Multi-process HRSourcing

The EDS-Towers Perrin Marriage

What does this newest marriage mean for the HRO industry, you, and your career?

by Jay Whitehead

HRO wannabees take note: The HRO provider ante just got higher. On January 18, 2005, EDS and Towers Perrin came together to create an agile infrastructure company, a $600 million competitor with 400 clients including CIBC, Infineon Technologies, the U.S. Department of Defense, and the U.K. military. EDS paid $420 million for the 85 percent of the company it will own, and in turn, Towers Perrin will pay EDS $365 million during 10 years to manage its IT functions. More than 2,600 Towers Perrin employees will move into the EDS controlled entity to market HRO services.


The resulting EDS-Towers Perrin entity (which, according to its CEO Steve Bohannon, will announce its name in late February, which unfortunately is after this issue of HRO Today goes to press) creates another mighty entrant in a rapidly strengthening HRO field. Customers, analysts, and experts contacted by HRO Today magazine are clear on two implications of this announcement.


First, as the providers get stronger, large and midsized companies become more confident in the offerings, and HRO contracting activity will accelerate. And second, this combination, while significant, is one of a few that has forever boosted the level of competition at the high end of the HRO market.



Among the 27 Tier 1 firms listed by HRO Today (those that provide end-to-end or enterprise-level HR services), this merger creates a separation between the seven giants and the 20 more specialized players. Analysts and customers alike recognize these so-called giants as, in alphabetical order, Accenture HR Services, ACS, Aon HRO, EDS-Towers Perrin, Fidelity, Hewitt, and IBM. The remaining 20 companies, while formidable in their areas of specialization, will be largely relegated to the role of subcontractor in the hunt for U.S. Fortune 200 or Global 500 HRO deals due to the sheer requirements of geographic scale and capabilities footprint. While the good news for the 20 is that there is a lot of room to grow below the Global 500, the even better news for Global 500 customers is that the competition among these seven giants will ensure competitive pricing and strong service offerings forevermore.


Hugh MacDonald, vice president of operations and knowledge management in the HR division at CIBC and an EDS client, perhaps best reflects the markets sentiment about this merger and the emergence of several giants. There is no question that consolidation needs to occur in the HR BPO space, MacDonald says. To be successful in this market in the long term, and to acquire the requisite client base, a firm will need to combine HR domain expertise with the skill and abilities of a global IT powerhouse. The EDS-Towers Perrin combination is a natural fit.


MacDonald continues, saying, What matters to CIBC is HR service delivery day-in, day-out… every day, every week, every year… in every time zone and in every regionservice delivery that meets or exceeds our expectations and gives evidence of continuous improvement and operational excellence. We see this pooling of talent and resources by EDS and Towers Perrin as an enabler of this continuous improvement.



Wall Street reaction has been mixed, with EDS down from 21 1/2 at the time of the announcement to 20 1/4 as of press time. On February 8, Jeffries & Company downgraded the stock from hold to underperform, while RBC Capital Markets upgraded it from underperform to sector perform. Wall Street, unable to see immediate short-term benefit of the pact, seems confused.


But on the industry analyst side, reaction to the development has been decidedly more in tune with the long view that this deal creates a strong new entrant. Julie Giera, services analyst at Forrester Research, who spent nearly a week with company officials immediately following the announcement, reflects the general bullish mood of the industry analyst community.


Giera echoes CIBCs MacDonalds approval for the EDS-Towers Perrin deal, saying the pact springboards EDS squarely into a leadership position in HR BPO, which they desperately need. Giera goes on to explain that EDS has had $2.5 billion worth of BPO contracts for more than 30 years, a fact that the Forrester analyst calls their best-kept secret. In fact, Giera continues, probably one-third of that total is HR BPO contracts, which is a piece of data that is just not well known.


Analysts from Forrester to Yankee Group to Everest Group agree that Towers Perrin gives EDS a brand that is well respected among HR leaders, a strong distribution channel to reach those key HR decision makers, and what Giera calls intellectual property on the HR side of things. These assets, combined with EDSs global presence and delivery capability, make for a compelling package.


If there are any weaknesses to this new marriage, analysts warn, it is that joint ventures of this type are notoriously difficult to manage. When market conditions quickly change, for example, will the jointly owned companys governance structure allow it to move quickly enough to take advantage of the changes? Forresters Giera puts it best, Often these jointly-owned entities solve immediate problems, but JVs [joint ventures] are notoriously rigid and unable to adapt, especially because the only thing that most of these JVs measure is revenues and profits.


Giera notes that EDS and Towers Perrin management, under the direction of CEO Steve Bohannon, is tracking decidedly different metrics, which indicate a long-term view to success. They are measuring the quality of their people, Giera observes, delivery quality and customer satisfaction. And most importantly, they are tying those metrics to the compensation of the delivery people. People intend to do what theyre intended to do.


When asked whether this is a market announcement intended primarily to move the stock, she said no. These guys are in it for the long haul, she says. It fits.



A curious thing happened when HRO Today asked CEO Steve Bohannon the vision for the EDS-Towers Perrin entity. All he focused on was customers.


Client focus is key, he said. We are only doing three things in this new company minimize customers expense of excellence in HR; optimize customers investment in people and deployment; and maximize the value of information to our customer employees, managers, and HR professionals. When asked about the new entitys name only a few days after the announcement, Bohannon was understandably cagey. It would be rather silly, he asked, to not take advantage of the long standing heritage and brand strength of both companies, dont you think?


Bohannon, a veteran BPO executive, was also circumspect when asked about the reaction of the sourcing advisory community to the combination of EDSs technology and service platform with Towers Perrins HR expertise and consulting capabilities. I think it was a bit of an a-ha moment for them, Bohannon said. We have just become a gorilla in the jungle. They are enthused. Remember, nothing helps sourcing advisors more than stronger competitors.


Leadership of the new entity, Bohannon says, will be half EDS and half Towers Perrin. It just happened that way, he said with excitement. Towers Perrins Katherine Abernethy will run global sales, Bob Lopes will run client management, EDSs Jim Ciano will run product development, Mike Nosil will help HR execs through the transition, Peter Baxter will head strategy, Jeff Broockes will oversee service level agreement quality, Kim Messerschmitt heads marketing, Brian Michaelson is CFO, and Chris Ryan is HR business partner.


While Bohannon said that he spends little time dwelling on what his competitors think,  HRO Today is always interested to hear competitors views of such significant events.


Bohannons competitor, and engineer of the Hewitt-Exult merger, Kevin Campbell, now HR BPO head at Hewitt, was surprisingly congratulatory about the move. The HR market, Campbell said, is all about content. And the fact that EDS gets the benefit of Towers content is a move in the right direction. Any time anyone does anything in this space were all excited. Before you guys started HRO Today, we could have held an industry convention in a closet. And now look at us, were all big customer deals and big magazines and big conferences and big mergers.


Tags: Multi-Processed HR, Sourcing

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