Last December I was bold enough to gaze into my foggy crystal ball and prognosticate on the future of our HR industry.  Well it’s time to assess my performance and take my lumps where appropriate.  I don’t consider myself dim, but this bulb did not shine as brightly as I would have hoped.

I called 2008 “A Year of Shifting Priorities” and presented four predictions for the coming year, including:

1. The Beginning of the Employee Power Shift: Can you believe I said, “I see 2008 as the year of a pendulum swing back in favor of the employee”?  Really.  I said that??  Wow.  This was a giant swing-and-a-miss for me.  Not only did employees take a swift kick in the rear across 2008, but I’ve personally witnessed employers recklessly wielding the big stick to wipe out thousands upon thousands of FTEs.  Who would have thought the market would be relieved by jobless claims “easing” to 554,000 from 575,000 the week prior?  Sorry employees, the power is definitely not in your hands.  Inflexion Point Grade – F
2. A Major HRO Provider Will Divest: This seemed like a sure thing. But let’s be honest, the large market HR Outsourcing (HRO) industry remains plagued with challenges and 2008 was an awful year for most providers.  Missed earnings.  Delayed implementations.  Major write downs.  It’s a head-scratcher that many continue to play in the space. What I didn’t control for was the fact that providers would simply change the definition of HRO.  That nit aside, I have to concede that no major HRO provider divested of their business in 2008… yet. (NOTE – We still have a few weeks left for Convergys to sell its business unit to a large Indian firm!)  Inflexion Point Grade – F 
3. HR Will (Still) Not Have a Seat at the Table:  Can you believe I used to talk like that?  ”Seat at the table” is on the list of industry phrases that I’ve permanently banned from my vocabulary.  Semantics aside, I do not believe that HR materially progressed against this historic challenge.  This isn’t due to a lack of effort, but instead can be attributed in large part to a tremendous volume of unexpected transactions (see #1 above). And transactions are bad news if you’re an up-and-coming HR change agent.  Sure, there were examples of innovative practices, new ideas and differentiated leadership, but unfortunately those were the exception rather than the rule.  Inflexion Point Grade – B
4. HR Vendor Scrutiny Will Increase: Nailed it! This one proved to be rather obvious in retrospect.  We saw a tremendous number of business combinations over the course of 2008, some serious accounting issues, great concerns over sustainability, huge issues with profitability and a very public court battle over an email entitled “The Naked Truth”.  And guess what, this issue isn’t going away anytime soon.  Inflexion Point Grade – A

Oh well, it looks like I won’t be bonus eligible this year after all.  Fortunately 2009 is right around the corner and who knows what sort of nonsensical mumbo-jumbo I’ll come up with this time around.  Time to polish the old crystal ball and really think this one through.  In the meantime, let’s keep the conversation going. 

To put that number in perspective, this represents ~40% of CVG’s consolidated revenues for the quarter and is nearly 5x the quarterly revenue of the HR Management business unit.  And as you can imagine, investors were thrilled (insert sarcasm here).  On a day when the market rose nearly 11%, CVG lost ~28% of it’s value and closed at an all-time low.  That’s right…the lowest price in it’s history at $7.16/share.

So what did CEO Dave Dougherty have to say?

“….In HR Management, we continue to make progress with our two large HR outsourcing implementations; however, our financial results are not satisfactory. As a result, we are taking a series of actions to reduce the implementation risk and improve the future earnings and cash flow in this business.”

The two deals are Johnson & Johnson (signed in May of ’07 as a 10-year, ~$1B HRO contract) and DuPont (announced in November of ’05 as a 13-year, $1.1B global HRO account).  Due to the complexity of the change management initiatives, scope and scale of implementation, and revenue recognition ties to go-live, BPO providers must float their cost basis on a forward-funded model.  This creates undue pressure on the P&L and results in the outcome we see today.

So the age-old question once again raises it’s head – is large market HRO sustainable?  Can it be deployed profitably?  Will clients embrace standardization and will providers effectively innovate and deliver?  Unfortunately, today’s results continue to reinforce an increasingly negative perception of holistic HRO’s value proposition.  Let’s keep the conversation going.

Convergence Begins

It is only in the past eighteen months that we have seen the industry take note of buyers concerns surrounding language and taxonomy.  In 2007, two separate initiatives led by competing advisory firms (immediately following their failed merger) were announced:

• OpenDoor HRO: Launched in April of 2007 by the triad of EquaTerra, SAP and Arinso (now NorthgateArinso), OpenDoor was intended to offer best practices and supporting documentation to speed the sourcing process and ensure adoption of common standards.  Unfortunately, the closed-door origination was viewed to have disintermediated several dozen organizations that would have preferred to help shape the standards by which they would be measured.
• TPI HRO Standards Initiatives: Announced in May of 2007, TPI presented a new initiative based upon collaboration with ACS, Convergys, ExcellerateHRO, Fidelity and Hewitt.  Like OpenDoor, the intent was the derivation of a common taxonomy, including pricing norms and service levels.  TPI was recognized for being more industry inclusive, yet did not embrace the transparent presentation of OpenDoor.

The most promising initiative yet is the work of the Industry Standards and Practices Committee of the HR Outsourcing Association (HROA).  In April of 2008, the committee announced the publication of the first approved practices, acknowledged as the largely preexisting work of the TPI HRO Standards Initiatives.  In a mature nod to the best interests of the industry, OpenDoor HRO has joined with the committee to remove any angst or confusion surrounding competitive standards.  Although this signifies positive momentum, one should question whether interests are proportionately represented, for of the thirty one committee members, only six are buyers of HRO services.

Outcomes and Conclusions

Renowned critic and playwright Eric Bentley said it well:

“Ours is the age of substitutes: Instead of language we have jargon; instead of principles, slogans; and instead of genuine ideas, bright suggestions.”

Without overreaching, one such bright suggestion is for HR executives to get involved in this quest for standardization.  This language barrier will not come down in a means favorable to all parties if those who stand to lose the most participate the least.  This initial taxonomy represents only the United States and the English language, so rest assured that much debate remains over how and if each suggested metric could be applied to your countries of interest.

As an industry, we have yet to quantify the efficacy of these recent initiatives.  Although it is tempting to sit back and wait for others to clear a global path forward, we must work together to ensure that the language of the future of HRO is one we can all speak and understand.  Apply your skill, experience and immersion, for much remains to be done and it is this analyst’s opinion that the most difficult work is yet ahead.

Let’s keep the conversation going.

Input Variable A) HP

HP has been an uncharacteristic dabbler in and around HRO for many years.  They had been rumored to be entering the market via asset acquisitions ranging from ACS, Convergys, and Hewitt for some time now, but I must say that few (myself included) would have imagined EDS as the target.  Within HR service delivery, HP does have a few arrows in it’s quiver:

1. Announces Nestle as it’s only public HRO Engagement (2006) – Scope includes European payroll with options for benefits administration, including call center administration and some back office operations.  Serves as an extension to the existing finance and accounting outsourcing agreement with Nestle.
2. HP and SAP Alliance – 50% of SAP applications globally run on HP platforms, and HP is one of SAP’s largest clients.  HP also offers SAP consulting and integration services including operations, implementation, upgrades, support and end-to-end outsourcing.
3. HP and Oracle Alliance – More than 100,000 joint customers across every line of business globally, including JDEdwards, PeopleSoft and Oracle HR applications. 
4. HP’s HR Department – Supports 156,000 employees in 170 countries.  In a recent presentation for the Conference Board, HR EVP Marcela Perez de Alonso speaks her efforts to rationalize global HR into functional Centers of Expertise such as total rewards and learning.

Input Variable B) EDS

EDS’ creation of the ExcellerateHRO joint venture in 2005 allowed the firm to move directly into the race for tier one HRO transactions.  However, many have questioned the structure and strategy of the JV and whether it is sustainable in light of formidable competition and increased price pressures.  Here’s how EDS adds up:

1. Current ExcellerateHRO Portfolio – According to published data, 400 clients across nearly all geographies (except APAC) servicing more than 33 million active and retired employees.  Notable clients include CIBC, Total (UK), Bank of America and 7-Eleven Stores.  No new client wins announced since April of 2007.
2. Towers Perrin Joint Venture – Powers the full HR transformation and consulting side of the Excellerate relationship.  Provides global reach in 24 countries and outsourced IT to EDS as part of the initial venture structure.
3. EDS and SAP Alliance – 220 implementations with more than 850,000 users in nine languages and 54 countries.  Over 2,000 certified professionals on staff.  Their internal implementation of SAP is one of the largest in the world. 
4. EDS and Oracle Alliance – Emphasis on applications management, outsourcing, modernization and development services under the brand of the Agility Alliance.  Applications are primarily focused on CRM and HR BPO with 500 professionals on Oracle and 270 on PeopleSoft.

Does A + B = HRO Domination?

In my opinion, it does not.  There is no question that the combined entity will be formidable as a global provider of BPO and ITO solutions, and no one can argue with the depth and breadth of their technological acumen and ability to configure, manage and deploy SAP and Oracle solutions in any location in the world.  However, the one hole that remains is that neither entity brings forth deep and meaningful HR domain and consulting expertise.  Thus, I feel that continued codependency on Towers Perrin will be required to present a credible HR transformation story to the market.  This puts HP/EDS/Towers Perrin next to the likes of Convergys/Deloitte in the HRO landscape.  Competitors such as Accenture, IBM and even ACS (with it’s Buck and Mellon assets) will maintain some advantage with wholly owned and internalized HR consulting capabilities.

This could be resolved with one additional tactical acquisition.  With BearingPoint trading at $1.61/share and lowering its 2008 outlook, I’d see them as one possible candidate for such a takeover.  Suffice it to say that the next 12 months in the market should be quite interesting.

Let’s keep the conversation going.