by Jay Whitehead

HRO Today goes one-on-two with Jim Madden and Kevin Campbell, the Chairman/CEO and President/COO of Exult, who have often been credited with single-handedly defining the end-to-end HRO space.

They often complete each others’ sentences. They are seen as two halves of the same whole. Their complementary skills—Jim Madden’s public flair and respected capital markets profile and Kevin Campbell’s deep domain and operating expertise—have been cited as the reason for Exult’s prodigious success in landing Global 100 clients.

Some of you know the story already. Jim Madden, a former CFO of IT outsourcer MCI Systemhouse and Booz-Allen & Hamilton consultant, incorporated Exult in October of 1998. He raised capital from General Atlantic Partners and was off to the races with a unique value proposition: end-to-end HR outsourcing for the Global 500. His first big clients—Tenneco, BP, and International Paper—set the pace for all grand-scale HRO contracts to come. Their scope was vast, they guaranteed mighty savings and process improvements to their customers, their client acquisition costs were high, and the recurring revenue from the multi-year contracts would provide investors a strong return.

Exult went public in June of 2000 at $10 a share, and hit $20 a share several times in late 2000 and mid 2001. The June 2004 announcement that Hewitt would purchase Exult for $690 million in stock pushed Hewitt’s annual revenue growth projections to 35 percent for fiscal year 2005. Since the announcement, Hewitt’s stock has hovered around the $27-$28 range. Wall Street analysts, sourcing advisors, and HRO buyers have been generally supportive of the merger. On the eve of the finalization of Exult’s merger with Hewitt, HRO Today spends some up-close-and-personal time with the pioneering executives to whom all in the HRO industry owe a debt of gratitude.

Outsourcing Today: In ten years, we are sure that Exult’s merger with Hewitt will be looked back upon as a watershed event in the history of the now $55 billion HRO industry. From each of your points of view, what does the deal give Exult clients?

Jim Madden: Additional resources, feet on the street, financial heft, improved service offerings, and complete integration with payroll.

Kevin Campbell: It adds more valueadded consulting services, and Hewitt’s expertise in pensions and defined contribution plans.

OT: What improvements or changes will Hewitt clients see as a result of the merger?

JM: Industrial-strength transaction processing capability.

KC: Payroll provision at scale on Peoplesoft, SAP, and Oracle, and a recruiting footprint that includes 250 centers.

OT: When will both companies’ clients experience the advantages of these combined benefits?

KC: Some clients are already experiencing these benefits, although technically, the deal doesn’t close until October 1.

OT: With the combination of the two companies, some have said that the HRO market is moving toward some pricing standards. Is this true?

KC: If by standards, that implies commodity, I disagree. If you mean in terms of scale, I agree. Sourcing advisors have had the largest impact on standardizing pricing, probably more than this combination of companies ever will.

JM: On the heels of this combination, a number of companies will be playing catch-up. We have more than 20 services from one provider. Lots of folks are now teaming up to compete. We bought Reloaction [a relocation company] earlier in the year. Now we’re a complete suite.

OT: What will this mean for each of you personally?

JM: I now have two jobs: keeping Exult running and posting results, and getting the deal done. I will be involved in the integration and transition team. It’s an exciting time.

KC: In the new organization, I run the HR BPO function. For HR BPO, I run it all—sales, marketing, and new products.

OT: What about the cultural fit between the two organizations? How is that working?

KC: There are more similarities between the companies than differences. For Hewitt, outsourcing is 70 percent of revenues, just like Exult. Exult is more entrepreneurially focused, and Hewitt is more about scale. We were both already looking to be more like each other. We believe this is a one-plus-one-equalsthree situation.

OT: One of the other watershed events of 2004 has been the entry of IBM BTO into the HRO market. What do you think will be the impact of this new competitor?

JM: In the immediate term, we don’t see them as a major active competitor. Right now, we are in 20 deals, and they don’t seem to be in any of them. Right now, IBM seems to be focusing on back office.

KC: They are picking their spots very carefully. Certainly, IBM gives credibility to the space. But they still have a lot of learning to do and need to recognize how hard this is. However, nobody doubts that they can compete.

OT: The market for pure-play HR consulting seems to be drying up. Lots of consulting firms have either gone away or been absorbed by outsourcing players. Why?

KC: Rather than consult, clients now want you to give them the whole answer and solution. Design the solution, build it, and run it—rather than design it and run away. Having a consulting capability in the early days was much more a differentiator than it is now.

OT: We have heard that the decision cycle for HRO contracts is increasing due to several factors. Have you experienced this, and if so, why?

JM: Two years ago, the cycle was 9 to 12 months without an sourcing advisor. Now it is routinely 12 months and involves a sourcing advisor. There is a frantic level of activity with RFPs and sourcing advisors right now. And of course, we have to deal with all this activity and the merger on top. Prior to the Exult-Hewitt combination, there were four deals we were not in that we are now participating in. I guess that means that size does matter.

OT: Do you think that the upcoming Presidential election on November 2 will have much impact on the activity in the HRO market?

JM: I don’t think it will have much impact on the pace of action, but it will impact the visibility of offshoring. There is a hysterical sensitivity to offshoring.

KC: I agree that the real political issue right now is offshoring.

OT: To wrap up, we’d like to ask both of you to gaze into your crystal ball and look ahead 24 months. In two years, what do you think the news will be like in the HRO business?

JM: One, our merger will be the first step to a consolidation. If there are 20 or more companies among the Tier 1 HRO providers right now, there will be less than 10 two years from now. And two, there will be more than 100 Tier 1, enterprise-level HRO deals signed by then. That will represent more than a tripling in just two years. That is significant, since many of these deals are in the billions of dollars in value over their life.

KC: I agree with Jim that the first theme will be consolidation. The second theme will be that some providers who are thinking now about getting into HRO will realize that this is too hard and will move on to other things. Another thing I think we’ll be discovering is that content actually counts—it matters. The IT outsourcers will not be big players eventually, because to compete, they have to know something about the domain. And last, we’ll see that payroll and benefits integration is critical to the employee experience and for suppliers to offer the best financial profile to customers.