For providers of business process outsourcing services, 2005 is shaping up as a difficult year, with potential clients backing away from large deals.
One exception seems to be human resources outsourcing, which Fidelity Investments says is its fastest-growing source of new business.
Jenny Engle, a spokeswoman with the Boston fund company, said its benefits and HR outsourcing business continues to grow and draw interest. She said Fidelity has added relationships with clients such as Bank of America, BASF, and General Motors during the past year and a half.
Fidelity is implementing some of its largest new client relationships, Ms. Engle said. "We expect the momentum to continue, and we will continue to increase our market share," she said.
Though Fidelity is bullish, Mellon Financial Corp. of Pittsburgh, which was the top banking company in the business, recently sold its operation. Affiliated Computer Services Inc. of Dallas bought it in May for $405 million. Martin G. McGuinn, Mellon's chairman and chief executive, said at the time that his company had decided to focus on "growth businesses."
And some analysts said that for the past year Fidelity seemed to be on the sidelines as it reorganized in HR outsourcing.
Peter Allen is a partner and the managing director at Technology Partners International Inc., which helps evaluate, negotiate, implement, and manage IT and business process outsourcing initiatives. He said Fidelity did not seem to be competing hard for new business in the past 12 months.
Despite that, his firm puts Fidelity's market share at 30%, just behind that of the market leader, Hewitt Associates Inc. of Lincolnshire, Ill., at 35%.
Fidelity has a couple of "cornerstone large clients, like Bank of America," Mr. Allen said, but in essence it told the market that it wanted to spend some time getting services and clients in order before starting to go after new customers, he said.
"When they are ready to take clients on, it will be viewed as very good news for the market," Mr. Allen said.
But Ms. Engle said Fidelity has not been fending off business. "We have added significant client relationships, and we will continue to add clients," she said.
Mr. Allen said HR outsourcing continues to grow despite a slowdown in business process outsourcing, of which it is a part.
"There has been significant slowness in the growth rate and continued softness" in business process outsourcing "with the exception of HR outsourcing in the Americas," he said. "The metrics indicate that this is going to continue."
The second-quarter decline in business process outsourcing was substantial, Mr. Allen said. His firm's data shows 19 deals in the quarter, versus an average of 24 in the preceding nine quarters. The average second-quarter deal was with a company having $4 billion of annual revenue, but the average for the preceding nine quarters was $5 billion.
"There are fewer BPO transactions and fewer megadeals," he said. "We are finding clients are much more cautious around BPO; they are changing scope and aborting transactions."
Over all, the number of business process outsourcing deals declined 13% from the second half of last year to the first half of this year, Mr. Allen's firm calculates.
But HR outsourcing, the largest segment, grew to 28% of the total in the second quarter, from 11% a year earlier.
Ten HR outsourcing deals are near signing, Mr. Allen said. "That is sizable," he said, since so far this year only 11 or 12 such deals have been signed.
Analysts said the principal limitation on the growth of HR outsourcing has been a dearth of providers with the scale and technology to go after Fortune 500 companies. Among such providers, in addition to Hewitt, Fidelity, and Affiliated, are International Business Machines Corp., Accenture, and Electronic Data Systems Corp.
Last year Hewitt bought Exult Inc., an Irvine, Calif., provider of HR outsourcing services.
Bryan Doyle is the president of HR outsourcing at Hewitt. "We have had very strong competition from a number of organizations including Fidelity," he said. "Strong competition is good for the marketplace - it is good to have three or four or five choices - but Hewitt will continue to do well because of the competitive advantages we have."
Mr. Doyle said Hewitt continues to be the market leader because it has the most comprehensive and flexible offering. He said it has benefits outsourcing relationships with 300 organizations and will keep trying to expand those relationships.
It announced such an expansion Monday. It said it would provide HR outsourcing to Mervyns, a Hayward, Calif., retailer with more than 250 department stores in 13 states. Hewitt had been providing defined-benefit advice and consulting to Mervyns.
Mr. Doyle said the deal was Hewitt's 12th in HR outsourcing since the start of its fiscal year, in October. He said the pipeline is robust and he expects 10 to 12 more deals in the next fiscal year.
Kevin Daniels, a Boston analyst, said banking companies like Mellon have backed away from human resources services because they have had a hard time developing enough scale to achieve adequate profitability.
"Banks and large financial services firms are still trying to find a way to cross-sell human resources services to their defined-contribution and defined benefit plan customers," Mr. Daniels said. "When they can make that link they'll make money from this business line. Until then they'll leave these services to Hewitt and Fidelity."
Mr. Allen said he does not expect many banks to become providers.
"We have a few banks that TPI is representing on the buy side," he said, "but otherwise banks are not really interested in looking to be anything but customers in this business."
"This is a business that is working for Fidelity and is working for Hewitt," he added, "but it just isn't a core strategy for Mellon or for other banks. … Banks want to manage money."
