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April 14, 2005

HRO consolidation set to intensify

Human resources outsourcing providers are preparing for the current wave of consolidation in the market to intensify, as IT services firms continue to build out their HR capabilities and aggressive pricing squeezes smaller players out.

By CBR Staff Writer

Senior HRO executives on a panel discussion at the HRO World Conference in New York City claimed that their sales pipelines were rapidly increasing as acceptance of back office outsourcing had grown markedly. However, despite the top line growth, competition has kept margins low, and further consolidation is accepted as inevitable.

Advisory firm Everest Group estimates the HR BPO market to be worth $14.3bn (counting only contracts for over 3,000 employees which include at least three HR functions) and is growing at around 25% a year.

More and more companies are looking to outsource back office functions in order to reduce costs and avoid major capital expenditure, and an increasing number of vendors have entered the space. As the major players fight for market share, price pressure has been significant and a number have found it difficult to make a profit.

Everest estimates that the price per employee per year in contracts for more that 25,000 employees has dropped by 38% to $358 in 2004 compared to the pricing level seen from 1998 to 2003. The drop was even more severe in smaller deals around 50%.

Hewitt was one of the first to make a move, spending $690m last year for Exult, which had failed to capitalize on earlier deal wins, and lost a major contract with Bank of America to Fidelity. The deal made Hewitt the largest player in the market. Since then, EDS bought Towers Perrin, CSC struck a strategic alliance with Aon, and most recently ACS bought Mellon HR, which had failed to make any significant profits from HRO.

Rumors of who will be snapped up next and by who continued to spread during the conference. Many have been surprised at the fact that IBM has yet to make a move, though speculation continues that it is about to buy Mercer HR, after having at least considered making an offer for Hewitt.

The vendors claim that after having got past the election, controversy over offshoring has subsided and companies are now convinced of the value of HRO. After the election, the offshore debate went away and the decision was made in favor of BPO, said Diana Shelgren, a senior executive at Accenture HR Services. The risk/reward has changed in favor of buying, and we’ll see more consolidation.

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Michael Sternklar, executive vice president of business development and global strategy at Fidelity HR, claimed that customers were more comfortable with HRO, as those who have benefited from outsourcing become more open about their experiences. Customers are willing to stand up and say Fidelity or whoever have delivered, he said. Jos Sluys, CEO of Arinso was a little less convinced of this though. We need more references in the market, there are not that many good references around. We need 30 to 50 cases over the next few years.

In a separate panel discussion, outsourcing consultant Joe Vales gave a warning to the industry. He claimed that soon, Microsoft and Oracle would enter the market. This is a ‘Pacman’ market, consolidation will continue. The big software guys are coming into the service provider area and it’s going to scare the hell out of every one in this room.

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