Highlights and Trends in the HRO Market for H1 2013: Part 1

Amy L. Gurchensky, HRO Research Analyst, NelsonHall

It’s hard to believe that H1 2013 is complete, which makes it an ideal time to recap highlights and trends from the HRO world this year.

Overall Activity

There was a healthy number of new contracts awarded across all HRO service lines in H1 2013. In addition, renewals and contract extensions signed were consistent with H1 2012. There was, however, an increase in activity with organizations changing their existing service provider, particularly within benefits administration and RPO.

For the last few years, attention has been on the mid-market (500-10k employees), among other things, as an area for growth within HRO. Quarter-over-quarter, mid-market activity has made strides relative to the large market. In fact, in H1 2013, the majority of activity reported was from the mid-market.

Beyond HRO, the number of HR software contracts signed globally was up substantially compared to H1 2012. For example, in the U.S., ADP was awarded a contract for its Vantage HCM platform, including HR, payroll, benefits and onboarding modules, by The Paradies Shops covering 4k employees. In the U.K., Ceridian gained traction with its automatic enrollment module with Asda for 175k employees and WH Smith for 16k employees.

Payroll

Despite being a mature service line, payroll outsourcing does not disappoint. The biggest news reported in H1 2013 would have to be ADP’s acquisition of Payroll S.A., which will expand its LATAM payroll capabilities to Chile, Argentina and Peru. ADP already had in-country services in Brazil, and had capabilities through GlobalView and Streamline to serve multinationals in other LATAM countries.

Other news within payroll includes Acrede opening an office in Singapore to expand its global payroll reach into Asia-Pacific. Growth opportunities in the region include Japan and South Asia-Pacific.

RPO

The RPO market continues to be a hot one to watch. Contracts were awarded in various countries, including the U.S., U.K. and China, and ~20% of contract activity in H1 2013 was from multi-country deals.

The level of M&A activity was consistent with H1 2012, but the level of RPO partnerships has dwindled. Nevertheless, RPO vendors were busy expanding service offerings and delivery capabilities, and launching new websites. Some examples include:

• Randstad Sourceright launching an RPO integrated assessment program
• Manpower U.S. launching a multi-channel delivery model
• Ochre House launching a COE to drive innovation
• Randstad Sourceright opening a shared services center in Budapest
• Hays launching a new mobile website
• AMN Healthcare launching a redesigned website.

Although technically within H2, it is timely to mention the Pinstripe and Ochre House merger.

Learning

After a rather long lull, the learning BPO market has shown many signs of improvement. New contracts include Raytheon and GM Korea for content development and training administration services, and delivery of sales and non-technical training.

GP continued its acquisition frenzy focused on strengthening and expanding its geographic footprint with Prospero Learning Solutions (Canada) and Lorien Engineering Solutions (U.K. and Poland). Not to mention Capita’s acquisition of KnowledgePool.

Stay tuned next week for more highlights and trends from H1 2013 that are specific to benefits administration and MPHRO. I’ll also share some insights on what to expect in H2 2013 based on NelsonHall’s recent HRO Confidence Index survey.

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RPO, MSP and Continent Labor Contracts Gaining Ground

In my April 16 blog “An RPO and MSP Combo: the Best of Both Worlds,” I wrote about the value of workforce solutions that are rooted in both RPO and Managed Service Provider (MSP) services to meet the dynamic and evolving needs for both contingent and permanent employee hiring. We’re now seeing an increasing number of these types of contracts being inked, and some providers are partnering to gain the breadth of offerings needed to win to-be-awarded deals.

Recently awarded contracts include:

• SourceRight Solutions’ – originally an RPO provider – multi-year deal with Siemens for provision of contingent labor procurement programs in the U.S.

• An MSP and RPO agreement between AMN Healthcare and Hendrick Medical Center

• Alexander Mann Solutions’ three-year recruitment, contingent workforce and employer branding contract in the U.K. with aerospace and defense engineering firm Cobham

Recent partnerships and M&As for the RPO/MSP combo include:

• The RightThing with ZeroChaos to provide contingent labor services alongside RPO. The RightThing, which was always considered a pureplay RPO provider, partnered with ZeroChaos to enable it to provide a broader range of recruitment solutions in today’s moving-target hiring marketplace

• AMN Healthcare acquiried Medfinders for its clinical workforce managed services program

• SourceRight Solutions and Hays, per their strategic alliance announced in 1Q10, launched WorldSource, a new service offering to manage and integrate global RPO and MSP programs. (And SourceRight Solutions also further expanded its own MSP offering)

The primary driver of escalating contract and partnership activity in this HRO segment is clear: as companies remain cautious due to continued low consumer confidence and ongoing market uncertainty, they are hiring more temporary employees and utilizing more contingent workforces than on-boarding new full-time hires. And let’s not forget buyers’ increasing desire to keep their portfolio of service providers to a minimum, particularly when in the same service line.   

The bottom line is that vendors and buyers both win with the right workforce combination that best meets clients’ organizational objectives. I believe we will continue to see additional pureplay RPO specialists looking to partner to provide MSP and contingent workforce solutions to meet continued demand. And while contingent workforce solutions can be used in any industry, I believe the nature of seasonal demand and spikes in volumes will drive more of these types of contracts in healthcare, pharma, manufacturing, retail, technology and defense.

Gary Bragar, Senior HR Outsourcing Analyst, NelsonHall

Quarterly Earnings Announcements – A Bellwether of the State of the HRO Industry

Just as our regular trips to doctors and dentists provide us with our own health updates, HRO providers’ quarterly earnings announcements serve as a bellwether of the health of the industry. With the most recent round of quarterly earnings reports: Diagnosis = Sick, Prognosis = Improving.

For example, in the RPO/staffing space, overall revenue among AMN Healthcare, Kelly Services and Randstad was down year over year ranging from -29 percent to -36 percent. The primary reason for this plummet is that most RPO/staffing revenue is dependent on hiring for both permanent jobs and temporary positions, and the recession has led to a drastic cut in hiring volume at many client companies.

While this sounds relatively bleak, we can inject a dose of positive news here:

•  RPO revenue, part of overall staffing company revenue, has not declined as steeply as traditional staffing due to renewals and expansion of existing services contracts, as well as new contract signings

•  Though overall results are steeply down year over year, declines in Q2 2009 revenue in comparison to Q1 2009 are lower. And in a bit of an anomaly, Kenexa’s revenue increased from $38.5 million in Q1 2009 to $39.5 million in the second quarter of 2009

•  On earnings calls, companies are reporting the initial signs of stabilization and stating that the worst of the economic storm is behind them, but are not quite prepared to say when revenue will increase again, other than a rather nebulous “should pick up by mid-2010”

Non-staffing/recruiting and transactional services providers fared better, but are also experiencing some revenue declines. For example, in ADP’s case, its fiscal Q4 2009 (for the period ended June 30, 2009) revenues were -0.5 percent in Employer Services, +6.6 percent in PEO Services, and -9.5 percent in Dealer Services. It jumped over RPO and staffing providers’ quarterly revenue reports because, as in payroll and benefits, revenue is commonly generated by number of employees paid. While headcount is down at many client companies, the decline is not nearly as steep as the reduction in hiring volume.  New business has also helped ADP offset declines in volume, For example, in May 2009 it was awarded a contract for managed payroll services by Swiss Re to support 10,000 employees in approximately 25 countries.

Aon’s revenue was down only -4 percent constant currency (comparisons excluding the impact of changes in foreign currency exchange rates). Further, it reported a modest increase in benefits administration outsourcing. As for its RPO business, in June 2009 it was awarded a large sub-contract by Lockheed Martin to perform hiring for the Transportation Security Administration (TSA), which may enable it to be one of the few RPO providers to achieve double-digit growth in 2009.

And TALX, a provider of services to HR, payroll and tax departments, reported an increase of 12 percent in Q2 2009 revenue. As found in our recent Q2 2009 Outsourcing Confidence Index, the strongest revenue growth will continue in the more transactional areas of HR outsourcing, including payroll services, which in part explains TALX’s revenue increase.

One of the customer-valued strengths of outsourcing is variable pricing that moves with volumes. Non-leveraged customer-specific customized services can tolerate only limited volume movement and trap costs for both the client and provider. For the newer SaaS and PaaS (Platform as a Service) models, which are typically priced on number of employees served and number of processes delivered, and to a greater degree in RPO which can have wide volume swings, the service providers pick up the risk of ensuring scalability and must be able to quickly keep operating expenses as closely aligned with volumes as possible. Providers with a mix of service offerings, including those where volumes move more slowly, or even move against the market, are showing less volatility. For example, for ADP, payroll is a more constant/consistent service, and for Aon, additional benefits outsourcing offset declines as customers look to increase services like absence management and dependent audits to reduce benefit spend.

Yes, the HRO industry has been ill, but a dose of economic recovery will help it regain its health.

Gary Bragar, Lead HRO Analyst, NelsonHall