My comments about money losing were specific to Convergys’ HR Management division, which is the acquisition in this announcement.

This is a money losing group according to SEC filings. NorthgateArinso bought this for a bit more than book value.

Of course, other companies can make money in this business. I’m just saying, NorthgateArinso didn’t buy a profitable business for $100M. It bought assets, sales contacts, and the ability to put a few more dots in the USA on the standard geographic reach slide prevalent in all outsourcing vendor pitch decks. The winner here is Convergys which offloaded the unit and I bet the raised their guidance more than the $100M sales price, as this was an anchor around their neck…or at least a couple of the mega deals made it seem that way on paper.

Not sure I entirely agree with Tony that this is a “money losing business”. I’d say it WAS a money-loser, but the new breed of providers are approaching these client engagements in a far more sensible way. Will take time to prove the new model, but the increased focus on standardized payroll and common HR process / standards is slowly transforming the business to something that will make it a profitable growth industry,

Brian

I do not believe that multi-tier HRO will work without the clients agreeing to standardization. And HR clients don’t agree to standardization because their process are incredibly diverse. Just think about the process of hiring, which requires a people master (Oracle/PeopleSoft), a hiring automation tool (Taleo), a background checking firm (HireRight), a temp labor automation firm for temp-to-perm (FieldGlass), an outsourced managed service provider to manage temp labor firms (pick from a wide variety), external recruiters, some level of scanning/imaging/storage for all the final documents, and probably some things I can’t think of right now. It’s like making soup – we all eat it, and there are countless recipes. Since the multi-tier HRO vendors cant get economies of scale, their businesses are limited.

I like when outsourcing vendors focus. Payroll is a great focus as most companies outsource this function and it has a clear method of delivering the service, though there are variety of ways to approach time card entry, integration with POS for time entry, and a few ways handling the banking processes and reconciliation. It’s still distinct enough and a sufficiently mature process to stand on its own.

This acquisition is about focus for both organizations.

Convergys lost focus on their call center outsourcing business because they thought HRO was about the HR call center, but it turned out to be so much, much more. Returning to the call center focus is good for Convergys as their isn’t sufficient overlap in the functions. Read Convergys’ 2008 10k (annual report) for the underlying tone of their perspective of the HR business (page that includes comments like, “it is not expected to be the future growth driver we once envisioned” and “results here are clearly not satisfactory.”

NorthgateArinso gets an established HRO business, US relationships, and a strong toe-hold in the US marketplace. And they get more payroll, which is good for their focus area. I suppose they got a reasonable deal on this acquisition, but the truth is Convergys is relieved to dump this business for $100M, given that the HR Management division of Convergys is operating at a gigantic loss.

Buyers who are managing existing relationships with Convergys that will be transitioned should be thoughtful and inquisitive about how NorthGateArinso handles renewals or unprofitable contracts. This is a money losing business, and I suspect their will be limited in interest by NorthGateArinso management to continue unprofitable contracts.

PF