Tuesday, August 22, 2006

Russ Fradin: The New CEO at Hewitt Associates

Last week I promised to write about measuring risk related to group benefit plans and techniques on evidence based cost avoidance (when I put it that way, it sounds so boring!) I’m sorry, but some other news broke last week that I felt compelled to comment on. I’ll get back to measuring risk next week.

Last week, Hewitt Associates announced that it has appointed Russell P. Fradin as the company’s new chairman and chief executive officer, beginning September 5, 2006. The announcement came the week before a rather disastrous 3rd quarter earnings report in which the company posted a net loss of $202 million or $1.88 per share.

The announcement was seemingly timed to help mute the bad news that was coming. Indeed, the stock has taken a 10% hit since earnings were announced which offset the stock rise after the Fradin announcement.

But what can Russ Fradin do for Hewitt?
According to the press release, he’s the right man for the job:

“Previously, Fradin spent more than seven years in various executive positions with Automatic Data Processing (ADP), including president of its global employer services group, where he doubled revenues to $4.5 billion, improved profit margins resulting in operating income of over $1.3 billion and pioneered the company’s entry into total human resources outsourcing for small businesses.”

First, I’d like to point out the very interesting parsing of words in the press release. Hewitt has a very sticky problem here. They have just announced the appointment of the top job in their company, but it is going to someone who used to run the competitor. Interesting thing is that Hewitt does not like to lend credibility to ADP as a competitor. Hewitt’s paradigm has always been that they are without peer.

So read the press release carefully. Hewitt has hired someone who knows the BPO business and HRO in particular. He knows how to grow profitability and revenue. And the kicker? He cut his teeth in the small business market.

This isn’t quite accurate. I first met Russ when ADP was in full acquisition mode. He was working on acquiring Mercer’s administrative capabilities in benefits. They were also going after J&H/KVI’s outsourced business. This came after the Health Benefits America and Williams, Thatcher Rand acquisitions.

It was the continuation of a very clear strategy of expanding market share, product offerings and revenue. Much of this expansion set the stage for, and was the beginning of, the move into HRO in the National Account (over 1,000 life) space. It would actually be interesting to calculate how much revenue growth during Fradin’s ADP tenure was organic and how much was acquisitive growth.

So despite the claim of Hewitt in the press release, it would seem that Fradin actually set the stage for ADP’s explosion into the large employer market through diversified acquisition. It didn’t come without cost, however, as ADP gave up its 40 year string of double digit earnings growth during Fradin’s reign. They also saw stagnant and/or declining share price. In the end, Fradin didn’t like the ADP succession plan that was developed, and moved on to Bisys.
Bisys was reeling from accounting issues, and during his time at Bisys, Fradin saw the stock price plummet over 35%. It is hard to pin that on Fradin, who was brought in to right a ship that had previous accounting irregularities.

What the recent history may tell us, however, is how Fradin might approach the daunting task which is Hewitt. On the most recent earnings conference call, the outgoing CEO acknowledged serious difficulty in delivery especially in recruiting and payroll. He and the CFO indicated that they had taken on too much too quickly. Perhaps Hewitt’s board thinks Fradin is a payroll guy who can get things moving.

They reality is, though, that Fradin is a strategy guy in the McKinsey mold. He won’t be able to right the operational ship. What he can do is come up with ways to either consolidate operations / service offerings or acquire market share while enhancing revenue and delivery capacity simultaneously.

My personal prediction is that Fradin will oversee the “prettying up” of the balance sheet and work to divest Hewitt of the outsourcing business itself. Consulting will remain behind, a shell of its former self. I give it 18 months. If it happens this way, it will be truly unfortunate. As a privately held company, Hewitt was the undisputed leader in its field. As a public entity it has lost its mission and what made it so good. Back in the day, you would never have heard that Hewitt took on too much too fast.

I hope I’m wrong. I hope that Hewitt can once more be at the top. As for Fradin, the rumored succession plan at ADP would have had him as the COO when Gary Butler takes the reigns, and CEO when Butler retires. I wonder if he’d rather be the COO at the currently growing and profitable ADP, or CEO at a listing ship.

About the authorDonald Glade is President and Founder of Sourcing Analytics, Inc., an independent consulting firm specializing in helping companies optimize their HR / benefits / payroll service partnerships through relationship management, financial analysis, and process improvement.

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