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Amidst Other Challenges, Hewitt's HR BPO Head Resigns
Hewitt announced it will "review" its third-quarter guidance as it struggles for profits -- a common problem in the emerging industry. Pioneering in an emerging industry requires "some pain," says one expert.
Hewitt Associates is the 800-pound gorilla of the HR business-process outsourcing market. The firm holds more than 37 percent of the HR BPO market and has more big-name clients (30 or so large companies, including Sun Microsystems and PepsiCo) than any other vendor in the industry. However, the recent resignation of Bryan J. Doyle, president of Hewitt's HR outsourcing business -- along with the simultaneous retirement announcement of chairman and CEO Dale L. Gifford and Hewitt's statement that it plans to "review" its third quarter profit guidance -- has brought new attention to the company's operations. It also has underlined the difficulties Hewitt is having as it struggles to earn a profit in what is still a controversial new industry, one in which most of the major vendors have yet to turn a profit. "Their earnings calls have been dominated by their HR BPO business, which has been bleeding money," says Yankee Group analyst Jason Corsello. "Hewitt has continued to win new business since it acquired [HR BPO vendor] Exult in 2004; it doesn't have a sales problem," Corsello says. "However, implementing and managing a BPO contract is very complex and Hewitt has really struggled with it. Many of the HR BPO contracts it inherited [from its 2004 acquisition of Exult] have not borne fruit in terms of scalability or operating efficiencies." Though it's possible Gifford's retirement could be linked to problems with Hewitt's HR BPO unit, says Corsello, he says he's "not reading too much into it." However, consultant Naomi Bloom, of Bloom & Wallace in Fort Myers, Fla., says she believes Gifford was "forced out" because of problems with Hewitt's BPO business. "He wasn't delivering," she says. "HR BPO is a business that could be successful, but Hewitt hasn't had the right leadership in place. They inherited an outstanding sales team when they acquired Exult, but those people have all left." Hewitt expects its HR BPO business to lose $128 million this year, says Hewitt investor-relations spokeswoman Genny Pennise. The Lincolnshire, Ill.-based company, which also provides benefits consulting and administration services to clients, had total revenues of $2.8 billion for fiscal 2005 and net income of $135 million. Phil Fersht of Everest Group says Hewitt's problems are the result of "trying to solve too many operational difficulties at the same time" and the outcome is that "many HR BPO vendors are shifting more of their resources from marketing to operations." Julie Gordon, Hewitt's chief business excellence officer, will serve as temporary head of the company's HR BPO business while it searches for a permanent replacement. The company denies Gifford's retirement is linked in any way to the HR BPO unit's performance. "Dale Gifford has been thinking about retirement for some time and he recently told the board of directors that now would be a good time to retire," says Hewitt spokeswoman Kelly Zitlow. "As for Bryan, he's resigned to pursue other opportunities, and I'm not going to speculate beyond that." Hewitt is not alone in finding the road to profitability difficult. Few if any HR BPO vendors are making money at this point, says Corsello, adding that Cincinnati-based Convergys is also losing money, while IBM, Accenture, EDS and other companies that provide HR BPO services have not released numbers around their services. Hewitt's difficulties are compounded by the fact that the HR BPO industry (in which companies outsource four or more of their HR functions to a single vendor) is still relatively new and most of the large contracts have yet to mature, he says. "I'd say profitability is pretty uncommon among the firms providing HR BPO services today," says Stan Lepeak, managing director of EquaTerra, an outsourcing advisory firm in New York. "There's a camp of equity analysts who wonder if HR BPO can ever be profitable. If Hewitt -- one of the most respected companies in the HR business -- can't make money at this, the thinking goes, then who can?" Bloom says the answer to the question of whether HR BPO can ever be profitable is a "resounding yes," adding that she believes several vendors have (or soon will) achieved "fragile profitability." "It's hard work, not to mention expensive, to be a pioneer in an emerging industry, and that's what HR BPO is," she says. "There've been a whole host of issues the industry has had to address, ranging from massive investments that had to be made to services that weren't priced correctly, software that had to be created and the question of what role customers should play. Look at Amazon.com -- it's an established player now but they had to suffer through years and years of losses. You don't get to an upside without some pain." Lepeak says he anticipates Hewitt will most likely restate the number of HR BPO clients it expects to sign this year, adding that the company had initially predicted it would sign eight to 10 new clients in 2006. Hewitt has not publicly announced any new HR BPO clients so far this year. Hewitt's challenges include the fact that it aggressively courts large clients, which, in turn, necessitates long and complex transitions from the clients' systems and processes to Hewitt's, says Lepeak. "It's usually a couple of years into such a contract before the client and the vendor finally start to achieve the results they'd anticipated," he says. "This is complicated by the fact that customers tend to have higher expectations of Hewitt in terms of service delivery, which tends to lead to higher costs." Hewitt still has plenty of opportunities to make its HR BPO business profitable, he says. "Hewitt is putting processes into place to make sure new HR BPO deals are economically sound, although the results won't be obvious until two or three years down the line," says Lepeak. "Deals are being more carefully vetted by top managers, whereas before, like many other vendors, they had their field teams structuring deals, which was good for the clients but not so good for the providers." Bloom is skeptical about Hewitt's prospects, however. "One hopes that their board either has a big plan for either creating an A-plus leadership team or else selling off the BPO business before it loses even more value."
June 23, 2006 Copyright 2006© LRP Publications |
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