for staffing, but it’s hard to believe that RPO will maintain quite the same momentum.  That said, hiring will improve and I agree completely with Manpower’s findings on May 6^th stating that  U.S. companies must hire again as workers are stretched to the max doing more with less.  In my view, it’s been this way long before the recession, mostly in part to how Wall Street rewards companies for their performance, but we’ve reached a tipping point and I’m almost certain this is not just a U.S. phenomenon.

But instead of just reading about it, come join us at the HRO Forum in Las Vegas May 24 – 25 that combines the HRO, RPO, and MSP Summits along with the HR Demo Show.

As a speaker, I’ve been extended an offer to invite buy-side HR execs with a 60% discount and also an offer for a limited number of RPO buy-side practitioners to be able to attend all four Summits for free, get reimbursed for travel up to $500, and get 2 hotel nights for free. If you are interested, then send me an email at gary.bragar@nelson-hall.com and I’ll send you the info/codes to register.

Gary Bragar, Lead HRO Analyst, NelsonHall

Learning Services Acquisition Frenzy

Last year, we wrote quite a bit about all of the M&A activity in benefits administration including:

• Towers Perrin and Watson Wyatt completing its merger to become Towers Watson
• ACS, a Xerox Company acquiring ExcellerateHRO
• ADP acquiring Workscape
• Aon acquiring Hewitt to become Aon Hewitt
• Other acquisitions made by vendors including Mercer, Xafinity, and Capita.

Will learning be the next HR service area abundant in acquisitions?  Although we have seen learning services acquisitions in the past, including ACS acquiring Intellinex in 2006, and will likely continue to see more in the future, I don’t believe we will see any in learning that are equivalent in scale to the large benefits acquisitions.  However, if there was an award for the number of acquisitions in a short period of time, it would have to go to General Physics Corporation (GP). On March 10^th, GP acquired RWD Technologies for $28m, its 8^th acquisition in the past 18 months.  RWD is based in the U.S. near GP in Baltimore and has three additional U.S. locations as well as offices in the U.K. and Colombia.

GP got RWD at a bargain since RWD’s consulting revenues were $65m in 2010.  RWD was hit hard by the recession and GP came along at the right time with cash on hand.  As a result of the acquisition, GP inherits RWD’s IT learning expertise, where it had little prior experience.  The acquisition also strengthens GP in the petroleum, manufacturing, and automotive sectors.

Last month, GP acquired Communication Consulting to expand delivery of its training services in China.  GP’s other acquisitions were made in the U.S. and U.K. between September 2009 and December 2010.

GP’s 2010 revenues were $259.9m, an increase of 18.6% compared to 2009.  Growth was attributed to increased volumes from existing clients, new contract awards, and its acquisitions, which had the greatest impact.

Moving forward, what will happen?  Well for one thing, don’t count GP out from making future acquisitions.  GP still has ~$35m in revolving credit after the RWD deal and has stated that they will continue to seek acquisitions to grow globally.  However, with so many acquisitions, GP now faces the challenge of creating an integrated client experience and cross-selling into the strengths of these acquired companies to continue its rapid pace of growth.

It will be interesting to watch as things unfold this year.  In the meantime, we can finally put to rest the question “what’s happening with RWD”.

Gary Bragar, Lead HRO Analyst, NelsonHall