NorthgateArinso acquiring Convergys’ HRO operations opens up new options, signals good news for buyers.
By Jeff Croyle
Less than a year ago, with both Fidelity and ExcellerateHRO exiting the multi-process HRO market, buyers and industry observers shared a valid concern that the HRO market would be dominated by Hewitt and IBM.
At that time, Accenture’s management team was more focused on selling a full suite of learning and recruiting services than the workforce administration (WFA) and payroll services that buyers wanted, and ACS had stopped pursuing complex HRO opportunities in favor of finding the first client for its newly announced SyncHRO platform. Convergys (CVG) had announced $500 million in implementation losses on its two largest HRO deals, making its future uncertain in the HRO market. Then, in early March 2010, NorthgateArinso (NgA) announced that it was buying Convergys’ HRO operations.
Reduced competition is rarely good in any market, but reflecting on discussions with management from both firms, we see lots of upside for the HRO market that has resulted from the NgA/CVG acquisition.
On March 4, 2010, NgA and CVG signed a definitive agreement for NgA to acquire CVG’s HR Management division, which generates about $250 million in annual revenue. The agreement is expected to close around the end of the second quarter of this year and calls for a cash payment of $85 million at closing and another $15 million distributed over the next three years. For its investment, NgA gets CVG’s HRO clients (subject to clients’ consent to the change in control), access to the underlying technology platforms supporting these clients, most of CVG’s HRO employees, and access to about 10 HRO delivery centers around the world.
The marriage of these two companies produces a whole that is greater than the sum of its parts, which will benefit buyers and the newly combined service provider. NgA has always been far more successful in the European HRO market and has long wanted to expand its U.S. presence. CVG has generally been recognized as a global HRO provider, yet more than two-thirds of its covered HRO population is in the U.S.
When the acquisition is complete, NgA will have transitioned from a European-based payroll provider to a Tier 1 global HRO provider. According to TPI’s Prevalence DatabaseSM, which tracks WFA contracts for companies with 10,000 or more employees, the combined organization will be in second place behind Hewitt in both the largest number of HRO employees supported and the most HRO contracts.
NgA has already been tapping into the financial backing of its owner to plug some gaps in the company’s service offerings. Since KKR took the company private in 2008, NgA has purchased Neller, a software as a service (SaaS)-based payroll provider in Australia, and has acquired CIAN, a Netherlands-based payroll provider. Both of these acquisitions are relatively small compared to the $100 million purchase price for CVG’s HRO operations, but it is reassuring to know that KKR sees value in the HRO market and is willing to invest in it.
For Convergys’ HRO clients, any clarification in the future direction of their service provider is good news. As CVG has been preparing its balance sheet for some time in anticipation of this sale, the company has eliminated most HRO investments and has focused on just meeting contract basics. As a result, its current HRO client base has a pent-up demand for new functionality and innovations that NgA is expected to support.
Although CVG has been successful in signing renewals with at least eight of its HRO clients, the provider has been unable to sign a single new HRO client since the Johnson & Johnson engagement in 2007. So in this case, the combination of a large HRO provider that had lost its way with a new, well-funded upstart is a welcome addition.
In the last two years, Hewitt and IBM have been the major winners in new multi-process HRO contracts, leaving their competition to fight for smaller pieces of business. But now that is changing. Some major developments since late 2009 also seem to be expanding options in the marketplace. Buyers will be happy to know that Accenture’s new management team has returned the company to selling WFA and payroll services, and the company has recently signed three confidential HRO contracts. And Xerox’s backing of ACS now has that organization aggressively pursuing large, complex HRO deals again.
The new NorthgateArinso is a great blend of two organizations that makes for a new contender in the large HRO market. Acknowledging the market presence that NgA has after this acquisition is completed, we again have a solid roster of well-known, experienced HRO service providers in the market. This new competition should bring about more innovation and keep costs down, which we believe is good news for buyers of HRO services globally.