A year after a big merger made it the largest human resources outsourcing firm, Hewitt Associates Inc. says it plans to maintain its position through organic growth as the industry continues to consolidate.
“The growth strategy here is to take our existing customers here and broaden the relationship into total HR outsourcing relationships,” said Bryan Doyle, the president of HR outsourcing at the Lincolnshire, Ill., outsourcing and consulting company. “That is one advantage we have over the competition — our relationships. We are doing a high level of service today, and we want to deepen and broaden those relationships.”
Hewitt last October completed its deal for Exult, an Irvine, Calif., provider of human resources business process outsourcing, and now it has 35% of the human resources outsourcing market, according to Technology Partners International Inc. The second-largest provider is Fidelity Investments, with 30%, according to Technology Partners, a Houston company that tracks the industry.
Peter Allen, a partner and the managing director at Technology Partners International, said he expects these market share rankings to be unchanged when his company releases its quarterly data next month.
“We haven’t seen any noticeable shift. Hewitt is still the leader,” Mr. Allen said. “There hasn’t been any upticks from IBM, Accenture, or ACS that would sway those figures.”
Mr. Allen said Fidelity, which appears squarely positioned as No. 2 in this market, has not seemed to be competing hard for new business the past 12 months. Fidelity has a couple of large clients, like Bank of America Corp., he said, but in effect had told the market that it wanted to spend time getting services and clients in order before starting to go after new customers.
Jenny Engle, a spokeswoman for Fidelity, the Boston mutual fund giant, said its benefits and human resources outsourcing business continues to grow. Fidelity added relationships during the past year and a half with clients such as Bank of America, BASF, and General Motors, she said.
“We are currently in active conversations with prospects and expect to continue to add new relationships,” Ms. Engle said.
Mr. Doyle agreed with Mr. Allen that Fidelity is still trying to determine its position in the market.
He said he is confident that Hewitt can maintain its position. “We are a leader in an industry without a clear No. 2,” he said. “We are very determined to maintain our leadership position. As this market grows, we want to be the market leader here both in terms of customers and capabilities.”
Analysts said Hewitt’s purchase of Exult was part of the continuing consolidation of human resources outsourcing. Gartner Inc., a Stamford Conn., research and advisory firm, has reported that employee benefit outsourcing is a $29.8 billion industry in the United States (at July 31) and predicted it would grow to $34.8 billion by the end of next year.
Despite this prospective growth some large companies have gotten out of the business. In May, Mellon Financial Corp. in Pittsburgh, which was the top banking company in human resources outsourcing, sold its operation to Affiliated Computer Services Inc. of Dallas 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.”
“Once there w[ere] a dozen organizations competing for new business,” Mr. Doyle said, “now there are four or five organizations we compete with.” The five main competitors in the field are Hewitt, Fidelity, IBM, Accenture, and ACS, he said.
Mr. Doyle said he expects consolidation to continue. “Most industries get to three or four primary providers, and I think in the next couple of years we could see that,” he said.
Hewitt, Fidelity, IBM, and ACS have established themselves as the leaders, Mr. Allen said, omitting Accenture.
“Some industry players are clearly established in this business, and others want to be contenders but don’t have the necessary capabilities,” he said. “Clients recognize who the leaders are and want to work with them.”
Companies like Convergis Corp., an Addison, Tex., provider, and Arinso International Inc. in Brussels are working to make the right deals, Mr. Allen said, to get the scale to compete with Hewitt and Fidelity.
“There are providers out there like Convergis and Arinso that are perennial bridesmaids,” he said. “They don’t have enough global reach or corporate heft to really make it to the top tier. That is a recipe for some consolidation.”
But Hewitt does not expect to make any major acquisition in the next year, Mr. Doyle said, instead focusing on cross-selling for organic growth. “Being successful is about scale. We have great scale and will look to scale up by growing organically,” he said.
Some companies have quit human resources outsourcing because it can take time for the business to become profitable, Mr. Doyle said. And some enter the business hoping it will help them cross-sell other services, such as investment management, but are disappointed when profits are not immediate.
“It comes down to core capabilities and service,” he said. “All we are about is HR and HR servicing. That is all we wake up every day to do. That is why we have been successful; we are focused on HR.”
“If you look at other organizations, this is one of many businesses they are in,” he added. “But this is a business model that takes a lot of patience. It is a business that may be unprofitable in year zero or year one but then it gets profitable. It just requires a lot of patience.”
Since completing the deal for Exult, Hewitt has added 14 clients, including a large deal to provide benefits services to Wachovia Corp. Mr. Doyle said he expects to add eight to 15 clients next year.
Hewitt is confident it has the capability to add a large client every month, he said.
“We are feeling very, very good about the first year after the acquisition,” Mr. Doyle said. “We were hoping that, together, we’d sign something like eight or nine large clients, but we really exceeded that.”
Hewitt has 30 “very large clients” among its 300 client relationships.
“Hewitt’s management team is quite strong, and they of course have a decade-long tenure in this business,” Mr. Allen said.
