Hewitt-Marriott Pact Bodes Well for BPO Sector

February 18, 2005

In one of the biggest human resources outsourcing deals to date, Hewitt Associates Inc. has signed a seven-year contract to provide a complement of services for hospitality giant Marriott International Inc.’s 128,000 domestic employees. It’s Hewitt’s eighth and largest contract since acquiring outsourcing specialist Exult Inc. late last year, and yet another indicator that 2005 could be a banner year for business process outsourcing.

Though Hewitt and Marriot won’t disclose terms of the deal, one analyst estimated the contract’s value at $350 million, solidifying Hewitt’s current standing as the No. 1 player in the $12.4 billion human resources business process outsourcing market. It should also quiet critics who questioned Hewitt’s $690 million stock buyout of Exult in October, says Kevin Campbell, former Exult president and now market strategy and development leader for Hewitt’s human resources outsourcing business. “We proved we had the right answer at the right time, and frankly it feels good to have everyone else reacting to our moves,” Campbell says.

With the economy picking up, corporate human resources departments want to spend more time on hiring and other strategic issues and less time on benefits administration and “the day-to-day grind,” says Michel Janssen, president of supplier solutions at the Everest Group, a Dallas outsourcing consultant. Senior executives don’t want the capital expense of updating software systems but do want to reduce administrative costs, and outsourcing fits all those needs.  “It’s red hot,” Janssen says.

Under terms of the deal, Hewitt will handle benefits administration, compensation, recruiting, learning and development, call centers, and domestic relocation for U.S. employees of the $10 billion hospitality company. As part of the deal, an undisclosed number of Marriott human resources employees will transfer to Hewitt, Campbell says. Marriott, which manages 2,600 properties worldwide, will retain human resources strategy, policy design and payroll functions, he adds. Marriott officials could not be reached for comment.

According to the Everest Group, the going rate for full-service BPO contracts for major employers is about $400 per employee per year, giving the Marriott deal an estimated value of $350 million over seven years. That makes it one of the top five human resources BPO contracts ever, according to Janssen and other analysts, similar in magnitude to pacts such as a $280 million, seven-year contract Convergys signed in 2002 with the state of Florida to cover 189,000 employees and elected officials.

In addition to the Marriott contract, in the past five months Hewitt has signed new agreements with Thomson Corp., Rockwell Automation, Capgemini and Sun Microsystems as well as three customers that Hewitt would not name. That compares with a total of five BPO contracts Hewitt signed in the previous year.

Over time, Hewitt has transformed itself from a human resources consultancy to a full-fledged outsourcer, the better to market itself to growing demand. Although only 8 percent of Fortune 1,000 companies currently outsource human resources, that number is expected to grow by 30 percent this year, according to the Yankee Group.

For Hewitt, the move appears to be paying off. In the quarter ending December 31, the first to include results from Exult, Hewitt’s net income rose 16 percent to $34 million from the previous year on a 34 percent increase in revenue to $710.4 million. More tellingly, quarterly revenue from outsourcing grew 47 percent from the previous year, far surpassing a 7 percent increase in consulting revenue.

“The market was waiting to see what would happen combining pioneering Exult with the more conservative Hewitt -- so far it's looking good,” IDC analyst Lisa Rowan wrote in a just-issued industry update.

Hewitt isn’t the only human resources outsourcer starting 2005 with a bang. In February, Affiliated Computer Services signed a seven-year, $120 million BPO deal with Delta Air Lines, an agreement that ACS says will help the airline reduce human resources costs by 25 percent. Also, in the past two months Accenture expanded a contract with BT, the British telecommunications provider, and Fidelity signed a pact with BASF, the global chemicals company. “It’s all positive for the market,” Rowan says.

-- Michelle V. Rafter