Fidelity Investments has lost share in the human resources outsourcing market, according to industry analysts, as competitors have made big acquisitions and gathered assets.
The Boston mutual fund company has lost ground in the business to competitors such as Hewitt Associates Inc., IBM Corp., Accenture, Affiliated Computer Services Inc. in Dallas, and Convergis Corp., an Addison, Tex., provider.
Since Hewitt closed its deal in October 2004 for Exult, an Irvine, Calif., provider of human resources business process outsourcing, it has established itself as the leading provider in the business, with a 35% market share, according to research by Technology Partners International Inc. Fidelity had a 30% share as recently as the second quarter of 2005, according to Technology Partners, a Houston company that tracks the industry, but because of its relative inactivity in the growing market, its share had slumped to 14% by yearend.
But talk about Fidelity's diminution as a factor in human resources outsourcing has been greatly exaggerated, the company says.
"HR outsourcing is a growth business for Fidelity," Guy Patton, the president of the Fidelity Human Resource Services division of Fidelity Employer Services Co., said in an interview this week. "So while there is a lot of talk about how much we have or haven't grown in the past 12 months, I can tell you that this is a very, very important business for us from a growth perspective."
Fidelity added 16 client relationships in 2005 - and 1.2 million participants as recently as Jan. 3, Mr. Patton said, and he expects to grow "at a faster pace in 2006 than we did in 2005."
Analysts have been skeptical about Fidelity's commitment to the business.
Peter Allen, a partner in and the managing director of Technology Partners, said in September that Fidelity had not seemed to compete hard for new business in the preceding 12 months. It has a couple of large clients, like Bank of America Corp., he said, but in effect had told the market that it wanted to get its existing services and clients in order before seeking new customers.
Mr. Allen said in an interview Wednesday that Hewitt continues to hold a sizable lead in market share, with Fidelity, Accenture, Convergis, ACS, and IBM "all positioned strongly for second place." The five have 7% to 14% shares. "These other firms have taken share while Fidelity has been on the sidelines," he said. "Right now it is Hewitt and then everyone else."
Fidelity has declared itself open for business again, Mr. Allen said, and that is good news for the business. The Boston company has positioned itself as a U.S.- and North America-oriented human resources outsourcing provider, he said, while its competitors are more globally oriented. Fidelity may get some business in the Americas, he added, but is not well-positioned to make bigger deals.
Characterizing Fidelity as "on the sidelines" is unfair, Mr. Patton said. "We view this business on a longer-term time frame than some of our competitors," he said. "While they are focused on growth from quarter to quarter or year to year, we are focused on long-term growth."
Big purchases by competitors have overshadowed Fidelity in the past two years. Hewitt's 2004 deal for Exult was succeeded in May 2005 by the decision of Pittsburgh's Mellon Financial Corp., the top banking company in human resources outsourcing, to sell its operation to Affiliated Computer Services. Martin G. McGuinn, Mellon's chairman and CEO, said at the time that his company had decided to get out of human resouces outsourcing in order to focus on "growth businesses."
In the past two years, Fidelity grew organically by adding big customers like Bank of America, BASF, and General Motors Corp.
"Acquisition is not generally our philosophy," Mr. Patton said. "We want to know the businesses we are working with deep and well in order to develop a deep relationship that we can build on over time. You can't do that through acquisition."
Fidelity plans to stay on the organic growth path, Mr. Patton said, offering additional services to its existing customers.
In December, Fidelity began outsourcing health savings account administration services to its customers, and this year it plans to begin offering work-force management tools that include talent, performance, and succession management. Bank of America and BASF each already uses these tools.
Mr. Patton said he sees growth potential in human resources outsourcing. A Fidelity survey of senior executives at more than 100 of the largest U.S. corporations said 97% are considering, or have recently completed, a human-resources operation upgrading.
Only 9% of Fortune 500 companies sent human resources work to outsourcers as of last August, he said, but he thinks the human resources customer group is eventually likely to include up to 60% of these companies.
"There is a lot of head room in terms of growth," Mr. Patton said. "If you size up the industry today and expect penetration to continue, you can see why we see remarkable growth opportunities."
Mr. Allen said he agrees that Fidelity can develop share if it is committed to the business.
"Fidelity will be warmly embraced if they are open for business again," he said. "Their reputation is strong, and they were on the sidelines for all the right reasons. They were there because they wanted to focus on their clients and to develop more offerings for them. But now the competition is stiffer. They have four or five strong competitors that they will now have to differentiate themselves from."
