Moorepay and NGA get even more SaaSy in the U.K.

The one question that I always have after acquisitions is, “How does it work out over time?” Some M&As put emphasis on “synergy” (i.e., consolidation and cost recovery). Others focus on skills and footprint in new geographies. NorthgateArinso (NGA) is one of the HRO service providers that use acquisitions in new markets as one type of growth strategies. Moorepay is a payroll and employment service provider in the U.K. with over 10,000 clients and it is one of those NGA acquisitions.

Growth through accretion of revenues and clients in new geographies – along with the access to in-country knowledge to service MNC clients – is a good rationale for M&A. But does the overall vendor system become stronger? Are new capabilities leveraged across opportunity areas? I have lived the life of trying to create change, fighting against the not-invented-here syndrome in the corporate world. This is one of the more subtle reasons for using HRO—to circumvent this internal tug of war.

Now back to Moorepay and NGA. Moorepay just released its newest service on March 12th, a SaaS HR and payroll platform that it will use for the small-employer market. I asked if the underlying technology was based on SAP or Oracle. The answer is “neither”; it is based on Preceda, a proprietary NGA system stemming from the 2010 acquisition of Neller in Australia. Preceda is already in use for ~4,000 clients and 500,000 participants in Australia, Philippines, and New Zealand, and now it is expanding to the U.K. Yeah, synergy, re-use, and leverage to improve capabilities and services for the underserved small-business market halfway around the world!

HRO SaaS is a proven cost-effective alternative to fully customized systems. Its very nature lends itself to offering needed benefits to the small and midsized employers (SME). SaaS brings the illusion of customization through configuration at an affordable cost. These are important attributes, especially important for the employer with less than 500 employees.

Moorepay is fully using the benefit of configuration to launch the new service with four pricing levels from the most basic HR and payroll that gives the option to easily turn on additional services like time and attendance, recruiting, and learning modules.

HR and payroll platforms also bring self-service for employees and streamlined HR processing for managers. According to Ann Fitzpatrick, Moorepay managing director, existing and prospective SME clients are asking for the same level of services that have been in the market for years for the large-employer market.

If the launch goes well, and Moorepay turns the rising demand and its first-mover advantage in the U.K. SME market into new and profitable growth, expect to see new NGA Preceda-based SaaS HRO offerings pop up elsewhere around the world.

Linda Merritt, Research Analyst, HRO, NelsonHall

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M&A Activity in Benefits Administration: Round 2

Following the benefits administration merger and acquisition (M&A) frenzy of 2010 that resulted in some major consolidations including Aon Hewitt, Towers Watson, Xerox/ACS and ExcellerateHRO, to name a few, are we poised to see round 2?

The second wave actually began in early 2011 and tends to consist of the more established providers, in their own right, acquiring Tier 2 health and welfare (H&W) administration companies in the U.S.  Examples include:

• Towers Watson acquiring Aliquant in January 2011
• Sedgwick, a leader in the leave of absence administration market with ~20% market share, acquiring the productivity solutions unit of Nationwide Better Health in May 2011
• Morneau Shepell, the leading total benefits outsourcing (TBO) provider in Canada, acquiring SBC Systems Company in January 2012.

As of last week, we can now add ADP to this list since it signed a definitive agreement to acquire SHPS Human Resource Solutions—a subsidiary of SHPS, Inc. ADP has actually been making key acquisitions to strengthen components within its benefits administration offering for the last 18 months. It started with Workscape, which added compensation management services, and was followed by Asparity Decision Solutions for decision support tools and analytic capabilities.

Now, the SHPS acquisition strengthens ADP’s leave administration and reimbursement account administration offerings. The HSA and HRA components will be especially important considering the rising cost of health-care and the transition toward high-deductible health plans paired with these health savings accounts.

The H&W acquisition trend is also expanding beyond the U.S. It started in September 2010, when Capita – a U.K.-based HRO vendor providing total retirement outsourcing (TRO) exclusively in the U.K. – acquired FirstAssist Services Holdings for £12.5m. Then it continued when Mercer acquired REPCA – a brokering and advising firm for health and benefits (H&B) plans – to strengthen its H&B administration offering and advisory services in France.

The remaining question on my mind is whether U.S.-based TRO providers such as ING, Great-West, T. Rowe Price, etc. plan to jump on the H&W acquisition bandwagon to provide a one-stop shop for benefits administration like Fidelity Investments.

I’m eager to see who will make the next M&A move in benefits administration.  In the meantime, it’s always fun to hear about cross-selling opportunities that resulted in contract scope expansions.  Stay tuned.

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

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The Towers Perrin/Watson Wyatt Merger: What Will Happen to Benefits Admin Outsourcing?

Encapsulating the reported highlights of the much-publicized Towers Perrin/Watson Wyatt merger: Towers Watson, with a combined workforce of 14,000, is expected to have annual revenues in excess of $3.5 billion, 55 percent of which will come from benefits services – administration, solutions and consulting. The approximate cost for integration of the two firms is $80 million, with most of the financial hit occurring in the first two years of the anticipated three year period it will take the company to achieve “full realization of synergies.” But the company also anticipates approximately $80 million in pretax annual synergies.

Oh yes, this is a big deal. And of course with any deal of this magnitude there are positives and challenges.

On the plus side, the merger works for the companies in strengthening consulting areas they lacked as standalone organizations. This may facilitate expansion into new consulting markets, such as emerging countries in Latin America and Asia Pacific. The merged company will have greater geographic coverage, increased service breadth and perhaps stronger communications and survey capabilities, which will enable a more complete HR services portfolio. Further, Watson Wyatt’s technology offerings will likely enable stronger solutions, particularly within performance management and compensation, two current hot button topics due to pressures put on HR departments to achieve success without salary increases. And finally, office spread potentially allows the Watson Wyatt side to enter new administrative markets through existing Towers Perrin locations. However, this would be a longer-term strategy as one would expect that growing existing market share would take priority over new market entry per the current economic climate.

On the challenges front, the integration of two such large organizations will take a long time (and at no little expense), and will unquestionably be unsettling to employees, existing clients and prospects alike, particularly as consolidation efforts will likely have a negative impact on morale and employee retention. There will also be layoffs due to redundancy, resulting in competitor’s ability to snatch up strong talent. And, given “big fish/little pond, big pond/little fish”, there are undoubtedly prospects that will prefer to work with smaller professional services firms.

One area I think will be very interesting to monitor is the extent to which Towers Watson maintains Watson Wyatt’s level of service delivery in benefits administration outsourcing. We estimate $300 million of Watson Wyatt’s total FY08 revenue of $1,760,000 can be attributed to benefits administration services. That represents nine percent of Towers Watson’s anticipated annual revenue of $3 billion, which is no small potatoes given that it’s a recurring revenue stream, as compared to one-off consulting engagements. On the other hand, integrations of this scale promise to be bumpy, and benefits administration outsourcing service levels could, as a result, decline, even if temporarily. And attitudinally, existing clients may well be cautious about staying with such a large organization, and some may even prematurely jump ship due to these concerns. As many questions loom, we’ll be keeping an eye on this space.

Finally, we believe this represents an opportunistic merger based on the value of the deal due to current economic conditions, and is unlikely to herald a glut of such transactions within HR consultancy organizations, certainly not on this behemoth scale.

Until next time, happy sourcing!

Helen Neale, Research Director, Human Resources Outsourcing, NelsonHall