Another round of consolidation and merger transactions is sweeping the outsourcing business, and our CEO examines the ‘deal’ behind the deal business.
Almost every day, the landscape of the HRO and the broader BPO space is changing. Companies are being bought by each other and by private equity firms. Recent headlines have blared such notable announcements as “Fidelity National and Thomas Lee Partners Buy Ceridian” or “ACS Announces Acquisition by Cerberus” or “Northgate Acquires ARINSO.” Why are there so many investment bankers chasing deals in the HRO space?
Here’s why: because sophisticated investors want to own equity in good companies such as Ceridian. Because ACS is a proven powerhouse with an aggressive vision, growth plan, and proven leadership team. And because ARINSO has carved out a niche in Europe and has huge potential for further growth in the EU and worldwide; it also complements the great success story and product suite that is Northgate.
What does this trend mean to the industry? It should make us feel great about the future. It strengthens the argument for HRO and is a clear validation of the business model. We can be very hard on ourselves. We are an industry obsessed with customer service. We strive for perfection, and we have often missed that target badly.
But we dwell and even revel in the self-flagellation of the industry’s early struggles. Project managers and client liaisons want a month in which everything unfolds perfectly, and they will never have one. When problems arise, however, we hyper-focus on them.
This reminds me of the early philosophical debates about Six Sigma. As a former provider, I did not understand why the aspiration was not to perfection. A
Six Sigma expert once explained to me that it might be as costly to crush the last one percent of error as it was to get the first 99 percent. Unfortunately, the one-percent pain always draws more attention.
In HRO, we have not had perfection in execution, and we have had much talk of the struggle. This month, however, the deal news validates the BIG PICTURE. HRO is a great business with a great model. Whether single tower or end-to-end enterprise, the deals offer long-term, recurring revenues and stable cash flows. Well-managed HRO providers are, in short, a good investment, in a good industry, and investors have recognized that the marketplace is coming of age.
What does this mean for the customer/practitioner? Wall Street is telling Main Street that HRO is here to stay and that when you enter into a contract, you can be assured that we are well past the moments of experimentation and tentative exploration. The industry and your provider will be with you for the duration of a long-term agreement.
The recent spate of news follows the consolidation trend that you see among industry leaders in many global markets. Part of what has historically driven consolidation in the HRO industry is the need for breadth of service and geographical reach. We have seen mergers driven by these determinants to build a global multi-tower solution set in a compressed time frame. We have also seen mergers in years past that make no sense as troubled companies or divisions come together in the fervent hope that two bad operations can live as cheaply as one, or something like that.
What’s different about these recent deals is the deliberation and the involvement of the sharp-eyed private equity firms that see and seize opportunity in growth markets. Regardless of the reasons for these providers to come to the table for a deal, professional money managers were there to greet them. Clearly, the advantage of being private also gives the provider the opportunity to get off the quarterly Wall Street earnings treadmill and think and manage long-term, which is also a benefit to the customers.
What does the future hold for HRO and the larger BPO market? Simply put: more deals. Strategic mergers as well as financial transactions will continue because it’s a great business. And, for just a moment, let’s celebrate its strengths.
