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

Modesty is the Order of the Day in Big HRO

As the earnings reporting season rolls on, some of the HRO heavy weights are reporting modest revenue growth for the second quarter 2010:

• ADP  Employer Services  $1.6 billion, up four percent

• Aon Consulting  $317 million, up six percent

• Mercer $838 million, up one percent  

There was no exuberance, rational or irrational, among the reporting executives. There was modestly cautious optimism based on some growth, strong pipelines and faith in that the cost-cutting actions taken during the downturn will continue to pay margin-enhancing benefits.

Benefits outsourcing revenues were stable at Aon Consulting ($51 million) and Mercer ($161 million). The hot action again seemed to be outside of the U.S., with health and benefits doing particularly well, and compensation consulting also up.

While ADP does not break out HRO, it did say revenue in the U.S., beyond payroll services, grew six percent. ADP Employer Services revenues are now 20 percent international, largely from payroll, and the global growth rate is expected to exceed that in the U.S.

Moderating a nice quarter is continued pricing pressures, client reluctance to make spending commitments on new outsourcing, and a slow return of discretionary spend on projects and other services. Mercer saw a nice sequential increase quarter to quarter in talent management and rewards, which it considers may be a bellwether of improved conditions.

Vendor operating margins have held up relatively well once actions were taken to lower expenses in line with lower incomes. ADP’s took a small dip of 3.2 percent because it has chosen to hire ahead of the full upturn, adding about 300 heads in sales and service. Mercer feels it is poised to move quickly to capture increased opportunities as they appear.

Aon Consulting will, of course, be busy with planning and then integration when it becomes Aon Hewitt. In commenting on the merger, Mercer was comfortable that, overall, it will be a stabilizing force in the market and a confirmation of Mercer’s own three pillars of consulting, outsourcing and investment services. Further, it expressed confidence in its ability to compete in the changed benefits landscape.

Still, it sure sounds likely that it will add something to bulk up a bit as well. MMC, Mercer’s parent,  has $1.5 billion in cash, with more coming in from the sale of Kroll. While it is perhaps not iminent, do expect to see Mercer make a move by the end of the year.  Any speculation on where it may add? Mercer is already strong in consulting, and at $2 billion per year, would it add in outsourcing, or perhaps investment services, which is its smallest, yet nicely growing unit?

Linda Merritt, Research Director, HRO, NelsonHall

HRO’s Summer Gets Hotter – Aon to Acquire Hewitt

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

Some Holiday Time HRO Cheer: Some Companies will Return to Better Benefits in 2010

Per a USA Today article on December 11, 2009, many companies have announced they will reinstate suspended benefits and/or increase some of the benefits they provide to their employees in 2010. Named companies include FedEx, JPMorgan Chase, American Express and Motorola.

During the current recession, many companies reduced 401 (k) contributions and lowered merit increases and bonuses, if they indeed provided them at all. And bah humbug, some companies even reduced salaries and/or employee hours.

The good news is that two thirds of the companies that did not give pay raises this year plan to do so in 2010. And one third that cut back on their 401 (k) matches plan expect to reinstate or increase company contributions next year. While FedEx and others may not offer 401 (k) matching and other benefits on par with previous years, any step in the right direction is still good news!

So what does this mean for the HRO industry?

First, Defined Contributions (DC) Administration represents the largest share of Benefits Outsourcing revenue for providers, and over half of all vendors get paid per transaction, in addition to per participant per month. The net here for providers is that more transactional changes results in more revenue. Dealing internally with these transactional changes may not, on the surface, seem like a big deal. But as a former programmer and systems administrator, I know first hand that all such changes must be fully tested and is a huge administrative burden. Thus, with buyers happy to get out of performing this type of transactional work, a return to better employee benefits likely means happier times for providers, buyers and their employees.

Second, consistent with several of my recent blogs, the fact that some companies are beginning to again invest in training and developing their employees is driving an increase in the pipeline for learning services agreements, and has resulted in some recently signed contracts. And even though significant hiring volumes may not return for some time, attracting and retaining top talent is showing signs of increased importance, and thus most RPO providers are also reporting substantially improved pipelines.

Finally, the today-released results of a Hackett Group study, which stated earnings are significantly higher for companies with strong talent management capabilities, underscores the importance of reinstating and increasing employee benefits in order to retain existing high performers and attract key talent in the future. Ala, more opportunities for HRO providers and for smart buyers that are re-acknowledging the value of outsourcing key functions such as learning and hiring.

While my blog today started out focusing on a return to better employee benefits, much of the success in today’s competitive (although still economically limping) environment is attributable to how employees are treated, developed and managed. Given the pipeline increases and contract awards we are seeing in the learning, RPO and SaaS talent management, I’m optimistic for a happy and healthy New Year!

Gary Bragar, Lead HRO Analyst, NelsonHall

Europe Overtakes U.S. in New HRO Deals

While the United States continues to dominate the global HRO market with over 50 percent of revenue share, 60 percent of the announced HRO contracts in the first half of September 2009 were with European buyer organizations, and only 20 percent were inked with U.S. companies. Granted a two-week period is just a short snapshot in time. But there is data to support a trend of geographic shift in where new HRO deals are being established. For example, the number of HRO contracts signed in the U.S. dropped from 50 percent in 2008 to 45 percent in 2009 to date, while U.K.-based deals jumped from approximately 30 percent in 2008 to approximately 40 percent in 2009 to date.

Why this traction shift? As organizations in the European buyer community become more accepting of HRO as a delivery model, they are increasingly seeking the cost savings, standardization of processes and technology, improved data quality, talent acquisition and improved data quality benefits associated with outsourcing payroll, benefits administration, RPO and other HR processes.

In addition to these traditional HRO drivers, European companies face significant HR complexities beyond those experienced by U.S. companies. Think compliance to local labor laws and legislation in different countries, different length work weeks and holiday time across countries, currency differences, disparate overtime rates and changing tax laws. HRO providers have the up-to-date knowledge and staff levels to effectively and efficiently manage these complex issues for their client companies.

The U.S. remains the largest market for HRO, and NelsonHall’s 2Q09 HRO Confidence Index indicates the U.S. to be among the top countries and regions in expected revenue growth by geography in 2009. However, I expect that in 4Q09 and 2010 we will see closer to 40 percent of contracts coming from the U.S., which is down slightly from 1Q to 3Q09. I further expect to see a continuing increase in the number of European – and Asia Pacific – HRO contracts. And wherever the engagements are located, an increase in HRO activity bodes well for the global HRO industry.

What do you think?

Gary Bragar, Lead HRO Analyst, NelsonHall

HRO and the HR Function Study: Troubling Findings

Key findings from the Chartered Institute of Personnel and Development’s (CIPD) June 2009 survey entitled, “HR outsourcing and the HR function: Threat or opportunity?” – for which 315 heads of HR, HR managers, HR experts, learning and development experts and others from CIPD member companies were queried – included:

•  29 percent of respondents’ companies outsource HR, but 43 percent of respondents claim HRO isn’t relieving the pressure HR departments are facing, e.g., need to enhance efficiency, need to enhance quality and an increasing need to innovate

•  80 percent considered their partnership working, change management and business awareness skills to be good or excellent. But only 28 percent considered their vendor management skills as fair or developing, and 13 percent declared no skills at all in this area

•  50 percent think HR is taken seriously within their organization, but most HR professionals are not involved in HRO ventures until the later stages – monitoring, managing vendor relations and provision of end-user feedback

•  36 percent do not consider HRO a strategic enabler for the HR function, while over 50 percent believe it has enabled them to adopt a more strategic role to a limited extent

•  Only 19 percent consider they play a key administrative role in their organization, and only 13 percent consider the HR function to be at the forefront of shaping the organization’s strategic direction

•  48 percent of respondents have occupied a range of business positions prior to their role in HR, while 39 percent have a pure HR background

•  Payroll, pensions, training and aspects of recruitment are among the most outsourced functions, which supports the results of NelsonHall research studies

•  Most respondents report that HRO has been successful in some areas but not others, with a minority reporting no success at all (5 percent), and only 7 percent declaring HRO an all-round success

I am troubled by many of these findings, and HRO buyers and providers should be as well.

First, HR heads must be involved in the HRO decision-making process from the very start – providing input and key advice on vendor selection based on the “on the ground” requirements within HR, cultural fit and the requirements for governance of the contract within the HR department and throughout the buyer organization – as they are the individuals who ultimately will make the outsourcing initiative succeed. Accordingly, without this input from HR executives, many contracts will fail. Thus, the question looms if HR is taken seriously, why isn’t it involved in the HRO deal process? This mismatch suggests that some HR organizations do not have a realistic view of their role within an organization, and perhaps need to take a step back to determine whether lip service is being paid to their actual role in their organization.

Obviously success or failure of an HRO initiative must be shared among the provider, the buyer and the HR department. In regard to the CIPD study findings – as the overall perception of whether HRO has been successful or not didn’t stem from the success of achieving organizational objectives but rather on whether it relieved pressure on the HR department and enabled the HR department to adopt a more strategic role in the organization:

•  Providers should proactively explore with client stakeholders, including HR, whether these challenges are due to incorrect scoping in the contract, unrealistic contract expectations, too-limited client-side governance resources, etc., and develop and implement mitigation plans to address the findings

•  Buyer organizations must recognize and rectify the fact that their HR departments are pressured to change from a transactional to a strategic function without the necessary skills to do so, as well as realize that lack of involvement in the initial contractual discussions results in HR not understanding what’s expected of them in order for the outsourcer to deliver its targets

•  While a very high percentage of those surveyed consider their change management and business awareness skills to be very strong, HR departments must reconsider their view of their own skills. For example, there is clearly room for improvement within change management to enable a more seamless transition from an in-house to outsourced environment. And HR leaders’ admittedly low vendor management skills must be enhanced as these are not only critical to the success of an HRO initiative but also a responsibility with which HR is tasked

Further, to achieve greater HRO success, again in light of the parameters of this CIPD study, buyers must ensure HR personnel have the right tools to enable them to play a more strategic role, e.g., analytics tools to help understand HR’s pain points and their impact on the business. They must also invest training dollars in consultative and problem solving skills to enable HR to act on the resulting data. And providers must encourage buyers to utilize analytics within engagements and provide not just the data but also insights on what that data may mean in the HR and wider business community.

An end note to HR departments: If you want to be more strategic contributor to your company, don’t wait or hope for it to happen, make it so. Provide your C-suite with a solid value proposition outlining how you can more strategically support the company, and present a solid business case regarding the reskilling required to do so.

Until next time, happy sourcing!

Helen Neale, Research Director, Human Resources Outsourcing, NelsonHall