Archive for the ‘mid-market HRO’ category

HRO’s Summer Gets Hotter – Aon to Acquire Hewitt

July 13, 2010

July is one of hottest months of the year in many areas, and it just got hotter as the trend to bulk up in benefits continues with Aon Corporation to acquire Hewitt Associates for $4.9 billion.

The combination of Aon Consulting and Hewitt will be renamed Aon Hewitt. Russ Fradin, Hewitt’s current head, will serve as chairman and CEO of the new unit, and will report directly to Aon’s CEO, Greg Case. The transaction is expected to close in November after achieving the required approvals.

Once closed, the new Aon Hewitt will become the largest human capital consulting and benefits outsourcing services provider, moving ahead of Towers Watson and Mercer. The new mega-player will start out with a combined $4.3 billion in revenues, 29,000 associates and offices in 120 countries worldwide.

The acquisition will almost triple the size of the company’s Aon Consulting unit, which generated $1.3 billion in revenues in fiscal year 2009 compared to Hewitt’s $3.0 billion. The blended revenue mix, using 2009 data, is 49 percent consulting services, 40 percent benefits outsourcing, and 11 percent from HRO. Separately, consulting revenues were about the same for both companies, at about $1 billion. Eighty-five percent of Aon’s revenue comes from consulting, with the balance from benefits outsourcing. At Hewitt, consulting contributes 33 percent of revenues, with 51 percent coming from benefits outsourcing and 16 percent from multi-process HRO.

Other than multi-process HRO, both companies have similar offering line-ups in human capital health, retirement, investment, compensation and benefits consulting and benefits outsourcing. Hewitt’s focus has been large corporate clients, and Aon Consulting has a large base of middle market clients, which will help reduce overlap. Both also offer talent management services, with Aon more focused on its U.S. practice and Hewitt on providing global services.

Hewitt continues to offer multi-process HRO, and is currently supporting approximately 700,000 participants with $480 million in revenues. After stemming several years of outsourcing unit losses after its acquisition of Exult, Hewitt has returned to acquiring new business, winning both renewals and several new contracts to date in 2010. Hopefully Aon, which offers RPO services but had stopped competing for multi-process HRO deals, will support Hewitt’s current intention to remain a major player in the comprehensive HRO market. We want employers looking to outsource multiple processes to a primary vendor to have a prime set of robust choices.

Due to the major changes and uncertainties in the U.S. market due to the Health Care Reform Act, there will be heightened opportunities for consulting, outsourcing and brokerage of employee insurance plans. Also, understanding and rationalizing employee benefits, compensation and talent management are growth areas for multi-country companies as addressing economic pressures will remain a top priority for the near future.

Ultimately, the point of mergers and acquisitions is growth, and the longer term value of the Aon Hewitt deal is in the global scale and scope of the combined entity and the opportunity to cross sell into each other’s base.

Aon Hewitt will be well-positioned to compete in the middle and large markets around the world for a full range of human capital services from consulting to outsourcing, investments and insurance. HRO’s summer just got hotter, and the summer is far from over!

Linda Merritt, Research Director, HRO, NelsonHall

When Down is Up and Flat is Good in HRO

May 11, 2010

The HRO provider financials reporting season for the first quarter of 2010 ended kind of flat, but that’s actually good given that all things are relative.

Several large HRO vendors that provide financials at the  HR consulting and outsourcing level reported revenues that were basically flat year-over-year, within one percentage point up or down from the same quarter in 2009. Using constant currency, ADP and Mercer revenues were up one percent and Aon and Hewitt were down one percent. 

The good news – and here’s where “relative” comes into play – is we are seeing the slowing and stopping of sequential declines. ADP was pleased to announce that new business sales growth was flat, an improvement after six quarters of decline. Flat revenues are a sign of market stabilization and, hopefully, a harbinger of an upturn in the second half of 2010.

HRO providers are still talking about the pending recovery, as opposed to it already being here. Pricing remains very competitive, and although pipelines are healthy, buy-side executive decision making is still cautious and slow. Other headwinds on the return to growth are lower client employee headcounts, reduced spend on discretionary projects, and in the U.S., confusion along the path to health care reform.

Interestingly, it is growth outside of the U.S. that is helping buoy revenues to some extent. Aon reported growth in global compensation consulting, Hewitt increased financial management and consulting services in Europe, and Mercer’s health and benefits consulting revenues rose two percent, led by growth in Canada, Europe, and Asia Pacific.

Conversely, benefits consulting demand was soft in the U.S., largely impacted by the turmoil leading up to the passage of the health care reform act. Since the various components of the act will go into effect over the next several years, with some elements starting in 2011, there should be increased demand for health care consulting and project work to help clients adapt and ensure compliance. As one vendor referred to health care reform, it’s “the gift that keeps on giving.”

Many current major HRO contracts are with large and multinational companies, and most HRO services are priced based on the number of employees served. ADP’s beyond payroll revenues grew by eight percent, but with employer payrolls down another 2.5 percent, the overall impact was a modest one percent increase in revenues for Employer Services. While there was an uplift in sales to the small and middle market, it will take a return to growth by the large market employers to support stronger and sustainable growth.

HRO vendors are still tightly managing operating expenses in line with revenues, and operating incomes, margins, free cash flow and cash on hand were all quite strong per the earnings reports for 1Q10. There are signs that service providers are looking forward to better days. As a result, watch for continued acquisition activity with some of that cash on hand. At the same time, I expect acquisitions will be of modest size to strengthen point solutions and expand geographic coverage without being overly dilutive or adding pressure on debt. 

And as yet one more sign of a pending recovery in the HRO market, Accenture has increased its hiring estimates for 2010 to 50,000, and Hewitt is staffing up in sales in anticipation of an improved market. 

At the moment, a reduced rate of decline and flat revenues are good signs of stabilization. But a return to when up is really up will be even better news!

Linda Merritt, Research Director, HRO, NelsonHall

HRO Providers – Are You Sweating Yet?

August 25, 2009

You may be sweating because it is deep in the dog days of summer, hot humid and hazy. Or perhaps you are sweating and fretting wondering when the recession will end. Instead, as an HRO service provider, you should be sweating to ensure you are ready to hit the ground running as the recession truly begins to end.

At the Federal Reserve’s annual retreat last week, Chairman Ben Bernanke, said, “The prospects for a return to growth in the near term appear good.” And according to the August 21 New York Times, Bernanke and European and Asian central bankers were all expressing increased optimism. At the same time, Bernanke repeated his warning that economic recovery was likely to be slow and arduous, and that unemployment would remain high for another year.

Okay, so no one expects a no-sweat recovery, but we are seeing signs that the recession is ending and the recovery is soon to begin. The question is, are you ready? Really, really ready?

Did you invest wisely?

ACS is doubling down in a big way, having already invested more than $28 million in strengthening its Total Benefits Outsourcing offerings.  Infosys and Genpact are among the Indian entrants into the multi-process HRO space that are building their own platforms for technology and service delivery.

Have you managed your footprint?

Some have partnered to strengthen their geographic footprint, or fill a gap in their services portfolio.

•  Xchanging, a major U.K.-based HRO provider, is partnering with U.K’s RPO vendor Alexander Mann Solutions (AMS), to enter new markets with complementary services.

•  AMS is also the partner of choice for The RightThing, an American RPO provider looking to expand international coverage for its multi-national clients.

How confident are you in your plans for new growth?

I have spoken to one vendor who is specifically targeting the small and mid-market, and another who is looking for the single service entry point, with plans to expand to multi-process over time.

Is your vision and value proposition crystal clear?

Being all things to all people turned into a Mid-Summer’s nightmare for many early entrants in the large market enterprise play space. We have all seen the changes in direction for Hewitt, Fidelity and most recently ExcellerateHRO, to focus on areas in which they have the greatest strengths.  

Those providers which have positioned themselves for changed buyer expectations in the new competitive post-downturn environment, and those that can show a cost-effective plan for HR buyers to get back on the path of strategic HR transformation will benefit from the their sweat equity as the frozen corporate decision-making begins to thaw. Are you sweating yet?

Linda Merritt, Research Director, HRO, NelsonHall

BPO Platforms – a Springboard or a Swan Dive?

August 18, 2009

Last week I attended Infosys BPO’s analyst day and BPO conference in Baltimore, Maryland, overlooking the beautiful Inner Harbor. Platform BPO was one of the big topics, and one of Infosys BPO’s big bets for new avenues of growth. 

Platform BPO is the service delivery model whereby end-to-end processes are offered as managed services on a standardized business platform based on an ERP solution that is hosted, managed and maintained by the BPO provider. Platform as a Service (PaaS) providers bundle operations, integrating management of an end-to-end process with their technology suite and staff. Designed to be configured instead of customized, platform BPO will accelerate mid-market BPO adoption with its lower cost of entry, scalable services, variable pricing and ease and speed of transitions.

Platform BPO service providers will continue to build out their global service delivery footprint with service centers and partnerships, taking advantage of locations with low cost labor and access to skilled talent. These true multi-tenant service platforms will renew the promise of economies of scale the earlier generations of customized client-specialized services did not deliver. It’s an enticing value proposition designed for today’s capital constrained and challenge and change fatigued buyers. If the adoption rate is good, it will be a more economical infrastructure for vendors which can provide a springboard for profitability.

The timing is right. Clients are asking about and for solutions they would have rejected pre-downturn. The advent of new technologies like Service Oriented Architecture (SOA) and the openness of ERP providers like SAP and Oracle to work with service providers are enablers supporting the degree of needed integration.

There will be challenges, especially for the provider community. In return for moving to a configurable platform, the buyer gets to pass some risk and increased expectations over to the service provider. The provider becomes responsible for managing and integrating specified processes, applications and technology, including the investment in development and upgrades, and the selection, management and fit of any third-party applications and delivery partners. Also, accepting accountability for the increased complexity of integrated IT and operations requires a greater level of skilled staff capabilities and coordination across the expanded value chain. 

Hmm…not hearing any HRO platform BPO cannonball splashes yet? It’s a big leap for HR to make and platform BPO is not expected to fit everyone. Yet it is a viable option for many in the mid-market and even some in the large market. PaaS for HR will be especially appealing to those with openness to new solutions, positive experiences with hosted services and point solution SaaS providers, and those pushed by economic realities.

Single service platforms are not new; think payroll or benefits administration as managed services platforms. What is new is the possibility of multi-client and multi-process HRO on a platform that delivers globally for buyers and providers.

There are already some buyer toes in the water. Infosys reports it has several clients up and running on its new Hire-to-Retire HRO business platform which includes talent acquisition, development, retention and management services. At the conference I spoke with an attendee from a borderline mid-market to large-sized company who was thinking about replacing several current separate HRO provider services and wanted to learn more about the new Infosys HRO offering.

Overall, PaaS sounds great and the water is warm, so jump on in! Not ready? Then watch the pool of platform-based services and providers expand, learn about the challenges and successes, and get ready to test the waters.

Linda Merritt, Research Director, HRO, NelsonHall

Poll: What Topics Would You Like Us To Cover In HRO Insights?

June 29, 2009

As I’m on holiday today, it seemed like an ideal time to ask what you’d like to read about in upcoming HRO Insights blog postings. Our goal is to keep HRO buyers, providers and influencers informed, in an ultra-timely manner, on all things HRO. But we want to make certain we cover the topics which address your most compelling needs and areas of interest.

By taking just five minutes out of your busy day to respond to this survey, you’ll provide us with the insights we need to arm you with the drill-down data and intelligence most relevant to you.

We look forward to receiving your input!

Until next time, happy sourcing!

Helen Neale, Senior HRO Analyst and HRO Research Manager, NelsonHall

Standardized Health and Benefits Admin Outsourcing Services Proliferating for the Mid-Market

June 22, 2009

As my colleague Gary stated in his May 27 blog, standardization is key in making mid-market HRO affordable, efficient and sustainable for both buyers and providers. And given the skyrocketing costs associated with healthcare and delivering health and benefits administration services to employees, it should come as no surprise that Mercer on June 11 introduced an expanded health and benefits administration outsourcing platform to offer a standardized solution for clients with 5,000 to 10,000 employees.

With this new service offering, Mercer joins the ranks of HRO vendors – including Hewitt and ExcellerateHRO (which, as of last week, is now exclusively owned by HP following its purchase of Towers Perrin’s shares in the company) – which have developed and are providing standardized health and welfare offerings to the mid-market. What’s the value proposition of such standardization for mid-market buyers?

Our January 2009 Mid-Market HR Outsourcing Market Analysis found that the top drivers for outsourcing benefits administration services are: 1) Better technology than clients have the capital to invest in themselves; 2) Improved employee experience; 3) Standardized and streamlined processes; and 4) Reduced expenses. And indeed, the standardized health and welfare offerings from today’s HRO providers are helping mid-market companies meet each of these needs. Let’s look quickly at each one.

Better Technology – due to economies of scale, providers have been able to cost-effectively develop or invest in technological platforms which enable rapid implementation – and thus quicker payback – of automated functions and robust self-service capabilities for their clients’ managers and employees.

Improved Employee Experience – whether it’s changing a deductible amount, applying for a Leave of Absence, enrolling in a benefits program or adding or removing a spouse or dependent to an insurance policy, employees feel more in control when they can manage health and benefits-related activities themselves via self-service. And they can do so 24/7, rather than during regular working hours.

Standardized and Streamlined Processes – enterprise-wide consistency regarding activities such as how to enroll in a benefits program, how to determine the impact of healthcare policy changes, who to call for questions and where to go for online portal-based FAQs is advantageous for employees and their companies alike in terms of satisfaction, bandwidth and cost savings.

Reduced Expenses – our above-mentioned Mid-Market Analysis found that mid-market health and benefits administration outsourcing buyers are reducing their costs by an average of 26 percent.

We estimate more than half of the health and welfare outsourcing market is comprised of mid-market organizations. Further, we anticipate growth in overall benefits administration in the mid-market will be 10 percent through 2013, which signals a continuing trend for mid-market organizations to address technology, service delivery and cost issues through outsourcing.  But questions do remain. Which companies will jump on the bandwagon, and which won’t? Will health and welfare outsourcing for the mid-market live up to its promises? This is certainly a space to keep an eye on.

Until next time, happy sourcing!

Helen Neale, Research Director, Human Resources Outsourcing, NelsonHall

Selection and Assessment Tools Help Companies Separate the Jewels from the Trinkets

June 10, 2009

With near double digit unemployment rates, today’s recruiters and hiring mangers are being inundated with hundreds of applicants for every job opportunity. Yet despite such tight economic times, our recent RPO market analysis found that talent acquisition demand continues to be the top HR issue organizations face. So how can someone tasked with hiring sift through volumes of resumes to select only the most viable candidates?

There is an increasing array of selection and assessment tools – both those developed and utilized by RPO providers on their clients’ behalf as well as SaaS purchases leveraged directly by in-house recruiters – in the marketplace. These tools not only assist in identifying those candidates who meet the skills and experience qualifications of a given job and then assess best fit based on multiple criteria, but also considerably reduce cost-to-hire in terms of recruiters’ and hiring managers’ time expenditure.

Let’s look at several examples.

Aon Consulting’s Screen Machine combines applicant tracking, custom assessment and back-office functions appropriate for entry-level and skilled positions, designed for specific industries. It begins by screening applicants for basic skills and job fit followed up by a custom realistic job preview. Next, the applicant must pass an online assessment which measures their work habits, dependability and retention likelihood. If qualified, the applicant schedules himself or herself for an interview. 

Kenexa Performance Indicators is a web-based suite of pre-employment assessment tools designed to identify prospective employees who have a propensity to be engaged, to work well in a team and to demonstrate excellent customer service orientation. It and other Kenexa offerings help organizations select and retain top performers based on seven key areas that predict individual performance and potential – experience, skills, abilities, personality, motivation, judgment and culture fit.

An offshore services provider uses a Predictive Index tool which measures each candidate across four distinct parameters per a software-based test completed by the candidate. The system-generated scores are used to determine the suitability of each candidate for a specific job.

We believe the use of candidate selection and assessment tools will increase, not only today when there is such a job applicant glut, but also after the current economic crisis subsides. It makes sound business sense to continually develop and leverage new and improved automated tools to reduce the number of potential candidates to only those who meet key specified criteria.

Gary Bragar, Lead HRO Analyst, NelsonHall

What’s Next for TriNet, its Clients and its Prospects?

June 8, 2009

By now, we’ve all read about what the behemoth created by TriNet’s acquisition of Gevity will bring to existing small business clients and potential HRO buyers:

•  Better service center (East and West Coast U.S.) and onsite personnel coverage

•  100 different healthcare plans from which clients can choose

•  Focus on a wider range of specific industries including blue/gray collar sectors such as retail and hospitality, as well as white collar sectors including professional and financial services

•  Improved risk management services

•  An Oracle/PeopleSoft-powered HRIS platform and HR Passport, a web-based self-service portal for managers and employees

All well and good. So what’s next for TriNet, its clients and its prospects?

Although the mega PEO/HRO provider for small businesses is only a week old, following are my thoughts on relatively near-term happenings:

Expanding reach and offerings to smaller mid-market – read, not just small – companies in its combined target industries: Yes, TriNet has asserted its focus on the small business market. But its one-to-many model – and Gevity’s heritage focus on the mid-market – can easily extrapolate to medium-sized companies of up to 1000+ employees in its target industries. In fact, in its acquisition completion press release, Burton M. Goldfield, President and CEO of TriNet, is quoted as saying, “Our vision is to capitalize on the deep expertise from both companies in order to equip clients with industry-specific services and solutions, breaking with the ‘one size fits all’ approach that companies have typically been forced to endure from HR outsourcing providers.”

More acquisitions – This is TriNet’s sixth acquisition since 2002, mostly of other localized/regionalized PEOs. Given its history, and that one of the driving forces behind its acquisition of Gevity was geography, it’s very reasonable to assume the company will acquire other small PEOs to further expand its service coverage.

Technology enhancements…made in India – There’s little question that TriNet will continue to deliver HR services to its clients from the United States. Offshore delivery won’t play, and doesn’t need to, for its target clients. But that its venture capital backer General Atlantic has in its portfolio a wealth of India-based IT services and BPO firms, we can easily anticipate that future standardized technological enhancements to satisfy the needs of the SMB market will come from non-U.S. sister firms.

What do you think?

Until next time, happy sourcing!

Helen Neale, Research Director, Human Resources Outsourcing, NelsonHall

To Offshore or Not to Offshore…That is the Question for Mid-Market Companies

June 3, 2009

Is offshoring of non-client facing, back-office HR processes valuable and viable for mid-market companies? Let’s put political rhetoric, protectionism, fears of domestic job losses, etc. aside for a moment and look at the dollars, sense and stats.

Just like their larger brethren, mid-market companies can gain fairly significant cost savings by offshoring back-office processes such as data entry and validation, payroll processing, software applications development, resume mining and job offer generation, file sharing and other administrative and transactional processes. They can also benefit from improved service delivery due to streamlined, standardized processes and technological homogeny, and expedited cycle times due to 24×7, follow the sun capabilities.

On the flip side, the purported cost savings for mid-market companies (of up to 30 percent, a questionable number, in my view) often don’t materialize anywhere near to that extent. This lack of anticipated cost savings is due to a range of initially unforeseen factors including greater than expected training expenses, travel-related costs, inflation and increasing wages in many offshoring locations. And service delivery issues, still maturing delivery models, governance challenges, etc. also have a negative impact on the benefits and perception of mid-market HR offshoring.

Sounds pretty much like large-market and mid-market buyers face the same dilemmas in the whether to offshore or not to offshore decision, yes?

Yes. This all said, the results and our analysis of the findings of our January 2009 research study entitled “Mid-Market HR Outsourcing Market Analysis” found that offshoring of non-client facing back-office HRO processes will continue to increase. This is in large part because offshoring service providers are increasingly recognizing the importance and value of the still largely untapped mid-market, and are making significant investments to support and satisfy it. For example:

•  One mid-market provider we spoke with plans to increase its offshore capacity from 475 to 800 by the end of 2010; 60 percent of the volume increase will be to service newly transitioned processes from existing clients and the balance is expected to come from new clients

•  New or expanded service centers to support mid-market companies are planned for or cropping up in Ukraine, Mauritius, Morocco, the Far East and Philippines, as well as Tier 1 and Tier 2 locations in India

•  Pure play offshoring providers such as Caliber Point and Wipro are partnering with ERP providers to deliver services to the mid-market through offshore locations, signifying a clear change in both the supplier landscape and the services to be provided to mid-market organizations

•  We estimate offshore, mid-market HR FTE numbers will increase by five to 10 percent over the next three years

The investment in offshored mid-market HR processes is clearly being made, and uptake appears to be solid and growing. Time will tell what level of ROI is realized by the provider and buyer communities.

Gary Bragar, Lead HRO Analyst, NelsonHall

The 80/20 Rule in Mid-Market HRO = Major Cost Savings and Much More

May 27, 2009

The “80/20 rule” most frequently refers to the Pareto principle which states that, for many events, roughly 80 percent of the effects come from 20 percent of the causes. But here, with all due respect to Italian economist Vilfredo Pareto for well-intentioned plagiarism, I’m referring to making mid-market HRO affordable, efficient and sustainable for both buyers and providers.

In mid-market HRO, the 80 percent is standardization, e.g. alignment and relative homogeny of systems, processes, metrics and data across the buyer organization, and a provider model built to operate to scale and at peak efficiency across multiple clients. And the 20 percent is configurability – minor changes to the standardized processes and technology – to meet individual client’s unique needs and requirements.

And the model appears to be working well for the provider and buyer communities alike. It enables providers to realize a profit by offering scalable, repeatable, affordable solutions to mid-market companies, and provides buyers with significant cost savings, single, standard technology platforms for delivered services, increased consistency and accuracy, and employee self-service ease.

•  For example, in payroll, a variety of providers offer multi-country payroll services which are a big boon for multi-lingual, multi-currency companies. And per our January 2009 research report entitled “Mid-Market HR Outsourcing Market Analysis,” the average cost savings for mid-market payroll outsourcing buyers – whether multi-country or not – was 22 percent.

•  In benefits administration, the standardization provides enterprise-wide consistency on how to enroll, how to determine the impact of changes, how to apply for a leave of absence, where to go for company online portal-based FAQs and who to call for more individualized questions, etc. And our above noted report found an average savings of 26 percent for buyers.

•  Standardized RPO processes in the mid-market include creating and submitting job requisitions, screening and testing candidates, extending job offers, processing I-9 forms proving eligibility to work in the U.S., etc. And by outsourcing RPO, buyers can save an average of 26 percent according to our January 2009 mid-market HRO research study.

The downsides of this high level of standardization for the mid-market are that there is a learning curve for both HR staff and employees, and larger mid-market companies may have multiple systems and legacy processes that “work” for particular groups within the organization, and those will have to be given up and the new modus operandi embraced. But effective communications and change management programs can eliminate those challenges.

Finally, according to our January 2009 Mid-Market HR Outsourcing Market Analysis, by 2013 HRO standardization will increase to 90 percent to meet the mid-market’s top three drivers: 1) reduced cost; 2) improved service (including consistency of service delivery); and 3) better technology than clients can afford to implement themselves.

Gary Bragar, Lead HRO Analyst, NelsonHall