Can We Move Beyond “HRO Vendors Aren’t Making Money”?
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?
December 20th, 2006
5 Comments Add your own
1. Bill Kutik | December 21st, 2006 at 8:24 am
While not disagreeing with anything you say, Jason, I must point out that historically companies don’t stay in new lines of business where they can’t make money. Some of the deep-pocket vendors you mention may stay longer than others, but in the end, providers will exit HR-BPO (later or sooner), perhaps orphaning current customers, if it ain’t adding to their bottom lines.
2. Patrick O'Brien | December 21st, 2006 at 12:16 pm
Come on, this is isn’t old news at all - this is happening right now. Hewitt’s problems cannot be dismissed as near term - it has admitted that all its FY 2005 contract signings will make a loss collectively *over the lifetime of the contracts* and those signed before will only breakeven *over the lifetime of the contracts*. “Challenging financials” indeed.
“Does it really matter?” you ask. I hope the people Hewitt has laid off don’t read your blog Jason.
No, Hewitt or others won’t be going out of business as they have cash etc, but they are giving a rethink to how (and even if) they do HR BPO.
3. Jason Corsello | December 21st, 2006 at 12:45 pm
Bill - Nice to finally see some comments. Let me clarify two points…
1) In any early stage market, buyers gain the upper hand in terms of price because they have to absorb alot of the pain as the vendor builds its solutions/capabilities. As a result, margins are foregone. At some point though, the pain goes away, the model becomes repeatable, the vendors begin to differentiate from the pack, and as a result, begin to elevate the price points. We are starting to see that now in HRO.
2) Lots of the HR technology vendors aren’t making any money. Why do we chose to ignore that?
4. steve dipietro | December 22nd, 2006 at 12:54 pm
ok ok
5. Jason HE | January 31st, 2007 at 9:28 pm
I agree with Jason.
As early stage, the first target of one firm is have market share. For HR BPO market, no customer will resetup the capability after the first contract.
SO the profit is on the way, but question is how long should vendors insist their no profit business.
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