Fast-Growing HRO Sector Continues Consolidation Drive: HR service providers want to bulk up, as more companies relinquish functions to outsourcers.

The human resources outsourcing (HRO) market, the fastest-growing segment of the broader business process outsourcing (BPO) industry, is a broad, fragmented market that incorporates dozens of different HR tasks, from pre-employment screening, recruiting, staffing, and employee development to payroll services, benefits administration, taxes, and accounts payable – virtually all the functions that in-house HR departments provide for their companies. The field – populated by giants that provide a comprehensive array of services to pygmy niche players – is a relatively recent outgrowth of BPO. Research shows that almost 10% of U.S. companies outsource one or more HR functions, and industry analysts expect that number to rise significantly in the next few years. Some analysts report a trend among larger companies to outsource most of their administrative and transaction-oriented HR functions (like payroll and benefits) to HR service providers but retain more strategic issues, including salary and incentives planning. This year, HRO is projected to be a $51 billion global market – about 40% of overall BPO revenue – and in the U.S alone, researchers expect the sector to grow to more than $32.7 billion in revenue by 2006. “HR outsourcing developed later than other types of outsourcing because companies thought these functions were too sensitive to be outsourced. But what they are now thinking is that the strategic parts of HR should remain in-house while administrative and transactional functions can be outsourced. Advanced Internet technology has contributed to a more seamless relationship between the provider and the client companies and has helped HRO take hold,” says Judith Scott, a Managing Director at Robert W. Baird & Co. and co-author of the Baird report, “Human Resources Outsourcing: Gaining Traction Fast.” Notable deals in recent months include Mercer Human Resource Consulting’s acquisition of Synhrgy HR Technologies; Gevity HR Inc.’s purchase of TeamStaff Inc.’s human resource outsourcing client portfolio and other assets for $9.5 million; Exult Inc.’s acquisition of PricewaterhouseCoopers’ international BPO operations for $17 million; and Hewitt Associates’ buys of Cyborg Worldwide Inc., provider of HR management software and payroll services, and Northern Trust Retirement Consulting LLC. For a number of reasons, the industry should continue to be an area of robust merger, acquisition, and alliance activity over the next several years, Scott adds. Large HRO providers are looking to become full-service firms and to gain new clients. Smaller players, with specialized offerings, want to add to their capabilities or achieve critical mass in their niche, she notes. “There are a lot of niche providers in the HRO business, particularly in recruiting, staffing, and software, that are drawing the attention of potential buyers,” says Dave Carlson, U.S. leader of the Administration Practice at Mercer Human Resource Consulting. Carlson, the former chairman and CEO of Synhrgy, speaks from personal experience. Synhrgy provides HRO services and software products that manage a variety of HR functions, including training, payroll, and benefits. He says that Mercer was attracted to Synhrgy’s specialized capabilities, and at the same time the acquisition helped eliminate some of the challenges Synhrgy faced. “HRO providers the size of Mercer seem to be more appealing to larger companies. There are a lot of big, cash-rich players in the market, and we saw an opportunity to combine with one of the leading providers in the market and eliminated some of the issues we faced in terms of size and depth of pocket,” he notes. Another factor sparking consolidation is the highly fragmented nature of the industry. This is a market where the biggest payroll outsourcer in the country, Automated Data Processing Inc., has less than a 10% market share. According to the Baird report, in the U.S. there are thousands of companies providing staffing and payroll services alone. The market is composed of a small number of large providers and a large number of small and mid-size outsourcers. And while many of these smaller entities are appealing stand-alone business, the report notes, combination with a larger HRO provider often has “compelling strategic benefits.” Although consolidators thinking “rollup” may face significant integration issues. “Acquirers generally are buying an outsourcer because of a single integrated technology and a set of processes to deliver services for the client. The problem you run into in doing a rollup – and Im not saying that companies arent trying to do this – is that when you do acquire a bunch of different entities with different delivery systems, youre looking at an integration effort that will last many years,” says. Jim Giesinger, global leader of the Administration Practice at Mercer Human Resource Consulting. Copyright 2004 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com