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Hewitt Exults in HRO Dominance

June 2, 2005
Related Topics: Outsourcing, Featured Article

From its position as an independent business process outsourcing pioneer, Exult has in the past year become the crown jewel of Hewitt Associates’ human resources outsourcing business.

    Since buying Exult for $690 million in stock in October, Hewitt has used the company to vault to the lead of the HRO industry, closing almost $1 billion in deals with 10 companies including Marriott, Pepsico and Sun Microsystems during the first seven months of fiscal 2005.

    Hewitt now holds 21 percent of all HRO deals worldwide, with competitors Accenture and Fidelity running second and third, respectively, according to an April 2005 report by Everest Research Institute, an industry researcher in Dallas.

    By jumping headfirst into the HRO market, the Lincolnshire, Illinois, company is banking on higher growth rates and operating margins in the still-young industry. This will bolster stagnant financial results in its more mature businesses: providing Fortune 500 clients with benefits administration and HR consulting.

    Currently, HRO contracts account for 21 percent of Hewitt’s total revenue. The company does not break out earnings for that segment of its business.

    But swallowing Exult hasn’t come without a price. As it refocuses, Hewitt has reported lower earnings on narrowed margins for the second quarter ended March 31, including a one-time $10 million charge stemming from two contracts originally signed by Exult.

    After the May 4 announcement, Hewitt’s stock fell to a 52-week low.

    In a Q2 conference call with analysts the same day, Hewitt CEO Dale Gifford characterized 2005 as a building year for the company’s HRO business, saying that as newly signed outsourcing deals mature, they should generate profit margins as high as 20 percent. According to Gifford, Hewitt has signed additional contracts, worth $150 million in annualized revenue, that the company hasn’t started working on yet, and it has bids out for contracts worth an additional $290 million.

    Analysts and industry observers agree that Hewitt looks smart for buying Exult when it did and at the price it paid.

    "Given what they’ve done since, it made (Exult) a great buy," says Ed Lawler, a management professor at the University of Southern California’s Center for Effective Organizations and co-author of the 2004 book Human Resources Business Process Outsourcing: Transforming How HR Gets Its Work Done, which chronicles Exult’s early days.

    Still, Hewitt can’t afford to sit still. In addition to Accenture and Fidelity, several much larger companies have entered the business, including IBM, ADP, ACS and--through its ExcellerateHRO joint venture with Towers Perrin--EDS. That alphabet soup of a dozen or more competitors should dwindle to a core of three or four first-tier vendors over the next two years, predicts former Exult CEO James Madden, who left Hewitt in January.

    "That’s the way it is in most of the BPO markets," Madden says. "IT has three major vendors, and more at a second tier. I think you’ll see the same thing here."

    A bigger player could decide to buy its way into a heftier market share, and then Hewitt is the prime takeover candidate, analysts say.

    "They’re not so big they couldn’t be bought," says Michel Janssen, Everest’s managing research director.

    Bryan Doyle, president of Hewitt’s outsourcing business, doesn’t see that happening. Since merging with Exult, Hewitt can fill all of its clients’ HR needs and doesn’t need--or want--to be part of another organization, he says. "Our assets are our employees and the relationships we have with their clients," Doyle says. "If we were interested, it would have to make sense for our clients and the industry overall."

Workforce Management, June 2005, p. 53 --Subscribe Now!

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