Bigg fishing for business: HR outsourcing firms are forming partnerships and acquiring resources in a bid to get contracts from big business - Outsourcing

HR Magazine, April, 2002 by Steve Bates

The human resources outsourcing business is being transformed as large consulting firms acquire or establish alliances with smaller, more focused HR service provides. Many of these transaction blend the big picture business acumen of leading consulting companies with the technology and expertise of firms that can manage detail oriented functions such as payroll compensation and recruiting.

Some large firms such as Mellon Financial Corp's Mellon HR Solutions operations (MHRS) have basically swallowed HR outsourcing firms whole. Other major players, such as Towers Perrin have established what they term strategic alliances with smaller companies, allowing each partner to retain much of its management team and identity.

Although their approaches may way, most of the companies involved in such transactions have the same goal to grab a greater share of the expanding HR outsourcing market.

Consulting firms "are faced with changing competitive forces, and they need to grow," says Marc Pramuk, an analyst with IDC, a technology and e-business market intelligence firm in Framingham, Mass. "To grow, you have to move into new areas" and develop new competencies.

The fastest and easiest way to do that in today's economy, says Pramuk, is to set up an alliance of companies that complement each other. Lining up process design expertise in one firm with HR service implementation experts in another is a significant trend that is "rewriting how service providers compete at the high end of the market," he adds.

A Dynamic Market

To get a sense of the dynamic nature of the HR outsourcing market, consider these transactions, all of which were announced within a three-week span late last year:

* Pittsburgh-based Mellon Financial announced that it is buying Unifi Network, the HR outsourcing and consulting arm of New York-based business services giant PricewaterhouseCoopers (PwC).

* Towers Perrin, also based in New York, announced that it is joining forces with Working Concepts, an HR technology consultant and provider in Columbia, Md.

* PwC announced that its management consulting business, PwC Consulting, will form a global alliance with information technology services firm EDS of Plano, Texas, to provide e-commerce consulting and outsourcing services.

In particular, the Mellon acquisition of Unifi reflects just how active the market is, analysts say. Unifi traces its roots to Kwasha Lipton, a consulting outfit that was purchased in 1997 by Coopers & Lybrand. The next year, when Coopers & Lybrand merged with Price Waterhouse to form PwC, the operation that had been Kwasha Lipton was reborn as Unifi, which managed large outsourcing projects for top corporations.

By 2001, PwC determined that Unifi was not in sync with its business plans, in part because of federal regulatory issues surrounding firms that provide both auditing services and business advice. In stepped Mellon, which offered about $275 million for Unifi.

Mellon officials plan to move Unifi's 2,100 HR outsourcing professionals into their MHRS arm and to fold Unifi's approximately 400 HR consulting employees into Mellon's Buck Consultants operation.

Market Factors

There are a number of factors driving the trend of outsourcing partnerships, mergers and acquisitions. The chief factor, however, is money. The HR outsourcing market could reach $80 billion this year, up from nearly $60 billion last year, according to Jose Cunningham, managing director of the Outsourcing Institute in Washington, a professional association that offers information and facilitation regarding business outsourcing deals.

Ironically, the sagging economy is one reason that HR outsourcing may be on the rise this year.

"The recession is convincing many companies to continue to look for areas of their business that they can outsource," says John Challenger of the international outplacement firm Challenger, Gray & Christmas, based in Northbrook, Ill. "You see business managers and owners much more conscious about adding people. They've been burned too much in the past" after business expansions, states Challenger. Outsourcing "allows them to push off the volatility in their revenue flow to the outsourcer."

In addition, there may be more large pieces of the outsourcing pie for providers to pursue. The business world has undergone a spate of mergers and acquisitions, which means there potentially are more large firms--with bigticket needs--for outsourcing firms to serve.

In many cases, the acquisitions and alliances being pursued by major players in the HR outsourcing industry are designed to fill gaps in their array of services so they can better compete for big-volume, big-money outsourcing contracts.

For example, the alliance forged between Towers Perrin and Working Concepts provides synergies that can help all players, say Towers officials.

Working Concepts president Brian McIntyre explains: "We understand the software technology side. We're able to provide that knowledge to their teams." And, with fewer than 100 staff members, Working Concepts "can only scale up to so many levels of organization" without outside help, he says. "Towers brings the large customers that have money."