In Search of the Elusive Rollup

Usually, this column is for buyers, but this month the focus is on providers because what they are going through will ultimately impact you, the buyer.

by Harry Feinberg

As I write this, the Dow Jones Industrial Average hit a six-year high. It has not been at this level since January of 2000, when the dot-com boom was still booming and had yet to turn into a bust.

In any recent capital markets boom time, we have found ourselves awash in cash. Too much cash chasing too few deals. Quality companies are rare. And quality segments are even rarer. And there are very few segments where the growth opportunities are as high and the recurring revenue models are as plentiful as in BPO and professional services, with special emphasis on HRO. Look, for example, at companies such as ADP, Accenture, Ceridian, TALX, GevityHR, Administaff, and Paychex, which have strong recurring revenue models, and whose stocks have out-performed expectations repeatedly.

This HR BPO market is hot. HRO is like crack to private equity. And, in fact, other sectors are like crack to private equity as well.

If you had a magic tool that allowed you to peer into the dream sequences in the minds of private equity investors, you would often see visions of something called a “roll up.” A “roll up” is where an investor will acquire several complementary firms, smash them together to wring out all the expenses, sometimes taking public companies private to avoid the harsh spotlight of public markets, invest some money in marketing and management, and voila, you have a huge gainer.

Here is the only problem with this dream. It is nearly impossible to do. The roll-up road is strewn with the dead bodies of thousands who had good intentions and lots of cash, but the wrong deal or wrong management. The list is large. The PEO industry has one of the largest rosters of roll-up failures that we can think of. Remember HR Logic, SES, AMS, and EmployeeSolutions? All well-intentioned, fairly well-capitalized companies, but all resulting in huge losses, a few huge bankruptcies, and, in the case of SES, even a couple of long jail terms.

The successful roll up is the work of an artist. Someone whose bankroll is as big as his managerial experience and who also has a stable of strong leaders at his side. This is someone who can command client respect, knows how to keep all the stakeholders aligned with the company’s mission, and who knows where all the accountabilities lie. This is someone who knows technology, someone who knows service excellence. Artists like these are rare.

And here is the problem of the artist in a boom market like today’s. There is a lot of money sloshing around looking for fine art. But as any artist will tell you, money does not determine good taste. Taste is in the taste buds of the beholder. And beholders are rare too. So you are getting the picture: lots of money chasing rare art made by rare artists.

If you go to and search the resource guide, you will see the listing of about 1,500 firms in 18 service categories. Somewhere in there are the rare pieces of art I am talking about. And in some cases, the art is unlisted. A mystery wrapped in a riddle.

I have led you this far so I can share the benefit of my 20 years looking at art—some fantastic, some downright horrible. So here are my three rules for finding art in a confusing gallery of HR BPO providers:

  • First, follow the management. Who are the operators who have made big winners? Where are Jim Madden and Kevin Campbell of Exult? Where are Tom Sinton and Jeff Bizzack of ProBusiness? What about all those ADP executives? How about those Ceridian guys?
  • Second, follow the private-equity people who have made big winners. Can you say General Atlantic? How about Frontenac? Have you looked at Warburg’s success rate lately?
  • Third, ask a bunch of HR BPO customers what they are looking for. Is one-stop shopping a high priority? Is RPO a high value-add? Do they need outsourced finance and accounting functions as well?

Finally, if you are still confused, call me. I may not have all the answers, but at least I know the right questions to ask.

Tags: Contributors

Related Articles