If you asked the middle-market CEOs what they want to outsource today, they might just say HR and F&A in no particular order.
Sam Borgese is explaining how his company is tops in its industry in what he calls the “third part of the day.” And I’m sure that’s a great thing, but there is a big problem. I have absolutely no idea what this thing he calls the “third part” is.
So, I figure that even though he’s a hospitality industry powerhouse as the CEO of Catalina Group—operators of 190 Carrow’s and Coco’s restaurants—my status as a journalist affords me the luxury of asking the world’s dumbest questions, even of CEOs. So I dig right in. Oh, it is restaurant jargon, he generously explains, for “dinner.” So I go back for seconds. That means the “first part” must be breakfast, and the “second” lunch, right? Right, he nods. Now I feel like a hospitality industry jargonaut.
But our interview is not about coaching me in restaurant-speak. It is actually about something else. As it turns out, Sam Borgese, whose restaurants feed 32
million people a year, outsources his company’s finance, accounting, payroll, and even some HR. And he considers himself a fan of FAO.
The Catalina FAO story goes like this: Back in 2002, Catalina was spun off by Advantica, the former owner of Denny’s restaurants. Orphaned from its corporate finance and HR departments, Catalina needed high-quality turnkey finance, accounting, and payroll functions to continue to grow. The company was faced with a classic build-or-buy decision. It decided against building and outsourced the functions. Roll forward to June 2004, when Borgese joined Catalina. At that point, the company’s FAO provider relationship had been in place for a while. As the former CEO of a couple of technology companies, Borgese knew a little something about transaction processing. And what he experienced in his first months at the company gave him confidence that the right provider had been selected. The provider’s name? Savista.
Fast forward again to March 2006. Borgese gets official notice that Wichita, KS-based Savista has just become part of Accenture, the worldwide consulting and outsourcing giant whose client list looks like the Global 1000. Borgese feels validated.
“It only confirms that our vendor selection was correct,” he says. “Now we have the $9 billion-plus assets of Accenture to count on for service delivery.”
As Borgese considers the big-picture significance of the announcement, he notes something else more important to the broader market. After all, Catalina, since it has yet to reach Fortune 1000 size, falls into what most analysts call the mid-market, generally described as firms with 2,000 to 12,000 employees. If Accenture is buying Savista, he thinks this means that Accenture is making a deep dive into the mid-market.
“When you get a big player who validates the value of the mid-market,” Borgese notes, “that’s a strong statement. It really says there is a business here. For us customers, it says we have a choice. We [now] have viable choices beyond the mom-and-pop operations.”
For Borgese, and many other veteran mid-market BPO market-watchers, the marriage of the two companies—Accenture boasts a global BPO workforce of 18,000 employees, while Savista employs 400 primarily in the U.S.—has drawn looks from across the industry for what it represents and what it could grow into. By winning Savista in a hotly contested courtship initiated last fall—a contest in which several suitors joined the fray—Accenture is now poised to become the leader in the integrated HRO/FAO mid-market. Moreover, it lends credibility to the notion that the mid-market has arrived and any provider not contemplating FAO, the fastest-growing segment of outsourcing, should simply hang up its gloves and go home.
But will the acquisition of Savista, which by some estimates had revenues of between $20 million and $30 million last year,
really make a difference to a behemoth whose net income alone in 2005 was nearly $1 billion? The head of Accenture’s BPO business thinks so, especially as he looks at the potential synergy between the two organizations.
“We think there is so much opportunity for Savista in the North American market that they will be busy just capturing that demand,” said Kevin Campbell, global managing director of business process outsourcing for Accenture. “We’ll pass leads back and forth, and certainly we will share knowledge capital and perspectives.”
Campbell said the acquisition makes sense on many levels. For one, while Accenture’s consultants are well-entrenched in mid-market companies, it has only found limited success selling outsourcing to mid-market companies. Secondly, Accenture is one of a few large BPO outsourcing providers with deep domain expertise in both FAO and HRO, and Savista is uniquely similar in its business model, albeit aimed at the smaller market.
Finally, Campbell said, the acquisition is hinged more on acquiring Savista’s proven management team and customers than on its hard assets, which will continue to operate in Wichita for the foreseeable future. On the topic of talent, Catalina’s Borgese agrees with Accenture’s Campbell. Savista’s top management, Borgese says, “is a team that is a team. They know what needs to be delivered in this space. If left to their own processes, they would be winners in this space.”
THE RACE TO THE MIDDLE
Since the early days of the BPO industry, providers have raced to capture the business of the largest employers, those with at least 10,000 lives. Those big companies had the advantage of scale and significant cost savings to be realized. But with the growth in HRO and FAO at the top end of the market, the universe of available big buyers has gotten decidedly finite. By contrast, the mid-market is large—the Yankee Group estimates that the mid-market involves more than 15,000 companies. These smaller companies are just starting to discover BPO. In the HRO market, HRO Today magazine estimates that only nine percent of mid-market companies have outsourced as many as 3 of the 16 HR functions. In the Fortune 1000 market, HRO Today estimates the number is as high as 31 percent.
The Everest Research Institute cuts the 3,000- to 15,000-employee market into even thinner slices. For enterprise-level HRO deals, involving at least 10 HR functions, Everest says only 4.3 percent of the Global 1000 have done the full HRO monty, but in the mid-market, the number is a under 1 percent. On the other hand, analysts at IDC say that mid-market firms are more than excited about trying different forms of BPO, including FAO and HRO. According to a recent IDC study on mid-market BPO, 52 percent of survey respondents claim to be engaged in some form of BPO, with HR and F&A being the two key outsourced processes. Couple those low penetration numbers and willingness to outsource with Accenture’s estimate that the mid-market segment represents $17 billion in potential in 2006 and will grow to $25 billion in potential by 2009, and you’ve got a big growth story in the making.
Jeff Bizzack, Savista’s CEO, sees the same upside picture. “Today we run a great company, but we are marrying up to a large, multi-national company with deal flow and has clients looking for mid-market solutions that we will be able to deliver very quickly,” Bizzack said. “We see this as a huge opportunity.”
Accenture’s Campbell agrees. “We now have a front- to back-office solution and all of the senior executives of Accenture and senior executives of Savista who understand the different models,” he said. “Savista has a business plan that offers services and growth for clients, and Jeff and his team will work very hard on that business plan.”
All parties acknowledge that selling and serving big clients is a different drill than working with the smaller firms. On the selling side, Accenture’s big-company pursuit teams can spend nine or more months to court a potential client. And many of those big firms are represented by a sourcing advisor, while mid-market buyers tend to go at it alone. Savista’s sales cycle is decidedly shorter. And although big-company providers often moan about needing to work with sourcing advisors, Savista’s Bizzack says he would welcome sourcing advisors in the mid-market.
“Historically, whenever sourcing advisors come into a BPO market, client counts have gone up more rapidly,” he notes. Bizzack believes that having a sourcing advisor at your side makes buyers more confident in their decisions. “I think it would help to have more mid-market advisors out there.”
On the service side, Campbell acknowledged that mid-market and large companies have different expectations and
tolerances when they outsource. For instance, the largest buyers tend to demand customized, non-standardized services, while mid-market buyers are more willing to accept standardization and care less about choice of platform. Accenture’s shared-service facilities are in several onshore and offshore locations, while Savista’s services largely come out of Wichita. Most likely, the companies will eventually merge some of those services, but Campbell and Bizzack said the plan for now is to leave Savista’s unique mid-market-oriented culture and delivery mechanisms intact but with the notion that the whole package is powered by Accenture.
WHAT IT MEANS TO EMPLOYERS
While buyers like Borgese look at the deal one way, analysts have different perspectives. On one point, though, they all agree: the development signals a turning point for the segment as it will surely attract more competition, more solutions, and simply more choices.
Robert Brown, an analyst with the Gartner Group, said the fact that additional suitors sought to buy Savista and that the segment has strong growth potential leads him to believe that other enterprise providers will look to take a similar path. While there has been little talk of impending deals of this nature, Brown said he believes several companies are positioned to follow Accenture’s lead.
“The writing isn’t on the wall at this point, but it’s a milestone,” said Brown, who pointed out providers such as IBM, ADP, ACS, Hewitt, and others may be next in line to make a play for the mid-market. Then the question is, if one of these big players wants to acquire its way into the market, who would it buy?
Several players such as ADP and Ceridian could build up from their base of small clients. But for the bigger guys—if there are few peers like Savista to acquire— they will have to build capability at significant cost over time.
“I think the market is crying out for this. Demand is outstripping supply quite aggressively. We need some of the suppliers to move down-market,” said veteran BPO analyst Phil Fersht.
Fersht added that the move certainly will accelerate the development of the mid-market segment, which for now has had a limited number of choices in bundled F&A and HR solutions. Even though Savista has been offering its services for some time, the Accenture brand, its vast network of mid-market-savvy consultants, and its sales people will help steer many more clients its way.
When asked about the competitive threat in the mid-market, Accenture’s Campbell was candid. “They always say that when people copy what you do, it is the sincerest form of flattery,” he said. “What I feel good about is I’ve got the management team. They [competitors] can stack up anything they want to, but I feel good about the combination of the Accenture brand, our assets, and the Savista management team.”
He noted that there have been no examples of companies in the large-cap segment that have successfully moved down-market or companies in the small-business sector that have successfully moved up-market. “We fully expect to dominate the market,” he added.
Even if no other large outsourcing provider comes along soon with an integrated F&A and HR offering for the mid-market, the Accenture-Savista marriage will at least broaden services on its own. Doug Harrison, the chief operating officer of Savista, said the company may eventually offer even more integrated services to small and medium-sized companies.
“Our new parent brings vertical expertise as well as functional expertise to bring value to our clients,” he said. Services such as procurement, recruitment, e-learning, and others may be incorporated into the bundle sometime in the future.
Lisa Rowan, program manager for HR and talent management services at analyst firm IDC, said Accenture acquired a unique business in Savista. With few providers offering integrated mid-market F&A and HR solutions—Savista said more than 90 percent of its customers buy services in both domains—Accenture in one sense has cornered the market on bundled services.
“By acquiring Savista, they gain some serious traction,” she said. “You’ve got some good choices in HR and good choices in F&A, but there are not that many with both in the mid-market. I think it’s quite an astute move by Accenture.”
Stakeholders such as Borgese say if they had any concerns about the buyout, it would be whether Accenture will allow the Savista team to operate freely. Accenture’s Campbell allayed such fears by pointing out that the outsourcing giant purposely acquired the company for its depth of management, perhaps its most strategic asset.
“From my perspective, this was a chance to get a preassembled management team, especially one I call a second-generation BPO management team,” he said, referring to Bizzack’s previous experience as a co-founder of ProBusiness, an outsourced payroll and HR BPO company acquired by ADP in 2003. “To get that second-generation team is absolutely critical.”
Gartner’s Brown said it’s imperative for Savista to expand on its footprint beyond hospitality. He cites the company’s historical focus on meeting the unique back-office needs of food service companies as a reason that the company must prove it is more than a one-trick pony. For example, the company has developed solutions that make drive-through food ordering more cost-effective.
Bizzack said the company already has plans for pursuing the financial services sectors, and new clients are expected to be announced soon. He mentions that the company’s innovative systems partnership with SSA Global allows it to deploy its existing services to many industry segments. For example, he says, in FAO terms, Savista can just as easily customize for client A’s chart of accounts in food service as for client B’s chart in financial services. Otherwise, the remainder of the functionality is based on a one-to-many model.
For both HRO Today and FAO Today magazines, this merger could not have come at a better time for two reasons. First, both magazines have been predicting the “Year of the Mid-Market” for the past two years. (Publisher mea culpa: We know we were not right on time, but it is nice to finally be right.) And second, both magazines have predicted the convergence of HRO and FAO in the mid-market for more than a year. Does the Savista-Accenture merger indicate a continued convergence of bundled services for mid-market companies? If so what is next? Is it procurement, or supply chain management, or facilities? Stay tuned.