Another Exciting Year for the HRO Industry in 2005

In the new year, watch for a new supplier, growth in multi-tower deals, and hints of trouble after the honeymoon.

by Michel Janssen

As 2005 draws to a close, we can certainly look back at some tremendous activity in this space. No doubt the concept of HRO is a major discussion point for HR executives and their teams. We at Everest think most HR buyer executives are convinced the trend is real; what they are wondering is: “How does this impact me?”

The compelling event to drive outsourcing in 2006 will be avoiding both the capital expenditures and the risk associated with a large-scale implementation or upgrade of their HRIS systems. Yes, there is an assumption of lower cost and better delivery with outsourcing, but if HR executives face having the cap-ex conversation with the CFO, they almost always look for a better alternative.

Below is a reflection of what we saw this year and what to look for going into 2006:

Rapid growth continued. While we still have weeks to go in the year, it looks like growth rates in annualized revenues are going to exceed 30 percent. The number of signed contracts already exceeds last year’s 34, and the amount of activity in the pipeline is substantial.

Outsourcing firms marry HR domain expertise. Of the three major relationships formed this year, it looks likes the EDS/Towers Perrin (ExcellerateHRO) merger is the first to produce tangible wins. The jury is still out on the ACS/Mellon combination.

Convergys surprises the market. It is fair to say that the real surprise supplier of the year is Convergys. It has put together an impressive series of wins, including one of the largest deals in the history of this industry with DuPont. The market will wait and see if it can deliver and make money. Based on early calculations of total contract value (TCV), it looks like Convergys is going to move from a rather distant seventh place all the way up to third in terms of market share based upon TCV.

2005 was the year of execution. Certainly 2004 was the breakout year in terms of number of deals sold, and one could argue that 2005 was the year that these same management teams had to deliver. Many of today’s HRO suppliers are still in investing phases. Fidelity comes to mind as the boldest of the suppliers when it actually made a decision to pull back on its sales force to focus on investing in their platform and getting delivery right for the long term.

Mid-market roars to life. One of the major trends that we identified at the end of last year was a real trend toward deals with companies with fewer than 25,000 employees. This year we watched ADP and Ceridian fire up their sales teams to take their gigantic base of payroll clients and move them upstream to a more robust HRO relationship. ARINSO is quietly winning clients by helping them use a streamlined SAP, and Aon is about to announce some wins with clients in this segment as they become the first major HRO supplier to utilize Ultimate Software.

Multi-tower: hype or reality? There are at least two major suppliers (IBM and Accenture) pushing the multi-tower outsourcing relationship (HRO, FAO, IT, CRM, and/or procurement). Their contention is that there are transformational opportunities to be had for outsourcing multiple G&A areas to one supplier. The jury is still out on this kind of outsourcing strategy, but it certainly makes sense to IBM and Accenture because it allows them to out position many of their more nimble, best-of-breed pure plays.

Are deals in trouble? We hear rumors on a daily basis about relationships in trouble. We discount many of them as every relationship has its good and bad days. What can’t be discounted are those that end in divorce or result in movement from one supplier to another. While I labeled 2005 as the year of execution for the supplier community, it is clear that this trend will likely be a make-or-break issue for several deals in 2006.

Will there be any new entrants? There are certainly some obvious players sitting on the sidelines looking for a way into this market. HP comes to mind in this category, but there are also numerous rumblings about big money coming together to provide a fresh start alternative by doing a rollup strategy. While the barriers to entry are certainly high in this industry, it seems that any long-term BPO strategy has to include HRO. Stay tuned for another exciting year.

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