HR gains from supplier mergers in current trend for consolidation in HR services and outsourcing

A number of high-profile mergers and acquisitions within the HR services and outsourcing market have hit the headlines in the past month. This has raised questions as to why the market is consolidating, and how this will affect HR professionals who are exploring outsourcing as an option.

At the start of May, HR software firm Northgate bought a majority stake in international outsourcing company Arinso, putting the value of the company’s HR services revenue at £257m.

Arinso is a provider of SAP-based HR services, including HR outsourcing, technology integration services and strategic consulting. It employs more than 2,500 staff in 27 countries.

Hot on the heels of that deal, software giant Sage bought rival firm Snowdrop Systems for £17m. Sage serves 5.2 million customers worldwide, while Snowdrop provides HR and payroll management software to more than 700 mid-sized businesses in the UK.

A new trend?

So why the sudden rush to consolidate? Anthony Bruce, director of HR effectiveness at consultancy PricewaterhouseCoopers, said multi-million pound corporate deals in the HR technology and services market were not new phenomena – just part of “a continuing trend”.

To back this up, he pointed to two significant deals in recent years: consultancy Hewitt buying outsourcing provider Exult for £380m in 2004, and IT firm EDS joining forces with consultancy Towers Perrin in a £235m deal the following year.

Roger Metelerkamp, partner at professional services firm KPMG, agreed. “Consolidation has been going on for some time,” he said.

“It is nothing new, and it enables a company to provide a greater breadth of service. There are many service providers in the market, and these deals are not sufficient enough to have a major impact on, or dictate, cost trends.”

Peter Fitzmaurice, head of commercial development at HR information group Wolters Kluwer, also concurred. “Due to the size of these markets, we would not consider this as a consolidation of businesses, but rather a move by these companies to expand their current market offerings.”

Martyn Hart, chairman of the National Outsourcing Association, which represents outsourcing providers, said such deals generally happen in clusters, causing a halo effect.

“I suspect consolidation has been ongoing for some time. All that may be happening is that as more organisations outsource generally, suppliers need to get bigger to compete,” he said.

Future developments

Analysts continue to predict significant growth in the HR outsourcing market. The Yankee Group, for example, has reported that the market is estimated to grow to $28bn (£14.1bn) by 2008.

Bruce offered more reasons as to why such deals take place. “To increase revenue and support their clients, HR services organisations are using acquisitions to expand from single process into multi-process – for example, from payroll into pensions and HR administration,” he said. “They are also using acquisitions to extend their geographic reach into new countries.”

According to Metelerkamp, acquisitions are an easy way for providers to acquire specialist skills. “It also takes time to develop software, which these acquisitions and mergers can overcome,” he said.

Samad Masood, an analyst at technology consultancy Ovum, said most outsourcing contracts tended to be multi-year agreements. “So in the case of the Arinso deal, the two companies aim to gain longer projects through business process outsourcing to ensure a recurring income,” he said.

“The aim is for Northgate’s UK mid-market-focused products and services to slot underneath Arinso’s services across the 27 countries in which Arinso already has a presence,” he added.

Masood believes this consolidation is a sign of the increasing importance of technology choice in HR services provision, and the increasing potential for organisations to outsource their HR processes.

“Experience and understanding of HR technologies and outsourcing will become an increasingly common requirement for HR professionals,” he said.

HR outsourcing remains an option for organisations to consider, according to Bruce. “The market is showing confidence in outsourcing as a viable option for assisting with the transformation of HR,” he said. “It should still be one of [the HR director’s] strategic options.”

Top tips

Questions HR directors should ask during the process include whether the supplier can align its IT platforms with the organisation’s current system, and how it has fared with similar deals in the past.

“Your evaluation of HR services suppliers should consider their capability to assist with the execution of your organisation’s strategy and long-term plans,” said Bruce.

He also provided some pointers for HR teams assessing how these deals might affect them professionally.

“I believe HR practitioners will need to assess their role and adapt, to become more efficient and understand where they are starting from,” he said. “In a changing supplier market, it is more important than ever to understand the current position of HR – namely, the cost and the efficiency of the function.”

Bruce added that HR professionals should also have a real understanding of what the company wants going forward, and keep an eye on reducing the cost of the HR function.

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