Two years ago, HR outsourcing analyst Michel Janssen told Workforce Management that he wondered whether the HR outsourcing deal between Convergys and DuPont would make or break the Cincinnati-based HRO provider.
Now it looks like it might be the latter.
On Tuesday, October 28, Convergys announced a third-quarter operating loss in its HR management business of $280 million on revenue of $59.4 million.
In a call with analysts that day, David Dougherty, president and CEO of Convergys, attributed the loss to increased costs in the implementation of HRO contracts. He further cited “the complexity of global implementation and also actions taken by our clients that have contributed to project delays.”
Specifically, Dougherty cited “two significant global outsourcing implementations” where the company is talking to the clients about changing the implementation approach.
For these two clients, the company is looking at passing on the implementation to third parties, Dougherty said in the analyst call. However, the company would remain “the ongoing operator, potentially,” he said.
Convergys declined to name the two clients, but analysts speculate that they’re DuPont, with which the HRO provider signed a 12-year global contract valued at $1.1 billion in July 2006, and Johnson & Johnson, which signed on for a 10-year global HR outsourcing deal in May 2007.
Until recently, Convergys had been the new darling of the HRO world, surpassing Hewitt Associates as the leader in such deals.
But like Hewitt, it appears Convergys might be learning that implementing the contracts is much more complicated than it had anticipated.
“It certainly seems like they bit off more than they can chew,” said Janssen, who is now an analyst with the Hackett Group. “The customization of these deals was too much for them.”
Convergys spokeswoman Laurie Roderick would not elaborate on the company’s announcement.
In the analyst call, Dougherty said Convergys is working to “drive efficiency faster” through “further automation, standardization and leverage of our offshore assets.”
Convergys’ situation is “eerily similar to Hewitt’s situation two years ago,” said Naomi Bloom, managing partner at Bloom & Wallace, a consulting firm in Fort Myers, Florida.
“But there are important differences,” she said. “Whereas Hewitt had, and still has, a strong franchise in benefits administration outsourcing and a very profitable blue-chip HR consulting practice which can provide a good deal of cover for what was their troubled HR BPO business, Convergys has neither of these.”
Convergys’ overall third-quarter consolidated revenue was $676 million, compared with $704 million for the same period last year.
Whether Convergys will be able to weather the storm remains to be seen, analysts say.
“I think they would sell the business if they could get anything reasonable for it,” Bloom said. “But that’s not likely in this economy.”
—Jessica Marquez
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