H1 2012 HRO: Who Did What in the Large Market?

Linda Merritt, HRO Research Analyst, NelsonHall

There was a good amount of announced HRO contract awards of many sizes and services in the first half of 2012, especially in the large market. A nice volume of new work coming online will provide future revenue support for HRO service providers, where earnings have recently been lower than in 2011.

Learning: finally announced some major deals including:

• Capita Workplace Services: awarded a competitive win for a £250m contract by the Cabinet Office to manage civil service training services in the U.K.
• Serco: won awards with the Army in both the U.K. and the U.S.; it won a scope extension valued at $38m by the U.S. Army and a £55m training contract by the British Army
• Genpact: won  a learning services contract by Johnson Controls, extending its record of recent learning wins; last year, it won a 7 year MPHRO contract with Nissan that included learning and it also won a 5 year content development contract by JobSkills in India.

MPHRO: activity was spread around nicely with ADP, Aon Hewitt, NorthgateArinso, and Logica all bringing in MPHRO contracts. One notable deal was IBM’s multi-tower BPO and IT deal with Cemex valued at $1bn; it includes finance and accounting BPO, HR BPO, IT infrastructure management, application development, and maintenance.

RPO:  continued to see a high volume of new contracts spread across many vendors. There were also two of the largest awards ever in RPO:

• ManpowerGroup: awarded a $400m five year contract extension with the Australian Defense Force, continuing a relationship that started in 2003
• Capita: won a £440m 10 year recruiting partnership contract by the British Army; it will also deliver supporting technology for the Royal Navy and the Royal Air Force, partnering with advertising agency JWT for recruitment marketing and with Kenexa for assessment and recruitment technology.

Benefits administration: contract awards were announced by Aon Hewitt, Empyrean, HP, and Xafinity Paymaster. Fidelity Investments reported the highest volume with DC contracts adding 522k new participants to its base of over 15m participants served. It also made major renewals and brought in new competitive wins. This is Fidelity’s strongest first half sales period in the last five years.

Payroll: deals in the U.K. led the way with awards going to Ceridian, Equiniti ICS, Liberata, and Mouchel. ADP won a multi-country contract from HP and will implement its GlobalView for payroll and Enterprise eTIME system for time and labor management for ~130,000 employees across 40 countries in Asia Pacific (excluding India), Europe, and the Americas (excluding U.S.) over the next five years.

With pipelines still healthy, the second half of 2012 should bring in a year of solid HRO growth and results. Congratulations to all!

Interested in reading the latest HRO news from NelsonHall? Subscribe to our newsletter by clicking here.

Anatomy of the Deal – Managing the HRO Service Provider Portfolio

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

HRO Holiday Gifting

What do you get the company that is hard to buy for? How about a new niche acquisition? As we ready for the holiday season and the end of the year, I wonder if there will be any interesting, prettily wrapped presents. If you are shopping to buy or sell all or a portion of an HRO business, here are a few gift buying guide pointers.   

Look at the Bow on the Package

Attractive acquisition factors:

•  State-of-the-art technology infrastructure with low operating costs and great end-user experience

•  Integrated service centers in desirable locations, good regional coverage for languages, deep subject matter expertise and knowledge of local regulations

•  Reputation for service quality and relationships

•  Compatibility in values and culture

•  A well-rounded book of current clients

•  Strong revenue stream with a high percentage of multiyear contracts

•  No/low debt

•  Small enough to be affordable and benefit from the leverage of a larger partner

Shake the Package

While the above characteristics are the ideal, it’s much more likely a potential acquisition candidate will have a mix of elements, some more attractive, some not so much.

Extra due diligence is required if the main asset is a current slate of contracts. If the potential acquisition is friendly, take a look at the customer termination clauses to see if there are easy outs. Larger clients often have Change in Control terms that work both ways, including covering what happens if the provider is acquired. Check the penalties for Termination for Convenience. If the penalties decline over time, how near end of term are the largest clients? Are there signs some of the major clients are already on their way out the door?

Last April, Empyrean Benefits Solutions, Inc. made a bid to acquire ING’s Health and Welfare Unit. By June the deal was dead. According to my information, a key to the deal was keeping the majority of the clients intact as Empyrean already had its own new technology platform. When it became increasingly clear that the full book of clients would likely not be retained, the deal fell apart. As a result, Empyrean decided to stay focused on its own organic growth path. (Which, by the way, Empyrean has successfully done, almost doubling its client base by adding 14 new clients so far this year.)

There are providers looking for the right acquisition, and there are those who would like to sell. A match in the HRO space requires the same level of mutual due diligence required in a major provider and client long term contract. A match in the HRO community is also a matter of attractive elements and compatibility.

Happy holiday due diligence and gifting.

Linda Merritt, Research Director, HRO, NelsonHall

Potential ExcellerateHRO Suitors: Who’s Suited?

In just the few short weeks since Hewlett-Packard repurchased all of Towers Perrin’s shares in ExcellerateHRO and the Watson Wyatt/Towers Perrin merger was announced, there has been considerable speculation on ExcellerateHRO’s fate. Will H-P retain it or put it up on the sales block?

H-P hasn’t demonstrated any interest in growing or even supporting its HRO business. And while ExcellerateHRO hasn’t made much headway in the multi-process HRO space, it’s a relatively strong player in benefits administration outsourcing. As a result, we believe – as do many in the marketplace –it’s a potential and solid acquisition target for providers who are already heavy into benefits administration or others interested in entering the space.

What does ExcellerateHRO have to offer potential suitors?

•  Its new technology investment in the BA7 platform, which offers enhanced self-service capabilities, allows for increased customization to enable benefits portals to look and feel more like the client company’s overall HR environment, provides more modeling capabilities, and gives plan sponsors improved reporting capabilities by enabling them to slice and dice data across multiple domains

•  34 million participants per claims of approximately 400 clients, the largest of which itself has 23 million participants

•  Strong experience in managing complex benefits administration relationships, e.g., companies with many different plan structures post M&A, grandfathered benefits, and those with complex formula calculations and offsets

•  Stock plan administration capabilities, which may see a requirement uptick as companies seek alternatives to salary increases

•  Flexible benefits administration capabilities in Europe, particularly in the U.K., which we estimate has high double-digit growth potential by 2013

•  About 20 clients in European pensions administration. European benefits administration business is estimated to generate approximately one quarter of the company’s revenue

All the above make ExcellerateHRO appealing to a select group of providers, especially those looking to bolster their technology capabilities in benefits administration and expand their geographic footprint beyond North America.

Who might be interested in acquiring ExcellerateHRO?

Fidelity, Hewitt and Mercer – to capture additional market share in the health and welfare and defined benefits/defined contributions spaces, as well as greater market share in the U.K. which will require additional servicing when auto-enrollment is introduced to pension schemes in 2012

Empyrean – following its failed ING acquisition, it may be interested in acquiring ExcellerateHRO’s health and welfare portfolio of business to gain more market share. The question in this scenario is what would happen to the remainder of ExcellerateHRO’s businesses? Perhaps they would be hived off to local providers in the U.K., e.g., Capita, and retirement administrators in the U.S.

ACS – the level of noise it has made in the HRO space following its launch of SyncHRO could signal acquisition interest. However, the integration challenges it faced with its purchase of Mellon might deter ACS from making another acquisition in the near-term

ADP – although highly speculative, it might be interested to enable penetration into the larger benefits administration marketplace and to gain defined benefits capabilities

Offshore BPO providers – ExcellerateHRO’s technology would provide the base for offshore BPO providers, most of who have acknowledged proprietary technology is an absolute must in order to effectively serve benefits administration clients directly, rather than as the offshore arm of an existing third-party benefits provider. However, a strong looming question is whether existing ExcellerateHRO clients would accept a purchase by an offshore organization, particularly if there was a threat that first-line contact for processes such as health and welfare were moved offshore

We’ll be keeping a close eye on developments on ExcellerateHRO’s destiny, and so encourage you to keep an eye on our HRO Insights blog for more on this and other hot topics!

Until next time, happy sourcing!

Helen Neale, Research Director, Human Resources Outsourcing, NelsonHall

The Demise of the ING/Empyrean Deal: What’s Next for ING and the H&W Marketplace?

A recently posted Note from the CEO on the Empyrean Benefit Solutions website reads, “Empyrean spent three months evaluating and proposing on an acquisition of ING’s health and welfare outsourcing business. At the end of the process, we did not reach a mutually advantageous agreement with ING.”

The fact is that while there may have been other contributing factors, ING’s lack of a solid health and welfare (H&W) technology platform and the jumping ship or tendering for work of at least five of ING’s 11 H&W clients are what ultimately caused the deal to fail.

So what does this mean for ING and the H&W administration marketplace in the U.S.?

It is clearly damaging for ING. Its client base has shrunk and is likely to continue contracting. The resulting instability of its business is undoubtedly unsettling for its employees, and this will likely cause significant morale problems and staff exits, even if layoffs aren’t forced. The company could try and find another buyer, such as defined contribution administrators looking to grow their H&W businesses (for example Fidelity), or other H&W providers, e.g., Workscape, Hewitt and Watson Wyatt, hoping to increase share. Its only other option is to resign itself to losing its whole book of business to other providers.

We believe the latter will happen. It’s far more likely that other providers will look to pick up ING clients without the cash outlay to buy the business, especially in its unstable and dwindling state. But that said…

A cautionary note to H&W providers: be wary of taking on ING clients too quickly with first conducting appropriate due diligence on the contracts. ING has clearly had challenges servicing its clients, and that may not all stem from issues in its own operations. It’s worth paying close attention to the contracts it was bound to honor to ensure there are no hidden pitfalls such as unrealistic cost saving expectations or inappropriate governance structures.

And a word of warning to buyers: if you’re considering outsourcing to the H&W arms of a traditional defined contribution administrator, make certain the provider has made a long-term commitment to the H&W space, perhaps evidenced through investment in real-time decision support tools, self-serve enhancements and analytics technologies. A lack of robust commitment to fully servicing H&W clients may place you in a similar position in which your provider exits the business and you must unexpectedly transition to another supplier.

Until next time,

Helen Neale, Research Director, Human Resources Outsourcing, NelsonHall