Now that all the analysts have spoken and market insights have been given, a lot has been said about the Aon and Hewitt Merger. Both good and not so good comments have been made about this upcoming union, and most having to do with the impact of this merger on the human resources outsourcing market and HR consulting market.
In case you haven’t heard, Aon Corporation announced on July 12th that they plan to purchase Hewitt and Associates for $4.9 Billion, and create an integrated consulting and outsourcing service under the brand of “Aon Hewitt” with 29,000 global employees. Aon Corporation is one of the world’s leading providers of risk management services, insurance and reinsurance brokerages, and human capital and management consulting services. Hewitt is also known as one of the world's leading HR consulting and outsourcing companies. With Aon’s consulting businesses FY’09 Revenue of $3Billion, more than half of that earned in benefits outsourcing, and Hewitt’s Revenue of $1.3 Billion, 85% of which comes from consulting services, the new company will have a combined opportunity for $4. 3 Billion dollars of business based on FY09 figures. Additionally, they expect to garner savings of $355 Million by 2013 due to reductions in operating costs from the combined business operations.
Outsourcing and consulting in HR can be difficult to follow at its most stable points. But in today’s market, companies are shifting and merging on a daily basis, and the fundamental basics of HR outsourcing are changing dramatically. In the last year alone we’ve seen:
All of these are very different types of companies, some more focused on consulting, or outsourcing, or technology. But the underlying driver behind these moves is a play for an HR market that has been less than lucrative in the past, but is on the verge of something big.
It was just in March, that we learned about the NorthgateArinso purchase of Convergys’s HRO business, and I commented on what HR Leaders were looking for from their HR Outsourcing partners.
Today I want to talk a little bit about the differences between the HR outsourcing and HR consulting businesses. Depending on the organization providing the services, these two areas, outsourcing and consulting, usually overlap in a service provider’s offerings. This type of overlap in service areas can be a positive cross-selling and skills enhancement opportunity for both the client and the service provider. On the other hand, these two offerings can also be separated by a wide gulf of business red-tape and competing internal goals within a service provider’s organization. In some cases, the separation is so severe that you often hear about the HR consulting side of the business and the HRO side of the business working against each other in business deals, especially in overlapping strategic areas.
So what really makes these two areas so different?
HR Outsourcing
There is no doubt that today the HR outsourcing business is tough; margins are low, HR leaders’ expectations are high and standards are simply nonexistent. The focus for most organizations is on outsourcing “Core HR Services” to increase efficiency and create room for strategic HR efforts. When you offer outsourcing services, you take on the ownership of the employees, processes and usually the technology within those services. In the HR space today, this is often more of an art than a science.
Today’s outsourcers have to decide on many different aspects of what they will offer –but some of their biggest challenges include:
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Scale of business
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Target Market Size
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Technology
Scale
As an outsourcer you could be considered an:
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MPHRO – Multiprocess HRO Firms (also known as an HR BPO) – An organization that outsources many process areas with a focus on being a single HR outsourcing firm for an organization.
Companies such as Accenture and IBM are focused on this area and feel that their extensive experience in the IT outsourcing space makes this a real opportunity for them. But, even they would admit that they can’t offer everything today. Hewitt had made a recent resurgence in the HR BPO market, stating that about 16% of their revenue was based in this market.
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Or you could be one of the many HRO's that offer one or only a few service-specific outsourcing areas, such as:
• Benefits Administration Outsourcing (BAO)
• Recruiting Process Outsourcing (RPO)
• Learning Administration Outsourcing (LAO)
• Payroll Administration Outsourcing (PAO)
• EDM (Employee Data Management)
Aon Consulting only offered Benefits Administration Outsourcing, around 15% of their revenue for FY’09.
Market Size
Then you have the question of which size of organizations within the market space you "want to" and "can" serve. This is a really tough question for outsourcing organizations, because what it takes to be an HR outsourcer for small, medium and large organizations is very different. It requires:
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Different sales tactics
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Different support structures
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Different pricing packages
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Usually different technology options
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Definitely different revenue opportunities
Some organizations, such as Accenture, have chosen to step out of the mid-market HRO space (keep in mind we are only talking HRO services here). Hewitt was also known for its large company HR BPO and BAO services. While Aon, is known for its expertise and market share in mid-market BAO services. In a small research project we did last year, it was clear that the large, more mature HR organizations were looking for what I’d call “Core outsourcing” – they wanted to outsource a few very large CORE HR services that allowed them to work more strategically. Mid-market companies, on the other hand, were much more interested and open to the concept of a full HRP BPO – they were looking for someone to manage their entire HR outsourcing needs.
Technology
As I noted in my last blog, a big component of what many organizations are looking for from their HR outsourcing provider is the oversight and management of major HR systems. These systems include HRIS, benefits and compensations platforms, payroll, talent management systems, and the various manager/employee self services options. Today’s HRO's need to make major decisions concerning their approaches to systems.
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Will they require a company to use their own internal platform, or will they be flexible in there platform capabilities. Are they open to working with multiple systems; often requested by the clients?
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Will they use a single internally hosted platform or will they choose to connect best-of-breed platforms?
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Will they create strategic alliances with platform providers, or will they create their own internal systems and platforms?
HR Consulting
HR consulting on the other hand is a lot more about providing advice, guidance, and project or temporary support for an organization’s HR function. The margins in this space, when done well, should be considerably higher. The focus of this area of expertise is on “Talent Management” and “Strategic Enablement” services – including the important board-level decisions dealing with compensation, retirement and benefits plans. I’m not saying that HRO functions don’t do this type of work, but usually this is part of a bigger package, and more often gets lost in the day-to-day challenges of dealing with a transactional business.
Today’s HR consulting firms also have to give some deep thought to their business approaches. They often struggle with:
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Scope of Services
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Target Markets
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Division of Services
Scope
HR Consulting today can range from simple process optimization efforts to developing talent and retirement investment strategies. IBM has services that range from helping organizations identify critical talent to implementing HRIS systems. On the other side, a major competitor to Hewitt, Mercer’s HR consulting organization recently announced new services to help organizations optimize their entire talent management lifecycle. Additionally, you have the very lucrative areas of compensation, investment management, and retirement, and employee benefits. All of these are key areas for Hewitt.
Target Markets
The type of services provided, dictates the capabilities of an HR consulting firm to meet the needs of small, medium or large organizations.
If the consulting services stay at a strategic level, and focus on best practices and sharing industry insights, organizations can leverage lessons learned across organizations of any size, as well as any industry. In many cases, having a diverse background allows the consultants to bring new and fresh ideas to the table. On the other hand, deep experience in a particular market such as size or industry can be very powerful, as well. If you are a highly regulated mid-market business, having someone with experience in the laws and regulations that apply to your specific business type can be invaluable. For example, Booz Allen Hamilton serves the government industry solely with its HR consulting offerings.
If the consulting services move into implementation of processes, tools or even change management efforts, then that often requires an HR consulting function that has the ability to work globally, and at the same scale and size as the client. This requires a great deal of “hands” and “feet” in a local area to support rollout efforts.
Division of Services
Some organizations divide their consulting resources by service offering area, for example consultants become experts in Recruiting, Compensation or Retirement packages. Other organizations focus on the deep synergies that can be found by dividing services into industries; for example, IBM is well-known for its industry specific expertise areas. Some divide themselves by size, for instance, mid-market and large companies. Some organizations are large enough to split them by all of these divisions.
Most firms have a matrixed environment from which they can pull a team of people together with the right skills, background and experience to work on a project. This is one reason why it is important to understand how closely a service provider’s HRO and HR consulting team work together. If these two entities are completely separated, you can quickly miss out on some of the best synergies a service provider can offer – the combined knowledge of its organization.
Conclusion
This is a simplified look at a very complex industry that is rapidly redefining how it goes to market and who the big players will be at the end of the day. What is important is that as buyers look at this market, they are interested in one thing – How can you as the outsourcer or consultant make it simpler for me! How can you integrate my CORE HR processes, my benefits decisions, my compensation plans and my technology efforts into my talent management strategies – and enable my organization to make more strategic people decisions?
The Aon and Hewitt Merger has some real benefits that may or may not come to fruition, depending on the approach they take to the merger:
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Expanded capabilities and stability as an HRO service provider for both large and mid-market companies
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Expanded global presence, the combined company will be in 120 countries now
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Cross-selling opportunities for both the Risk and HR side of the business
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A real opportunity to begin combining the power of Benefits Administration Outsourcing (something boards and CEOs pay a great deal of attention to) with other HR outsourcing and talent discussions.
The HR consulting and outsourcing industries as a whole have a greater opportunity ahead of them. They have the ability to help lead a market in which their efforts will inform the most important business decisions that leaders will make on a day-to-day basis – their people decisions.
I think it is summed up best by Aon’s Chief Executive Officer Greg Case, who set the tone for this integration effort, when he stated “This merger will give us [Aon] a broader portfolio of innovative products and services focused on what we believe are two of the most important topics in the global economy today: risk and people.”