Posted tagged ‘Convergys’

Anatomy of the Deal – Managing the HRO Service Provider Portfolio

June 3, 2010

A sign of economic recovery is preparation for the future and a return to investing in growth and expansion over cost cutting and containment. A purchase may be the fastest way to growth for HRO service providers, if the price is right and the risks manageable. And the first half of 2010 has been busier with large and small mergers and acquisitions in the HRO universe than with major new client deals. 

Today let’s take a look at the similar strategic criteria I see that cross several recent HRO acquisitions: footprint, portfolio, profile, talent and technology.

Footprint – expand into new geographies by buying an established “local” player. NorthgateArinso just closed on its purchase of Convergys, greatly expanding its footprint in the U.S., the world’s largest HRO market. It also purchased Neller, an Australian-based payroll provider to increase its global payroll coverage in the Asia Pacific region.

Portfolio – what services should you offer? Acquisition for portfolio management is seen as part of the ACS purchase of ExcellerateHRO (EHRO) from Hewlett Packard. According to ACS Managing Director Rohail Kahn, ACS intends to be a top industry leader in each of its lines of businesses. ACS will add to its heft as a benefits administrative player with the addition of EHRO, which was a strong benefits admin provider going back to its start with Towers Perrin.

Rounding out a service line is also a reason cited in recent acquisitions. Hewitt’s purchase of HRAdvance adds strength to its growing dependant audit services as part of its point solution offerings within its larger benefits admin portfolio.

Profile –marquee “logos” and major clients adds scale and is a common reason for M&A activity, but it is one that requires a clear head and due diligence. Last year Empyrean Benefits announced it was going to acquire the benefits unit of ING. A few months later the deal fell apart when it became clear to Empyrean that several major clients were already on the way out the door. The closing of the Convergys deal is a sign that NorthgateArinso felt a good sense of security that enough of the major clients will stay and give NorthgateArinso a chance. ACS also mentioned a stable client base as one of the advantages of the EHRO deal.

Talent and Technology – both can be an important consideration in purchase decisions. Praise for the leadership and talent base of the acquired company is practically a requirement in the M&A communications handbook. It is another thing to determine if it is true in action as well as words. Another common reason for M&A’s is synergy, i.e., reducing operating expenses by eliminating duplication and overlaps.

Technology can be the point of, or a problem rather than a benefit, in some M&A’s. In the case of Hewitt, it will adopt HRAdvance’s technology platform, which was a criteria it was seeking in an acquisition. 

More often, that which cannot be profitably and practically integrated must be separately maintained or clients migrated. Either way, the time, cost and effort must be factored into the financials and risk management of the deal.

2010’s HRO service provider deals have good bones and clear intentions, may they all grow hale and hearty for themselves and their clients!

Linda Merritt, Research Director, HRO, NelsonHall

It’s a Pac-Man World in HRO – ACS Buys ExcellerateHRO from HP

May 26, 2010

Google celebrated the thirtieth anniversary of the release of Pac-Man, one of the most successful and long lasting video arcade games, by putting the game on its home page. Created by Namco in Japan, the license to Pac-Man was bought by Atari, the biggest name in early gaming. And Atari hit big time with Pac-Man, selling a then outstanding seven million games. Unfortunately, it manufactured twelve million copies of the game. Success in the early stages of an emerging market is not always the path to long term success.

ACS, a Xerox Company, just announced it is acquiring ExcellerateHRO (EHRO) from HP, ending the rampant industry speculations, including those from NelsonHall, on who might want EHRO.  Almost from the start there was conjecture that EHRO was not a strategic fit with HP, which maintains focus on computing and IT-related services. (Try finding any references to EHRO services on the HP website.)

EDS acquired EHRO for around $400 million. Now being sold for an estimated $125 million in cash, EHRO now joins Exult – which was purchased by Hewitt in 2004 – and Convergys – which is in the process of being acquired by NorthgateArinso for ~$85 million –  as early HRO providers chomped by industry consolidation. 

Exult flew the highest first, literally helping birth the comprehensive HRO industry. Exult rapidly won a large book of large clients in the first generation of lift and shift deals that took over management of clients’ HR processes in place of complex ERP and legacy systems. But once the exhilaration of creation and big deal fever passed, it turned out to be a hard way to make money. Hewitt quickly learned this after its acquisition of Exult. In fact, given the major money lost by the early players year after year, it is amazing that the game is still alive and being played by a stronger, albeit smaller, field of service providers.

A shakeout and consolidation is not unusual in the early stages of industry development, especially when tempting bargains are there to be found. Just as the HRO industry was finding its way through the maze to a new level of services fueled by newer technologies and lower cost service delivery networks, the worldwide recession gobbled up growth and cornered hard won margins, leading to the availability of several of the early leaders at discount prices.

The question was, who was hungry enough to bite? NorthgateArinso wanted into the U.S. market in a bigger way and it is snapping up Convergys to do so. ACS is also hungry in its own way. Already a first tier player, it wants to be even bigger in segments such as benefits administration.

ACS has already spent more than $20 million on upgrading and enhancing its services and platform for benefits, and has been on an aggressive campaign to win share in benefits administration. And what could be even more enhancing than a shiny new acquisition? With the support of Xerox and the addition of EHRO’s assets, ACS will be significantly increasing its market share in corporate relocation services and benefits administration, especially in pension administration and health and welfare outsourcing.

Pac-Man survives thirty years. Long live Pac-Man. Long live HRO.

Linda Merritt, Research Director, HRO, NelsonHall

April Showers May Not Yet Bring May HRO Flowers

April 27, 2010

I listened earlier today to Convergys’ 1Q10 earnings call and the new CEO, Jeff Fox, felt the company would meet its existing 2010 projections for earnings of $0.95 to $1.10 earnings per share (EPS) and free cash flow of more than $150 million. The firm did change revenue projections to $2.1 billion to $2.2 billion, largely due to lower expected revenues in the Customer Management segment due to continued lower volume-based revenues, but stated that managing cost in alignment with revenues remains a main focus that will support meeting EPS projections, as well as help increase margins from the current non-GAAP 7.5 percent to a projection of ~10 percent.

Little was mentioned of the pending NorthgateArinso purchase of its HR Management segment, other than it was now considered a discontinued service line, and that the sale was expected to close in the second quarter as projected.

New deals are occurring with new and existing customers, with an expected contribution of $67 million to 2010 revenues from new business coming on line. The new revenues are like nourishing showers, but a return of current client volumes is also needed to generate revenue growth.

Convergys projects that the second half of 2010 will show more signs of growth and recovery. This matches what most HRO venders were projecting for 2010, so some patience is needed to feel comfortable that the recovery is fully underway, looks sustainable and will “bloom” later in the year.

One of the questions facing Convergys is how much of the reductions in existing client revenues will bounce back and where are the losses  more structural and not likely to return. Of course, this a key question not only for Convergys, but also for the HRO industry and the larger economy.  There are green shoots emerging, but it is still unclear what kind of crop they will yield.

Convergys expressed confidence that it was not losing share with its clients, but rather that its clients’ own activities were reduced, in turn reducing the needs for outsourcing support.  When your business is supporting the business of others, you are subject to the vagaries of their industries and their abilities to weather storms and return to growth!

There are other forces to consider as well. Clients are always looking for ways to lower expenses, and not just from lower pricing; they look for lower cost channels, technology displacement of higher cost human contact and improved quality to reduce the need for a contact in the first place. Service providers need to continually innovate to maintain and grow revenues with their existing client base.

Which service providers have not only weathered the storm, but also have a new crop of cost effective service enhancements ready for an early harvest, positioning them as preferred partners in growth?

Linda Merritt, Research Director, HRO, NelsonHall

Customer Satisfaction in HRO – When are High Scores too High?

April 6, 2010

Congratulations to all the firms named as HRO Today’s 2010 Baker’s Dozen Multi-Process HRO providers. The rankings were driven by customer survey responses on the scale, scope, quality and satisfaction with the services provided.  The top five in the overall ranking are also the top five in customer ratings for quality of services: ADP, Ceridian, IBM, Accenture and Convergys.

I am currently wrapping up some research for one of our NelsonHall buy-side clients on the corporate relocation market. Naturally, I am asking each vendor about how they measure customer satisfaction and their current rating levels.

I came away with two thoughts.

First, all the vendors were conducting serious customer satisfaction (CSat) programs they were proud to discuss, and each program was tied to compensation and/or reward and recognition problems. The most common method used was an end-of-process survey of relocation transferees using a five point scale. Each vendor tracked both the overall average scores as well as “top box” scores. Top box ratings are important because those respondents reporting the highest levels of satisfaction are more likely to be the kind of customers that will continue to use and recommend the provider’s services to others. 

My second thought was that the reported rating scores were very high across every vendor. Having managed CSat survey programs in the past, I am a bit skeptical of unusually high scores, especially at the top box level. Of course CSat can truly be high, but it can also be a sign of a softball survey with questions carefully constructed to avoid any areas of difficulty. 

I once worked in a group with an employee survey question that was answered very negatively in each survey cycle. The management answer was not to figure out the drivers of the negative response; rather, it simply dropped the question. Ignoring a difficult issue does not make it go away,

It’s extremely important to ensure that same approach is not used in a more subtle manner in the surveys you rely upon. Look for confirmation that the CSat survey scores are matched by desirable real world actions. For example, are there correlations with sales, retention rates, referrals or complaints?

Also, be sure those who will be impacted by the survey results are not guilting customers into providing good scores. When I get my car serviced, the service people ask if I am satisfied and let me know I may get a survey, then they subtly – or not – add that their compensation and ultimately their job depends upon my satisfaction. Then I get a call from someone at the car dealership going over it all again. Gee, do I want to risk that my minor issue could cost someone his or her job? Perhaps close down a whole dealership? This approach reduces the chances of hearing easily addressable, legitimate feedback, and may even chase away customers who do not want to feel guilty over an oil change.

Finally, separate key client stakeholder satisfaction from service delivery performance measurements. Even services that are truly satisfying to the end-user may not continue to win renewal and referrals if pricing, technology capabilities, governance and other critical client relationship areas are deficient.

Truly great customer satisfactions scores are worth their weight in gold…just be sure it isn’t fools gold.

Linda Merritt, Research Director, HRO, NelsonHall

HRO Consolidation – NorthgateArinso to Acquire Convergys’ HRM Business

March 5, 2010

On February 4th we wrote about HRO acquisitions being on the rise at a rate of more than one per week. But none were as big for HRO as the March 4th, 2010 announcement of NorthgateArinso acquiring Convergys’s Human Resources Management (HRM) business for $100 million cash ($85 million cash at closing, and $15 million in cash over three years).

What does this acquisition mean for the HRO industry? Is it a good thing for existing customers and new potential clients? You betcha!

NortgateArinso is a prominent European provider in the U.K. and Continental Europe, with strengths in payroll, technology and systems integration. It is especially strong in multi-country payroll, and recently won a seven-year HRO contract with AstraZeneca that included payroll, HR administration and talent management. Payroll services will be provided to AstraZeneca’s 65,000 employees across more than 100 countries.

It has been clear for some time that NorthgateArinso wanted to grow its U.S. business, and Convergys is a wise choice. 

Convergys has been known for its strength in customer service and relationship management, and it is still a sizeable player in multi-process HRO and learning BPO, although it has struggled in recent years to find profitability in HRM. Convergys, though a global provider, generates most revenue in the U.S. where it serves some major U.S.-based clients including several very large multi-nationals. 

• Convergys has one of the largest HRO contracts to date with a Fortune 50 multi-process HRO pharmaceutical industry client, originally valued at $1 billion 

• Convergys has some other big name clients including FifthThird Bank and DuPont (another $1 billion client)

• Convergys has also won several recent contract extensions, including a $185 million multi-process HRO contract extension with the State of Florida

Thus, NorthgateArinso will benefit from this acquistion by gaining a significantly larger footprint in the U.S. market and a marquee book of clients.

Convergys employees will benefit as Northgate will be offering employment to the HRM unit’s approximately 2,300 employees. Though Convergys had maintained its commitment to HRO, most recent contracts have been renewals. This is critically important, but from an employee career perspective, you’d like to be part of a growing business. 

I don’t mean to sound like a CEO giving a speech to make customers and employees feel good, but as a result of this acquisition customers will have more services choices in more countries. They will also have their choice of technology, including an ERP system such as SAP or Oracle PeopleSoft, a NorthgateArinso system, such as its SAP-based euHReka platform, or a SaaS solution, with or without BPO.  

Conclusion

In NelsonHall’s 2010 HRO predictions HRO Today article (published in December 2009), we said the field of multi-process HRO providers would continue to refresh itself with plenty of major players committed to staying in the game. Although multi-process HRO may not come back to life as we once knew it, I think this new combined (and refreshed) company will be a formidable competitor to the large multi-process HRO providers, and will thrive in both the mid and large markets. 

Gary Bragar, Lead HRO Analyst, NelsonHall

Take Care to Show You Care – of Humanity and HRO

January 19, 2010

If you are in the business of caring for people, you have to show you care about people.

In the HRO community we all are in the business of caring for people, as employees, as managers and as retirees. We provide products and services that help people at every stage of working life and beyond. Much of that care is administrative, automated and drives to self-service and efficiency, as well it should. Sometimes we get to show employee care in a more direct manner, such as calls with live agents to understand the variety of benefit actions and options needed to wend through a major life event, or use of a caring tone when helping process an unexpected leave of absence during a personal or family crisis.

There are other ways to show you care in this professional space we have chosen to serve, such as corporate social responsibility activities and philanthropic initiatives.

HRO service provider examples include: 

• ACS Government Healthcare Solutions has a dental outreach program for disadvantaged children which has expanded from one to ten states

• Convergys highlights its Social Responsibility Community focus with examples of worldwide projects, including many teacher training and education programs

• Accenture uses its consulting and IT expertise in its Skills to Succeed effort to build skills that will enable people all over the world to participate in and contribute to the economy

• IBM, befitting its size and global reach, sponsors many varieties of programs. One that caught my eye is Kid Smart for early learning development that has reached 60 countries and has won IBM accolades from the highest levels in some countries

Then there are the times of crisis like a hurricane, a tsunami and now the earthquake in Haiti. How do we in the HRO community lend our skills and capabilities when natural disasters strike?

Many companies, which also happen to be HRO clients, excel in business-aligned philanthropy. For example, as it relates to the catastrophic earthquake in Haiti last week, GlaxoSmithKline donated cash and medicine worth $1.8 million, mostly urgently needed oral and topical antibiotics, and has promised further commitments as local infrastructure is repaired. AT&T immediately gave $50,000 to help bring emergency telecommunications to Haiti, supports the American Red Cross’ text donation program (in the U.S. text the word Haiti to 90999 and a one time charge of $10 will be added to your cell phone bill), and has pledged $200,000 to the Red Cross this year alone for disaster relief. And the State of Florida called upon its citizens to donate money to its “Neighbors to the Rescue” program through the Florida Disaster Recovery Fund.

Ceridian is making sure its Life Works customers know that services are available for employees concerned about friends and family in Haiti, and it has also listed some contact and resource information for the general public on its website, including several in Creole.

Hewitt posted a Red Cross press release for Thursday’s CHICAGO HELPS HAITI telethon in which 1,500 employees will volunteer their time staffing the phone banks from its Lincolnshire headquarters and three other centers.  The press release also mentions, “The last time the Red Cross partnered with Chicago media and Hewitt was in 2004 for a one-day telethon to aid victims of the Asian tsunami. The result of that effort was extraordinary.” This is a very good example of using the skills and caring of the company and its employee during a crisis, as well as getting positive media coverage for the significant contribution.

The human impact of major disasters lasts for years, long after the media leaves. That will be the time to consider using ongoing corporate responsibility programs in both nearby communities and markets in which it is most needed. How are you showing you care?

Linda Merritt, Research Director, HRO, NelsonHall

The Public Sector – an HRO Opportunity, One Way or the Other

January 12, 2010

The public sector is a dual factor in HRO. The first factor is government’s role in legislation and regulations that impact commercial sector client needs. The greater the uncertainty, changes and compliance focuses, the greater the opportunity for HRO providers to emphasize their subject matter expertise and risk mitigation partnership capabilities as added value incentives beyond the traditional cost savings and administration benefits.

The second is that the public sector is a major market for services for those providers with the stamina and fortitude to persevere in the long wave sales cycle public arena, the skin thick enough to survive the public commentary of creating change in organizations with often polarizing interest groups, and the management and technology wizardry to make margins at the same time as operating under more restrictions than with commercial clients.

The January 2010 NelsonHall BPO Index showed that 2009 global public sector BPO awards outpaced the private sector, led by Europe where government BPO spend was a whopping 74 percent of total contract value.

We can see the impact on HRO with some examples of 2009 public sector awards and renewals:

• RPO ended 2009 on an up note with Manpower being awarded a $200 million contract by the Australian Defence Force, as well as public sector RPO awards won by Carlisle Managed Solutions in the U.K. and Kelly Government Solutions in the U.S.

• CSS, General Physics and Raytheon each won major new and renewal military and defense learning contracts

• Health and welfare did very well, with Ceridian being awarded a $477 million contract for additional Military OneSource services and with Hewitt winning a flexible benefits contract by the State of Georgia

• European municipalities awarded contracts and renewals for Pensions, Payroll and HR administration services that included Logica in Sweden, KMD in Denmark, and Capita Hartshead and Mouchel in the U.K.

• Convergys stayed the course and received a two-year renewal by the Texas Health and Human Services Commission and a five-year and $185 million extension by the State of Florida

Jamie Liddell points out in his Shared Services & Outsourcing Network (SSON) article on Public Sector Outsourcing After the Recession that economic pressures are continuing to grow on revenue-strapped public sector organizations in the U.S. and Europe, driving increased interest in outsourcing options. Jamie says that, “the U.K. is widely viewed as a ‘world leader’ in public sector outsourcing,” and that outsourcing already accounts for about thirteen percent of government spending. The U.S. has not yet seen a similar surge in outsourcing, but economic pressures will encourage both public sector agencies and HRO providers to address and overcome barriers to increased outsourcing. As we see from the U.S. awards in a down year like 2009, it can be done and we will see more in 2010.

There is no way around it. The public sector will continue to be a major opportunity in 2010, both as a regulatory driver and as a major HRO buyer.

Linda Merritt, Research Director, HRO, NelsonHall