One of the big themes in human resources outsourcing (HRO) this past year was, "…none of the HRO vendors are making money". Can we please move beyond this because, frankly, its old news? Yes, Hewitt and Convergys have disclosed challenging financials with their HRO business (I actually credit these 2 vendors for actually disclosing their financials at the business unit level) but does it really matter?
Although I would agree vendor viability is important, saying HRO vendors aren’t making money is both naive and inexact. Many large companies leverage the profits from lucrative business units to fund growth areas. This is certainly the case for companies like HP, who fund new and emerging business units from its highly profitable printer and cartridge business.
Profitability would be a factor if the vendors are young and have little access to capital. That is not the case with almost every vendor in the market. The lack of near-term profits may affect the pace in which they build out their HRO services and capabilities but the fact of the matter is vendors like IBM, Accenture, Fidelity and ADP have barrels of cash and are definitely not going out of business anytime soon. Likewise, Convergys and Hewitt, under the most scrutiny because of the HRO financial disclosure, have a combined market capitalization of $6 billion. You could argue these two vendors in particular, are at risk for private equity takeover (especially due to the huge private equity funds that are being created every day) but so is everyone else for that matter…including Microsoft.
Vendor viability should be gauged by many other factors besides profitability. How is the vendor investing in the business compared to their peers? What is the vendors current and planned capacity? How is the vendor viewed in terms of customer satisfaction and responsiveness? What is their view and track record on service quality and support? What is the knowledge and stability of the management team? How is the vendor viewed in the market? What are the vendors change management capabilities?