So one of the worst-kept secrets in the HRO business finally came to fruition today, when the British HR services provider NorthgateArinso acquired Convergys' HRO business for $100m.
By our calculations, that gives the newly-formed entity a 15% market share of the enterprise HRO market (engagements with firms greater that 15,000 staff). We'll confirm this fact when we update our HRO market landscape in a couple of months.
The merger effectively moves them above IBM, Accenture, ACS and Hewitt into the leading position in the market from an employees-served perspective; not a bad day's work from a British payroll firm that acquired an upstart Belgian SAP-payroll integration shop. This also elevates NorthgateArinso firmly into the high-end of the enterprise HRO business, in addition to the mid-market scrap with the likes of ADP and Ceridian.
Why this merger makes a whole load of sense
Payroll-centric HRO is in high demand. As we revealed in our industry study last month, there is renewed appetite for HR services as businesses limp their way out of recession. This is especially the case where payroll is at the heart of the customer requirement and customers need a solid mix of software implementations expertise, backed up by low-cost processing capability (near shore and offshore) and HR domain expertise. So this acquisition is timely. It's also been a long time in the works, and NorthgateArinso has clearly thought long and hard before making the plunge.The US market was the gap in NorthgateArinso's armoury. NorthgateArinso could have made an alternative play into the benefits outsourcing arena and bid for the likes of ExcellerateHRO or ACS's HR business, but it's decided to stick to its knitting and fill out the one yawning gap in its armory - it's ability to win US business. "We were winning too many of the international components of deals, and customers kept the US services inhouse", CEO Mike Ettling (pictured) told us earlier today. Convergys gives them US strength and depth in spades. The highest concentration of multinationals are still in the US and their expenditure dominates the HR services market. Moreover, Convergys' international presence is quite a snug fit with NorthgateArinso's business (the addition of Sao Paolo and Budapest, along with a promising Asia/Pac benefits business are good additions to have for the future).
Convergys' woes appear to be behind them. Only two of Convergys' 21 clients had contrived to be unprofitable, but these are now in a much healthier position, having been ring-fenced and restructured. NorthgateArinso will have the challenge of delivering on Convergys' promises, but they've looked long and hard at the issues here, and know what they're letting themselves in for. Moreover, $100m is a great price for a strong book of business. Even if one of those two remaining deals is problematic, they can deal with it.
Both SAP and Peoplesoft (Oracle) clients can be serviced. While Northgate has enjoyed expanding the Arinso EuHReka business, which focuses on an SAP-based SaaS/BPO delivery model, the Convergys element really does beef up the company's Peoplesoft capabilities. And, unlike the unrealistic promises being made by some of its competitors, Northgate is being refreshingly realistic that it will not attempt to develop genuine multi-tenancy around Peoplesoft. That would be no easier to achieve than healthcare reform...
The Bottom-line: Great buy for NorthgateArinso at a great price, but the hard work begins now
Noone denies that old-world HRO turned into a bit of a train-wreck, where many contracts became unprofitable and providers struggled to ring-fence them and re-structure them. Convergys and others were guilty of taking on some deals that brought down executives, upset Wall Street and cast a dark shadow over the HRO industry. However, smart firms like NorthgateArinso are sticking to their knitting and focusing on global client work they know they can deliver profitably. The global payroll market opportunity is massive - CFOs cannot function properly when they can't have a handle on their global employees, and our research repeatedly reinforces this desire to improve the effectiveness of global operations.
NorthgateArinso now truly has a strong foothold with multi-national opportunities, however, their real challenge starts now. They now have to compete even more aggressively with the likes of IBM and ADP, where they will need to bring the best out of their existing client portfolio to prove they can truly take on that missing piece - the US market. Convergys gives them a bigger engine, now they have to fine-tune it to a performance level noone's really attaining in the HR services industry right now. Here's a chance to make HR services history - they now need to shore up their management and delivery talent to achieve it.