How Did They Get Here – Hewitt Associates

The other day I was trying to remember what happened to a company in the benefits administration space I used to deal with quite regularly. Of course, as been happening with increasing regularity, it had been acquired some years ago by another provider and has been all but lost except in the memories of those of us in the business who either worked with or for them.

The list of these long gone companies is extensive and made me think for a moment about doing a “where are they now” series. After noodling on it for a while, I realized a more interesting tactic would be to take a look at today’s companies and see how they got to where they are today.

So as part of a recurring series, I bring you “How Did They Get Here,” a look at the mergers and acquisitions that have formed the companies we see today. Along the way, you will hear names such as Kwasha-Lipton, Howard Johnson, Wellspring Resources and Williams Thatcher Rand.

By no means will I provide the definitive history of the organizations I will look at, but it might be kind of fun. There are enough of you out there who have a history with the companies that we will look at that I hope you will contribute to the conversation with recollections of the old companies’ cultures and services or even add to the list companies that I may have missed.

For the first “How Did They Get Here” company, I take a look at Hewitt Associates. I do this not because we have written a lot about them lately, but because as a company who grew mostly organically, I thought they would be the easiest for a first company. Many of the other current service providers will take a bit more time and research to write about.

For the longest time, Hewitt Associates was the company that kept their heads down and did nothing but grow organically. They made a reputation for themselves as being the best at what they do with no excuses. Growth came easy as they became the gold standard in benefits consulting and administration.

Hewitt was founded in 1940 as an actuarial and benefits consulting firm (ABC firm), and expanded from there into broader compensation and HR consulting and administration. I don’t know if it can still be looked at in this way (perhaps others have an opinion), but at one time Hewitt was part of what many termed the Big 4 ABC firms: Hewitt, Wyatt, Mercer, Towers Perrin. Is there still a “Big 4,” or has the move to broader HR services and the proliferation of administration-only firms rendered this an obsolete notion?

In any case, Hewitt was not known for making acquisitions, but rather steady organic growth and a strong non-diluted corporate culture. All this seemingly changed in June of 2002, when Hewitt became a publicly traded company. Before this, Hewitt’s forays into new lines of business was through expansion of service, not acquisition. Remember Sageo? This was a separately run internet health and welfare services business created by Hewitt in 2000 to capitalize on the tech bubble. In September of 2001, it was wrapped back into Hewitt, its clients transitioned to the TBA platform, its employees redeployed or terminated. (Anyone reading this today who worked for Sageo? I’d love to hear recollections.)

After going public in 2002, the acquisitions seemed to come as an annual event. In June, 2002, Hewitt acquired the UK Actuarial firm, Bacon and Woodrow. Also in 2002, Hewitt acquired National City’s Retirement Plan Services recordkeeping staff, systems and clients. The client base was about 500 clients with 130,000 participants. It wasn’t a major acquisition for Hewitt, but it was a portend of a much more significant acquisition one year later: Northern Trust Retirement Services.

Northern Trust was, by most accounts, a significant player in 401(k) recordkeeping and pension services. In fact, Northern was one of the first (if I recall, they used to market that they were THE first) to use voice response systems to collect 401(k) participant transactional requests.

Also in 2003, Hewitt began its foray into broader HR and payroll services through the acquisition of Cyborg. At the time, Hewitt’s press release billed it this way:

"Hewitt becomes the only organization able to offer total HR outsourcing services - HR, benefits and payroll - with complete HR consulting expertise to large (more than 10,000 employees) companies.”“

Of course, we end this story of Hewitt acquisition with the most recent and in retrospect, most notorious of all: the Exult acquisition. Exult has been the most difficult of all to digest and with it, Hewitt has ceased the annual acquisition ritual it began in 2002.

Only time will tell if Hewitt will renew is acquisitive path, or whether they in fact will become the acquired as has been speculated for many years.

About the author – Donald 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.

Hewitt’s Financial Results - What Do They Mean?

Hewitt’s very public financial difficulties continue today, days after announcing quarter-end September 30, 2006 financial results. It is not my intention to single out Hewitt by writing about them again. Rather, as the recognized leader in HRO, Hewitt can be viewed as the industry bellwether and can provide insight into the dynamics of the industry.

Taking a look at the results as reported by workforce.com, we see that Hewitt posted modest (0.9%) revenue gains year over year while net income was down 43%. Surprisingly, net income was only $23 million on $727 million in revenue. A deeper dive reveals that the outsourcing arm of the business (over half of the business) experienced declining revenue, income and profitability.

The workforce.com article goes on to report on Hewitt’s declining market share according to an EquaTerra study. Take a look at the article if you have the time.

As a bellwether, I would also look to see what else is being said about the market in general. Are we in fact seeing declining revenue, profitability and income industry wide? An interesting (un-attributed) article published the end of last month by HRO Today provides some interesting insight.

The article, citing a NelsonHall study, points out that the growth in the industry has definitely slowed and is not meeting analyst expectations. In fact:

“The value of BPO TCV (total contract value) awarded has declined by approximately 50 percent in North America from a peak of $15.4 billion in the 12-month period ending September 2004 to $7.5 billion for the 12- month period ending September 2006”

So while Hewitt’s revenues are down, clearly the industry is still growing: albeit at a slower pace than expected or previously enjoyed. By definition, Hewitt’s market share must be slipping. But what about profitability and the reasons growth is slowing? According to HRO, “Contracts are not awarded in 30 percent of instances where BPO is evaluated.”

There seems to be a disconnect in the general market between supply and demand. The market is demanding something that is seemingly in short supply: a proven ability to deliver high quality services with operational expertise at cost-reduced levels.

These quotes from the article are telling:

“Eighty percent of U.S. sourcing managers state that lack of process operations knowledge within the vendor has led to rejection of BPO.”

“Superior process capability is essential for BPO vendor success and needs to be more widely demonstrated than at present.”

“Vendors frequently fail to justify the levels of cost reduction promised during the bidding focus. Vendors are offering cost savings but two-thirds of sourcing managers have rejected BPO as a sourcing option because of a lack of belief in the vendor’s ability to deliver the cost savings promised”

So it would seem that while companies look for better process and cost reduction, vendors are falling short of the mark. “Lift and shift” can be one reason for this. It’s not unreasonable to ask how a vendor can do it better and cheaper if they use the same people, process and technology. We have consistently seen that the productivity gains are slow to come. The market seems to be noting this more than ever as the HROToday article title states: Many Potential Buyers Stay out of Market over Concerns about Delivery.

So as the market demands change in delivery, and change seems to be the key to provider stability, growth and profitability it comes as no surprise to see Russ Fradin make the following statement last week: “Our attention in the near term will be on accelerating the growth of the benefits outsourcing and consulting businesses, and redefining our approach to the HR BPO business.”

I would caution Mr. Fradin to take care not to put the cart before the horse. Redefining the approach to HR BPO will be critical to the future success of Hewitt and the market in general.

About the author – Donald 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.

Human Resources and the Mid-Term Election

Today is Election Day!!! After today, we will no longer be bombarded with political ads slinging mud right out of our TV sets. After today, most of the nightly news will go back to the typical and sensationalist news of the day. I really won’t miss the political mudslinging, but election season is always an exciting time in my mind. Regardless of political stripe, persuasion, or philosophy, it’s a great time to check the pulse of the nation and determine if we are on the right course or if, as a nation, we need a course correction. And today’s election should prove to be more spell binding and exciting than the typical mid-term election.

All the news is a twitter with election coverage, and every pundit is pontificating and speculating as to the future composition of the House and Senate. At the risk of alienating our significant non-American readership, here today we take a passing glance at the American Election.

SystematicHR (at least Donald Glade) will remain neutral and unbiased (I can’t speak for Double Dubs). I will, however, color the election in terms of Human Resources.

As I said earlier, regardless of your political leaning, we can all recognize differing approaches to HR issues between the Parties. Clearly, these issues will not sway most people’s votes given the reality and gravity of today’s larger issues, but let’s take a look at them here.

Some of the issues at play in the current election that could affect the HR professional’s job include:

• Social Security reform – reduced benefits, later retirement, private accounts, increased taxes, SS wage base are all potentially in play.
  
• Medicare prescription drug coverage – the last legislation passed has cost the government much more than anticipated; a Democratic controlled Congress would surely take this on.
  
• Minimum wage legislation – with the Federal minimum wage not changed in nearly 10 years, the parties have been fighting over this issue for a while now. With individual states also having the right to set minimums above the federal level, six states (Arizona, Colorado, Missouri, Montana, Nevada and Ohio) also have state minimum wage increases on the ballot today.
  
• Union regulation – legislation could be introduced making unionization easier to achieve
  
• Ergonomics regulation – Only 60 days after taking office, President Bush signed a repeal of ergonomic regulations which were to become effective October 15, 2001, dooming office workers across the country to wrist and back pain. No, seriously, this was some pretty comprehensive OSHA stuff that the Democrats would love to get back. Check it out: “ergonomic legislation” gets 682 hits on The Google!
  
• FMLA expansion – all sorts of tinkering with the FMLA has been discussed. Keep an eye out!
  
• FLSA regulation – The Democrats were generally unhappy with the final regulations published by the DOL in 2004, and may bring it up if given a chance.
  
• Health care reform – On EVERYONE’s list in some fashion whether it’s through universal health care, health care pooling, or Health Savings Accounts, we will definitely be hearing about it when Congress reconvenes; but can anyone get legislation passed in this contentious arena?

There are plenty of issues to which both parties can attach themselves. There are differing perspectives, proposals and outcomes depending upon which party will control Congress.

I have no illusion that HR issues will sway the electorate, but I encourage all of you to educate yourselves on the options and approaches of both of the parties, and write your representatives to let them know how you, the HR professional, feel about these issues. You’ll feel good about yourself while fulfilling your civic duty.

And remember: Vote Early, Vote Often!

About the author – Donald 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.