When Down is Up and Flat is Good in HRO

The HRO provider financials reporting season for the first quarter of 2010 ended kind of flat, but that’s actually good given that all things are relative.

Several large HRO vendors that provide financials at the  HR consulting and outsourcing level reported revenues that were basically flat year-over-year, within one percentage point up or down from the same quarter in 2009. Using constant currency, ADP and Mercer revenues were up one percent and Aon and Hewitt were down one percent. 

The good news – and here’s where “relative” comes into play – is we are seeing the slowing and stopping of sequential declines. ADP was pleased to announce that new business sales growth was flat, an improvement after six quarters of decline. Flat revenues are a sign of market stabilization and, hopefully, a harbinger of an upturn in the second half of 2010.

HRO providers are still talking about the pending recovery, as opposed to it already being here. Pricing remains very competitive, and although pipelines are healthy, buy-side executive decision making is still cautious and slow. Other headwinds on the return to growth are lower client employee headcounts, reduced spend on discretionary projects, and in the U.S., confusion along the path to health care reform.

Interestingly, it is growth outside of the U.S. that is helping buoy revenues to some extent. Aon reported growth in global compensation consulting, Hewitt increased financial management and consulting services in Europe, and Mercer’s health and benefits consulting revenues rose two percent, led by growth in Canada, Europe, and Asia Pacific.

Conversely, benefits consulting demand was soft in the U.S., largely impacted by the turmoil leading up to the passage of the health care reform act. Since the various components of the act will go into effect over the next several years, with some elements starting in 2011, there should be increased demand for health care consulting and project work to help clients adapt and ensure compliance. As one vendor referred to health care reform, it’s “the gift that keeps on giving.”

Many current major HRO contracts are with large and multinational companies, and most HRO services are priced based on the number of employees served. ADP’s beyond payroll revenues grew by eight percent, but with employer payrolls down another 2.5 percent, the overall impact was a modest one percent increase in revenues for Employer Services. While there was an uplift in sales to the small and middle market, it will take a return to growth by the large market employers to support stronger and sustainable growth.

HRO vendors are still tightly managing operating expenses in line with revenues, and operating incomes, margins, free cash flow and cash on hand were all quite strong per the earnings reports for 1Q10. There are signs that service providers are looking forward to better days. As a result, watch for continued acquisition activity with some of that cash on hand. At the same time, I expect acquisitions will be of modest size to strengthen point solutions and expand geographic coverage without being overly dilutive or adding pressure on debt. 

And as yet one more sign of a pending recovery in the HRO market, Accenture has increased its hiring estimates for 2010 to 50,000, and Hewitt is staffing up in sales in anticipation of an improved market. 

At the moment, a reduced rate of decline and flat revenues are good signs of stabilization. But a return to when up is really up will be even better news!

Linda Merritt, Research Director, HRO, NelsonHall

HRO Provider Acquisitions on the Rise

Just five weeks into 2010 and seven HRO provider acquisitions have already been announced or closed! Two were in staffing services, two in payroll, two in learning and one in relocation, so a nice mix across HRO processes. But at a rate that comes out to more than one per week thus far in 2010, why are we seeing this level of acquisition activity? I attribute it to any combination of five things HRO providers are trying to achieve:

• Strengthen their service offerings

• Enter/expand into new industries, market sizes and geographies

• Improve their technology/technological platforms and capabilities

• Obtain new clients

• Improve their financial results through revenue growth and cost savings due to synergies

Let’s take a quick look at three acquisition announcements/closings that happened just this week which support my above assertions:

Manpower is acquiring COMSYS to strengthen its IT staffing capablities, which is COMSYS’ predominant business and will bring Manpower $650 million in revenue. Additionally, COMSYS’ RPO division, TAPFIN, which focuses on the mid-market, will help strengthen Manpower’s RPO business in the U.S.

NorthgateArinso acquired Neller Payroll in Australia to support its growth strategy in Australasia. The acquisition includes Neller’s Preceda OnDemand SaaS payroll solution and the Neller Employer Services (NES) subsidiary which provides outsourced payroll services. Neller’s more than 1,000 clients will also add significantly to NorthgateArinso’s existing Asia Pacific client base.

Spherion acquired Tatum to strengthen CFO executive staffing services, increasing Spherion’s higher margin professional services business. Spherion anticipates approximately $6 million cost savings in synergies.

So what does this level of acquisition activity signal for the HRO industry and the remainder of 2010?  You got it…more acquisitions driven by:

• Increased demand for multi-country/global payroll, RPO and other services as buyer organizations continue to seek to reduce the number of vendors they work with and standardize procesess and technology

• The need to better service exisiting clients and obtain new clients, with the end result of better financial performance

Even when the economy recovers, I belive M&A activity will continue to occur, as it did before the recession, as that is the nature of all business – to continually try and better service customers and improve financial performance.

Gary Bragar, Lead HRO Analyst, NelsonHall