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Mellon-ACS Deal Heats Up Competition

March 29, 2005
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The race to be HR outsourcing’s big kahuna is intensifying, with business outsourcing heavyweight Affiliated Computer Services Inc. announcing in mid-March that it will pay $445 million for Mellon Financial Corp.’s underperforming HR consulting and outsourcing division, which had been for sale for several months.

The deal follows a joint venture announced in January between Electronic Data Systems and Towers Perrin to form a $600 million HR outsourcing entity called ExcellerateHRO, and Hewitt Associates’ $690 million acquisition of outsourcing pioneer Exult, completed in October.

The contenders are positioning themselves for a boom in HR business process outsourcing, which is expected to grow by 30 this year as midsize and large companies farm out benefits administration and other mundane, process-intensive operations to focus on strategic issues.

Thanks to the Exult deal, Hewitt currently leads the field with an estimated 35 percent market share. Five or six others are vying for the No. 2 spot, according to Michel Janssen, a managing research director at Everest Group, a Dallas-based HR outsourcing consulting firm. Buying Mellon’s business puts ACS “into the strong contenders to move out of the pack” Janssen says.

ACS, a $4 billion IT and business process outsourcer based in Dallas, moved into HR outsourcing several years ago but lacked a strong presence in HR consulting. The Mellon deal fills that gap, but at a price. Mellon’s Ridgefiled Park, New Jersey-based HR division has faced stiffening competition and in 2004 had an undisclosed “small” loss on revenue of $660 million that was essentially flat from the previous year, Mellon officials said in a conference call on the deal. In a separate conference call, ACS president Mark King said the company expects to bolster financial results for the unit by moving some operations to more cost-effective data centers, possibly including offshore facilities.

An ACS spokeswoman says the company will offer jobs to virtually all 4,000 of the Mellon division’s current employees. The deal is expected to close by June 30, pending shareholder and regulatory approvals.

For ACS and other vendors buying their way into the HR outsourcing or consulting business, the key is striking the right balance so that one aspect of the business doesn’t consume the other, Janssen says. “ACS has a very strong operations gene, but they’ve never owned a consulting company before,” he says. “Will they be able to make those two cultures mix?”

In their joint venture, EDS, an IT expert based in Plano, Texas, will pay Towers Perrin $420 million for an 85 percent stake ExcellerateHRO, which will provide payroll and pension management services. Towers Perrin, a private consulting firm based in Philadelphia, will control the other 15 percent. The new company was expected to be operating by the end of March.

As outsourcing grows, there are more announcements on the horizon, according to Janssen. “Keep looking out the window,” he says.

–Michelle V. Rafter

 

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