Industry consolidation is still coming to HRO—just not in the way you expect it. Look for the guys with fat wallets to start the check-writing process.
In any immature market, it’s sometimes difficult to keep track of the participants. That’s because a fast and furious flight of capital in and out of the business can abruptly alter the landscape. And usually in a nascent segment, more dough is thrown around than at a Dunkin’ Donuts at 3 a.m. But strangely, this hasn’t been the case with HRO—or at least not recently.
The consolidation wave we have been predicting for several years now refuses to make an appearance. Sure, you can point to smaller acquisitions here and there—even a large buyout such as that of TALX by Equifax is around a point solution and not end-to-end service—but the real tremor-inducing mergers have eluded this space in recent times. Why is that?
Well, the jury is still out on whether enterprise HRO is an attractive market segment. Consider that HRO is a long-term investment, with most enterprise deals not expected to turn a profit for the service provider until year three or later in the contract. Shareholders are an impatient bunch; having them wait for quarterly results already stretches their attention span, so to ask them to delay gratification by three years or more most likely won’t fly.
That’s good and bad news for outsourcing buyers. Nothing hurts a market’s credibility more than fly-by-night operations, and usually in budding segments, all sorts of questionable vendors come out of the woodwork looking to make a fast buck. But the HRO model prohibits the fast buck, which for buyers is good news.
What it means is that most enterprise, end-to-end vendors came into this space to stay. They’ve made the requisite investments, patiently waited for the market to develop, and have staked their claim of the business. This is long-term thinking. Remember, nothing kills long-range planning like quarterly reports, and there are no quarters in this game—just years.
Buyers benefit from the long-term mentality. They don’t have to worry about whether their providers will be around tomorrow—unless the business has been run very poorly. This long-term approach is also usually accompanied by a willingness to invest in technology, processes, and people around the world.
They’ve learned that buyers during the past six years have figured out how to sniff out weak competencies.
Moreover, a good number of HRO providers have learned not to acquire business for the sake of revenue growth—a wise move by the collective provider community. HRO has achieved enough critical mass, so providers don’t need to win clients just to fill out their portfolios. It’s a proven commodity.
But here’s the other shoe. End-to-end enterprise HRO has hit the proverbial wall, and the fantastic growth we witnessed just two years ago has gone the way of the $2-a-gallon gas. Know how I know? Seen any new vendors in this segment lately? Some offshore BPO providers have made negligible noises in HRO, but a truly dynamic market usually elicits lots of splashing. Even though service delivery capacity is constrained, not too many new players have decided to enter the game.
Another telltale sign of a frenetic market is a flood of new money—whether venture or IPO—into the vendor side, but not too many checks have been written to big enterprise providers in the past couple of years. Like I said, the jury is still out, and the purse-string guys are on the sidelines.
So what does it all mean for the consolidation wave? We still believe a roll-up will occur but not in the same way that we previously thought. Most likely, acquisitions will encompass point-solution guys, much like the TALX deal. Those with demonstrated success in recruitment, learning, and other segments will be the targets. (We know this because a lot of venture guys—you know, the ones with the big checkbooks—have been calling our offices looking for market intelligence.) More capitalization usually means more innovation and—at the point-solution end—possibly more integration and less market confusion. After all, we can always use more donuts.