Consolidation was the name of the game in 2010, but what does it mean going forward?
By Linda Merritt
HRO M&A madness was a big story in 2010, and the tale will continue into 2011. Nearly three dozen 2010 HRO mergers and acquisitions crossed the gamut of HRO service lines—with action in benefits, learning, multi-process HRO, RPO, and payroll.
Benefits outsourcing saw major consolidation through acquisition, with the combinations of ADP and Workscape, ACS and ExcellerateHRO, and Aon Consulting with Hewitt. Early in 2010, NorthgateArinso purchased Convergys’ HRM business, and Towers Perrin merged with Watson Wyatt. To kick off 2011, Towers Watson is jumping back into the fray with the acquisition of Aliquant, a mid-range benefits service provider.
NelsonHall’s “Targeting Benefits Administration 2010” market report predicts that health & welfare (H&W) will be the hottest benefits outsourcing growth area through 2014.
During a recent earning call, ADP’s CEO, Gary Butler, said the company is assessing further movement into the health care arena. It is not the only HRO vendor considering additional moves in H&W; NelsonHall continues to see many client inquiries on this segment, with its expanding opportunities driven by high health care costs and concerns over health care reform.
Changes in regulations, new technologies, and clients looking to rationalize and standardize processes globally are all factors in driving HRO vendors’ internal investments, partnerships, and M&A’s. Also, after aggressive cuts during the recession, many companies are now in lower debt positions and sitting on cash, which makes acquisitions possible with less risk of overextension.
With M&A mania in the air, HRO providers need to act from a considered strategy for long-term profitable growth and not just react to the pressure to join in the feeding frenzy. Strategic questions to address include coverage, capability, capacity, and cost.
Coverage—Expansion into new geographies by buying an established “local” player can be strategic as HRO continues to grow “any shore” coverage, moving from serving multi-nationals to adding local clients in emerging economies. Also, some vendors are hoping to move into new market segments. Technology advancements such as HR SaaS platforms and global service delivery networks make moves into the mid-market more affordable for both providers and employers.
NorthgateArinso purchased Convergys’ HRO unit, greatly expanding its footprint in the U.S., the largest HRO market. It also purchased Neller, an Australian-based payroll provider, increasing its Asia Pacific coverage. In the UK, the second largest HRO market, Xafinity bought PwC’s pension administration business; GP made several targeted learning purchases; and Capita acquired FirstAssist Services Holdings, expanding health and workforce management coverage. Europe-based Randstad picked up FujiStaff in Japan.
Capability—What HRO services should you offer? Portfolio management is seen as part of the ACS purchase of ExcellerateHRO from Hewlett Packard. According to Managing Director Rohail Kahn, ACS intends to be a top industry leader in total benefits outsourcing. Rounding out existing service lines, Mercer purchased IPA for its benefits enrollment technology, and Kenexa brought in Salary.com to add to its compensation management capabilities.
Marquee major “logo” clients can add prestige and scale, but require a clear head and due diligence. The closing of the Convergys deal was a sign that NorthgateArinso had a good sense that enough major clients would stay to give it a chance to earn and keep their business.
Capacity—Both talent and technology capacity are important considerations. Towers Watson picks up needed North American capacity and a base of skilled agents with the addition of Aliquant.
Technology can be the point of, or the problem with, M&A’s. Technology that cannot be profitably and practically integrated must be separately maintained or clients migrated. Either way, the time, cost, and effort must be factored into the financials and risk management of the deal.
Aon Hewitt (then Hewitt) acquired HRAdvance for its H&W-dependent audit subject matter expertise and will adopt HRAdvance’s technology platform. Administaff, a PEO service provider, is on a clear path to expand its SaaS and licensed HR services for the small business market. Having just acquired its third software company, with each new HR application being SaaS capable, Administaff is keeping action aligned with its strategy.
Cost—A big M&A rationale is “synergy,” i.e., reducing operating expenses. Aon Hewitt plans to save $355m annually from back office reductions and leveraging technologies and offshore capabilities. If managed successfully, the deal will add to its coverage, capability, capacity, and lower cost—adding pressure to the other major HRO players to up their games.
Whether designed to catch-up, keep up, or move ahead of the competition, the ultimate point of M&A’s is profitable growth. Finally, the realization of long-term value is rooted in the ability to successfully leverage scale and scope of the combined entity, to cross-sell into both the old core and new base of clients. In 2011, it will be time to see which HRO service providers deliver the results.
Linda Merritt is research director for human resources outsourcing at NelsonHall. She can be reached at email@example.com.