As head of the company’s enterprise HRO business, Jay Rising is charged with turning around the fortunes of this profits-challenged unit. Can this former executive of ADP and American Express help the Lincolnshire, IL-based outsourcer tumble back into the black?
Taking over the reigns at a troubled company is usually an unpleasant experience, but to do so for the thorniest business unit at a troubled company might show masochistic tendencies.
Jay Rising would argue he’s not prone to self-inflicted wounds, but the president of Hewitt’s HRO business also knows he faces a mountain of a task in righting the company’s recent wayward path. Following a gigantic write-down of the company’s business process outsourcing operations in the fourth quarter of the last fiscal year—a loss of $280 million—Rising must now help guide the company back to profitability.
It was only last May when the former American Express and ADP executive arrived at the company’s Lincolnshire headquarters, ready to bail water from a listing ship at Hewitt. After all, the market leader in enterprise HRO had experienced more than a few rocky quarters, and a number of seasoned executives had abandoned ship faster than rats on the Titanic. Many outsiders wondered whether Hewitt could survive all of the costly enterprise HRO deals it signed in 2005—contracts that were not expected to turn a profit until last year at the earliest—and some still question whether Hewitt has the appetite to stay in the enterprise HRO segment. With the latest quarterly results further casting doubt on Hewitt’s longevity in this business, no wonder some observers question the company’s long-term intentions in the sector.
Rising, an Ivy Leaguer who got his undergraduate degree and MBA from Dartmouth, argued that there should be no doubt of the company’s intentions. In a recent interview with HRO Today, the 51-year-old head of Hewitt’s BPO and benefits outsourcing business assured the industry of the company’s plans for aggressive growth, explained how those recent results masked the progress of its outsourcing business, and reminded readers that HRO, even after a decade following its founding, remains an immature market.
Big Task Ahead
Those familiar with Hewitt might recall that the company, with a 68-year-history, didn’t become the market leader in the enterprise HR BPO market until its landmark $691 million, 2004 acquisition of Exult, one of the first provider companies in the industry. The merger was one deal that Hewitt shareholders might have wished had fallen through. During the past two years, according to the Chicago Tribune, the BPO business has posted losses of $918 million. Moreover, all of the goodwill that had accompanied the original buyout has now all disappeared, written off the books.
The biggest challenge facing Rising and Hewitt CEO Russ Fradin—who replaced Dale Gifford in 2006 at the helm—is profitability. After signing more than a dozen enterprise HRO deals in 2005, by far the most of any provider at the time, the company faced huge implementation costs for the next several years. While other providers also struggled with similar issues, the sheer number of accords reached in 2005 in addition to some unprofitable deals inherited from Exult has simply squeezed results. Although operating results have been improving, along with an uptick in share prices, there’s no denying the loss in value of the BPO business.
“In the last three or four quarters, we have had to sort out our numbers, and it’s been very confusing,” Rising remarked, noting that Fradin himself has labored with valuating the BPO unit’s true worth. And indeed that was reflected in the fact that Fradin didn’t even provide guidance to the Street until the most recent quarter. In announcing the year’s results, he called it a period of “stabilization and rebuilding.”
If 2007 was a year of rebuilding, then the challenge facing Fradin and Rising is that 2008 will be a year of increased expectations, and Rising, more than anyone else, will be charged with ensuring that the outsourcing business doesn’t fall short of those expectations. How well Hewitt can turn its performance around will hinge on the outsourcing market, which is divided into two key segments for the global provider: enterprise HR BPO and benefits outsourcing, by far its more profitable performer. According to Rising, there is ample opportunity for Hewitt to further grow the core business even as the HR BPO segment slows.
“In our core business, we have extraordinary aspiration for growth,” said Rising, who also helped oversee ADP’s HRO offerings when he ran that business as president of the National Accounts Division. “We are still in a growth mode.”
Stressing that the outsourced benefits business—which encompasses components such as defined benefits, defined contributions, and health and wealth—is in a still-growing sector, Rising pointed out that Hewitt last year made additional investments to bolster the core portfolio. By acquiring RealLife HR, a mid-market provider of benefits management services, the company has better positioned itself to capture a greater share of this fast-growing segment.
Rising said that one challenge many HRO providers have faced and continue to struggle with is being able to deliver services at a reasonable profit. Establishing a one-to-many business model—the holy grail of an outsourced BPO operations—has long been a goal of service providers. Although in enterprise HRO deals a provider can never implement the same standardized services across all of its clients, most deals signed to date require a much greater degree of customization than many vendors had anticipated.
And among all of the market’s enterprise providers, Hewitt perhaps knows this struggle better than anyone else. Rising conceded that his organization in the past had underestimated its delivery costs and has paid dearly for this error in judgment, but he pointed out that other competitors have grappled with profits or have made similar missteps but with less notoriety. He cautioned that industry critics shouldn’t rush to write off Hewitt or the overall HRO market from the results during the past two years because providers have grown wiser and more selective in their choice of deal pursuits.
“I think quite frankly, we’ve learned lessons that other companies may not have learned or have not been public about,” he said, dismissing speculations that Hewitt may eventually exit the HR BPO market because of the unit’s financial difficulties. “At our core, we are an HR company. At the end of the day we do have the most clients and we are the market leader.”
Indeed, according to sourcing advisor Everest Research, Hewitt continues to be the market leader, with a solid share of companies with more than 15,000 employees. It is especially strong in its core practice in North America, where Rising said Hewitt continues to focus most of its efforts. Although the strongest demand for enterprise HRO these days stems from Europe, he said Hewitt is not actively pursuing deals with buyers there. Instead, he noted, the company views the region “opportunistically.”
Despite its domestic focus in enterprise HRO, Hewitt remains an important global player, delivering services to some of the largest multinational HR organizations. Among its clients are household names such as Marriott, PepsiCo, Thomson Corp., and Wachovia—all companies with considerable multi-country presence. So even though Rising has no plans to actively pursue new Europe-based clients, it continues to have a global footprint through servicing its existing base.
Limiting the geographic scope of Hewitt’s pursuit may be just one indicator of how the industry is evolving. By being more selective in their deal pursuits and focusing on clients that are a good fit for their capabilities, providers are able to leverage existing assets, not waste time going after high-investment clients, and keep costs down, which in turn benefits existing clients. This market transformation has led many providers to better define their ideal clients.
“The larger and more complex the deal, the better it is for us,” Rising said in explaining suitable buyers for Hewitt. “We are more North American-centric and are looking at companies that want to leverage our strengths, utilizing platforms such as Peoplesoft and SAP.”
He noted that the lift-and-shift models early on in the industry were highly unprofitable for providers and rather disappointing to buyers. These deals failed to realign processes, failed to reward providers for innovations and investments, and unrealistically raised expectations among HR leaders that services would dramatically improve along with significant cost savings. It wasn’t until the industry began focusing on transformational deals that organizations began to realize significant benefits from outsourcing.
“As far as BPO is concerned, clients want to outsource but they still want things their way,” he said. “Thinking that somehow things are going to be different through labor arbitrage or a change in firewall is not reality.”
But as the industry continues to evolve, he added, new deals are built on the best practices and not lift-and-shift. More importantly, providers and buyers have a better grasp on what they each need from a deal and developed better vetting processes to ensure a good fit with their partner. And having learned this through the past two turbulent years, Hewitt is better positioned now to meet the future needs of the HRO market.
Still, considering the troubles that the company has had in the comprehensive HRO business, does Rising think the Exult acquisition has added to the company’s fortunes? He said as a pure-play HR company, Hewitt does benefit from participating in the enterprise HRO market, even if those advantages aren’t so apparent sometimes.
“This business serves a lot of strategic purposes for us, and a lot of time that’s not reflected in the numbers,” he added.