Catching Up with ADP

Linda Merritt, HRO Research Analyst, NelsonHall

The recent passing of long-term U.S. Senator Frank Lautenberg reminds us of his early role in the formation of what became ADP, a founding member of HR outsourcing. In the early 1950s he was engaged in selling insurance and sold a policy to two young New Jersey businessmen, Henry and Joseph Taub. The Taub’s were pioneering a then new concept; payroll outsourcing. The brothers knew payroll processing and Lautenberg knew sales and marketing. Lautenberg took a risk and joined the Taub brothers and together they created a new industry.

Establish Operating Principles

By the time the company incorporated in 1961 the three leaders established principles that still guide the company some 60 years later. Following are a few of the principles they put in place.

Focus on Business Markets that Offer Significant Growth Opportunities

ADP has always pursued growth through new market opportunities, both by expanding it service lines and by entering new geographies. Much of the early growth was through acquisitions, as well as organic growth. Lautenberg retired as CEO from ADP in 1982 having made over 100 acquisitions!

Over time, ADP became a global player. An early acquisition was GSI, a large payroll and HR services company in Europe. The latest 2013 acquisition is Payroll S.A. to expand LATAM payroll capabilities to Chile, Argentina, and Peru. In the last few years major acquisitions included Workscape (benefits), The RightThing (RPO) and SHPS (benefits).

Embrace Technological Change to Enhance Product and Service Offerings

By the early 1960s ADP had moved from manual operations to the pre-computer punch cards and on to leasing its first computer: an IBM 1401 mainframe. That willingness to continue to embrace the new is seen in ADP’s successful launch of a series of cloud-based SaaS HR technology and BPO service platforms, including Workforce Now (1k-20K employees), Vantage HCM (50-3k employees), and GlobalView for multi-nationals. Together, the three services support more than 40k clients.

The company has also launched extensive mobility options, including RUN powered by ADP for small business mobile payroll and ADP Mobile Solutions for access to a broad range of information and transactions spanning time and attendance to benefits and pay cards.

Attract and Retain Motivated and Talented People

ADP has grown into a $10bn global outsourcing business with one of only four remaining AAA credit ratings in the U.S. With ~570k clients across 125 countries, we know customers support its line-up of services and proprietary developed technologies. What about people? A few recent awards tell the story:

• Ranked second on Fortune’s 2012 list of America’s Most Admired Companies in Financial Data Service
• Ranked in the Top 50 on IDG’s Computerworld 2012 list of the 100 Best Places to Work in Information Technology (IT)
• Named to the 2012 Working Mother 100 Best Companies, for the third time.

We therefore need to ask the question of prospective purchasers: does your prospective or current HRO service provider have long-term guiding principles and can you see evidence of them in action? Because ADP does.

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The Parable of IBM and Kenexa: Part I

Linda Merritt, HRO Research Analyst, NelsonHall

I have not seen such a range of varied opinions from members of the HRO and HR tech communities as those about IBM’s acquisition of Kenexa. The commentary showed that many were taken a bit by surprise and weren’t sure how to analyze the news that IBM was acquiring Kenexa for $1.3bn.

IBM Bought Kenexa?

The surprise was not the purchase of Kenexa, which was foreshadowed by the acquisition of Taleo by Oracle and SuccessFactors by SAP. It was more about the fact that IBM was doing the purchasing.

A few  thought that ADP might make such an acquisition since it had already expanded its benefits capabilities with Workscape and SHPS and its RPO capabilities with The RightThing, so wouldn’t talent management make sense? Speculation continued, perhaps Mercer, Ceridian, or even ADP would be the target of an acquisition or merger.

IBM itself was considered likely to continue its acquisitive ways with something more in the talent management / HCM space. Likely targets mentioned included Cornerstone OnDemand, SilkRoad, SumTotal, Saba, with a few suggesting Halogen, Peoplefluent, and others. In short, someone is going to buy something else.

The Meaning of the Deal?

What does this mean we all asked, much like the tale of the Blind Men and the Elephant as was suggested by the leading light Naomi Bloom. Early viewpoints on the acquisition included:

• Continuing IBM’s move into social media and analytics
• Continuing IBM’s move into professional services including strengthening RPO
• Disrupting the HCM market and becoming a talent management player
• Delivering value to the HR executive
• Delivering value to the C-suite and bypassing HR
• Primarily being a HRO deal with some software attached
• Primarily being a software deal with some HRO attached
• Upping competition with SAP, Oracle, Salesforce.com, and even Workday
• Selling into Kenexa’s IBM-like customer base of Fortune 500 clients.

IBM’s news crossed many markets including HRO, HCM, HR tech (software, platform, cloud, etc.), BPO, social media, talent management, and financial and market analysts. Each commenter viewed the same information through the lens of their personal perspective and professional interest, much like the blind men touching different parts of the elephant.

With so many options before it, including IBM’s own announced intentions for the addition of Kenexa, the opportunities are new and exciting. Given the inherent complexities, IBM will face many risks as well. Look for more on The Parable of IBM and Kenexa coming in Part II.

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Benefits Administration Poised for a Good Year: Part 2

Earlier this week, I highlighted revenue growth reported by benefits administration service providers. In addition to the positive earnings reported, there are other signs indicating that 2012 will be good to benefits administration including acquisitions, hiring, and surveys.

There have been a few strategic acquisitions that will boost benefits administration revenues for vendors this year. For example, ADP’s benefits administration business will see a nice increase from SHPS, which had annualized revenues of ~$80m. Morneau Shepell’s acquisition of SBC Systems Company will modestly increase its revenues, and more importantly will strengthen the company’s presence in the U.S. Finally and most recently announced is Towers Watson’s acquisition of Extend Health, which will enhance its benefits administration offering by adding exchange services for retirees.

Another positive sign of expected future growth is the hiring of personnel. Towers Watson announced that it will be hiring employees within all of its segments. The benefits segment, specifically, will get an additional 172 employees, 60 of which will be for technology & administration solutions (TAS).

Finally, regardless of the constitutionality of the PPACA, benefits administration will likely flourish as compliance becomes increasingly complex as new regulations are issued or as older ones are amended for other federal laws such as COBRA, HIPAA, FMLA, etc.

A recent study by ADP cites that health care reform and compliance complexity are expected to lead to more benefits administration outsourcing. The survey, which included input from 504 HR and benefits decision makers in the U.S., found that ensuring compliance is one of the top reasons cited for outsourcing benefits administration.

In a recent article, Mercer is also advising employers to act to ensure compliance and to implement cost-control strategies now regardless of health care reform. It recommends the following, which are all dollar signs for benefits administration service providers:

• Managing the cost of dependent coverage, which will strengthen demand for dependent eligibility audits and verifications
• Shifting to CDHPs, which will lead to an increase for reimbursement account administration services including FSAs, HSAs, and HRAs
• Offering cost-competitive health coverage, which will boost demand for private health care exchanges for both active and retired employees
• Encouraging a healthier workforce, which will lead to the implementation of wellness programs (i.e., health assessments, biometric screenings, etc.).

Benefits administration is one of the oldest foundations of HR business process outsourcing and it is also one of the largest segments in revenues and yet it remains vital, adaptive, competitive, and ready for continued growth!

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

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