ContributorsMulti-process HRSourcing

To See Where HRO Is Headed, Follow the (Private Equity) Money

This year promises an explosive mix: HRO’s first $100 billion year combined with private equity and hedge funds that sport a trillion dollars or more in deal appetite. Shake them together, and what you get is a dealmaker’s delight.

by Jay Whitehead

"Follow the money.” It was 1976 when I first heard actor Hal Holbrook, playing Deep Throat in the movie “All The President’s Men,” utter the phrase to Robert Redford, who played Washington Post journalist Bob Woodward. I knew the line would be important. So I remembered it until today. Just so I could write this column.

Check out these two sets of money numbers, and consider the implications for HRO.

First, according to our brainy analyst friends at IDC, companies worldwide are expected to spend more than $103.3 billion by 2007 on HRO, way up from the $61.2 billion spent in 2002. The IDC report continues, saying this growth will continue at around 9 percent through 2010, with a lot of the growth coming from contracts with mid-market firms. At $100 billion, HRO is the biggest dog on the BPO porch. Bigger than ITO, FAO, or any of the other “O” words.

Second, private-equity funds in the U.S. and Europe have amassed more than $1 trillion to fuel what analysts say could be the history’s most explosive corporate mergers and acquisition market. They make this prediction based on 2006, where $738 billion in private equity accounted for 20 percent of all U.S. M&A activity, as compared with only 3 percent in 1996, according to Thomson Financial.

In fact, just since the New Year’s break, The Gap, Timberland, and Eddie Bauer have all announced plans to take a look at being owned by private equity. For public companies, private equity represents the chance to go private and avoid Sarbanes-Oxley-type scrutiny and the chance at an outsized payday for management when the company goes public again or gets sold to another buyer.

On just one day, January 9 of this year, Citigroup reported closing on $3.3 billion for its new private equity fund, and former U.S. Senator Bill Frist’s family’s HCA was named the largest private equity-backed buyout of 2006 at $21 billion. Compared with corporate capital, private equity is the big dog on the capital markets porch.

That’s two big dogs on two big porches. Here’s what that means: Time to move over and let the big dogs eat.

What I am seeing for 2007 is a year filled with high-profile, private equity-fueled deals to create larger, stronger, better-run HRO firms than ever before. Let’s look at just two of the opportunities that the private equity-guys see on their menu for 2007.

• First, RPO. Recruitment process outsourcing is, for lack of a better definition, technology-enhanced, industrialized headhunting. It delivers more well-matched staff faster and a lot cheaper than the traditional smiling-and-dialing recruiter model. Clients love RPO. As a result, the number of firms who sport an RPO capability has ballooned.

When HRO Today launched its Resource Guide in October 2002, there were only five firms that called themselves RPOs. Today, there are nearly 200. Check it out for yourself—go to the current Resource Guide on HROToday.com, click on Recruiting, Staffing and Search, and start counting.

Of the 200 RPO firms, at least 30 are moderately to highly profitable with marquis client bases. But very few—maybe as few as two or three—have the critical mass or global scope to take on giant deals or innovate beyond the current RPO service model. This is an ideal situation into which private equity can invest, add value, and flip the resulting company for a magnificent profit.

• Second, combined enterprise-level HRO and FAO. Readers of this column have seen this theme before—the newly equity-rich FAO companies are poised to take over equity-challenged HRO firms. Enterprise-level FAO is already jam-packed with private equity—and VC-backed companies: OPI backed by Trident Capital; now-public WNS is backed by Warburg Pincus; Genpact by General Atlantic; and now-public EXL Service by another group. In HRO, General Atlantic’s got a big stake in mid-market player TriNet and did back Exult. But another dozen enterprise-level HRO firms could all use a shot of new equity or complete takeovers.

Like modern employees, money moves to where it can feed best. In 2007, expect HRO to be private equity’s very own rhino lunch box.

Tags: Contributors, Multi-process HR, Sourcing

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