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.

Benefits Administration Poised for a Good Year: Part 1

If last quarter’s earnings reports are an indication of what will continue in 2012, then benefits administration service providers will have a good year.

Some of the financial highlights include Morneau Shepell’s record growth for Q1 of 22% year-over-year (y-o-y). Modest growth was reported elsewhere, but it’s significant in light of the economy and pending health care reform legislation. Providers with modest growth include Aon Hewitt, Towers Watson, Mercer, and T. Rowe Price.

Aon Hewitt’s outsourcing segment reported 3% y-o-y growth, 3% organic growth. Its organic growth began last quarter after four consecutive quarters of either flat or negative organic growth. New client wins are for its retiree health care exchange offering, dependent eligibility audits, and absence management services.

Towers Watson’s benefits segment reported 2% y-o-y growth, 3% organic growth. Its technology & administration solutions (TAS) line of business, which incorporates majority of its benefits administration revenues, had mid-single digit constant currency growth. Towers Watson also reported some new client wins for pension administration services within its retirement business.

Mercer’s outsourcing segment reported 0% y-o-y growth, 4% organic growth. The good news is that its outsourcing segment has recovered from its steady decline of organic growth that began in Q3 2011; the bad news is that growth was from 2011 client wins that came on this quarter, so this positive level might be temporary.  However, Mercer’s health & benefits consulting segment reported strong growth of 7% y-o-y, 6% organic, as did Towers Watson, which reported low double-digit constant currency growth for its health & group benefits segment. This is significant in that this strategy work may flow downstream and result in benefits administration contract awards later this year.

T. Rowe Price, although not a TBO service provider, reported 3% y-o-y growth for its administrative segment, which includes revenues from retirement plan services (RPS). RPS consists of DB, DC, and non-qualified plan administration services.

A new company to monitor is WageWorks, a H&W service provider offering reimbursement account and COBRA administration services. It commenced its IPO of 6.5m shares of common stock for $9 per share on May 10^th.

Tune in later this week to learn about the additional signs pointing to a good year for benefits administration service providers.

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

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

NorthgateArinso Sets a Cadence for Growth

NorthgateArinso (NGA) recently held its annual analyst day in Boston. Chief Executive Mike Ettling reported that NGA’s revenues have increased 6-7% every quarter for the last six quarters and it had brought in over £500m in revenues for 2011. With very good growth under its belt and its built-out set of services, updated core technologies, and global delivery network, NGA is setting new goals to reach its target of $1bn in revenues by 2014.

The company is defining itself as “an HR BPaaS business enabled by technology, process, and domain expertise.” Business-platform-as-a-service is what many are calling business platforms, and since we are talking about HRO, I call it HRO platforms. From that perspective, NGA is already in the BPaaS business of providing bundled business process services and technology solutions.

NGA has ~8,500 personnel in 35 countries with HR technology, outsourcing, and consulting services in over 100 countries. That will not change. It will continue to offer unbundled technology and software services for payroll and HR. It will also continue to offer consulting services for HR systems and implementation of sand integrations, as both are good revenue streams. What is new is that the company is staking out its direction for future growth as an HRO services company, not a technology company.

How does an already good, solid HRO performer accelerate to outpace its competitors? For NGA, the answer is in structure and cadence.

Structure

Management structure is seen in the cascading goals, upcoming changes in organizational structure and alignment of compensation, the use of metrics, and the top-down involvement in selecting and managing key initiatives, investments, and projects. NGA is continuing to standardize its services into a catalog of selections, standardize implementation, and even standardize the offer to delivery process. It is developing an internal system called ScopeHR, which will standardize and automate the production of all key BPO/BPaaS information and documents to make solution selection, selling, pricing, and contracting easier, faster, and more efficient for both the client and NGA.

Cadence

Timing and pacing are also NGA keys in achieving profitable long-term growth. This includes an understanding of how to migrate and grow client scale and scope over time, to step-by-step refine its robust system for services delivery that includes moving to “mega centers of scale” and plans for workforce development to avoid capability gaps. Components of the service delivery value chain are addressed, cross-checked, and backed up. Continuous improvement is also seen in the use of Lean Six Sigma teams, CCMI standards, and an operational excellence framework to increase capability maturity while growing the business and retaining satisfied customers.

There is still a lot of uncertainty in the economy, which may impact NGA’s plans and timing. Given NorthgateArinso’s track record so far, clear goals, and achievement plans, if it adds in a bit of flexibility, the odds are good that it will hit its target.

Linda Merritt, Research Analyst, HRO, NelsonHall

Interested in reading the latest HRO news from NelsonHall? Subscribe to our newsletter by emailing amy.gurchensky@nelson-hall.com with “HRO Insight” as the subject.

First Year+ Strong for ACS, a Xerox Company

With a year and a half passing since Xerox acquired ACS, Xerox has appropriately defined its new tagline: “Services-Led, Technology-Driven” with revenues roughly split equally between its Services segment and its Technology segment. Of Xerox Services, BPO is leading, accounting for 55% of revenues. The remainder of its Services revenue is ITO (12%) and DO (32%).

Within BPO, its four segments are HR, F&A, customer care, and transaction processing. Focusing on HR specifically, ACS is doing well according to information shared at yesterday’s Industry Analyst Meeting in NYC.  In total, the company has secured 44 HR services deals in the past 18 months.  Its first HRO deal since the acquisition was closed was a 5 year H&W services contract with P&G in March 2010.  

Some recent HRO highlights include signing a long-term TBO contract with a wireless telecommunications company, winning its largest ever learning services contract with a pharmaceutical company, and leveraging the ACS and Xerox relationship to win a multi-process HR outsourcing (MPHRO) contract from a competitor. 

Serving more than 11m employees and retirees worldwide, the company is focused on “consumer-driven solutions” or viewing the client employee as the end-consumer.  Part of this initiative includes its client collaboration group, FutureThink, which began piloting last year and has recently expanded. 

Its plans for geographic expansion are ripening.  The company has made great progress with its first target, Europe, with revenues increasing 10% and pipeline growth up more than 100%.  Approximately 90% of this pipeline improvement is the result of Xerox synergy.  Another positive is a recent MPHRO win from this region. 

Aside from Europe, ACS is targeting Latin America, specifically Brazil and Mexico, and Asia.  In Latin America, the company has a good market presence due to its acquisition of ExcellerateHRO last year. 

Additional acquisitions and partnerships can’t be ruled out either, especially for building out service capabilities.  Finally, to support all this growth, ACS has made investments in CRM, expanding its India and Malaysia centers.

Eighteen months since the acquisition has closed, Xerox has demonstrated a successful integration of ACS and signs are pointing to a positive future for HR services.

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

HRO (and overall BPO) Total Contract Values up in Q1 – Q3 2010

During NelsonHall’s recent quarterly BPO Index Call, our CEO John Willmott stated overall BPO contract values were up for all BPO sectors, including HRO, both on a rolling twelve-month basis from 2009 – 2010 as compared to 2008 – 2009, and up year-to-date Q1 – Q3 2010 as compared to Q1 – Q3 2009. This is all good news, but not a surprise given that we are beginning to see some recovery from the recession.

Looking specifically at HRO, total contract value (which includes the value of the full term contract plus any renewals) in Q1 – Q3 2010 was up nine percent. The growth came primarily from North America, while Europe declined as it is coming out of the recession a bit slower and clients in that region continue to be more cautious about outsourcing their HR processes. Although its total contract values isn’t as large as in North America, contracts are still being awarded in Europe, e.g., wins in Q3 by Logica, Midland HR, HR Access, Raet and CPH Consulting, as recently cited by my colleague Linda.

HRO growth in Q3 2010 was particularly led by RPO, similar to numerous other points during these tumultuous times. But here, I’d like to take a quick look at why the learning services market is starting to recover (please see Linda’s October 5 blog entitled, “Recapping the Not-so-Dog-Days of HRO’s 2010 Summer” to see a few of the recent learning contract awards.)

In learning, providers are introducing new training offerings largely focused on certified training courses, primarily technical areas including IT. Training is coming back to life, and the initial emphasis is on strengthening direct job-related skills. Making sure IT professionals can keep up with professional certifications can also be a way to build engagement and head off turnover as the employment market improves. There was also some introduction of new leadership development courses, perhaps indicating a return to a focus on the future by investing in management skills development. Finally, social learning is continuing to make inroads, and Expertus introduced its new platform, ExpertusONE, which facilitates communities of practice, expert networks and mentoring, in addition to normal learning system functions. Other new learning offerings introduced in Q3 included those from Raytheon Professional Services, QA and Edvantage Group.

It will be interesting to see, at the end of Q4, which HRO processes, regions and industries are the leaders and laggards. But much, much more to cover before then, including my “Targeting Learning BPO Market Analysis” to be published later this month.

Gary Bragar, Lead HRO Analyst, NelsonHall

Recapping the Not-so-Dog-Days of HRO’s 2010 Summer

One of the biggest HRO stories of 2010 will be the flurry of big and small acquisitions in the benefits administration space. The three big acquisitions – ACS and ExcellerateHRO, ADP and Workscape, and Aon and Hewitt – have recently closed.

As acquisition mania played out, many HRO deals were getting done, and this week, as the weather has finally, thankfully, started to cool, I’m taking a look at some of the deal activity over the long hot summer.

There were not a lot of announced deals in benefits administration, but a Hewitt summary indicates plenty of activity was still quietly going on. Hewitt won new awards across the span of benefits administration in the large and mid-market, including several in defined benefits and defined contributions. But the greatest activity was in health and welfare, and for point solutions like dependant audits and flex spend accounts.

While not necessarily matching North America in total contract value, the U.K. and Europe were also quite active in HRO. Logica was awarded a £10m payroll and pensions HRO contract extention by U.K’s Metropolitan Police, with new scope this time around including increases in employee and manager self services and electronic pay slips. And Midland HR won a deal for its iTrent HR platform including HR administration, employee and manager self-service, payroll, talent management and workforce planning.

In RPO, CPH won a contract with Opal Telephone, and Alexander Mann was awarded  a contract for recruitment and contingent labor by Cobhan. On the continent, HRO activity included HR administration and payroll deals by Reat and HR Access in the mid-market.

ADP parlayed existing payroll services for KAO, a Japan-based consumer products manafacturer, into extended HR administration and payroll services across Asia Pacific including China, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, Taiwan, Thailand, Vietnam and Japan. In addition, ADP won a global managed payroll services contract with BT that will cover more than 40 countries in North America, Europe and Asia Pacific when fully implemented.

It was refreshing to see a spate of learning contract awards won by Expertus, General Physics, Intrepid and The Learning Associates. However, as most of the learning outsourcing activity was in the public sector, we still need to see more of an uptick in the private sector before we can say learning is fully on the road to recovery.

RPO maintained its lead position as the most active single service area, with the greatest increase in revenues and new contracts. RPO activity was highest in the U.S., followed by the U.K., and was spread nicely across providers including Alexander Mann, CPH, Kelly Services, Manpower, PeopleScout and SourceRight. Several of the awards were for contingent labor or combined RPO, with the contingent labor focuses indicating that employers are still cautious about a full return to permanent hires.

There were no announcements of the HRO mega-deals of yore, but it was very nice to see the increased activity levels across many HRO service lines and service providers. Now that the cooler weather of fall is here, we’ll  hopefully see an even more serious return to getting business done before the end of the year!

Linda Merritt, Research Director, HRO, NelsonHall

The Forgotten HRO Capabilities

It is no longer enough to just talk about HRO lowering administrative costs and burdens.  The lead focus is now on how HRO and a particular vendor’s services will help make the buyer’s business better and HR more effective.

As soon as a business grows in size, it grows in complexity. And HR services are, in and of themselves, unexpectedly complex and dynamic – a lesson learned the hard and costly way by many a client and HRO provider. Thus, in addition to defining the service solutions and holding the pricing discussions, it is important to bring to light both the provider’s and the buyer’s capabilities to manage complexity. These deeper capabilities can make or break long-term results achievements, and make the partnership a binding one or a bonding one.

Most HR organizations are networks of services, some that cross internal support services organizational lines and others that involve multiple suppliers and start and end in the business units. Even with a new multi-process HR outsourcing (MPHRO) engagement, it is unlikely that all existing suppliers and technologies will be displaced. And a best-of-breed approach can actually enlarge the network, requiring the client to manage the services integration and vendors, or separately pay one provider for the integration and vendor management.

Complexity management capabilities such as governance, program management, project management, change management and supply chain management become critical enablers. No matter how latest and greatest the technology, or how compelling the pricing, it must all work in the ever changing world of HR and for businesses still facing uncertainty.

Let’s focus on one of the sometimes forgotten HRP capabilities – supply chain management. Vendor management is often listed somewhere in the benefits statements or addressed briefly in the RFP. The level of integration and coordination needed across a complex network of internal and external suppliers is major and can be a real bottleneck. Every interface is a service break point; every vendor requires communications, coordination and contracts. Just ask Boeing, which for years has been struggling with delays and burdened by hundreds of millions of dollars in cost overruns due to a complex and uncontrolled supply chain for its largest new planes.

What happens when changes, expected or unexpected, that cross boundaries of the HR network occur? For example, a change to the benefits plans requires changes to multiple systems including payroll, IT, the network of benefits providers, knowledge databases, etc. Who will handle what? What tools and governance systems will be used? Does the provider’s approach sound reactive, or proactive?

When I was with AT&T as contract manager for a large MPHRO deal, I remember the unexpected benefit of our vendor actually managing other vendors and suppliers, and coordinating with our internal IT, treasury and security departments. AT&T HR and my group were deeply involved as well, and together we were able to successfully implement more projects and changes on time and within our budget than ever before.

Buyers, really dig for complexity management proof points. Providers, showcase your competitive advantages!

Linda Merritt, Research Director, HRO, NelsonHall

HRO – Cloudy with a Chance of Sunshine

One way to while away the long hot days of summer is to speculate over the timing and pace of economic recovery and when it will translate into a return of workforce growth – which in turn adds units of volume to new and existing HRO contracts.

According to Accenture’s interesting The High-Performance Workforce Study 2010, the mood of senior executives around the globe is turning more positive, indicating that companies are starting to shift focus from cost control to also investing in growth. Compared to 12 months ago, those focusing primarily on cost control dropped from 41 percent to 15 percent. Eighty-five of the 674 surveyed executives said they are now evenly focused on cost control and growth (45 percent), or are primarily on investing in growth-oriented activities (40 percent).

While workforces are generally the same size or smaller, some hiring continues, often while other jobs are being eliminated as companies adjust to changed business direction. The top rationales for selecting where to trim employees included skills and workforces not critical to the future direction of the business. New employees were primarily added to meet specific needs for launching new products or entering new markets, and to add skills and workforces needed for the future.

In asking if the workforce will return to its pre-recession size, U.S. respondents were more positive, with 54 percent saying yes within the next two years. Globally only 35 percent said yes, while 65 percent said either no or probably not. Companies, as one would expect, cut back most in hiring-related activities during the downturn, with training the next most common reduction.

The senior executives indicated their workforces were pretty well prepared for managing during economic uncertainty. Forty-five percent felt their workforces were better than most of their competitors, but only 16 per cent considered them industry leading.

The return of a focus on growth and workforce expansion will bring back some volume to existing HRO contracts, and presents opportunities for added scope and new sales. But we need to understand and prepare for what will be different. Buyers and providers alike should be talking now about changes in business planning and what those changes mean for outsourced HR services.

Recruiting is already ticking up, but existing clients may need to gain skill sets in new areas, and more thoughtfully build a global workforce. Where are new pipelines needed, where can providers handle specialty recruiting, how can we help applicants understand salary offers that are perhaps a bit more modest? How will re-skilling the workforce and a renewed interest in leadership development be addressed?

Multiple surveys show a positive tone returning, yet, so far, moods and intentions are improving more than actual new sales. But then summer days often include pop-up thunderstorms in the afternoons. All is not yet sunshine, but the clouds are lifting a bit, so be sure to be prepared.

Linda Merritt, Research Director, HRO, NelsonHall

The Incremental Recovery – When will HRO Really Take Off?

The last round of major HRO vendor’s quarterly earnings calls suggested business will pick-up more in the second half of the year, but they still expect to see flat to slight declines in revenues in 2010. In a few weeks the next round of earnings call will begin, and we will see if forecasts remain the same, or get more or less optimistic.

What can we see now that will support a sustainable acceleration in revenues?

Bookings – business sold and being implemented – is a top predictor of coming revenues. The largest providers like IBM and Accenture have been reporting solid bookings. For example, Accenture reported last week on its fiscal 2010 second quarter and bookings were up. On the flip side, revenue predictions remain at the lower end of its range, consulting was expected to remain flat to single digit growth, and no comments were made on HRO growth.

Unemployment rates have recently started to stabilize. Worker productivity – the output per hours worked – has increased and provided a cushion for companies reluctant to hire full time staff.  My NelsonHall colleague Gary Bragar recently commented that the increases in temporary staffing may finally be ready to lead into more hires.  Accenture is doing its part as it again increased its own global hiring estimates from 45,000 to 50,000 for the year.

Relocation outsourcing was hit particularly hard during the recession, and volume dropped by thirty to as much as fifty percent! However, I am talking to a number of relocation companies and each is reporting that although volume has not yet returned to normal, it is picking up nicely.

The major buy-side corporations are sitting on big cash reserves amassed during the downturn due to cost cutting and steep spending reductions…cash to the tune of $832.4 billion, according to Standard and Poor’s.  And on the sell-side, Accenture has $4 billion in cash. Spending by the largest corporations stimulates business up and down the supply chain, including for HRO service providers, so we need them to spend!

Yet, the incremental nature of the recovery has left even those with piles of cash reluctant to make big bets. So far, the main use of the cash has been to continue stock buy-back programs. Sooner or later organizations need to return to investing in growing their businesses.  Since 60-70 percent of the economy is consumer-driven, we all need consumers to consume. The U.S. Commerce Department recorded another monthly increase in consumer spending, 0.3 percent in February.

If we are to do our part in ensuring the recovery accelerates, we too need to spend. So go, buy something today!

Linda Merritt, Research Director, HRO, NelsonHall

Weathering the Weather in HRO

I am weary of Winter and ready to get on with Spring! A record setting Winter snow storm just blasted the East Coast of the U.S. this past weekend, and more snow is heading this way by mid-week. London has also seen the heaviest snows in twenty years. Some areas are prepared for lots of snow and can handle it with aplomb and as an economic boom. But in cities like London, Philadelphia and Washington, D.C., big snow is disruptive, dangerous and a budget buster.

At least we are seeing signs of the coming Spring in HRO, with a generally upbeat tone to most of the earnings calls, even as most vendors continue to report revenue declines and offer guidance of relatively flat revenues for 2010.

Winter is not yet over

For example, last week ADP announced that its Employer Services fiscal Q2 2010 revenues were down two percent compared to 2009. ADP saw client payrolls down five percent leading to a drop of seven percent in payroll and tax filing revenues, reflecting continued workforce reductions at the end of 2009.

ADP’s Employer Services revenue growth will be constrained until payroll volumes increase, which are expected to start improving in the first half of 2010.

An expected thaw is on the way

HRO vendors reporting results that are less bad compared quarter over quarter and the universally reported increased pipeline activity are indicators of a thaw.

For example, for ADP, the view beyond payroll revenues, which includes HRO services, remains more optimistic based on three percent increases in each of the last two quarters. And ADP’s small business sales have increased, largely due to the successful introduction of Workforce Now, a new payroll, benefits and HR services SaaS platform for the less than 100 employee market. Workforce Now has already added 2,000 clients since its introduction in October 2009.

According to ADP, larger employers are starting to reengage in new services discussions, but remain slow to make contract commitments. Even with the uptick in the small market and the beyond payroll services, the overall decline in revenues driven by smaller payroll pays and lower client fund balances keeps the forecast for FY 2010 ES as flat to down one percent.

With some signs of the coming Spring

ADP is confident enough that the economic recovery is starting that it plans to begin modest hiring to have more sales and service personnel onboard and trained to take advantage of increased opportunities.

The truth is, Winter is still not over. We need to see an increased rate of contract signings Then we need to see positive revenue gains not clouded by currency exchange rates. And a few larger HRO deal announcements would help warm us up nicely.  

For awhile yet we will continue to see mixed signs of recovery and there is likely another Winter storm or two to weather. Still, I can almost hear the birds of Spring chirping…can you?

Linda Merritt, Research Director, HRO, NelsonHall