Modesty is the Order of the Day in Big HRO

As the earnings reporting season rolls on, some of the HRO heavy weights are reporting modest revenue growth for the second quarter 2010:

• ADP  Employer Services  $1.6 billion, up four percent

• Aon Consulting  $317 million, up six percent

• Mercer $838 million, up one percent  

There was no exuberance, rational or irrational, among the reporting executives. There was modestly cautious optimism based on some growth, strong pipelines and faith in that the cost-cutting actions taken during the downturn will continue to pay margin-enhancing benefits.

Benefits outsourcing revenues were stable at Aon Consulting ($51 million) and Mercer ($161 million). The hot action again seemed to be outside of the U.S., with health and benefits doing particularly well, and compensation consulting also up.

While ADP does not break out HRO, it did say revenue in the U.S., beyond payroll services, grew six percent. ADP Employer Services revenues are now 20 percent international, largely from payroll, and the global growth rate is expected to exceed that in the U.S.

Moderating a nice quarter is continued pricing pressures, client reluctance to make spending commitments on new outsourcing, and a slow return of discretionary spend on projects and other services. Mercer saw a nice sequential increase quarter to quarter in talent management and rewards, which it considers may be a bellwether of improved conditions.

Vendor operating margins have held up relatively well once actions were taken to lower expenses in line with lower incomes. ADP’s took a small dip of 3.2 percent because it has chosen to hire ahead of the full upturn, adding about 300 heads in sales and service. Mercer feels it is poised to move quickly to capture increased opportunities as they appear.

Aon Consulting will, of course, be busy with planning and then integration when it becomes Aon Hewitt. In commenting on the merger, Mercer was comfortable that, overall, it will be a stabilizing force in the market and a confirmation of Mercer’s own three pillars of consulting, outsourcing and investment services. Further, it expressed confidence in its ability to compete in the changed benefits landscape.

Still, it sure sounds likely that it will add something to bulk up a bit as well. MMC, Mercer’s parent,  has $1.5 billion in cash, with more coming in from the sale of Kroll. While it is perhaps not iminent, do expect to see Mercer make a move by the end of the year.  Any speculation on where it may add? Mercer is already strong in consulting, and at $2 billion per year, would it add in outsourcing, or perhaps investment services, which is its smallest, yet nicely growing unit?

Linda Merritt, Research Director, HRO, NelsonHall

HRO Total Contract Value Jumps 38 Percent in 1H10 – Where are the Gains Coming From?

During our Quarterly BPO Index webinar last week, NelsonHall CEO John Willmott reported that HRO total contract value (TCV) revenue increased 38 percent in 1H10 in a year-over-year comparison to 1H09. While HRO’s gains weren’t as great billions of dollars-wise as other BPO segments such as multi-process or industry-specific BPO, it is good to see the start of an upturn.

So where are these gains coming from? Forty-five percent of the contracts were signed with North American organizations, 43 percent were awarded to European enterprises (of which two-thirds were based in U.K.), and organizations in Asia Pacific accounted for the remaining 10 percent. And by service type:

• Recruiting – 32 percent of deals – including contract wins by Hays, Manpower, Kenexa, OchreHouse, Pinstripe, CPH Consulting, Alexander Mann Solutions, The RightThing, KellyOCG and PeopleScout

• Payroll – 22 percent of deals – including contract wins by Capita, MidlandHR, Raet, NorthgateArinso, ADP, TDS and Ceridian

• Benefits Administration – 20 percent of deals – including contract wins by Workscape, Aon, Secova, Mercer, Convergys and Xafinity

• Multi-process HRO (MPHRO) – 14 percent of deals – including contract wins by Accenture, Ceridian, ADP, Xchanging and Hewitt

• Learning – Eight percent of deals – including contract wins by Edvantage Group and General Physics

• Other HR – Four percent of deals – including talent management-related contract wins by Kenexa

Overall, I was not surpised with the above breakdowns as they were very consistent with the predictions in our June 2010 quarterly HRO Confidence Index.

Digressing a bit here to add to the buzz about Aon’s acquisition of Hewitt…while much written and water-cooler discussed has been about benefits administration, a sizeable amount of Hewitt’s revenue comes from MPHRO. A good example of this is Hewitt’s five-year contract renewal with International Paper, announced in April 2010.The renewal will support 40,000 International Paper employees with payroll, workforce administration, health and welfare administration, recruiting support, SAP application support and help desk, call center and HR manager support, learning administration and flex staffing management services. Given the amount of revenue coming from Hewitt’s MPHRO client base, I believe Aon will not only happily want to continue to support these existing clients, but also want to continue to grow the MPHRO business.

Although most new MPHRO contacts will likely not be the mega deals of yesteryear, reducing the number of suppliers in the outsourcing portfolio continues to grow in appeal among buyers. If buyers are satisfied with their MPHRO deals, they will continue, albeit in smaller fashion, to benefit both buyers and providers.

Gary Bragar, Senior HR Outsourcing Analyst, NelsonHall