As the pandemic normalizes across day-to-day life, NelsonHall expects HR service delivery to adapt to a whole new set of challenges, both through legislation and HR best practices.

The convergence of three key themes are likely to see new HR solutions being developed: staff welfare and resilience, operational efficiency, and automation.

Staff Welfare and Resilience

Pre-COVID, HR priorities looked something like this:

1. Attraction and retention of talent: by the end of 2019, the EU was experiencing the lowest unemployment in 20 years
2. Upskilling workforces and identifying skills gaps, taking into account jobs that are increasingly being replaced by robots and automation
3. Employee engagement and experience, in particular supporting Gen Z and multi-generational workforces
4. Pay: reporting, gender diversity, and addressing the gender wage gap, and removing bias from processes
5. GDPR compliance: the General Data Protection Regulation (GDPR) is the toughest privacy and security law in the world and was put into effect in May 2018 across the EU.

A 2021 study by SD Worx¹ looking across 21 HR challenges has found that the top five European HR challenges in the coming years are as follows (with the percentage of respondents placing each challenge in the top 3):

1. Staff welfare and resilience: 27%
2. Employee engagement and experience: 20%
3. Attracting and recruiting talent: 20%
4. Sustainable employability of employees (retention): 17%
5. Talent development and internal mobility (retention): 17%

The number one priority in the coming years is not surprisingly welfare and resilience, which is the most significant change from previous years. Staff welfare and resilience in this context means supporting workforces through added pressures to avoid burnout/resignations and supporting healthcare and wider work-life needs.

Prior to COVID-19, staff welfare and resilience was not a concept many HR service providers, platforms, or processes had to give much focus to, except as it related to workplace safety, accident reporting, OH&S, and sickness policy design and implementation.

Through the pandemic, individual staff ‘check-ins’ have become key. Without basic health information on their staff, how can organizations address staff welfare and resilience effectively? And today, organizations need to acquire even more information about employees – home location, travel preferences, vaccination, and medical information.

Is this asking too much? As we normalize our new ways of working and adapt to new HR practices, the GDPR provisions create unique challenges for HR, which faces a dilemma of how to respond to welfare and resilience issues while respecting GDPR rules. GDPR obligations need careful attention in this regard, as health information has the protected status of ‘special’ category data under data protection law. Various European countries are introducing local recommendations to help businesses navigate the next stage.

When NelsonHall interviewed HR service providers in 2020, we asked them how they were adapting. Most were creating communication tools to support employee outreach and manage business continuity and furlough during the crisis. Companies and service providers were initially timid to record health information such as vaccination status, but with legislation in various jurisdictions, organizations and HR tech providers are finally stepping up to implement robust solutions to record vaccinations.

NelsonHall expects that the HR priority given to employee welfare and resilience will likely stay for the longer term, so we expect more to be done to implement stronger processes in this area. HR service offerings expected to develop over 2022 and beyond will increasingly address vaccine uptake, mental health support, flexible working, and work office restructures with new procedures.

Operational Efficiency

The SD Worx study also identified that the highest priority in 2021 was addressing operational efficiency. It found that ~50% of organizations recognize operational efficiency as being the top priority or project for 2021. Similarly, NelsonHall’s 2021 Cloud HR Transformation market analysis report² identified the top driver for cloud HR transformation as helping organizations stay competitive with improved cost, process improvements, and a superior employee experience.

Going forward, managing staff welfare and resilience should ideally be more than a line manager function performed through informal ‘check-ins,’ and it is imperative, to keep operational costs down, that HR revisits tactical solutions to build stronger processes to support resilience and welfare across employee populations. Without an HR response, talent attraction and operational efficiency will be challenged. The HR-specific COVID responses and workplace practices of organizations are critical now, especially given that many employees have experienced new-found benefits in working from home and have increased work-life balance demands and/or preferences.

Automation

Finally, what hasn’t changed? The SD Worx study found that in both 2020 and 2021, looking across 19 different HR functional and cross-functional areas, the top priority and the projects most organizations looked for help with from external specialists was improved HR process automation.

Looking across the cloud HR transformation market, NelsonHall’s 2020 report found that 5% of organizations interviewed were using robotic/AI automation services from providers, and this increased to 18% in 2021. The satisfaction level across organizations serviced also increased from a score of 4.0 out of 5.0 to 4.3/5.0. Automation can’t solve all needs for all processes, but in times of increased stress and to support the mass disruption that many businesses have had to face, a service partner strong in automation and technology as well as compliance can certainly save the day, and arguably should be table stakes when selecting a provider.

Summary

NelsonHall expects that in 2022, more HR offerings will be developed to support improved automation around staff welfare and resilience and help organizations drive greater operational efficiency while supporting employees’ individual needs with personalized HR service offerings. Part of addressing individual needs will also include a longer-term emphasis on flexible or remote working, a key factor in attracting and retaining talent over the next year. Finally, given the complexity of European legislation and storing data, providers need to be very savvy with the GDPR and help clients establish robust processes to make an impact. 

HR may be cautiously putting in place new processes that store more personal data, but unless HR steps up, operational inefficiencies are likely to persist; HR can no longer afford for the management of staff health and welfare to be primarily a line management responsibility. Further, a lack of coordinated action could exacerbate staff burnout or resignations at the management level and discourage new talent if the organization is not seen as an employer of choice.

1 SD Worx 2021 ebook: Ride smarter not harder, Towards people-first digital HR

2 NelsonHall’s 2021 market analysis report: Cloud HR Transformation Services

Pete Tiliakos presents a round-up of the latest developments from Workday and the key discussion points from the Workday Rising annual user conference held in Las Vegas, Nevada.

This past week, I attended two HR events at opposite ends of the Las Vegas strip: HR Technology conference and SuccessFactors’ SuccessConnect client event. Together, they attracted ~14k HR leaders, practitioners, vendors, analysts, thought leaders, and clients, and had the common theme and purpose of showcasing the latest HR technologies and innovations that are enabling employers to compete for, engage with, and maximize the impact of today’s top talent – in a vastly different workplace than we knew just five years ago. 

Here are my key takeaways on the HR technology trends showcased during the past week.

Advances in employee UI/UX

Not only is the employment market starving for skilled workers and top talent, there is a sharp focus on bringing about innovations that fundamentally reshape the way HR manages its human capital and engages with employees. HR applications are being developed with a ‘user first’ focus, whereby the employee experience is heavily influencing and shaping roadmaps for future enhancements.

At both events, the drive toward more consumer grade HR applications came through consistently. Each vendor I spoke with is laser focused on delivering robust HR capability, but also a world class UI/UX that will provide employees with experiences that match their personal life experiences and offer preferred channels of connection to the organization (particularly mobile).

HR tech vendors remain steadfast in their efforts to create a simplified, guided, and prescriptive user experience. AI, machine learning, NLP, and prescriptive analytics have become table stakes in today’s HR tech, and are driving advancements in UX design and performance.

Example:

SAP introduced a new digital assistant for SuccessFactors. Leveraging the SAP CoPilot Web application bot framework and SAP Leonardo machine learning, the digital assistant learns and comprehends user needs and acts accordingly. The digital assistant is further enabled to support conversational interaction with the HCM platform by leveraging NLP, allowing users to engage the platform through verbal commands. Further, the assistant integrates with popular collaboration apps Slack and Microsoft Teams and is mobile-enabled through Apple and Android apps.

Talent management technology

Without doubt, the key priority for many organizations today is competing for, acquiring, developing, and retaining top talent, in what has become a highly competitive marketplace. Thus, organizations are focused on boosting their talent management technology, with an emphasis on talent acquisition, performance management, and learning management. Providers are bringing to market broader, more capable talent management solutions and insights into their platforms and offerings.

Examples:

• Paychex launched a new LMS (Learning Management System) module, further deepening the talent suite of their Flex HCM platform. In addition to hundreds of pre-loaded learning modules, clients can upload their own learning content, create new content, and import content or materials from external sources (e.g. YouTube). Further, the learning application is available in full native form by mobile
• Infor introduced an update to its Talent Science solution and Predictive Talent Analytics, which supports recruiters and managers in sourcing top candidates by leveraging machine learning and predictive analytics. By leveraging behavioral and performance data, the application uses a data-driven process to identify success drivers within the business and identifies internal and external candidates who share those success drivers.

App marketplaces are rapidly expanding

While all modern HCM platforms currently offer robust APIs (integrations) which connect critical business applications to the HCM platform and extend its capability, the demand for more robust options for connecting solutions, services, and applications is in high demand. 

Open platform approaches are becoming standard with HCM providers, allowing for clients, partners, and third parities to connect APIs for consumption through a marketplace/app store-style delivery system. This open approach is allowing for integrations to a deep pool of external solutions that extend the power of the HCM platform, allowing clients to connect the apps that make the most sense for their unique business needs and user population.

Examples:  

• SuccessFactors announced that it intends to triple its marketplace apps in the near term. Additionally, it launched a new HR community which builds on its existing SAP App Center and offers connected partner solutions around six key areas: well-being, pay equity, real-time feedback, unbiased recruiting, predictive performance, and internal mobility 
• Namely launched the Namely Connect Marketplace, which offers its clients access to partner solutions for recruiting, learning management, employee feedback, identity management, etc. and includes vendors such as Okta (identity management), Greenhouse (applicant tracking), CultureAmp (employee feedback platform), and Vestwell (401k).

Not everyone is sprinting to the cloud

Throughout the week, I spoke to companies of different sizes and complexities, and from various industries. Most were either in the process of moving their HR to the cloud or were planning the move in the next 12 months.  

However, what stood out is just how many companies still haven’t made a move to a cloud-based HR solution or are doing so with a modular approach (but are not starting with core HR). For example, I spoke with a handful of mid- and large-sized enterprise employers who said they had deployed a mix of cloud-based modules across their landscape, most commonly talent-focused modules. When asked what they use for core HR, the response was often “a leading on-premise platform”. When I asked why they hadn’t done so for core HR or payroll, the response was often “I’m not sure” or “We plan to get there… eventually.” 

This is consistent with findings in NelsonHall’s recently published market analysis, Cloud & Multi-Process HR Services: Journey to the Cloud and Beyond, which reveals that only ~40% of the multi-process HR services market is operating in a cloud environment. This could be attributed to client apprehension, but also to vendor solutions being geared to incremental moves to the cloud rather than a single shift. For example, SuccessFactors’ Upgrade2Sucess targets its on-premise customer base, enabling a move to the cloud, but as and when it makes sense for the business. This modular approach allows the client to reduce risk and realize ROI incrementally along their transformation journey.

HR innovation is no longer just for “HR companies”

Human capital management has become a very profitable market in the past several years, and only seems poised to continue its growth as organizations become more talent-focused. Historically, innovation in the HR space was left up to the HR vendors and tech providers themselves (e.g. ADP, Ceridian, Kronos, etc.) – i.e. those directly serving the HR practitioners with services and solutions.

However, this has changed as the largest, richest, and most capable software companies in the world (e.g. Google, Facebook, Microsoft) are targeting, developing, and selling human capital management solutions and stepping up the competition across the industry. 

Examples:      

• Google Hire: an AI-enabled talent acquisition platform for G-Suite
• Workplace by Facebook: Mobile-enabled tool for workplace communication, collaboration, including groups, chat, and video call capability. With integration to HR platforms including, ADP, Kronos, and Paychex Flex
• Microsoft Teams: Workplace collaboration tool which combines chat, meetings, notes, and attachments with integration to Office 365 and leading HCMs (e.g. SuccessFactors)
• Microsoft Dynamics 365: cloud-based ERP and CRM solution with HCM capabilities, including Core HR, talent acquisition, and onboarding.

Now in its tenth year, Neeyamo is hitting its stride as a niche global HR services provider. I recently caught up with the company at its first U.S. analyst and advisor event for an update on its HR service lines.

Strategic focus

Neeyamo aims to ‘address the white spaces in HR technology and services’, including underserved markets and geographies. It positions itself as a specialist long-tail country provider, targeting global organizations which have ~70% of their employee base across five countries, with the remaining 30% distributed in small numbers across multiple locations. In these multiple locations, clients typically have numerous payroll technologies, including legacy technology, often with payroll distributed across several platforms – resulting in poor overall data management, limited helpdesk and language support, and high fixed cost. Neeyamo’s goal is to be able to provide a single-point HR solution for all tail-country needs.

Starting with 50 employees and 30 clients in 2009, today Neeyamo has:

• 1.6k employees globally, serving ~250 customers
• 6 global delivery centers (California, Mexico and three in India) and 17 proximity delivery centers
• 4 lines of businesses: global payroll, multi-process HRO, pre-employment and other screening services, and cloud transformation services.

Global payroll

Neeyamo has~75 global payroll customers in 153 countries, and processes 7 million payslips per year, served by 500 payroll specialists. Its technology, PayNComp, is currently configured in ~30 countries. Neeyamo plans to bring this to ~70 countries within the next three years to handle most tail countries, and will use in-country partners elsewhere.

Neeyamo’s roadmap for PayNComp is focused on delivering real-time payroll results, and is currently capable of processing ~10k employees (gross to net) in ~90 seconds. Neeyamo is striving for three primary experiences from PayNComp:

• Executive experience: A single view of global payroll at a glance with the ability to view all relevant payroll reports for every country and business unit per pay period
• Payroll team experience: Country/BU level view of payroll, a maker/checker process to ensure validation at every level. Includes input validation to catch errors early, variance analysis, dashboards, and a compliance view
• Employee experience: Easy view/interface of payslips, tax documents and other payroll related information, supported in multiple languages.

Helpdesk

Though not a separate line of business, Helpdesk support is a strong area of focus for Neeyamo. Out of its 250 customers, 100 clients utilize helpdesk, supported in 25 languages and used by all payroll clients.

Helpdesk support and ticket creation is built into the process, so users don’t have to log out and log in to a separate system. Users also have the option to take a screen shot to attach to a ticket, add a category. Users can see the most common questions and answers, and can access the helpdesk via phone, email or chat. The following is a breakdown of how inquiries are handled, with two-thirds of inquiries answered via self-service (ESS, MSS), and only 5% requiring specialist support:

• Tier 0: 66% (ESS, MSS)
• Tier 1: 28% (HR Helpdesk)
• Tier 2: 5% (Specialist Helpdesk)
• Tier 3: 1% (Escalated Support).

Global multi-process HRO (MPHRO)

Neeyamo provides MPHRO in 100 countries for ~150k employees and ~24 processes, supported in 25 languages.

One of Neeyamo’s global clients spoke about MPHRO support including payroll, absence management, and leave management. The client runs a ‘topic of the week’ with the Neeyamo Service Center to provide continuous education, therefore minimizing the number of helpdesk calls. The client chose to leave the U.S. running on Workday payroll, with Neeyamo taking over payroll processing in another ~20 countries, serving ~4,200 employees. Implementation of Neeyamo replaced 8-10 other vendors.  

Other recent Neeyamo MPHRO contracts include a global CPG company headquartered in the U.K. with delivery in ~60 countries across six continents.

Global screening services

Neeyamo provides screening services in 190 countries, for 200 customers, providing 21 different kinds of checks (e.g. employment, background, criminal, education, reference, address, identity, drug testing), verifying 5 million elements. Of its clients, 125 U.S.-based companies use Neeyamo for all international checks. Neeyamo claims that they are the largest international verification company, and with a performance level of 80% of all checks achieved within five days.

Summary

In just 10 years, Neeyamo has scaled its geographic presence and its services and technology capability. Earlier this year, Neeyamo partnered with a French-based provider of HR and finance enterprise software, Talentia, to strengthen its global presence. Talentia supports clients directly in France, the U.K., Spain, Portugal, Greece, Italy, Switzerland, Germany, and Canada. Expect to see even more in 2018 and beyond as Neeyamo is opening offices in Argentina, Brazil, Costa Rica, China, Germany, Poland, South Korea, and Taiwan.

Neeyamo also covered its cloud transformation services, which my colleague Pete Tiliakos will cover in a separate blog, coming shortly.

Over the last year, Zalaris has markedly stepped up its geographic and service expansion journey –  first fuelled by the acquisition of Germany-based Sumarum AG and then with the acquisition of U.K.-based ROC Global Solution Consulting.

It’s important to note that Zalaris’ success in the wider Nordic market was also a result of two acquisitions soon after its formation (while its subsequent geographic expansion into Finland, Poland, and the Baltics were all a result of contract expansions with existing clients). These acquisitions provided Zalaris with the foundation and resources it needed to win subsequent business in these countries, including with Teliasonera, SAS, and a Swedish multinational networking and telecommunications company, and increase its turnover from ~$1.5m in 2001 to ~$21m in 2017, a CAAGR of ~18%.

Here I take a quick look at the geographic and service impacts of the two most recent acquisitions.

Geographic impact

The two acquisitions have clearly had a major impact on Zalaris’ European footprint, and Zalaris places an emphasis on establishing a physical presence in each country in which it serves clients. Prior to the acquisitions, Zalaris’ footprint was exclusively concentrated in the Nordics and Baltics, including the following eight countries: Norway, Sweden, Denmark, Finland, Poland, Estonia, Latvia, and Lithuania, with Norway alone accounting for nearly 45% of its revenues. Post-merger, the combined companies will still generate half of its revenues from both Norway and Sweden, but approximately a quarter of its revenues will come from DACH and the U.K.

Both acquisitions add resources across Central and Western Europe, as well as the U.K., to support multinational organizations. ~ 40% of Zalaris’ legacy HR outsourcing clients are served in multiple countries, including Nordea (which is also Zalaris’ largest implementation of SAP SuccessFactors to date), Statoil, and Telenor, and Zalaris is keen to expand its European footprint to enhance its ability to target and serve multi-country European organizations.

Impact on service mix

However, while geographic expansion is important to Zalaris, and these acquisitions have had a major impact in expanding Zalaris’ European footprint, their contribution to enhancing Zalaris’ service mix is equally important. These acquisitions help to facilitate Zalaris’ transformation into a one-stop-HR-shop for large and midmarket European-headquartered organizations by diversifying its service line offerings.

While Zalaris’ legacy business provided HR outsourcing, consulting and cloud services, ~90% of its total revenues were from payroll and transactional HR outsourcing, and the majority of these revenues were generated from a small number of clients. Both the ROC and Sumarum acquisitions support Zalaris’ ambitions to help its clients transform their HR operations by assisting them with SAP SuccessFactors deployment, and cloud conversion by boosting Zalaris’ consulting and advisory capabilities. In particular, the consulting group will be a key catalyst driving increased adoption of Zalaris’ cloud services.

Ultimately, following integration in mid-2018, the combined entities will operate as more of a cohesive and balanced unit, paving the way for Zalaris to be a prominent HR outsourcing and consulting contender in Europe, supporting organizations in a cloud HCM environment leveraging SAP SuccessFactors.

Sumarum & ROC in brief

For the reasons outlined above, both Sumarum and ROC are natural fits with Zalaris, enhancing both its service portfolio and its geographic coverage.

Sumarum, founded in 2001, is a provider of HR consulting and outsourcing services, with revenues of €19.6m (~$24m). Sumarum is a certified SAP partner and is a specialist in implementing and operating SAP HCM systems, with ~60% of its revenues related to consulting services, which extends to both public and private sector entities across Germany, Austria, and Switzerland. Like Zalaris, Sumarum provides cloud-based payroll and HR solutions exclusively on SAP platforms, with the remaining ~40% of its revenues from AMO and HR outsourcing services (serving ~45k employees per month). It has nearly 180 employees throughout five service centers in Germany, and primarily serves organizations with ~3k – 5k employees. The main sectors served include education, government, non-profits, and energy; clients include Germanwings, Goethe Institut, and Nintendo Europe.

ROC, founded in 1998, is a HCM specialist consultancy, with ~100 employees across five locations in the U.K., Germany and Poland, and revenues of NOK 100m (~$12m). Its areas of expertise include time and pay, talent management, shared services, analytics, business transformation, portal solutions, and global support. Key technologies leveraged by ROC include SAP HANA, SAP HCM, and SAP SuccessFactors. ROC is also a SAP silver partner and a verified SuccessFactors partner in the SAP PartnerEdge program. ROC’s clients include Britvic, Hampshire County Council, and Montblanc.

It has been 10 months since the announcement that Aon was divesting the businesses within its Outsourcing segment to private equity firm Blackstone, and 6 months since Alight was formally launched as a new company, which makes it an ideal time to review its progress and where it is headed in 2018.

By all accounts, it was a smooth transition, with client retention remaining high. But more importantly, the separation allowed the company to create a new identity, departing from its roots as the administrative arm of a much larger global professional services firm to reflect a more modern approach that emphasizes a consultative partnership with its clients.

The consultative partnership approach is becoming increasingly important as more and more organizations seek solutions that go beyond cost reduction to those aimed at solving larger business problems, such as increasing employee engagement and helping employees optimize their benefit selections. With market expectations changing, the line between consulting and administration is blurring, so it’s imperative for suppliers to adapt in order to meet demand for this higher level of service. While Alight is still at the initial phase of its journey to be an impactful advisor, its direction on this front is clear.

Alight’s other key priorities for 2018 include innovation with both its services and technology, as well as creating an engaging user experience, which are better viewed within the context of its two core businesses.

HR & Financial Solutions

Its HR and financial solutions segment is a mixture of hosted legacy HR BPO deals that it continues to support, and its newer cloud-based HR and financial services offering, which includes advisory services, deployment services, AMS support, and HR BPaaS support.

In 2017, Alight experienced continual expansion for its cloud services, including deployments for both Workday HCM and Workday Financials. One of the more significant trends in this business is the company’s growth internationally, including in Europe (largely the Nordics) and APAC.

Over the next year, growth is expected to continue in all regions, with APAC slated to be the fastest growing. More importantly, Alight intends to expand its service support, specifically focusing on services for the mid-market as well as a co-sourced and fully outsourced payroll offering.

Health & Wealth Solutions

Alight’s health and wealth solutions segment contains its legacy benefits administration service offerings, including various H&W services as well as DC and DB administration.

Highlights from 2017 include launching its unified data platform, which aggregates data from multiple sources and will be further enhanced to provide a consumer-centric view of each individual participant served.

2018 investments will focus on expanding the digital user experience, including releasing an enhanced mobile app that will have capabilities for annual enrollment. It will also launch a new integrated partner network on UPoint that will include seven providers in Q1 2018.

It’s clear that Alight’s 2018 vision will include a heavy emphasis on technological developments, especially with the front-end user experience, which is pivotal to address wider business issues as well as expectations from an increasingly diverse workforce. 

In my last blog, I laid out 2018 predictions for two areas of talent management: recruiting and learning (see here). This blog looks at what to expect over the next year for payroll services and benefits administration. Trending topics in these areas over the last year included cloud, compliance, configuration, and consumerization.

Payroll

The payroll landscape has shifted away from traditional bureau payroll services towards technology-based managed payroll services. Presently, ~80% of payroll contracts are delivered on cloud systems, but it’s the future developments of these platforms that will take center stage over the next year.

2018 developments will focus on enablers to make the move to cloud faster, simpler, and more manageable, especially for SMEs where momentum for cloud payroll systems will take off. Also, expect to see additional offerings that facilitate integration to external systems such as ADP’s Global Cloud Connect and CloudPay’s Cloud Connect 2.0.

Initiatives around driving transparency for both the organization as well as its employees will be top of mind in 2018, similar to ADP’s recently launched NextGen Payroll engine, which was designed and built with the user in mind. A greater level of transparency in payroll will also facilitate optimization of benefit choices.

Over the last year, the use of RPA for repetitive payroll tasks such as data processing and reconciliation has become quite common. In 2018, suppliers will seek to leverage machine learning and cognitive capabilities to differentiate themselves. Another significant advancement in 2018 will be around launching chatbots to create a conversational user experience in real-time.

In 2018, the global payroll market will grow by ~4%, with multi-country activity increasing 3.5 times faster than single-country contracts. In fact, over the last year, several payroll vendors geared up for global expansion, including NGA HR who launched a managed payroll offering in Africa, Ceridian who expanded its payroll capabilities in Europe, and activepayroll who established a presence in Germany. 

Benefits administration

2017 marked the end of the consumerization era in benefits administration (which emphasized a redesign of the user experience to incorporate consumer shopping trends in the enrollment experience, as well as the addition of voluntary benefits), to make way for the benefits optimization era.

The concept of optimization is in its infancy, but that will change over the next year and beyond. Currently, optimization tools in the market tend to be narrow, with most focused on “financial wellness.” The theme of financial wellness has been important for the last few years and continues to expand to a broad range of topics, and it will only get more personalized over time. To date, “health and wellness” optimization tools have only begun to scratch the surface, and will be a big area of development over the next year. 

In 2018, buying patterns for benefits administration services will focus on best-of-breed suppliers, making partnerships all the more important to bridge the gap in tying services together to a deliver a cohesive experience. Beyond partnering, tier one vendors will turn their attention towards data aggregation, like Fidelity Investment’s data sharing solution, Access, which facilitates aggregation of financial information across third-party websites and applications. In general, centralizing and aggregating data will be critical in next generation benefits administration services.

One final point of interest to watch for in 2018 is the resurgence of multi-process HR services deals, which have been revived by the adoption of cloud-based HCM systems, including SAP SuccessFactors and Workday HCM. However, unlike the legacy deals, the new wave of activity will be focused on narrow HR BPaaS services, with HR administration, payroll, and benefits support as the most common bundle. In addition, these contracts will likely include ongoing AMS support.

2017 did not disappoint and, based on current predictions, 2018 will be another exciting year in the HR services market.  

Relative to other HR services, the application of intelligent automation in benefits administration is lagging, but is slowly making progress.  With respect to RPA, Conduent and Alight are among the first movers, with both using bots for manual calculations in pension administration. In addition, Alight has deployed bots for low-level transactional work that is typically offshored, and in 2016, Conduent launched an intelligent technology group, which is focusing on leveraging RPA to drive improvement across its entire HR services business.

Fast followers currently with initiatives around RPA include other tier one providers.  For example:

• ADP has partnered with Symphony to roll out its first RPA program for 2018 annual enrollment, which will include four RPA processes, with eight robots live
• Fidelity will incorporate RPA in various processes, including reducing the implementation time for HSAs
• Mercer will have ten robots in its operation by the end of the year and will launch more in 2018.

In addition to RPA, the use of chatbots and automated virtual assistants is also increasing in the benefits market. For example:

• Alight is currently leveraging an IVA solution within its DB and DC administration business that includes ~425 questions, and will launch a chatbot for its H&W services business in H1 2018 
• Businessolver launched its chatbot, Sofia, in time for 2018 annual H&W enrollment
• Mercer recently launched a chatbot for internal use to assist its client-serving teams with benefits administration inquiries in Asia
• Fidelity launched an automated virtual assistant in its retail business earlier this year to help users find general information on the Fidelity.com website
• ADP and Conduent are actively seeking partners to deploy chatbots
• Morneau Shepell is considering the use of an automated virtual assistant in its EAP business for service-type calls, such as changing appointments.  

Both Alight and Businessolver’s chatbots are equipped with machine learning, allowing for easy analysis so that providers can quickly understand what information needs to be added to the chatbot.  Outside of chatbots, the use of machine learning in benefits administration is in its infancy. But, it’s only a matter of time until the use of all the intelligent automation tools becomes the norm.

The gig economy has been a recent trending topic. While the concept of gig workers is nothing new, the attention being paid to it is, especially since this is an area whose growth has been facilitated by the digital marketplace. Here, I take a quick look at the challenges gig workers present for HR.

Gig workers present a challenge on several fronts, especially when it comes to managing the workforce, since contingent workers are often managed separately from permanent employees. In fact, ADP research finds that only ~40% of organizations report that HR owns all talent (i.e. permanent and contingent workers). And the use of contingent workers by organizations will only increase in the future, especially within certain occupations such as IT, media, and communications.

To support this growing trend, some MSP vendors are offering blended services with RPO, essentially moving towards a total talent management model. For example, Alexander Mann Solutions provides this blended model to an energy client, supporting 500 contingent workers and 3k permanent employees per annum.

But there are other concerns with the gig economy, specifically around the financial wellness of contingent workers. Over the last five years, benefits administration vendors have been launching initiatives focused on providing educational and decision-support tools to empower participants to make good financial decisions. More recent developments focus on holistic financial wellness offerings that extend beyond planning for retirement, and incorporate assistance around student loan debt management, budgeting for college, and saving for emergencies. Unfortunately, however, contingent workers do not typically receive employer-paid benefits.

Current estimates of the size of the gig economy vary greatly ranging from ~10% to ~35% of the U.S. workforce. And it is important to note that many gig workers also have traditional full-time jobs (i.e. hybrid gig workers), which will provide them access to employer benefits, including retirement plans and health insurance, as well as annual and sick leave. But does this represent enough gig workers to the point that HR shouldn’t be concerned? Findings from a recent study by Prudential suggest not.

The Prudential study, Gig Workers in America: Profiles, Mindsets and Financial Wellness, found that 16% of pure gig-only workers and 25% of hybrid gig workers have assets in an employer-sponsored retirement plan compared to 52% of permanent workers. And when it comes to some voluntary benefits such as disability insurance, the stats are even worse for contingent workers.

It’s clear that employers will continue to leverage gig workers. Therefore, HR suppliers need to first recognize the issues that this class of workers creates across the HR lifecycle, from hiring to managing talent, to assistance with financial security, and then create solutions that address the blind spots and gaps in order to optimize HR.

This week, ADP held its annual industry analyst event in NYC, and as well as welcoming guests with apples to celebrate the arrival of fall, it also ushered in the season with significant news regarding its HR technology innovations. One thing is clear about the technology-enabled services company: its investments in innovation continue to accelerate, as it invested ~$450bn in FY 2017 – a significant increase from the ~$150m invested in FY 2011.

The key areas of innovation ADP has delivered to date include:

• Cloud HCM platforms: across its cloud suite, which includes Run, Workforce Now, Vantage HCM, and GlobalView, ADP supports ~570k cloud clients, adding ~40k in the last year
• Mobile: its mobile app has ~12m users
• Big data and analytics (via ADP DataCloud): there are ~4k analytics clients and ~1.5k benchmarking clients
• Open HCM ecosystem (ADP Marketplace): there are currently ~205 apps available, ~6k subscriptions, and ~4k downloads from ADP Marketplace.

While client-centric innovation has been a focus at ADP for several years, the company is going even deeper now with its latest next generation technology. Key attributes of ADP’s NextGen Platform include the ability to create dynamic teams, which incorporate analytics (such as attrition rates), and ~30 mini apps (and growing) for various HR processes across the entire lifecycle; these allow organizations to personalize their HR experience with the functions most pertinent to their needs, whether by company, region, or country.

In October, ADP will launch its NextGen Payroll engine which was again built with the user in mind. The system has ~51 predefined policies to facilitate configuration, and is event-driven, with payroll recalculated in real time. Advantages of the new payroll system for employees include flexibility of when they get paid, the ability to see all of their pay if they work multiple jobs and are paid by ADP, and transparency in how their pay is calculated. Transparency is also a common theme for HR practitioners as well as getting global insights.  Already available is ADP’s NextGen Tax engine, which is supporting ~300 clients to date. 

Other key initiatives include building out DataCloud further. Recent enhancements include launching the following data explorers: Turnover Probability and Pay Equity Explorer, with additional data explorers such as overtime projections on the horizon. A significant development with DataCloud includes the application of machine learning, which will add personalized assistance to HR (e.g. schedule certain reports to run automatically, or recommend that you run other reports based on what your peers in a particular industry are doing) and push insights to HR and managers (e.g. notify you if overtime is high). In addition, ADP will launch Mobile Insights this year.

The HR services industry is at an inflection point where technological innovation like that at ADP is necessary and will significantly impact whether vendors continue to experience healthy growth rates year-on-year. 

For years, the application of analytics in HR services has been heavily focused on descriptive information such as workforce demographics (e.g. average employee age, proportion of males to females, number of employees are nearing retirement, etc.) or talent management metrics (e.g. average time to hire, cost per hire, number of training hours per employee, etc.). In fact, ~90% of analytics leveraged in multi-process HR services is descriptive-based and/or includes benchmarking. In order for analytics to really affect business outcomes, however, organizations need to move beyond descriptive metrics. Currently, a number of HR services vendors are focused on developing predictive analytics and, to a lesser extent, prescriptive analytics. 

One area where predictive analytics is heating up is with employee turnover. For example, late last year, ADP launched its Turnover Probability solution, powered by the ADP DataCloud, which includes:

• Identifying the likelihood of voluntary turnover across an organization, within job types, locations, and teams, as well as for individual employees
• Analyzing combinations of a multitude of factors related to job characteristic, organizational dynamics, compensation elements, and employee demographics that impact the likelihood of employee turnover
• Allowing organizations to compare their turnover risk against industry risk benchmarks that draw upon ~30m employees within ADP's Big Data.

This year, Ceridian launched predictive analytics for its Dayforce HCM platform, which includes interactive visual dashboards that provide employee information including job title, performance percentile, tenure, flight risk, and the estimated cost to replace.

Retention is a huge issue for organizations, and with predictive analytics, organizations can more accurately determine the likelihood of future turnover and build retention plans accordingly.

WNS is another example of an HR services vendor with extensive predictive and prescriptive analytics capabilities. In 2017, it added performance prediction, attrition propensity, and more. WNS’ full suite of predictive and prescriptive analytics includes:

• Workforce management: workforce planning, retention model, capacity modelling, and attrition propensity
• Compensation & benefits and payroll: rewards policy effectiveness, market benchmarking, and wage cost modeling
• Performance and learning: performance prediction, pay for performance relationship model, and succession planning
• Talent acquisition: predictive hiring model, social media strategy, employer brand positioning, and stability index model.

There is already an abundance of data for HR managers, so the thought of advanced analytics can be overwhelming, which is why it is essential for organizations to have strong relationships with their HR services provider who can grease the skids and turn the data into a powerful tool that affects business outcomes.

Principal issues & operational priorities

The main issues and operational priorities cited by respondents included the following:

• Standardization of HR processes
• Increasing self-service utilization
• Increasing efficiencies/reducing manual intervention
• Statutory compliance.

Other issues included:

• Driving down costs in the delivery of HR services
• Redesigning processes in a way that improves the user experience
• Updating technology systems
• Delivering a roadmap of investment and change
• Implementing a robust quality control framework.

These issues and priorities, in turn, directly impacted the drivers and benefits organizations were seeking to obtain from outsourcing multi-process HR services, as explained below.

Drivers for outsourcing multi-process HR services

The top driver among respondents included seeking lower costs, including the use of labor arbitrage. Approximately 17% of organizations were seeking global standardization, followed closely by the need to increase productivity and automation.

Other reasons cited include leveraging best practices (13%), improving quality and service delivery (11%), HR transformation including processes and technology (7%), greater accuracy/error reduction (5%), scalability (4%), and continuity (2%).

Top vendor selection criteria

Nearly 25% of respondents made their decision on which supplier to use based on the rapport that was established with the vendor, with many organizations emphasizing the need to have a true partner where the relationship would continue to build and improve over time, and where the respondent felt that the supplier was invested in its clients’ long-term success.

The next highest selection criterion was cost, followed equally by the supplier’s ability to handle complexity and their ability to demonstrate knowledge and proficiency.

Current satisfaction levels & areas for improvement

Multi-process HR benefits: a selection of current client satisfaction levels and future importance ratings

Respondents’ current satisfaction levels derived from multi-process HR services reveals that there is plenty of room for improvement. While organizations are mostly satisfied with the cost savings achieved, driving further standardization and consistency in HR processes should be the main priority for vendors over the next few years. Another significant area for improvement is the turnaround time for HR transactions and inquiries.

In terms of respondents’ qualitative feedback, by far the top area for improvement cited related to various aspects of innovation, including:

• Integrating more innovative tools from a technology perspective, including robotics and AI
• Being proactive and formal as new innovations are released
• Working more cohesively to bring innovations to services faster, clearer, and within a defined timeline
• Introducing more incremental innovations.

Other areas cited for improvement included:

• Strengthening thought leadership capabilities
• Identifying issues and driving process improvements
• Applying knowledge to an activity, rather than just completing an activity
• Improving communications, especially when a change will be made.

Overall, respondents are reasonably satisfied with their current multi-process HR services supplier, and would on average rate their likeliness to recommend their existing vendor at 7.8 out of 10 in favor of recommendation.

NelsonHall’s NEAT vendor assessments look in detail at vendors’ ability to deliver immediate benefits to their clients, as well as their ability to meet future client requirements, and assist strategic sourcing managers in assessing vendor capability while cutting the time and cost associated with their sourcing projects. To find out more, contact Guy Saunders.

This is the second of two articles on the multi-process HR BPS market. NelsonHall’s latest market analysis report on the multi-process HR BPS market recognizes two types of strategies adopted by vendors taking a modern approach to multi-process HR services: intelligent technologies and cloud-based HR services. Here, I take a quick look at both strategies.

Intelligent technologies

The intelligent technologies approach to multi-process HR services emphasizes the use of automation tools, AI, and advanced analytics to enhance multi-process HR BPS services. Services in scope within these deals tend to include workforce administration, payroll, and often administrative functions around talent management processes, as well as analytics, leveraging on-premise or hybrid technology arrangements.

The top drivers for buyers under the intelligent technologies approach include:

• Improving process controls and driving efficiency
• Streamlining HR processes through automation to reduce process duplication
• Obtaining greater transparency and visibility through advanced analytics.

The biggest inhibitors and challenges with this approach include the following:

• Often, organizations are looking to address larger transformational issues first, including moving to a cloud-based HCM platform, or at least consolidating the number of systems used
• The challenge of demonstrating how intelligent technologies will generate cost savings over the life of the contract; this includes introducing continuous technological improvements that reduce costs beyond the initial year.

To succeed, suppliers must look to continuously develop intelligent technologies, especially machine learning, for different HR processes, and be able to deploy intelligent technologies for on-premise systems (since there will be a certain proportion of organizations that will delay the adoption of cloud platforms).

Cloud-based HR services

The cloud-based approach to multi-process HR services, on the other hand, emphasizes support around broader offerings, such as HR SaaS implementation and ongoing AMS services, in addition to multi-process HR BPS services. The service scope of these deals includes workforce administration and payroll, with an increasing focus on managed benefits, and can include deployment and/or ongoing release management support. The key distinction here is that the underlying technology is 100% cloud-based, including for core HR and payroll.  

Buyers of this approach are adopting it because they are seeking a technology transformation to a more manageable model and also lack the time, skills, or expertise to operate internally in a HR cloud environment.

Impediments to adopting this approach include a desire to ride out previous technology investments, and also the impression that cloud HR software is so intuitive that organizations can operate it internally as the ‘be-all and end-all’ solution. Other issues with the cloud-based HR services approach include ensuring integration with other HR systems.  

Under this approach, it is imperative for vendors to create fast and secure data sharing capabilities with third party applications for seamless integration, with an eye on incorporating intelligent technologies, particularly chatbots, in the near future.

While many providers tend to hone capability in one of these areas, ancillary developments are often made in the other due to competing market demands for cloud HR technology adoption and improved service quality.

Click here for the first article in this two part series: State of the Multi-Process HR Services Market

NelsonHall’s recently published (July, 2017) Targeting Cloud-Based HR Services market analysis report estimates the global cloud-based HR services market to be $15.2bn, and this is expected to continue its growth trajectory (~6.3% CAGR) to reach $20.6bn by 2021. 

With the largest portion of the market coming from cloud implementations (~44%), it’s interesting to find that less than half of the current multi-process HR outsourcing contracts are being delivered on cloud-based systems. Despite the growing appetite for cloud-based HR platforms, vendors continue to encounter organizations hesitant to leave traditional on-premise systems and make the switch to the cloud.

Our research finds that the top inhibitors to moving to cloud-based HR systems and services include:

• Lack of business case or funding to replace existing HCM technology
• Desire to maximize previous legacy technology investments 
• Perception that the change impact on the organization’s operations is too great or too risky.

A major challenge for vendors remains in helping prospective customers to overcome and successfully navigate the impact of change to operations from a cloud-based HR transformation initiative, particularly for larger, complex, highly-customized client environments. And the lack of a successful business case that shows ROI is often a roadblock that some deals do not overcome. 

As a result, vendors are continuing to invest in, and actively market, branded tools and enablers that make the move to the cloud simpler, faster, and less cumbersome. By offering pre-configured, standardized wizards and tools that shrink the deployment time and make implementation of cloud systems much easier, value realization and ROI are being achieved much sooner than before.

Examples of HR BPaaS vendor offerings that expedite deployment include:

• Ceridian’s Dayforce Activate:
  • Platform: Dayforce HCM
  • Description: Guided implementation wizard/tool configures ~80% of implementation based on responses and data leveraging RPA. It prepares system for testing and go live
  • Key benefit: Simplified implementation; reduces implementation effort up to 60%, cycle time up to 50%; quicker ROI realization.

• Neeyamo’s Rapid Deployment Solution:
  • Platform: SAP/SuccessFactors
  • Description: Leverages a standardized, pre-configured fixed-scope model for implementing SAP/SuccessFactors Employee Central
  • Key benefit: Streamlines implementation of SAP/SuccessFactors; reduced time, effort and cost of implementation; quicker ROI realization.

• NGA HR’s cleaHRsky:
  • Platform: SAP/SuccessFactors
  • Description: HRaaS including analytics that tie in HR, Payroll, as well as HR service center interaction data; pre-configured/’plug-and-play’ ready, for rapid deployment in 145 countries; range of HRaaS service models for post-deployment support
  • Key benefit: Live on SAP/SuccessFactors in ~100 days; reduces implementation cost ~30% on average.

Looking forward, in addition to improving the deployment of cloud-based HR systems and services, cloud-based HR service vendors will continue to make investments that drive value for clients in the following ways: 

• With demand for post-deployment application management services (AMS) now a leading gateway to new clients for vendors, ~70% of vendors expect to add or expand their post-deployment (e.g. AMS) support services. Many now offer AMS services on more than one system, and most now offer AMS as a standalone
• Enhancing the user experience by offering intuitive, easy-to-use, consumer grade (mobile-enabled) applications that make day-to-day HR transactions simple
• Providing access to on-demand HR data through descriptive and predictive analytics that is easy to access and provides accurate real-time views of the workforce; vendors are investing heavily in HR analytics as a service, which will become a more common vendor offering in the future
• Developing and deploying advanced automation capabilities (e.g. RPA/bots and AI) throughout the delivery model to reduce operating costs, increase efficiency and accuracy, and improve the user experience.

The multi-process HR services market has evolved significantly over the years. The traditional approach, characterized by comprehensive end-to-end HR BPS services over a long term (often 7-10 years) leveraged on-premise solutions that were heavily customized. This gave way to the transitional approach, best characterized by hybrid technology solutions where core HR and payroll is on-premise, and talent management processes leverage cloud-based solutions. And now, multi-process HR services have evolved to a modern approach, characterized by:

• Cloud-based HCM platforms, either vendor proprietary or TP systems, such as Workday HCM and SAP SuccessFactors, as well as Oracle HCM Cloud to a lesser extent
• Narrow HR BPS services, typically HR administration and payroll, for 3-5 years
• Mid- and large-market buyers, including the lower end of the mid-market (<5k employees)
• Automated processes and configuration.

Currently, the modern approach accounts for ~30% - 35% of the market, with ~45% - 55% of deals taking the transitional approach, and the remainder under the traditional approach. Over the next five years, the modern approach will increase, representing ~60% - 65% of the multi-process HR services market.

There are many issues shaping the modern approach to multi-process HR services, including:

• Globalization and growth, driving the need for standardization and simplification
• Maintaining compliance, as regulatory changes are rampant globally
• The need to replace inefficient and time-consuming labor-intensive processes
• Moving beyond cloud HCM technology-only deals due to challenges managing and optimizing release updates
• Demands for personalization and the need to digitalize the user experience to increase engagement and collaboration.

Accordingly, vendors tend to take one of two approaches to the modern multi-process HR services market:

• Emphasizing the use of intelligent technologies such as robotics, automation, machine learning, and advanced analytics
• Focusing on assisting organizations migrating to, or operating in, a cloud HCM environment by providing broader cloud support services such as SaaS deployments and ongoing application management support services.

Both of these approaches have multi-process HR BPS services as the foundation, and are focused on enhancing these core services. Stay tuned for a follow-up blog that will take a closer look at the modern approaches to multi-process HR services.

As H1 2017 comes to a close, it’s a good time to reflect on recent key activity and where the market is headed for the rest of the year and beyond. Here, I round up what’s trending now in payroll, benefits administration, recruitment, and learning.

Payroll

The most common theme in the payroll market is global and multi-country activity. NelsonHall estimates that multi-country payroll will grow 4x the rate of single-country payroll services through 2020, accounting for nearly a quarter of the market. Supporting this prediction were several new contract awards, including Neeyamo signing a contract with a global CPG company headquartered in the U.K., with payroll delivery extending to ~60 countries across six continents; and Ramco signing a multi-million dollar HCM and global payroll contract with Panasonic Group for ~20k employees across 21 entities.

In anticipation of the multi-country trend, some regional payroll providers made acquisitions to increase their presence and expand their geographic footprint. For example, Nordic-based Zalaris acquired Sumarum AG to expand its capabilities in Germany to better serve MNCs, and its geographic expansion plans aren’t ending there. Australia-based Ascender was also on a roll, acquiring NGA HR’s Australia and New Zealand payroll business, including NGA’s proprietary Preceda and PS Enterprise platforms, as well as Japan-based Workcloud; both acquisitions help to facilitate Ascender’s 2020 strategy to be a leader in payroll in the APAC region.

Benefits Administration

In benefits administration, the focus is centered on the employee experience, including education, integration, and connectivity. A recent survey by T. Rowe Price found that plan sponsors believe they have a duty to help prepare their employees for retirement, and that ~48% have a metric to track the retirement preparedness of employees. Currently, many DC administration vendors have implemented initiatives focused on education to ensure retirement readiness, and these programs are now expanding to address other financial issues such as budgeting and student loan debt management, with targeted messaging for participants based on their situation and goals. The objective will continue to push towards total financial wellness for participants throughout their lives.

To date, initiatives around integrating health and wealth have largely focused on offering retirement plan participants access to HSAs to help individuals prepare for healthcare expenses in retirement.  Since 2010, Fidelity’s HSA administration offering has experienced double-digit growth y/y, and over an 18 month period, Fidelity added ~65 new employer HSA clients, representing ~181k participants.

Empower Retirement is the latest plan administrator to add such an offering, partnering with Optum to launch The Empower Health Savings Account, which includes:

• Access to investment advice
• Health plan selection and enrollment
• Retirement plan management
• Inclusion of wellness programs and health savings account management.

The next phase of integrating health and wealth together will likely focus on the annual enrollment process, and include helping participants view the impact of their choices so better decisions about trade-offs can be made. 

Finally, a big part of the employee experience is providing access to benefits information on mobile devices and increasing functionality on mobile devices. In H1, Businessolver joined other vendors with the launch of its mobile app, MyChoice, which allows users to:

• View their current and future benefits elections for medical, dental, vision, voluntary, and supplemental plans
• View medical savings account balances
• Upload their medical ID cards and benefit documents for dependent verification
• Receive reminders via push-alerts
• Chat with a representative to answer general benefits questions.

Recruitment

In recruitment, the focus is shifting towards total workforce services by offering blended RPO and MSP services to organizations. Traditionally, services for the contingent workforce were offered separately from RPO. In anticipation of demand for total talent management services, supplier strategies vary, from adding MSP services to reorganizing portfolios (as was the case for TrueBlue, who transitioned its MSP business from Staff Management | SMX to PeopleScout).

Recruitment continues to be an area for strong growth, as evidenced by delivery expansions in H1, including:

• Allegis Global Solutions opening a recruitment services delivery center in central Birmingham, U.K.
• Alexander Mann Solutions opening an expanded global client service center in Shanghai
• Pontoon opening a new office in Bangalore
• Korn Ferry Futurestep opening a European talent delivery center in Manchester, U.K.

Learning

Not only is there increasing pressure to making training programs more effective, many corporate L&D departments are facing mounting pressure to demonstrate the impact of training on the bottom line. Many vendors have responded by organizing learning BPS offerings around specific performance improvement objectives, including:

• Strategic transformation
• Revenue and competency
• Compliance
• Cost reduction
• Learner engagement.

Learning developments will consequently be made depending on a vendor’s core performance objective focus. For example, with respect to the learner engagement objective, Raytheon Professional Services has built a number of electronic performance support systems (EPSS) for clients to improve performance and productivity by coaching employees through tasks.

Over the last few years, Ceridian has been focused on re-establishing itself as a cloud technology and service provider with its Dayforce HCM platform. Here, I look at the progress the company has made, including a review of current and future Dayforce developments and client successes.

Current Dayforce developments

In all its deals, Dayforce is always the global employee record. Modules include:

• WFM: time and attendance, absence management, scheduling, and labor planning
• Payroll: native payroll, ConnectedPay, and tax
• Benefits: eligibility, open enrollment, and ACA management
• Talent: Team Relate, compensation, onboarding, recruiting, and performance.

Ceridian’s investments in Dayforce are influenced and prioritized by its product idea portal, which allows its customers to submit feature requests that are then voted on by other clients. In recent years, developments have been focused around talent, with its latest enhancements on compensation and learning.

Compensation management allows users to define compensation budgets for base and variable pay and allocate compensation pools to teams. It also includes scenario modeling for managers, total reward statements, has analytics embedded, and provides pay equality drill-downs within each job, including performance and tenure information to identify disparities.

Dayforce learning management has been developed and will be available for clients later this year. The module will allow users to rate courses, and includes machine learning to recommend courses to users, with content provided from a partner. Other features include a personalized training calendar, learning paths, mandated training, publisher content integrations, and audits, reporting, and alerts.

Predictive analytics is another development for this year, focused on improving retention by predicting employee flight risk, ultimately increasing cost savings from reduced turnover.

Dayforce clients

NelsonHall estimates that Ceridian has ~3.3k clients (supporting ~5m employees) on Dayforce, including Rubio’s Coastal Grill and Blue Man Group. Rubio’s was leveraging a paper-based solution for its ~4.5k employees, and was seeking a partner to improve compliance. Rubio’s selected Dayforce because it was a single platform and was intuitive, and it executed a large change management initiative around the adoption of Dayforce. Benefits of Dayforce include reducing its onboarding time from 3 hours to 30 minutes. Rubio’s is currently expanding its relationship with Ceridian and is implementing the performance management module.

Prior to implementing Dayforce, Blue Man Group’s payroll was decentralized and the company was using three different payroll systems. Blue Man Group was seeking a solution that was streamlined, that would improve accuracy, and reduce processing time, with a user-friendly experience. What appealed to Blue Man Group about Dayforce was the unified system experience, flexible configuration, and security features. After implementing Dayforce, payroll run-time was reduced from 12-16 hours to 4 hours. Today, Blue Man Group is leveraging the HR, payroll, tax, scheduling, and benefits modules from Ceridian for its ~525 employees, with the possibility of adding on talent modules in the future.

Future developments

Ceridian shows no signs of slowing down, with future developments focused on succession planning and offboarding, among others. To facilitate implementations, Ceridian launched Dayforce Activate in late 2016, which was geared towards smaller organizations, but Ceridian will be expanding this guided implementation tool to organizations with more than 1.5k employees.

Historically, buyers of Dayforce tend to be North American headquartered mid-market organizations, but over the last 18 months, Ceridian has made headway with many large market organizations with >15k employees and has diversified its vertical markets by gaining traction in the financial services and healthcare sectors.

Long-term plans are to increase its global footprint, which will be facilitated by the Payroll Services Alliance, which extends payroll services to ~80 countries via partnerships with Ascender, Aditro, Seresco, SD Worx, Trianon, Elanor, and FIS Antex.

As Ceridian expands globally and builds its client base further, NelsonHall also expects it to provide benchmarking.

In summary, business focus has been key to enabling Ceridian’s rapid transformation as a cloud technology and service company.

ADP’s CEO Carlos Rodriguez began the company’s annual client conference, Meeting of the Minds, by talking about unprecedented challenges faced, including global talent needs, growing compliance burdens, and rising expectations. And though perhaps not the most original of messages, Rodriguez singled out service as the core differentiator that enables ADP to deliver positive impact on its clients’ business and that differentiates it from software companies. Here I take a look at how ADP’s focus on service as a differentiator cuts across several lines of business.

ADP Comprehensive Outsourcing Services (COS)

COS provides a full range of integrated HR services to clients. Some recent service highlights include:

• With clients using on average ~3 ADP services, an effective governance team process is essential. ADP has taken its operational reviews to the next level, and its value proposition includes 6-month interval reviews to make sure processes are optimized and ROI expectations are met
• Adoption of mobile across all clients has resulted in a reduction of paycheck calls by 14%
• Benefits obtained for a new COS security client included change management workshops and detailed plans to manage organizational change, communication, and people strategy. Plus, process optimization and cost reduction (including pay group consolidation, pay frequency change, go green, and paycard).

ADP DataCloud

Predictive analytics, including Predictive Turnover Probability, are delivering insights including:

• Competitiveness: How much future voluntary turnover might my organization have, relative to others in my industry?
• Hidden Drivers: What combinations of factors are contributing to the likelihood of employees leaving, so I can take action?
• Hotspots: Where are the likely areas of highest voluntary turnover in my organization – within jobs, locations, or teams?
• At-Risk People: Who are the high- and medium-risk employees I need to work to retain?

ADP RPO

Growing from 90 clients in 2015 to 114 today, the majority of new recruitment process outsourcing (RPO) clients are first-time adopters. One of ADP’s competitive advantages is its AIRS Recruiter Training provided internally to ADP staff (who are required to be re-certified every year) and also to clients (for whom 750 classes are held annually, with 10,500 people trained, and 3,600 certified).

2017 investments include:

• Global expansion and capability building in EMEA, APAC and LATAM to support growing U.S. multi-national corporations
• Enhanced RPO analytics and DataCloud Integration, including linking candidate profile data to retention and performance.

Mobile

ADP has 10m+ mobile users, providing capability that includes:

• Accessing and printing pay & W2 statements, access to categorized pay reports, setup of direct deposit, and comparison of pay statements
• Tracking time and timesheet approvals, view, request and approve of time off
• Checking 401k account balances, viewing account performance, and changing contribution rate or account allocation.

Benefits Administration

Providing Benefits Administration for 1 in every 17 employees in the U.S. and 9.4m participants, ADP receives ~850k calls annually to its service center, and first-time call resolution is 90%. Recent client case studies include:

• Upon automating Benefits Administration for its client Areas (including open enrollment), errors were reduced by ~75%, and benefits enrollment was reduced from 2 months to 2 weeks. Client feedback was that this was a smooth experience, the process being intuitive and easy to understand (http://bit.ly/2lB7fBK)
• Sumitomo Electric Wiring Systems turned to ADP for ACA Compliance and automating open enrollment. Feedback from the Corporate Compensation and Benefits Administrator included acknowledgement of ADP’s customer service expertise (http://bit.ly/2hirs9u).

The importance of service

The importance of customer service is hardly a new theme, but it’s worth reflecting on just how much it makes a difference. Consider these statistics:

• Most customers make their decisions on who they will buy from based on service as the most important criterion
• 3 in 5 Americans (59%) would try a new brand or company for a better service experience
• The probability of selling to a new prospect is ~15%. The probability of selling to an existing customer is ~65%
• It is 6.5 times more expensive to acquire a new customer than it is to keep a current one
• 91% of unhappy customers will not willingly do business with you again.

ADP clearly grasps this, and is committed to improved customer service and experience as a core differentiator across its HR business lines.

Last week Aon Hewitt announced that it has signed a definitive agreement to sell nearly all the businesses within its Outsourcing segment (including benefits administration, HR BPO, and Workday cloud HR services) to Blackstone. Initially, it may appear that this is a step backwards from some of its prior acquisitions, including Hewitt in 2010 for benefits administration, Exult in 2004 for HR BPO, and OmniPoint in 2012 for Workday services. However, the separation will be highly beneficial as the new entity will be a pure play, focusing on operational HR administration activities.

There are a few nuisances with the sale, since some benefits businesses will be retained by Aon Hewitt, including DBCalc and its private exchange for active employees and retirees. The key with both of these offerings is their tight integration with businesses in Aon Hewitt’s Consulting segment. For example, DBCalc is typically bundled with actuarial services.

The private exchange business, on the other hand, will essentially straddle both organizations, with Aon Hewitt retaining the front-end architecture and design and associated work around procuring carriers, plan details, brokering, etc., and Blackstone taking over the back-end administration, technology, and call center support services.

In addition, some U.K. and Canadian benefits administration businesses will be retained by Aon Hewitt; like DBCalc, these businesses are tightly integrated with consulting services, and make up a small portion of the overall portfolio. 

Although not technically operating under the Outsourcing segment, it’s worth noting that Aon’s global benefits business, including brokerage and consulting services, will not be part of the sale.

With the remaining Aon Hewitt focusing on advisory services, the two companies will continue to have a working relationship, especially with respect to the large market, but there will not be an exclusive partnership in place. 

More importantly, the separation will allow each entity to make targeted investments in their core capabilities, resulting in faster innovation overall. In the short-term, the roadmap for each business being sold will remain intact; for example, the current emphasis of benefits administration is on improving the participant experience, which includes combining health and wealth together, as well as driving self-service and enhancing the customer experience. With respect to the Workday business, the key objective is to provide a flexible and modular offering around Workday HCM and Workday Financial Management.

From Blackstone’s perspective, acquiring Aon Hewitt’s Workday business diversifies its HCM technology holdings, following its minority investment in Kronos in 2014.

The deal, for a cash consideration of $4.3bn at closing and additional consideration of up to $500m based on future performance, is scheduled to close in 60 days, with a new company name to follow.

Following several years of growth, the HR outsourcing market continues to ride the crest of the wave, and is gearing up for a prosperous 2017 following investments across all service lines. We will shortly be publishing an in-depth blog on HRO predictions for 2017, but first I take a quick look at what happened in 2016 to lay the foundations for things to come, specifically in payroll services, benefits administration, RPO, learning services, and cloud-based HR.

Payroll Services: HCM Integration & Multi-Country Expansion

Highlights in the payroll market in 2016 included an emphasis on integrating payroll systems with HCM software, which is especially important when it comes to multi-country payroll, an area targeted for huge growth over the next three years. In anticipation of multi-country demand, vendors have continued to expand their payroll capabilities, with ADP’s payroll services now extending to ~111 countries, and NGA HR launching a payroll offering across 33 LATAM countries.

Other 2016 milestones reached in payroll services include Paychex exceeding 1m worksite employees serviced across its payroll and PEO offerings, and OneSource Virtual (OSV) exceeding 500 clients, while maintaining a client satisfaction rating of 98%.

Benefits Administration: Private Exchange Momentum

Private exchanges continued to gain momentum over the last year. Fidelity investments expanded its PIX, focused on SMBs, beyond Massachusetts and New York to Colorado and California, and Morneau Shepell launched a retiree PIX in Canada, adding 3M Canada as its first client. Vendor priorities have been focused on integrating voluntary benefits into the exchanges as well as within traditional H&W administration offerings.

Private exchanges are growing at 6% CAAGR through 2020, and Willis Towers Watson, with ~20% market share, is gearing up to capitalize on the growth in 2017 after recently expanding its delivery center in Arizona, to which it will continue to add headcount over the next year.  

With respect to DC administration, Fidelity enjoyed another successful year, adding $65bn in new DC plan sales across ~1.3k employer clients in H1 alone. In addition, as of mid-year, Fidelity already had another $14bn in commitments for 2017.

Benefits administration acquisitions really heated up in H2, with Mercer making some key purchases, including Pillar Administration in Australia (which now makes it the largest superannuation provider in the country) and Thomsons Online Benefits, adding its global cloud-based benefits technology platform, Darwin.

RPO: M&A Hotspot

There were ~25 HRO acquisitions in 2016, ~40% of which were focused on RPO. Many of the acquisitions focused on expanding or strengthening geographic capabilities, especially for Randstad who acquired Penna in the U.K., Obiettivo in Italy, Careo Group in Japan, and BMC in the Netherlands.  

And, while the U.S. and the U.K. markets are the most active for RPO, emerging markets in APAC and LATAM have high growth potential over the next few years.  

Learning Services: Shift to Performance Targeting

The most significant change in the learning services market is the shift away from a transactional approach that pushes a catalog of service offerings towards an approach that leads with targeting performance objectives. On the backend, automation and analytics are key components of the performance-centric approach.  

Trending themes by learning function include the following:

• Content: content curation services
• Delivery: digital modalities
• Administration: RPA
• Technology: cloud-based Learning Management Systems.

Cloud-based HR Services: Focus on Rapid Deployment

The cloud-based HR services market, including cloud consulting, implementation, AMS support, and HR BPaaS, took 2016 by storm. Key priorities were focused on launching guided implementation tools for rapid deployments, for example:

• NGA HR launched NGA FastTrack to rapidly deploy SAP SuccessFactors
• Ceridian launched Dayforce Activate, which shortens the implementation lifecycle to provide clients with a faster ROI
• Neeyamo launched Rapid Deployment for SAP SuccessFactors, which allows go-live to be achieved in 21 days
• Aon Hewitt launched a rapid deployment offering for mid-market organizations (1.5k-7k employees) who are migrating to Workday from a payroll service bureau provider, activating Workday core HR, U.S. absence, U.S. benefits, and U.S. payroll, including payroll settlement, check print, garnishment admin, and tax filing services in ~5 months.

Other initiatives were focused on ramping up delivery capabilities, with Zalaris opening a COE for SAP SuccessFactors in the Nordics, OSV opening a center in Ireland to provide support around Workday, and Neeyamo launching a SuccessFactors Employee Central service center.

All cloud-based platform providers, including SAP SuccessFactors, Workday, Oracle, ADP, Ceridian, and Ultimate have robust pipelines and roadmaps for continued innovation, making this one of the key areas to follow in 2017.

One of the top HR initiatives for organizations has been to replace legacy on-premise systems with cloud-based technology. In fact, as of Q4 2015, ~44% of organizations have moved core HR to the cloud according to PWC’s annual HR Technology Survey. This trend will not only continue, but will naturally expand to other HR functions, including payroll, followed by time and attendance, then benefits, and finally talent management.

There are many factors driving the trend towards cloud-based HR technology adoption, including globally dispersed workforces. Cloud-based HCM software has introduced a new group of suppliers focused on delivering services around cloud-based technology, including:

• Pre-deployment services, including HR cloud consulting
• Deployment services, including implementation
• Post-deployment services, including AMS and HR BPaaS.

An example of a vendor operating in this space is OneSource Virtual (OSV). OSV focuses its services exclusively around Workday and, since its inception, OSV has expanded its capabilities in line with Workday; for example, it developed HR BPaaS capabilities in the U.S., Canada, and the U.K. following Workday’s payroll localizations in these countries.

More importantly, OSV is getting ahead of the curve by entering into an alliance with CloudPay to offer a global WFA and payroll service called Global Workforce Administration. CloudPay produces ~800k payslips and processes ~$3.5bn in payments annually across ~120 countries, ~26 languages, and ~30 currencies, instantly expanding OSV’s ability to provide payroll services for multi-national corporations operating beyond the U.S., Canada, and the U.K.

This alliance is significant and will be an important factor in OSV’s growth. In addition to the demand for cloud-based technology and support, demand for multi-country payroll is also very high.  NelsonHall’s recently published Targeting Payroll Services market analysis report reveals that the multi-country payroll market will grow four-times the rate of single country services through to 2020. 

What’s more, the convergence of these trends is widespread and not just occurring within large market multi-nationals. For example, the average size of organizations for the Global Workforce Administration offering is just under 4k employees, and typically across ~8 countries. In addition to the U.S., Canada, and the U.K., top countries in scope include Germany, France, China, and India.

While prospects for the Global Workforce Administration offering come from a variety of industries, the highest demand is currently from the financial services, technology, and healthcare verticals.

The immediate needs of organizations include having one system of record globally in the cloud for HR and payroll, which OSV is situated to deliver on the Workday platform. Looking ahead, NelsonHall not only expects the trend to continue with other HR functions, but for organizations utilizing the Workday HCM platform to expand use to Workday’s Financial Management module, and subsequently add on finance & accounting BPaaS support, which OSV can also deliver.

Over the last year, OSV’s business development initiatives have positioned the company well to capitalize on the future direction of the market, and it will undoubtedly continue to expand its portfolio of cloud services support.

As earnings are released, it’s a good time to reflect on HR outsourcing trends by key service line. Here’s a brief round-up of market activity across payroll, RPO, and learning services in H1 2016.

Payroll

Payroll activity has been bustling in Europe YTD, with a strong emphasis on ramping up capabilities. SD Worx made two acquisitions to accelerate its growth across Europe, including Ceridian U.K. and Ireland, and Fidelis HR in Germany. Already the largest payroll provider in Benelux, SD Worx strengthens its footprint across EMEA through these acquisitions.

Continuing its expansion, Workday launched payroll in France.  At the same time, Workday partners providing cloud-based HR services such as OneSource Virtual (OSV) and NGA HR have been expanding delivery capabilities in Europe as follows:

• NGA HR opened a new center in Bristol, England, that will also be an innovation hub for cloud HR, payroll, analytics, and HR BPaaS
• OSV launched the next phase of its European service center in Derry, Ireland, which currently has ~100 employees.

For leading payroll outsourcing providers, multi-country capability is a critical success factor, and most vendors continue to expand their footprint globally, e.g. ADP recently added payroll support for Angola, Azerbaijan, Guam, Mozambique, Puerto Rico, Tanzania, and Zambia.

For more insights into the payroll market, NelsonHall will be publishing its Next Generation Payroll Services market analysis in August.

RPO

The RPO market continues its evolution. NelsonHall estimates that ~43% of all RPO contracts include multiple countries in scope. Therefore, many vendors have been focused on expanding their geographic presence. Examples include:

• Randstad in Japan and Italy via its acquisitions of Careo Group and Obiettivo Lavoro respectively
• Cielo in Asia Pacific by expanding its delivery support in Singapore
• Adecco Group in the U.K. by acquiring Penna’s career and talent solutions business
• Alexander Mann Solutions by opening a second delivery center in Poland.

Learning

Contract activity for learning BPO (LBPO) was up significantly relative to H1 2015 across various verticals, including manufacturing, with wins focused on the automotive sector including:

• Raytheon Professional Services won a three year contract with BMW in Northern Europe for delivery, administration and management, deployment, and local adaptation services
• GP Strategies winning an automotive training contract with a Korean OEM as well as an operations training contract with a European Luxury OEM.

Also noteworthy was HSBC’s two-year extension with GP Strategies; HSBC is GP Strategies’ largest LBPO client.

Stay tuned for more highlights and trends from H1 2016 specific to benefits administration. 

Excelity Global is one of the leading Asia Pacific providers of payroll and HR outsourcing services, and Everstone, an India and South East Asia private equity and real estate investment company, plans to invest in Excelity Global for further growth in Asia Pacific and globally. Though a new name and brand, Excelity is an established provider with ~600 employees and ~400 clients across 17 countries in Asia Pacific. Formed in 1997 as Hewitt Associates, the company’s development in the region has seen various transformations, including:

• Hewitt forming a JV with India Life, creating India Life Hewitt in 2003
• Hewitt completing the acquisition of India Life in 2004, consolidating payroll processing centers, and starting payroll operations in China
• Further expansion to Singapore (2005-8)
• Aon Hewitt broadening its product portfolio for the APAC market in 2010, adding Workforce Administration as an offering
• Signing its first WFA client in India in 2011, a leading chain of fast food restaurants
• Expanding HRO services in 2012 to add regional payroll as an offering
• Launching the myPay app for accessing payroll on mobile, and being certified as a Workday Global Payroll Cloud partner (2013-14).

Excelity’s service offerings extend beyond payroll administration, also including tax processing, benefits administration (including mandatory, supplemental and flexible benefits), employee data management, learning, performance management, and recruitment.

Excelity targets single-country, regional and global companies. Service delivery locations include Singapore, India (Bangalore, Gurgaon, Noida, Hyderabad, Pune, Chennai, Mumbai), China (Shanghai, Beijing, Shenzhen) and the Philippines. China is also used as a nearshore center for 100% of Japan’s service delivery. Based on NelsonHall analysis, Excelity is one of the largest payroll service providers in Asia Pacific in terms of payroll revenue. Excelity processes over 1 million pay slips per month across the APAC region, with a value of $5bn per annum.

Clients are across several industries, including a multinational pharma company in China for payroll, a local bank in Singapore for payroll administration, a large restaurant chain in India for workforce administration, and a business processing center in the Philippines for automated time tracking and leave system.

Payroll in Asia Pacific is proving to be a very active HRO market. NelsonHall’s 2015 global payroll market analysis study reveals that the multi-country payroll market continues to grow at ~3X the rate of the total market, and the highest growth rates are in Asia Pacific and Latin America.

Meanwhile, HRO M&A activity continues unabated, with four acquisitions in 2016 already. NelsonHall believes this is a trend that will continue, including acquisitions of all sizes of companies, though we expect to see mostly mid-size companies acquiring to expand their geographic footprint and their ability to deliver multi-country, regional and global services. We will also continue to see acquisitions by private equity investors. Another very recent Asia Pacific example is Talent2 agreeing to sell its managed services business to private equity partners 5 Value Capital, rebranding to Ascender, providing payroll and learning services. Both Ascender and Excelity Global are in the top 5 payroll providers in Asia Pacific by revenue.

Excelity’s first Cloud Services product, Payroll on Demand, will be launched in Q2 2016. Excelity will be launching a fully unified regional payroll platform and SaaS capability in eight additional countries in the APAC region in 2016. NelsonHall expects Everstone to invest in Excelity's Hire-to-Retire HCM platform, enhance its service offering, and expand regionally and globally within the next 1 – 2 years. 

Overall, HRO contract activity is up ~11% y/y in 2015.  Renewals and contract extensions account for 25% of that activity, vendor changes ~20%, and new deals 55%. Regional and global multi-country contracts continued to grow in most HRO towers, especially payroll, which is also a strong driver for multi-country MPHRO contracts. 

Although trending down slightly in the last three years, mid-market activity remains high globally. Contracts included:

• Xerox awarded a Total Retirement Outsourcing (TRO) services contract for 1.2k employees by Tennants Consolidated in the U.K.
• Zalaris awarded a MPHRO contract for 1k employees by Borregaard in Norway, including HR admin, payroll, travel expense, time and attendance, and personnel document archiving solution
• Raet awarded a payroll contract for 6.7k employees by Philadelphia Zorg in the Netherlands.

Public sector activity is up nearly 5% y/y and accounts for ~20% of contracts, including:

• Voya Financial and City and County of Honolulu: DC administration
• Equiniti and Her Majesty’s Passport Office: payroll and time and attendance
• TIAA-CREF and Lane County, Oregon: DC administration.

M&A activity continues to increase y/y with ~27 deals to date, up from 25 acquisitions in 2014. By service line, M&A activity within benefits administration remained high, while acquisitions within RPO have become increasingly aggressive y/y. The majority of the RPO M&As have been focused on expanding or strengthening existing RPO services, especially to add recruitment consulting capabilities such as Capita acquiring ThirtyThree, WilsonHCG acquiring Sumner Grace, and ReThink Group acquiring Consort Group. To a lesser degree, RPO vendors are also keen to expand their geographic footprint, with the emphasis on the U.S., U.K., and Canada.

New offerings launched recently that will gain momentum in 2016 include cloud-based HR services, including HR technology consulting/strategy, HR SaaS implementation services, and post-deployment support, which may or may not include HR BPO services. The biggest focus for most organizations has been on developing a cloud-based HR technology strategy, though some vendors such as Aon Hewitt who launched its offering about two years ago are further along the continuum, providing post-deployment application management support on Workday exclusively to many clients.

Much of this HRO activity from 2015 will shape the deals and future direction vendors will pursue in 2016. Other 2015 developments that will continue to evolve in 2016 include private health insurance exchanges and the use of robotics process automation within HR.

As a result, the merchant banking division of Goldman Sachs and funds advised by Park Square Capital will become the primary shareholders, owning 95% of the business. Until the transaction is approved (expected in early Q1 2016), KKR will keep 100% ownership and then retain 5%.

Adel Al-Saleh, NGA HR and Northgate Information Solutions CEO, confirmed that over the past four years, the company has been “on a journey to streamline our portfolio, which included selling the Northgate Managed Services and Northgate Public Services businesses, and building strong foundations to grow NGA Human Resources.”

An area of growth announced in June 2014 is enhanced multi-country payroll capabilities via its Payroll Exchange, which connects cloud-based HRMSs including Workday, SuccessFactors, SAP, euHReka, Oracle, and PeopleSoft with NGA’s managed or comprehensive payroll services – which can be provided in 145 countries. Around fifteen clients supporting ~250,000 employees are being scheduled for deployment with these technologies between H1 2015 and H2 2019, and several more clients are in the pipeline. New client industries now using Payroll Exchange include pharma, transportation, food and beverage, financial services, and consumer services.

NGA HR’s strategic priorities in support of growth include:

• Delivery:
  • Build scale via its seven global delivery centers and ~30 local delivery centers
  • Provide consistency in delivery across all centers, as well as increased automation and quality including usage of Lean Six Sigma and Robotics.​
• Technology platforms & offerings: Process improvement of platforms and service offerings including Payroll Exchange, Service Center Tools, and increased localization

• Strengthening partnerships:
  • Certified Payroll connectors with Workday & SuccessFactors, integrated into Payroll Exchange
  • BPaaS: BPO service wrappers around Workday & SuccessFactors
  • Expand network of local payroll partners for selected geographies.
• Target areas for growth & expansion:
  • Enhance mid-market capabilities and growth in select markets, including the U.S., U.K., Western Europe, Australia and New Zealand
  • Seek growth in new markets.

NelsonHall believes the outlook for growth at NGA HR is very positive, as it has been making the right investments to quickly deploy and integrate HR solutions in the cloud (including HR Cloud Accelerators, announced Q4 2015). Plus, NGA HR has been enhancing its multi-country payroll capabilities via the Payroll Exchange, and is one of only a few companies that can deliver payroll and HR globally, via on-premise and cloud technology service and/or BPO and BPaaS payroll & HR outsourcing focused on workforce administration.

Capita states it believes the acquisition would:

• Position Capita as a leading provider of technology-enabled BPS
• Provide a stronger platform for Xchanging to accelerate sales growth and to develop its offerings
• Enable Capita to secure £35m+ in cost synergy benefits
• Be immediately earnings accretive.

Capita has been in discussions with Xchanging since early August regarding a possible offer, upping its initial 140p offer to its final 160p proposal on September 24 - which Xchanging’s board confirmed it would be willing to recommend on September 29 should Capita make a firm offer. Capita was granted due diligence access and had until 5pm on November 2 to make an announcenent.

There is another suitor, Apollo, with whom Xchanging has been having discussions about a potential 170p offer. Will this announcement push Apollo into making a counter offer? Xchanging's share price has surged since the news of the potential talks (over 165p at the time of writing, though still below its one-year peak).

Xchanging has been contending with a range of issues, and its global portfolio lacks coherence, partly a reflection of its heritage in a few large and diverse “Enterprise partnerships”. Xchanging is currently between CEOs, Ken Lever having announced his intention in July to step down at the end of the year, and new CEO Craig Wilson not yet started.

If Capita were to complete, this would be its largest ever acquisition, dwarfing its second largest, the £157m acquisition of avocis this February (though there have been a number of £50m+ acquisitions since 2011, helping Capita expand into new markets or extend its IT capabilities).  So why is Capita so interested?  

In recent years, Xchanging has repositioned and invested to emphasize its capabilities in “technology-enabled BPS”- exactly what Capita is emphasizing with its own various BPO offerings.  Also, the private sector is increasingly important to Capita (over 60% of its current pipeline is in commercial sectors) and Xchanging would increase its presence in the Lloyds market, where Capita already has a presence for specialist services.

Looking in more detail at Xchanging assets that would be attractive – or at least very relevant - to Capita:

1. Xuber software suite for the non-life commercial market: the biggest investment to date (a whopping $200m+ in total investments since 2011), both in platform development and in acquisitions: in 2014, Xchanging invested £75.6m in acquiring Total Objects, whose binder software is now integrated into the Xuber suite, and Agencyport Europe,extending its software into the health insurance sector, with software for international private medical insurance and exposure modeling (acquisition was delayed), plus a further £11.7m on development of Xuber. Xchanging has found converting interest in Xuber to sales more challenging than anticipated, particularly in the U.S. Will Capita’s greater commercial clout help? It would inherit sales teams from Xuber, Total Objects and Agencyport Europe that need integrating into a single unit to cross-sell, where relevant, the portfolio. Would Capita place the Xuber business in its newest operating division “Capita Digital and Software Solutions”, or would it place it in an insurance sector division?
2. The Xchanging Claims Services BPS unit : Capita is already active with a range of specialist services in the London insurance market: this capability would neatly expand its portfolio
3. Xchanging’s business in Germany, where it provides investment account administration BPS for Fondespot Bank, will also be of interest to Capita, who is building a presence in the DACH region, via an acquisition spree in the CMS BPS market, also via an insurance BPS contract with Zurich. The complex administration services in Germany that Xchanging would bring in to Capita would fit well in its Asset Services division
4. Procurement: Xchanging has been through a significant change of direction with its procurement services in recent years, to technology-led offerings, boosted by the acquisitions of MM4 (which was U.S centric) and Spikes Cavell Analytics Ltd (SCAL, which was U.K public sector centric). These offerings may find traction in the Capita client base
5. Expanded offshore IT services capabilities: in India, Xchanging has centers in Chennai and Pune, Bangalore, and tier 3 cities such as Shimoga (Karnataka).  It also has a center in Kuala Lumpur, Malaysia, most providing IT infrastructure services to YTL Communications, and a smaller ADM unit in Singapore (where Capita also has a small presence, targeting the reinsurance sector). There is also some offshore BPO activity in India and Malaysia. Capita may rationalize some of these sites, but would certainly be interested in the expanded offshore application services and BPO delivery capabilities
6. IT services: Xchanging has some networking capabilities, with a client base in the education and health sectors, as well as Lloyds – this would fit well into the Capita IT Enterprise Services division, which has grown through a series of acquisitions in recent years

And less attractive to Capita?

• The Australian operations, where Xchanging’s New South Wales Workers’ Compensation contract was not renewed, and where its procurement business has not really gained traction.
• The U.S. business: Capita’s international efforts are currently focused on Northern Europe. It would be a major change of strategy for Capita to start targeting the U.S., and its management will be highly aware of other service providers who have tried and failed to penetrate the U.S.

But overall, Xchanging’s portfolio is particularly well suited to Capita's business and where it is looking to develop over the next few years. And the cost synergies from the head office rationalization are also a particularly good match.  

We thus believe is highly unlikely that, even if there is a higher counter offer from Apollo, the Xchanging board will change it recommendation to shareholders: Capita presents a better option longer term. Howver, a counter offer from another IT services vendor might be more attractive.

NelsonHall has just published a comprehensive Key Vendor Assessment on Capita. We have also historically included Xchanging in the KVA program.

Overall, there has been growth across ADP’s cloud-based platforms, including RUN, Workforce Now, Vantage HCM, and GlobalView HCM, with the total number of clients reaching ~501k, up 16% from ~431k last year. These platforms make up the foundation of ADP’s HCM business, so further developments and enhancements to its technology are paramount to its continued success.

For the last year, the focus has been on enhancing the user experience across most of these platforms. For example, the benefits module of Vantage HCM includes a comparison shopping experience, and a new onboarding tool will be released in the next few weeks. Another significant enhancement included the launch of ADP Marketplace in late 2014, which integrates third-party applications with ADP’s technology. To date there are ~60 apps in the ecosystem, including RightFit’s RightView, which was added last week.

In the U.S., ADP has focused on the synergy between payroll, HR, and benefits, which is now expanding globally through a partnership with Thomsons Online Benefits. Global/multi-country benefits offerings essentially take one of two forms:

• Multi-country benefits brokerage and consulting services
• Multi-country technology platform with optional local administration.

Thomsons’ Darwin platform will be integrated with ADP’s GlobalView HCM platform, which is geared towards MNCs. Other examples of multi-country technology platforms include Mercer’s MercerGold and JLT’s BenPal.

In terms of its future direction, ADP’s new big data platform, DataCloud, will be a significant focal point, which goes beyond providing analytics and reporting to include benchmarks beyond pay. Other future developments of DataCloud include predictive analytics and data exchange, which will show how workforce metrics impact business outcomes.

The largest opportunity for ADP is leveraging its HR BPO services, and ADP appears to be on the path to capitalize on this as it focuses on connecting its technology with expertise to transform HCM. This, however, will not happen overnight and while ADP’s Strategic Advisory Services can facilitate the connection to its HR BPO services, the bandwidth of Strategic Advisory Services to support such a venture will take time to develop, especially when compared to other HR BPO providers such as Aon Hewitt, Accenture, and Xerox that have separate consulting arms.

However, the ingredients for success are all present, so it’s just a matter of assembling them – though the outcome will be different for each client depending on their outsourcing mix. For example, for Sodexo, ADP provides end-to-end HR BPO services, while Kimball International has outsourced employment verifications and COBRA administration to ADP while retaining other services in-house using the Vantage HCM platform. 

In any event, ADP is continuing on a path that is focused on client-centric innovation coupled with services.

In the U.S., the emphasis will continue around Health & Welfare (H&W) services, stemming from the Affordable Care Act (ACA). In 2015, tier two H&W specialists such as Businessolver and TASC launched ACA reporting offerings, with many PEOs expected to follow suit in the near future.

As the entire benefits landscape shifts in the U.S., service providers have ramped up capabilities around key service lines such as private exchanges and spending account administration. For example, ADP launched its private exchange offering, which is focused on integrating with its other HCM offerings including payroll, HR, spending accounts, and its ACA offering Health Compliance.   Blue Cross Blue Shield has also partnered with Connecture to launch its BCBS Marketplace for retirees in 45 states. In addition to adding private exchange clients, most vendors will be focused on expanding and enhancing private exchanges for active employees and retirees in 2016.

In terms of spending account administration, the objective for tier one specialists will be to acquire tier two vendors to expand their client bases, which has already started to happen with, for example, TASC acquiring BMO Benefits Services.

In the U.K., the new pension rules providing more freedom and flexibility will lead to new offerings that include calculators and modeling tools to provide individuals with information and assistance.  To date, Equiniti has launched its RetireMe app and Aon Hewitt launched an online retirement offering, Bigblue Touch 4life, that includes the following:

• Access to an annuity broking service to compare prices and select the provider and annuity that matches employee needs
• Flexible drawdown
• Access to cash and a range of investment funds and strategies
• Access to advice.

Also in the U.K., attention in 2016 will focus on employee engagement and education around retirement planning.

Globally, initiatives around employee wellness will be on the rise next year. Newer offerings in the market include Mercer’s Health Pathfinder platform, which enables employers to leverage the latest health management solutions to reduce healthcare costs and cultivate healthier and more engaged employees, and Towers Watson’s web-based health management offering, HealthVantage. In addition, EAP providers (such as Ceridian who divested its H&W business to focus exclusively on LifeWorks), will be improving available services for employees while being more proactive about engaging employees.

Over the last few years, traction on the multi-country benefits front has been slow and steady, and this will continue at the same pace. Towers Watson, however, has aggressively expanded its capabilities in this space. Its biggest news is the merger with Willis, although prior to the merger both companies were strengthening their respective businesses as follows:

• Towers Watson acquired Metis Insurance to launch a benefits brokerage business in India, as well as launching a benefits brokerage business in Japan and South Korea
• Willis acquired PMI Health Group to expand its presence and product offering in the U.K., and partnered with Benefex for benefits admin technology and communications in the U.K.

Trends from 2015 plus future initiatives will be highlighted in NelsonHall’s next Targeting Benefits Administration market analysis project, which will start in December.

With respect to its benefits administration business, ADP has carefully and deliberately built out a comprehensive offering, which now includes a private exchange. Within the broader picture, ADP’s private exchange integrates with its other HCM offerings, including payroll, HR, and benefits.

ADP’s private exchange offering, targeted at employers with a workforce of 1k-15k, provides an end-to-end experience for eligible and non-eligible employees including:

• Defined contribution
• Public exchange enrollment
• ACA compliance via ADP’s Health Compliance offering, which includes eligibility, affordability, and regulatory management around ACA
• Spending accounts, which will assist employees in saving for their health needs.

Underpinning ADP’s private exchange approach are the following two key partnerships, which essentially provide coverage for an organization’s entire workforce:

• USI Insurance Services: for eligible employees (although clients can continue working with their current broker)
• GoHealth: for non-eligible employees.

USI, an insurance broker and consultant with ~50% of its business focused on employee benefits, will use its ONE Advantage approach for ADP’s clients, which includes:

• Omni: its proprietary knowledge platform
• Network: ~1.5k employee-benefits employees across the U.S. in local markets
• Enterprise planning: regular client engagements focused on broader strategy objectives.

USI will provide eligible employees of ADP’s clients the ability to choose benefits that best suit their individual needs via a broad selection of plan options, which is integrated into ADP’s technology, including Vantage HCM. ADP’s emphasis on innovation, particularly in developing and enhancing the end-user experience, will bolster the solution with appropriate decision support tools in place and will mirror a retail-oriented shopping experience.

ADP’s partnership with GoHealth, on the other hand, will provide support for employees that are not eligible for employer-sponsored health insurance, namely part-time, temporary, and contract workers who need to enroll in a public exchange. Through GoHealth, non-eligible employees will be able to:

• Compare plans and prices offered on the public exchange
• Apply for subsidies
• Receive support from licensed advisors.

ADP’s partnership with GoHealth bridges the gap for non-eligible employees, who are often left on their own to navigate public exchanges, and provides employers with information on how these employees are obtaining health benefits. Like USI, GoHealth is integrated with ADP’s platforms. 

The end result is an integrated private exchange offering within a holistic HCM solution that incorporates payroll, HR, and benefits.

• Revenue was $4,817m, down 15.5% y/y, and down 10% in constant currency (CC), reflecting key account run off and weakness in EMEA
• Segment earnings before taxes (EBT) were $194m, a margin of 4.0%, up 143 bps y/y.

Q2 FY 2015 revenue by service line (with y/y revenue growth) was:

• IT Outsourcing $2,871m (-20.2%, -10% in CC)
• Applications and business services $1,946m (-7.6%, -2% in CC).

HP ES contributed 18% of HP Group revenue and 8% of Group EBT (up from 5% last quarter)

HP Group is nearing the completion of its 2012 restructuring plan. In Q2 FY 15, ~3.9k people exited HP making the total reduction to-date ~48k. The program has a total of 55k people expected to exit by the end of FY 2015, so a further 7k departures over the next two quarters.

HP has maintained full FY 2015 guidance for Enterprise Services of a revenue decline of between 4% and 6% on a constant currency basis, with an improvement in H2.

So where are the positives in HP ES' performance this quarter?

• A significant improvement in revenue performance in the Apps and Business Services segment, with a CC y/y decline of just 2%. This is led by the BPO business. And some geos are showing flat to slight CC growth
• Signings were up year over year, even without the $2bn Deutsche Bank deal closed at the beginning of the quarter (see our commentary here).
• And “Strategic Enterprise Services” signings continue to grow.... though no details are provided.

But the problems continue at  HP ES’ ITO business. It not only continues to be impacted from contract runoff from three large accounts continues, but is also being challenged by the evolution in the market. Meg Whitman refers to “risk in the longer term sustainability of this profit level if we don’t do further cost reductions”. As such, the current intention is to streamline HP ES and take up to $2bn of gross annualized costs out of the business over the next three years in pursuit of a longer term EBT margin target of 7% to 9%. The likely charge represents around 9% of HP ES overall revenues - and 14% of the revenues of the ITO business.

The restructuring actions in HP ES and in particular ITO will include initiatives such as further offshoring, data center automation, pyramid management… the same actions highlighted by CSC earlier this week.

Nevetheless, Whitman has made a clear statement of commitment to the future of HP ES: "the Services business in ES - (and the) -  TS Consulting businesses are  becoming more strategic to the future of Hewlett-Packard Enterprise…. “increasingly, services is becoming the tip of the spear”.

The acquisition will enhance Accenture’s digital capabilities in analytics, cloud and mobility for federal agencies. It also will add agile delivery expertise. Agilex brings in capabilities in agile software development for digital solutions. The company currently serves a number of federal departments and independent agencies, such as the VA, DoD, DHS, and Department of Commerce.  Commercial sector clients have included Amtrak.

Agilex was founded in 2007 by the late Robert La Rose (who had previously founded Advanced Technology Inc. and Integic, both of which were subsequently acquired), Jay Nussbaum (ex. Citibank and Oracle) and John Gall and quickly attracted senior talent to its leadership. The company offers services around

• Mobile applications for activities such as field inspection, emergency response management, performance dashboards, biometric identification, asset management, case management, personal productivity, etc.
• Healthcare IT - for example Agilex was involved in the deployment of the NHIN CONNECT Gateway. Also m-health - for example in May 2014 it was awarded a contract by the VA to develop and implement an enterprise web and mobile application image viewing solution
• CRM solutions.

Agilex has grown from 20 employees in 2007 to about 800 today. Nussbaum and Gall will leave when then acquisition closes, while the company’s leadership team will be integrated into AFS.

So why the acquisition? 

• AFS is already one of the largest U.S. federal systems integrators – this is about continuing to evolve its capabilities to be at the forefront of newer areas of demand; quite simply, Agilex brings in capabilities around digital technologies – and digital is clearly among the top priorities of the government sector
• And governments, not just in the U.S., are looking with much more interest in agile delivery as they move away from massive monolothic projects (for example, agile delivery has been a key element in the U.K. in the development of a new Universal Credit system for the DWP)

Accenture’s 2013 acquisition of ASM Research expanded its presence in the military healthcare market (DoD and VA) - and Accenture has worked alongside Agilex in projects at the VA. 

However, IBM is in the midst of a major adjustment of its portfolio. In line with this, the company is reporting $25bn in revenues (and 16% revenue growth) in 2014 (out of a total of $92.8bn) from its "strategic imperatives". IBM's acquisition of Softlayer, where it continues to invest strongly, appears to be delivering $3.5bn annual "as-a-service" run rate and IBM reports that its "Cloud" business had 2014 revenues of $7bn and 60% revenue growth (this includes hardware, software and services),

The revenue growth reported from IBM's other "strategic initiatives" were:

• Analytics +7% (2014 revenue approx $17Bn)
• Security +19%
• Mobile >200%.

Maintaining a high mix of software remains important to IBM but its strategy is now much more nuanced than the simplistic "software good" strategy the company sometimes appeared to adopt in earlier years, with the company rediscovering success in IT infrastructure management. Indeed IBM's acquisition of SoftLayer and its ongoing investment in Cloud infrastructure including in additional in-country SoftLayer data centers and cloud enablers such as security and its Bluemix cloud development platform is arguably having more impact on its signings than any of its investments outside Watson and analytics. In Q4, IBM's cloud infrastructure business moved way beyond the standard fare of IaaS contracts with start-ups to facilitating major infrastructure transformation contracts with values of a $1bn+ with the likes of Lufthansa and WPP.

Indeed, while the impact of SoftLayer was insufficient to lead to material growth in IBM's outsourcing revenues in Q4 2014, its impact is certain to be felt on outsourcing revenue growth  in 2015 as a result of these and additional major transformations to cloud infrastructure. Led by these deals, IBM's outsourcing signings transformed in Q4 2014, up 31% (in constant currency and adjusted for disposals). IBM now just needs its application management business, which is continuing to decline under competitive pressure, to undergo a similar transformation.

2014 was a busy year for HRO with ~60 partnerships, mergers and acquisitions combined. We now take a look at what to expect in 2015 and beyond for each HRO service line, including service offerings, market developments, and growth.

MPHRO driven by continued shift to cloud-based platforms

• The Multi-Process HRO (MPHRO) market will grow with a mid-single digit CAAGR through 2018
• In terms of revenue, North America will be the largest region, and LATAM will grow the fastest
• Offerings will continue to be structured around a core model, including payroll and HR administration; benefits and recruitment services will continue to be the most popular add-ons
• Workday use will increase in MPHRO contracts; other cloud-based platforms such as Employee Central will penetrate as well. Momentum among existing MPRHO clients for cloud-based platforms will pick-up significantly by 2017
• Partnership activity will far exceed acquisitions, with partnerships primarily focused on cloud-based platforms and analytics (in 2014 ~3/4 of all HRO contracts were platform-based, of which the majority were cloud-based)
• The proportion of mid-market clients will outnumber large market activity by 2016 (in 2014 the mid-market represented 45% of the market, up from 35% in 2012)
• Demand for end-to-end MPHRO deals will be almost non-existent, as buyers continue to seek specialists for some of their services (e.g. learning) and reduce risk by not having one vendor provide all HRO services.

Benefits Administration exchange offerings will be key

• The benefits administration market will grow at an upper single digit CAAGR through 2018, with the majority of activity coming from the private sector
• The U.S. market will be driven by a need to control costs and be compliant with legislation; the U.K. market will be driven by auto-enrolment legislation
• Within Health & Welfare (H&W) services, private health insurance exchanges, reimbursement account admin, and leave of absence offerings will grow the fastest through 2018
• The main emphasis for vendors will be to develop or enhance exchange offerings (e.g. launching an exchange geared towards the mid-market, adding extended lines of coverage); other efforts will focus on enhancing existing Employer Shared Responsibility offerings
• Technology updates will continue to focus around expanding portals with additional features, and improving the user experience, in an effort to further engage participants
• Multi-country benefits admin activity will take one of two approaches: leveraging existing benefits brokerage and consulting relationships, or focusing exclusively on a technology platform.

Learning key to attraction, development and retention of talent

• The Learning BPO (LBPO) market will grow at mid-high single digit CAAGR through 2018, with Government being the largest sector with growth led by Healthcare
• Selective LBPO contracts will continue to outpace full LBPO, led by content development, including the conversion of instructor-led training (ILT) to e-learning
• Client learning spend will accelerate for job skill training and professional development for purposes of attraction, development and retention of talent
• Vendors will continue to strengthen and integrate their talent management service and technology offerings with learning, both organically and via M&As and partnerships
• Clients will seek the help of LBPO providers to select and implement social learning platforms. Vendors who can help clients monitor and measure their effectiveness will have a competitive advantage
• Vendors will explore adding Corporate Massive Open Online Courses (MOOC) capability as clients seek to further reduce costs and reach a wider net of learners
• E-learning will continue to exceed ILT, though ILT remains important, including for hands-on learning and role-playing, e.g. performance management.

Payroll outsourcing driven by multi-country and platform integration

• The payroll market will show solid mid-single digit global growth. Primary growth is driven by demand for multi-country services and for integrated HCM/payroll cloud integration and/or interfaces
• There will be increasing uptake of employee access to payroll information via mobile, particularly in the U.S. Half of clients globally have self-service, and access pay statements online
• Payroll consolidation will continue to support geographical expansions
• Payroll services will develop by greater focus on technology and automation, including integrating with HR-cloud offerings and using platform-based outsourcing
• Retail, manufacturing, and financial services will continue to be the largest purchasers of payroll services
• Cost and compliance will remain fundamentally important requirements of payroll outsourcing.

RPO and MSP (Contingent Workforce Outsourcing) the fastest growing HRO services

• RPO and MSP are the fastest growing HRO services, expected to continue with mid-teen CAAGR through 2019, in a market driven by increased demand for talent
• Vendor consolidation and partnerships will continue to expand into new geographies to meet demand for global RPO / MSP services
• In the candidate-centric market, services will develop to support greater capability in analytics, improved visibility of labor market supply data, and workforce planning processes to address growing talent shortages. Candidate engagement and a streamlined process will remain a fundamental focus
• Technologies to support mobile marketing and video interviewing will be increasingly popular
• Vendors will continue to invest in onboarding services that go beyond the initial hire to support year 1 retention, and are expected to play a larger role in recommending employee progression and career advice for candidates to support retention
• Contingent workforce management services will grow in Statement of Work (SOW) programs and direct sourcing services to ~28% by 2018
• Requirements for diversity sourcing will be reinvigorated following the new legislation in the U.S. on veteran hiring
• Blended RPO / MSP services will increase in adoption, driven by a focus on developing optimal workforce strategies and bringing greater value to engagements through single governance and reporting and broader analytical insights on the total workforce.

We look forward to an exciting year!

Amy Gurchensky, Liz Rennie, Gary Bragar

First CEO TK Kurien opened by describing Wipro’s view of the market:

• Enterprises were created prior to the current digital era. As a result, customers cannot engage easily or effectively with legacy enterprises operating with old style operating models and operations systems
• Operations vendors (IT services and BPO) will be disrupted. “Slow and certain”, Wipro’s previous model, where offerings were developed and tested to assure quality outcomes, is no longer a successful strategy. Wipro describes its current model as “Fast and Uncertain”, where ideas are tried, then adapted over time, as a flexible strategy more appropriate for rapidly changing times
• The journey with clients to a digital operational development cannot be undertaken at full maturity. It requires Wipro, partners, and clients to slowly adapt while also continuing to provide current services. To accomplish that Wipro needs to maintain and aggressively grow existing operational relationships. Wipro will aggressively pursue new business to establish larger market share, because existing clients provide a base from which transformation can be launched (i.e., upsell). Kurien did not discuss how he intends to pursue new business before transformation. Presumably aggressive pricing and terms would underpin such a grab for marketshare
• Traditional BPO will be disrupted, with value levers extending beyond labor arbitrage and simple process re-engineering. While this has been a theme for several years in the industry, Kurien indicated community sourcing (open source software, cloud computing, and shared services) as opposed to vendor specific offerings will drive enterprise operations much more so in the years ahead than has been the case to date.

To address these trends, Wipro is changing its own approach. Key initiatives include:

• Digital POD, Wipro’s methodology for clients designing new operations environments (both platforms and processes).The process draws on strategy, design, and technology. Wipro is building technology and design capabilities in concert with partners to support clients’ evolving business strategies. Specifically Wipro is currently building three digital POD centers in London, Bangalore, and the Bay area of California. These centers will work on client engagements designing new operations environments for clients. As examples of how this might work, Wipro referred to several tier one banking clients, hit hard by the financial crisis and culling businesses and operations, who are redefining their business models to adapt to changing regulations and competitive conditions. Automating manual processes, modernizing legacy platforms, and maintaining ongoing delivery requires third party help from a combined IT/BPO vendor. An early example of what Wipro wants to do, according to Kurien, is a top 4 bank in the U.K. that Wipro has helped over the past three years improve its retail customer support using platform and operations change and support. During that time the client moved up from fourth to first in customer satisfaction ratings.
• Alliances and partnerships:
  • Open source: Wipro has committed to invest over the next two years to further develop its open source capabilities. Open source development has become a key area of investment for banks and other global 100 companies. Open source is used by enterprises for its low cost and ability to deliver custom functionality.
  • Wipro is building on its existing experience and joining open source communities to better identify best resources, also to help formulate community priorities
  • Corporate VC fund to invest in tech start-ups. Wipro has made three investments so far
• Move its own business model from labor arbitrage to process arbitrage (global standardization and greater automation of processing). Wipro has seen their clients’ focus for operational change shift from cost of resource to total cost of ownership (TCO), over the past few years and believes this trend will continue and accelerate.

Wipro articulated that, as a company, it is responding to the fact that businesses in its target sectors (banking, healthcare and retail, to name just three) are having to change their entire operational delivery methodology to adapt to the changing environment. Wipro also highlighted that this requires to talent - both technology and operations talent.

And, like many other IT services providers, Wipro is looking with increased interest at alliances and partnerships. Partnering however requires a wide net to succeed. Most partnerships are weak, some are strong, and a few drive strong value creation.

The challenge with partnering is how to drive partners forward to execution when they have competing demands/opportunities. Successful partnerships require the alignment of goals and culture, which in turn requires due diligence on potential partners and clear signalling of intentions and values.

Participation in communities, such as open source, is table stakes to access and due diligence, but not the trigger to execution. Wipro has indicated it will support partners by identifying sub-domains where it will be active. Wipro has a large client base, something developers typically do not. Wipro can create a market for open source developers’ services, while providing its clients with quality assurance and scale.  IT and operational support. In the long run, we believe Wipro will need to selectively partner with relatively few organizations and people for open source capabilities. Ultimately, Wipro will need large scale in-house complementary resources to capitalize on engagements. Leveraging the independent resources of alliance partners to deliver operational change to clients will demand that Wipro bring its own operational scale to the table, not merely IT skills. 

There are a couple of reasons why Payroll and HR/Workforce Administration scored highly:

• Firstly, being highly transactional mature service offerings it is not a surprise that payroll and HR/workforce administration scored well. Important SLA metrics such as accuracy and on-time delivery are > 99% and rarely missed
• Secondly, Payroll and HR Administration are the current core MPHRO service offerings. Aside from the shared service transformation segment (which often includes most of the entire HR service line) the core bundle of HRO services provided as part of MPHRO contracts has retrenched to primarily Payroll and HR Administration.

RPO certainly has many benefits when provided as part of MPHRO contracts. However, the results of this study suggest that RPO within MPHRO has yet to reach the maturity of standalone RPO. Talent is the top HR priority of business leaders today and RPO has become much more than a transactional hiring service. Clients now have high expectations of value-add and expertise from RPO across areas such as talent pool development, employment branding, on-boarding and talent retention. This can be a challenge in MPHRO where the services currently provided are typically highly administrative and/or transactional in nature.

Nonetheless, over the last couple of years we’ve begun to see MPHRO providers begin to rise to the challenge and develop RPO specialist capability either:

• Internally and via partnerships, e.g. Aon Hewitt SourceSprint which keeps applicants in a talent community for possible placement with other opportunities and Aon Hewitt’s digital interviewing capabilities via its partnership with HireVue
• Using M&A activity, e.g. ADP and The RightThing and IBM and Kenexa, to provide RPO specialist capability either as a part of a MPHRO service or as a standalone service.

Therefore I do believe that in subsequent surveys we will see RPO client satisfaction as part of MPHRO services contracts continue to improve.

Elsewhere performance management administration scored 10 points higher than succession planning. The stronger rating for performance management administration is good news for MPHRO providers as performance management is a critical element in talent retention and development, and ensuring that performance management policies are adhered to is a critical hygiene factor for organizations. However, succession planning may be a step too far. Here, there is typically less scope for MPHRO vendors to make a significant impact on the internal mobility decision process, and the lower rating may be indicative of clients needing to be more active and accountable for the succession process.

The MPHRO NEAT tool is available to NelsonHall clients at http://research.nelson-hall.com/service-line-programs/hr-outsourcing/multi-process-hro/ and is also available for a limited period free-of-charge to buy-side HR executives and strategic sourcing managers.

EBIT margin was 13.0%, down both sequentially (-7 bps) and y/y (-157 bps). And adjusted operating margin (the metric Genpact prefers to comment on its performance as regards profitability) of 15.6% was also down both sequentially (- 76 bps) and y/y (-108 bps).

In Q2 the number of clients contributing $25m or more increased from 12 to 14, so there is some progress in making more money from its clients but we have yet to see the results from Genpact’s transformational plan announced in February this year (see our blog “Genpact: Slow Progress on Transformation Strategy in 2013 - Unveils Next Phase of Plan: http://research.nelson-hall.com/blog/?avpage-views=blog&type=post&post_id=139#sthash.u2IRYAcO.dpuf). This plan includes expanding/enriching the sales force (the intention is to invest at least 6% of revenues in sales and marketing) and increasing domain expertise with SME hires, and increasing industry specific capabilities through acquisitions.

With 37 new sales hires so far this year, client coverage has increased by 10%. The investment in client facing teams is presumably not just about generating new logos but also to improve the protection of existing business, with F&A BPO in particular being an increasingly competitive market (for example, Genpact recently lost most of the Honeywell renewal to Capgemini).

Expenditure on SG&A, at 25.4%, was at its highest for four years. Taking out S&M costs, G&A spend remains very high at over 19% of revenue – there was no mention of improving efficiency in G&A.

Management highlights three transformational deals this year, one of which an F&A win in the insurance sector. Revenue growth this quarter in the BFSI sectors which are key to Genpact (they account for 41% of total revenues) was the lowest it has been for years, at 3.8% y/y, though generally BFSI has been resilient this quarter. We note that no reason has been given by management for Genpact’s slow growth in BFSI this sector. Looking ahead, CEO N. V. Tyagarajan referred to ongoing discussions about setting up a potential BPO utility in the capital markets sector in H2, presumably through a client acquisition. Elsewhere, Genpact saw the strongest y/y revenue growth in its manufacturing sector business since 2012. at 14.5% y/y.

Genpact remains in the early stages of its transformational journey, with Tyagarajan again referring to 2014 as a "pivotal" year.

We have yet to see the benefits flowing through to the topline of a refreshed and expanded sales force, with early wins tending to be smaller project-based engagements. Management continues to guide on accelerated revenue growth in 2015 with margin improvements lagging slightly, presumably in 2016, once new large deals are past initial ramp-up stages.

So far in 2014 we have seen an IP enhancing acquisition and a vertical focused partnership. Expect to see more niche acquisitions such as Pharmalink, as Genpact continues its shift to promoting industry-specific BPO services with IP application and analytics.

Jessica Soler and Rachael Stormonth

The MPHRO tool is available to NelsonHall clients and is also available for a limited period free-of-charge to strategic sourcing managers.

In addition to a comparison of overall vendor capabilities, the tool evaluates their capabilities in a number of MPHRO client buying behavior market segments including:

• Multi-country standardization
• A shared service transformation
• A technology-led HR service transformation.

Suppliers of MPHRO covered by NelsonHall’s Vendor Evaluation and Assessment Tool (NEAT) include Accenture, ADP, Aon Hewitt, Capita, Genpact, HCL, HP, IBM, Infosys, Neeyamo, NGA HR, Talent2, TCS, Wipro, WNS, Xerox Services, and Zalaris.

The NEAT tool for MPHRO is part of NelsonHall’s “speed-to-source” initiative.  The NEAT tool sits at the front-end of the vendor screening process and consists of a two-axis model, assessing vendors against the following:

• Their ability to deliver immediate benefits to clients
• Their ability to meet clients' future requirements.

The NEAT analyses themselves are based on a combination of vendor and client interviews. The vendors are scored against a wide range of criteria, establishing a number of scenarios, each with different weightings to represent a different business situation or client business need.

To add further value in speeding up the sourcing process, clients are able to input their own weightings and tailor the tool to their requirements. For example, clients can adjust the weightings to place more emphasis on different business needs.  Ultimately, this enables sourcing managers to use the service as an interactive tool via the web, and tailor it to meet their own specific sourcing requirements.

Bit of a mixed bag from Wipro this quarter, generally positive, but with a few areas where we would hope to see improve over the next few quarters.

Looking at overall topline performance, revenues were towards the higher end of prior guidance of $1,715m-$1,755m, and the 9.6% reported y/y growth was the best quarter’s growth since Q4 FY 12. However, the constant currency growth of 8.1% was lower than that achieved in the previous two quarters.

Operating margin continues to see y/y improvement (2.8 pts to 22.8%), reflecting, inter alia, continuing improvement in utilization (now at 77.9% excluding trainees).

Wipro has introduced a new service line reporting segment, called the somewhat splendid “Advanced Technologies and Solutions” (seems to be comprised of the former Analytics and Information Management segment plus around $70m of business from other service lines such as Global Infrastructure Services, and Business Applications Services). Whatever the segment may include, it is not yet a growth engine for Wipro, having contributed between 11.5% and now 11.3% in the restated segment breakdowns for the last five quarters.

This segment restatement makes assessment of any new developments in y/y growth patterns difficult. Three service lines delivered double digit growth this quarter: infrastructure services (16.7% growth, ~$63m in incremental y/y revenue, over 40% of the total incremental revenue, Business Application Services the other major revenue engine, with $50m in incremental y/y revenue, and ), BPO, which had a very strong quarter of nearly 21% growth.

Looking at the verticals, media and telecoms had its best quarter for years, continuing to accelerate from the 10.5% CC growth achieved last quarter. This sector group has more than just stabilized; it is now delivering growth above overall company levels. A recent outsourcing win at Sanoma (see here: http://research.nelson-hall.com/sourcing-expertise/search-all-content/?avpage-views=article&searchid=29555&id=203303&fv=2) illustrates Wipro winning cost-take out IT outsourcing deals in the challenged media sector. The Energy & utilities sector slipped below double digit constant currency growth for the first time in years - but the Atco win (the largest in Wipro's history, see here http://research.nelson-hall.com/sourcing-expertise/search-all-content/?avpage-views=article&searchid=29555&id=203338&fv=2) will return its E&Ubusiness to being its fastest growing vertical. 

The Americas region (which for Wipro has predominantly been the U.S., though the Atco deal will soon increase its footprint in Canada) delivered its best topline growth, both as reported and in constant currency, for several years, reflecting improving commercial sector market demand. Topline growth in Europe slowed down slightly (in constant currency) – but for Wipro, Europe is not a new growth market: it is already generating around 30% of its revenues from the region. The India and Middle East business performed better than expected (up 13.4% y/y), as the elections did not have the negative impact that had been anticipated.

This is the first quarter in a year that Wipro has increased its headcount, with nearly 1,400 new net hires (the year-on-year increase is just 234). Does this indicate renewed confidence? Or are the new campus hires partly being done to contend with increasing attrition? Wipro reports its attrition in parts: excluding its India/Middle East business and BPO, voluntary TTM attrition is now up to 16.1% (Wipro doesn’t report involuntary attrition). BPO quarterly attrition was 11.8% (slightly down, but still an annual attrition of over 28%). A rough estimate puts Wipro’s voluntary TTM attrition, excluding the India and Middle East businesses, where attrition will be higher, at around 17.5%.

We also note Wipro has been making steady progress recently in increasing its share of wallet in some of its largest accounts but this quarter, the revenue contribution from clients 2 to 5 is down, from 13.2% to 12.7%.  

Revenue guidance for next quarter is in the range of $1,770m to $1,810m, a y/y growth of 8.5% to 11.0%. With a number of large outsourcing deals coming online over the course of this year, we would hope to see Wipro return to double digit growth within the next two quarters.

Benefits Administration:

Benefits administration was a hotbed of activity in H1!  Contracts were awarded across various service lines in the U.S. as well as in the U.K. There was a solid stream of pensions and retirement administration contracts including TRO activity.  In addition, demand for benefits administration SaaS was quite strong.  Examples of deal announcements include:

• JLT won the DB and DC administration contract by Santander UK covering 100k employees
• Fidelity won the DC administration contract for FirstEnergy for 21k employees
• WageWorks expanded its contract with Lowe’s and is providing spending account administration and COBRA administration
• Towers Watson renewed its retiree exchange contract with Eastman Chemical Company
• Capita expanded its contract with Wood Group in the U.K. to include occupational health services.

RPO:

The level of RPO activity continues to be strong.  Like benefits administration, deals flowed steadily from the U.S. and U.K.  Contract examples in H1 include:

• FutureStep and TalkTalk: 2-year deal in the U.K. including internal and external recruitment as well as contractor and permanent roles
• Hudson and United Biscuits: 3-year multi-country contract covering end-to-end recruitment processes including specialist role recruitment and executive search
• Alexander Mann and Statoil: initially focused on Norway, the contract will extend to the U.K., Canada, North America, and South America to recruit ~5k hires per year.

Payroll:

Payroll continued its steady deal flow worldwide with wins across the mid and large market sectors.  Examples include:

• SafeGuard World and easyJet in the U.K. for 8k employees
• Aditro and Fennia in Finland for 1.5k employees
• MidlandHR and Hope Construction Materials in the U.K. for 800 employees.

Learning:

After a long hiatus, activity for learning services really ramped up in H1. Over the last few years, demand for learning services seemed to come mostly from the public sector.  H1 showed a healthy level of learning activity in both public and private sectors.  

MPHRO:

MPHRO activity was also abundant in H1, where the activity was centered around HR administration and payroll services.  Activity consisted of new contracts like Zalaris and Statoil for statutory leave and reconciliation of HR accounts (for Norway), travel & expense services (worldwide), and HR reporting.  Other activity included vendor changes such as NGA HR and BMS.  Also notable is the volume of mid-market MPHRO deals.

The level of M&A activity was in line with H2 2013.  Much of this was in the benefits and RPO areas, which is where we are seeing outsourcing activity.

The report analyzes the characteristics of the market and identifies four major segments and looks at activity within each of these segments.

• One of these segments is multi-country standardization segment, where we have seen a big shift in the proportion of global contracts and regional contracts and some small changes in the average number of countries in scope.
• Another segment the report identifies in MPHRO is shared service transformation segment, where further growth is expected.

NelsonHall’s MPHRO market assessment picks up on trends in aspects such as:

• Average contract lengths
• Mid-market versus large enterprise activity
• Single versus multi-country deals.

It also looks at what will drive growth over the next few years.

Accompanying the MPHRO market analysis report, the NelsonHall Vendor Evaluation and Assessment Tool (NEAT) for MPHRO for guiding sourcing managers will be availability shortly. 

There were ~1,100 HCM professionals at ADP’s Meeting of the Minds last week, most being ADP clients. The conference began with ADP CEO Carlos Rodriguez stating the company's desire to be the market leader in global HCM. To address this goal, ADP is engaged in:

• Providing a suite of cloud based HCM, benefits, talent management and payroll platforms and services, assisting organizations in achieving a more standardized and integrated end-to-end HR platform environment and making it easier to manage international employees. According to the ADP Research Institute, the average global company has 22 HR and payroll systems making unification a top priority of HR leaders
• Focusing on providing an improved and more seamless user experience; a system demo was given of a new user experience covering pre-board, on-board, benefits enrollment, etc.
• Investing in platforms and processes to scale HR BPO
• Leveraging ADP’s global presence to offer organizations HCM, benefits, talent management and payroll wherever they do business.

The following are highlights of some meetings and sessions I attended.

US Comprehensive Outsourcing Services (COS)

• In 2013 ADP added 17 new clients (combination of new ADP clients and ADP single HRO service clients who became COS) with y-o-y growth of 15% from 2013 – 2014. The majority of clients are U.S. headquartered
• Across all of ADP’s ~98 COS clients, average client size is 12k employees, with newest clients averaging 15k employees
• All COS clients use both managed payroll and employee call center, most purchase time, 40% purchase benefits, and 3 clients use RPO services
• ADP's clients are primarily supported onshore though most also have a hybrid model that includes some offshoring of back-office administration from India and Manila. A few clients have chosen to be supported primarily from India
• No client employees are rebadged to ADP to support a newly awarded contract. However, where opportunities are available supporting other COS accounts, ADP will take some employees as requested by the client.

National Accounts Benefits Administration

The following are statistics on Annual Enrollment provided by ADP:

• Concurrent client annual enrollment open windows during the week of 11/8/13: 485
• Total annual enrollment projects over 19 weeks: 946
• Participant call center calls: 368.6k
• Overall enrollments for participants and dependents: 15m
• Enrollments per hour at peak: 3k

In pursuit of offering a more seamless user experience, ADP is focused on real-time integration between Benefits and HR including:

• Providing an improved user experience, with a greater range of tools to support employees
• Integrated cross-application reporting
• Increased compliance effectiveness

RPO

• The RightThing’s client retention is 98% and 2014 revenue growth is in the high teens
• The RightThing is experiencing growth in the financial services sector where ~45% of new hires are millenial's
• Approximately twelve of The RightThing’s clients are provided RPO in two or more geographies, including McGraw Hill, who started as an EMEA client and has expanded its use of RPO into the U.S. and LATAM. In addition, Ricoh, a U.S. client since 2012 has expanded into LATAM and Europe Ricoh’s vacancy rates previously ranged from 5-10% and are now <2%
• Approximately half of The RightThing’s contracts in Q1 14 were new clients to ADP and half were existing ADP clients adding RPO
• In LATAM The RightThing is growing at 100%. Its clients here are primarily U.S. headquartered with hiring needs in LATAM. However The RightThing recently signed its first Brazilian headquartered client to deliver RPO in Buenos Aires. The Buenos Aires office provides onshore services to LATAM clients, including in Portuguese for its new client
• In Europe The RightThing serves clients onsite (including in France and Italy) and onshore from its London office (~20 employees), and from ADP’s office in Prague
• Offshoring services provided from Hyderabad and Pune India are primarily for sourcing 24x7 in support of North America and Asia Pacific
• A few employees are also located in Japan and China.

Recruiting in a Mobile / Digital Age

• The RightThing performs ~200k hires per year and LinkedIn is the number one source of hires. Approximately ~14m people found their last job using social media and ~89% of all candidates use social media to look for a job. Industry-wide the top social sites are LinkedIn, Facebook, Twitter and Google
• It is becoming increasingly important for companies to provide mobile recruiting and for candidates to be able to receive text notification of job openings as well as to apply for jobs: 32% of candidates have applied for a job on a mobile device. With mobile, speed and responsiveness are imperative as ~40% of job seekers have abandoned mobile processes that are too slow
• Millenial's need instant gratification and instant feedback when submitting for a job or they will discount the employer. In addition, employment branding is becoming increasingly important for millenial's who need to be able to understand what it is like to work for a company
• Talent Communities are the “holy grail of recruiting”. Indeed, the top reason (81%) why global companies use social media for recruiting is in support of the development of talent pools.

Some interesting statistics on recruiting from the ADP Research Institute included:

• 73% of job seekers prefer weekly communication
• 58% believe a reasonable time between first interview and job offer is 1 - 2 weeks
• 1.7 is the average number of phone interviews job applicants believe is reasonable number
• 2.2 is the average number of in-person interviews that job applicants believe is reasonable.

Indeed social media is a key focus for the ADP Innovation Lab, which is focusing on using social media to strengthen the onboarding process by:

• Building social capability as part of the onboarding process with the goal of new hires becoming engaged before their first workday. Upon offer letter acceptance new hires can log in, learn about ADP and meet the team they will be working with, including their guide/buddy when they start, and get a jump on completing first day paperwork, etc.
• Enabling new hires to build a profile and import LinkedIn data to get started. Upon entering skills and interests they are pointed to similar people in the organization to enable them to start to integrate with communities of interest.

When IBM acquired Kenexa for $1.3bn in December 2012 (with Kenexa integrated into IBM’s Software Group and operationally aligned to IBM GPS), much was written at the time of how this would strengthen IBM's Smarter Workforce strategic initiative by creating an integrated software platform across human capital management, analytics and social technologies. 

Though Kenexa certainly strengthens IBM’s technology offering, as I wrote at the time Kenexa has also strengthened IBM’s talent management services capabilities around consulting, RPO, and advisory services around employee engagement and leadership development.

Per the theme of the conference, in order to have an energized workforce you need to have an engaged workforce, which stems from an organization’s leadership. As evidenced by several client examples, Kenexa has strenghened IBM's ability to improve employee engagement. 

The Kenexa conference featured a session of how Kenexa helped seven clients get smarter about their workforces of which six described improving employee engagement:

• Giant Eagle, leveraged assessments to improve recruiting for ~11-12k hires per year by reducing the workload of reviewing 250k candidate applications per year. Kenexa assessments for cultural fit screened out 30% of the applications.  Results included a 12% decrease in time to fill in the first 6 months, with a 25% decrease after 12 months. There was also a 10 point increase in hiring manager satisfaction
• Pizza Hut wanted to improve the ability of its leaders to engage teams and develop managers. Kenexa helped by:
  • Studying the client’s best leaders to find out what they do every day to get results
  • Identifying key traits that predict candidate success
  • Connecting people with competency models and right positions
  • Building a framework for selection, development and performance and then assessing  and measuring potential
• The Hartford, used Kenexa surveys. Employee engagement results went up 8% in 1 year, with talent development increasing 14% with an 88% response rate
• Monsanto, uses Kenexa organizational survey and engagement survey tools. Kenexa also helped to identify attributes of top leaders and select the right leaders
• Eat’n Park, has used Kenexa to do employee engagement surveys since 2006. Now includes engagement in its incentive plan and has moved the survey to the Fall to coincide with the compensation cycle
• Burlington Stores, uses Kenexa to conduct engagement surveys and Kenexa is in the process of providing recommendations for improvement
• Caterpillar, has used Kenexa for engagement surveys since 2001. Last year implemented its first global engagement survey to include demographic data for its 70k participants, which uncovered previously unknown barriers to engagement. An employee opinion survey was then launched which was a leading indicator of business results and profit.

There were several RPO sessions where clients described their outsourcing journey with Kenexa. Kenexa was a significant boost to IBM’s standalone RPO business. Though IBM has been providing standalone RPO to GM for several years, up until Kenexa, RPO was primarily provided with IBM’s MPHRO services. Kenexa brought in some large global RPO clients including Eli Lilly, Baker Hughes and Ford. Per NelsonHall’s January 2014 RPO market analysis, in terms of revenue, Kenexa, an IBM company, is the largest RPO provider in Latin America and in the top 5 in North America, Asia Pacific and EMEA (excluding the U.K.). For 2014 Kenexa IBM has a strong RPO pipeline including a couple of large global prospects. To enable growth investments are being made including in employer branding.  

General Conference

Havas Worldwide, talked about the implications of workers no longer staying with the same company for life. Lessons include:

• Culture wins, i.e. how you feel at work
• Command and control is obsolete, have to trust people
• Be flexible, one size does not fit all
• Move people around and across the organization, cross pollenate talent
• Don’t be stingy with rewards and recognition, the #1 reason people leave jobs
• Support a healthy work-life balance
• Boost career trajectories, not just on the job training but career development, e.g. send to conferences. Interesting employees become interested employees
• Being the best at one thing is no longer enough
• Hire for passion
• Reward failure (a successful try)
• Build a growth culture
• Stay curious – if think you have it all figured out you are doomed, need to keep employees learning and they will come to you with new ideas, etc.

AMC, which serves 200m guests per year, is in an industry where turnover rates of 200% are common.  A key lesson about recruitment was, to quote Red Auerbach “if you hire the wrong person for the job, all the fancy management techniques in the world won’t help you”. After it deployed a Kenexa screening tool, turnover reduced from 200% within a few years to 90%, with guest satisfaction improving by 25%, which correlated directly to employee productivity and profitability. Kenexa also identified common key talent in the client’s top general managers. Where GMs were in the highly recommended engagement survey rating, unit level cash flows were up 18%, and concession productivity $20 per hour per employee higher than other locations, equating to $300k per location on an annual basis.

Scott Adams, creator of Dilbert offered a few pearls of wisdom, including having complementary skills improves your odds (e.g. he is not the best artist or writer or comedian but has combined complementary skills), and having a positive attitude widens your field of perception.

Summary

During the past year IBM has seen an increase in the number of requests from clients to help improve their culture, including engagement and leadership development. As evidenced by its clients at the conference, Kenexa has complemented and strengthened IBM’s talent management capability.

Pre-acquisition, turnover rates at Kenexa were historically low at around 8% and they have decreased post acquisition, providing further evidence of walking the talk.

Looking at signings:

• Full year 2013 signings were up 20%, with BPO and ITO renewal rate at 92%, above the target range of 85% to 90% and 7 points higher than 2012. And new business signings was up 9% in BPO and up and up 23% in Document Outsourcing (DO)
• In Q4 2013, overall signings TCV was flat y/y with fewer renewal opportunities in the quarter, though renewal rate was a strong 92% and new business signings were up 5%. For BPO, TCV of signings in the quarter was up 20% y/y, with strong growth in healthcare payor, healthcare provider, F&A, and Europe (the latter presumably driven by recent M&A activity in Europe). However, TCV of DO and ITO signings were down. In its ITO business, Xerox is focusing on executing on some large deals and improving margin.

Revenue growth in Services (DO up 4%, ITO up 2%, BPO down 3% in Q4) has decelerated, as expected. BPO revenues had a 1.5% impact from the student loan contract run-off. And Xerox has not had the benefit of acquisitive growth, which has traditionally contributed 2%-3% of Services revenue growth (under the former ACS model).

But Xerox continues to be challenged in its attempts to improve Services operating margin, once again lower than planned. As late as November 2013 (half way through Q4), in its investor conference, Xerox was guiding on achieving full year 2013 segment margin of 9.8% to 10% for Services … in fact, it achieved 9.76%, just getting into the bottom end of this. And it missed guidance for Q4: segment margin was 9.6%, below the targeted 10%.

Management acknowledges “although (margin decline was) driven by known issues, this is an area where we need to make more structural progress”.  So what were the contributory factors for the 160 bps y/y decline? The following factors have been given as major factors contributing to the y/y decline in Q4:

• The student loan run-off, which had a 60 bps impact on segment margin – but this was not an unforeseen event!
• Unforeseen extra expenses on healthcare platform contracts (MMIS, also healthcare exchanges), where Xerox allocated additional resources to projects. Given the newness and complexity of building a Healthcare exchange, and the challenge of doing so within a tight time constraint, one cannot fault Xerox for taking action to avoid the type of debacle seen in the federal exchange project. Having to do so also on MMIS projects indicates longer standing execution issues
• Slower than expected ramp ups in wireless customer care, leading to volume pressures. It is not clear whether this is delayed or lost work.

This is the third quarter of sequential margin decline, and in a year when Xerox said it was increasing its focus on improving profitability of Services. Services segment margin has now declined every year since 2010. Xerox is now guiding on a margin improvement of 50 basis points in 2014, with this improvement becoming evident in H2 “as near-term margin pressure dissipates and the impact of our margin improvement actions accelerate” Q1 2014 margin is expected to be flat y/y, at around 9.3%.

In the November investor conference, Xerox outlined a five plank strategy for Xerox Services. Some of the initiatives to improve margin – for example further offshoring – are initiatives that the former ACS was talking about even before its acquisition by Xerox.

Xerox needs to demonstrate in 2014 that it is getting a firmer grip on improving profitability of Services, ideally with no more unexpected expenses.

Acquisition spend in 2013 was substantially below the plan of $300m to $500m for the year. The $60m Invoco acquisition closed in January. In 2014, Xerox expects to spend up to $500m in acquisitions (including Invoco). A focus of recent acquisitions has been expanding its customer management services BPO capabilities in Europe: will we see in 2014 acquisition activity that brings in IP in other areas of its portfolio?

• Multi-process HR BPO services.
• Payroll Services
• Benefits Administration
• Recruitment Process Outsourcing
• Learning BPO.

The new Managed Services Program (MSP) demonstrates NelsonHall’s commitment to the HR field and in combination with the other HR programs, will provide the most comprehensive HR analysis on the market. Growth in the Recruitment Process Outsourcing is the highest of all the service lines. The scarcity of key talent and the increasingly global nature of employment markets has seen a market develop to even serve director and interim management positions. NelsonHall’s MSP program will evaluate:

• What is the market size and projected growth for the global MSP market by geography?
• What are the top drivers for adoption of MSP?
• What are the benefits currently achieved by users of MSP?
• What factors are inhibiting user adoption of MSP?
• Who are the leading MSP vendors globally and by geography?
• What combination of services is typically provided within MSP contracts and what new services are being added?
• What is the current pattern of delivery location used for MSP services and how is this changing?
• What services are delivered from onshore and which from offshore?
• What are the challenges and success factors within MSP?

The NEAT (NelsonHall Vendor Evaluation and Assessment) tool will be applied to the MSP service line. NEAT is part of NelsonHall’s “speed-to-source” initiative.  It sits at the front-end of the vendor screening process and consists of a two-axis model: assessing vendors against their “ability to deliver immediate benefit” to buy-side organizations and their “ability to meet client future requirements”.

The NEAT analyses themselves are based on a combination of vendor and client interviews. The vendors are scored against a wide range of criteria, establishing a number of scenarios, each with different weightings to represent a different business situation or client business need.

To add further value in speeding up the sourcing process clients are able to input their own weightings and tailor the tool to their requirements. So they might say:  “This set of weightings for this business need looks about right to me but I want to place more emphasis here". With this interactive tool, they can tailor the weightings to meet their own specific sourcing requirements.

If you would like to participate in or join the MSP program, please contact Guy Saunders. 

Wipro’s Energy and Utilities unit, boosted several years ago by the June 2011 SAIC unit acquisition , continues to be a major revenue growth engine: E&U contributed an estimated 31.5% of the y/y growth this quarter. Wipro’s Healthcare and Life Sciences unit has also delivered two quarters of double digit growth.

BFSI continues to contribute around 20% of the y/y revenue growth, but it has been two years since BFSI, Wipro's largest industry group, achieved double digit growth. There will be some revenue contribution to BFSI in Q4 FY 2014 from the imminent acquisition of mortgage origination and servicing specialist Opus CMC. Optus will boost Wipro's BPO revenues in FY 2015, also expanding its onshore delivery presence in the U.S. Wipro is looking to leverage Optus to build an end-to-end mortgage BPO offering introducing more automation and increasing the application of analytics.

While Wipro’s telecoms business continues to be soft (the company does a lot of R&D work in the telecoms sector), it has now had two consecutive quarters of positive growth and appears to have bottomed out after seven quarters of negative growth.

If we look at service line performance, IT infrastructure services and Business Application Services between them contributed $81m of the $101m incremental y/y growth for Wipro. Its Analytics & Information Management is not the growth engine it was in FYs 2012 and 2013; it is now regularly delivering quarterly revenues of around $120m.

Where Wipro is underperforming, in particular compared to TCS, is in bread-and-butter ADM services. For TCS, ADM delivered an estimated $173m in additional revenue this quarter, more than Wipro achieved across all its service lines ($173m in incremental revenue for Wipro would have meant a growth of 10.8% for the company). In contrast, Wipro’s ADM business has now had six quarters of negative growth. Infosys has been focusing on getting back to basics and is now seeing a recovery in its ADM business: we imagine Wipro is looking to do likewise (though in its service line reporting, ADM is just 20% of its business).

With headcount down 814 sequentially and y/y growth trailing topline growth, expect to see utilization improve next quarter. Attrition in both the IT services and BPO businesses continues to increase, to a level that is possibly of concern.

To finish on a positive note, we have been keeping an eye on y/y revenue growth from Wipro’s top 10 clients; its efforts to strengthen key account management continue to pay off, with these accounts growing faster than Wipro overall.

If we look at where the growth is coming from:

• The more established ADM services (where Infosys took its eye of the ball in FY 13) contributed an estimated $173m in additional revenue, or 35.4% of the y/y growth of $490m. (Infosys achieved $53m growth in its ADM businesses). Enterprise solutions contributed over 19% of the growth. Assurance services and IT infrastructure services both continue to enjoy very strong growth and between them contributed over 27% of the y/y growth. IT infrastructure services and BPO both crossed the $400m revenue mark this quarter. The only service line not delivering double digit topline growth is the software business (TCS BanCs), for which the market is soft
• By vertical, the y/y growth is dominated by BFSI, which contributed an impressive $200m (nearly 45 of overall growth) in incremental revenues this quarter: full FY 2014 revenues are likely to approach $5.8bn. TCS is confident of sustaining ongoing growth in this vertical. In two other verticals, the difference between TCS and Infosys is marked:
  • Telecoms: Infosys continues to experience negative growth (down 10% in Q3 FY 14) and says its client budgets for next year are down. In contrast, TCS saw accelerated revenue growth this quarter (17.8% estimated, or $50m)
  • Life sciences & healthcare, which Infosys indicated a few years back was a new target market but now considers is soft.  TCS, in contrast, is enjoying over 30% growth, again with $50m in additional revenues.

These data points, are, of course, simplifications, but they do expose significant gaps between the two.

Among the regions, y/y revenue growth, unsurprisingly, continues to be dominated by North America (an estimated $232m in additional revenue. But Continental Europe contributed an impressive $122m in additional revenue. If anyone is in any doubt about its penetration of Continental Europe, TCS is likely to achieve over $1.5bn in revenue in the region this FY, with the U.K. delivering around $2.3bn. It is a major player in EMEA, and by far the largest IOSP.

Looking ahead, TCS is very bullish about prospects for FY 2015. CEO N Chandra commented on expecting FY 2015 to be a "much stronger" year than FY 2014. With 16.5% topline growth in FY 2014 nine months year-to-date, that indicates very aggressive targets for next fiscal. Should we expect some acquisition activity for IP-based capabilities, to boost efforts to drive non-linear growth?

This is the third quarter of improved topline growth. Management has raised revenue guidance for full FY 2014 to growth of 11.5-12% (up from prior guidance of 9-10%, and double the level of growth achieved in FY 2013). This would mean Infosys is getting back to Indian IT services market growth rates (NASSCOM predicted 12-14% for FY 2014).

So where has the growth come from this quarter? It is the last quarter of acquisitive growth from Lodestone (acquired Oct 2012) contributing 41% of the y/y growth (55% last quarter).  Infosys’ traditional areas of ADM (which underperformed for much of FY 2013) contributed a healthy 28% of the overall growth. This indicates the effectiveness of the recent drive at Infosys to go back to basics; its BITS businesses overall contributed 55% of the overall growth this quarter. Management commentary on client budgets emphasized their ongoing focus on initiatives cost optimization, is where Infosys BITS service lines play.

In terms of service lines, BFS and Manufacturing continue to be the growth engines. But Telecoms continues to be a major drag (down an estimated 9.6% y/y): it has declined from contributing 12.9% of revenue in FY 2011 to 7.9% this quarter.

The revised FY 2014 revenue guidance implies anticipated y/y growth in Q4 of between 8 and 9.9%, thus H2 overall will deliver slower growth than was achieved in H1. Accenture also saw a slowdown in its quarter ended November 30: the indications from these two bellwethers are of slower revenue growth in Q4 CY 2013: we shall know more next week when more results are published.

The operating margin of 25.0% is up 322 bps sequentially (up 150 bps excluding the one-time visa provision last quarter). Infosys has been stripping out costs by offshoring both billable (where relevant, depending on service type) and non-billable roles (notably in marketing: sales & marketing expense is 5.0% of revenue, down from 5.8% last quarter, with management referring to increased investment in sales). Narayanan Murthy commented on ensuring that “all jobs that can be done in lower cost locations are done in lower cost locations”. Increased pricing also contribute to the sequential margin improvement. Nevertheless, this is the sixth consecutive quarter when operating margin is down y/y.

Another factor contributing to the sequential improvement in margin is the 1.1% q/q decline in headcount (the last time this happened was four and a half years ago, in the June 2009 quarter), or 1,823 employees.

Infosys has been looking to get utilization up to its 78% to 82% target range, but it has again declined sequentially to 76.9% (from 77.5% last quarter).

Attrition continues to increase, to 18.1%; this may be part of the drive to weed out underperformers, but is also possibly indicates a trend in employee morale, in spite of the wage hikes from July 2013. There has been a string of departures of senior execs in the last six months (since the return of N.R. Narayana Murthy) and this is likely to have caused some short-term disruption.

As part of a reshuffle at the top, B. G. Srinivas and Pravin Rao have been appointed as Presidents, with B. G. Srinivas focusing on global markets and Pravin Rao focusing on global delivery and service innovation, on top of their existing portfolios. These are clearly the two front runners for the next CEO after S D Shibulal retires in May next year, unless Infosys elects to go for an external hire. One indication of the level of rethinking that is going on at Infosys is that just a couple of months ago it significantly expanded its Executive Council. That same Council is being disbanded from April 1 with the two new Presidents being given responsibility to put in place “appropriate governance sectors for their respective areas”. Historically, Infosys was a company where any major changes tended to focus on its long-term vision and were planned in detail beforehand; today it appears to be focusing on shorter term imperatives.

Infosys continues to enjoy a very strong balance sheet, ending the quarter with $4,236m in cash, up from $4,130m in the prior quarter.

Looking ahead, management shared its outlook for FY 2015 client IT spending; the tone was cautious, referring to “a mixed bag” across segments.

So what should we expect from Infosys in FY 2015? The company is clearly making progress on getting back to basics with its BITS offerings and it continues to enjoy the boost from the Lodestone operation; next quarter will indicate whether Lodestone is helping drive organic growth in its consulting business. It is still too early to tell whether the newer PPS offerings, on which Infosys places so much store, will pick up steam this year and begin to approach, even outstrip overall company growth. PPS businesses currently contribute 5.3% of company revenue, down from 7.1% back in FY 2012. PPS is key to Infosys' long-term vision, but two years on it is hardly a success story. Indian media is speculating on setting up a separate subsidiary for PPS; we would expect to see some inorganic growth in the next year. Meanwhile, there are several new key roles still to be appointed including a global Head of Sales. Infosys is looking in a better shape now than it was three quarters ago but it going through an unsettling period.

NelsonHall will be publishing an updated comprehensive Key Vendor Assessment of Infosys within the next few days. For details, contact [email protected]

MPHRO

• We predict the Global MPHRO market will grow at mid-single digits CAAGR through 2017
• The Shared Service Transformation segment will continue to grow mainly as a result of contract expansions and renewals with existing clients, but the Multi-Country Standardization and Core Business Focus segments have the highest growth rate 
• MPHRO offerings will continue to be structured around a core model with recruitment services as the most popular add-on as companies focus on adding back talent; in the near-medium term, demand will increase for learning, performance and compensation administration
• Increased partnership activity, primarily for technology, with acquisitions focused on strengthening existing standalone HRO offerings (typically by vendors with $400m+ in HRO revenues)
• Higher levels of multi-shoring from offshore vendors as clients demand onshore and nearshore support; Philippines and China will grow as preferred offshore locations
• Workday use will increase as MPHRO providers such as Aon Hewitt market this platform as part of its offering
• Proportion of mid-market clients will continue to grow making up the greater share of new contracts and MPHRO pipelines

Benefits

• The global benefits administration market will grow at mid-high single digits CAAGR through 2017
• Demand for DB and DC core services will primarily consist of second generation contracts and beyond; H&W administration as well as additional H&W services, specifically health insurance exchanges and health and wellness services, will grow as a result to control costs and comply with changing legislation
• Vendors will increase headcount and add chat services from onshore centers to enhance delivery strategies
• Multi-country benefits admin activity by MNCs will continue to grow moderately with providers that can leverage existing benefits brokerage and consultant relationships

Learning

• Learning BPO (LBPO) market will grow at mid-high single digit CAAGR through 2017, led by the Government sector
• Selective LBPO contracts continue to outpace full LBPO, led by content development, including the conversion of ILT to e-learning. However, full LBPO continues its resurgence as clients re-invest in learning but do not want to rebuild their internal learning organizations and instead seek greater value by outsourcing a larger share of their learning if not in its entirety
• Client learning spend accelerates for job skill training and professional development for purposes of attraction, development and retention of talent
• Vendors continue to strengthen and integrate their talent management service and technology offerings. SaaS talent management continues to accelerate combined with LBPO and across all HRO service lines
• Clients budget for social learning and seek LBPO vendors for collaborative technology. Within two years, clients will also seek help to monitor and measure the effectiveness of their social learning programs
• ILT continues to remain important but e-learning delivery continues to exceed ILT, including increased usage of VLT for geographically dispersed workforces and m-learning to access content for self-paced e-learning on smartphones and tablets

Payroll

• Solid mid-single digit global growth, led by Latin America and Asia Pacific
• Compliance is increasingly important to reduce risk by ensuring adherence to ever-changing tax laws and regulations, for both domestic and multi-country payroll
• Multi-country payroll continues double-digit growth as MNCs look to standardize and consolidate onto one global platform with one vendor for consistency of process, technology and service for increased efficiency
• Mid-market outsourcing continues high growth due to demand for platform-based payroll
• Pricing is per payslip or per employee per month and is expected to decrease due to pricing pressures from payroll buyers
• Where MPHRO services are provided, payroll will continue to be the initial footprint

RPO

• RPO will continue to be the fastest growing HRO service, with mid-teen CAAGR through 2017
• Vendor consolidation and partnerships continue to expand into new geographies to meet demand for global RPO
• Talent shortages deepen resulting in increased employer branding and talent pool development. Vendors increasingly help their clients with a more robust on-boarding process that includes new hire and employee engagement, employee surveys, and retention strategies. More vendors perform internal hiring of employees for their customers and also play a larger role in recommending progression of employees
• Blended RPO and MSP, including temporary hiring, increases to develop optimal workforce strategies
• For deeper insight, please see NelsonHall’s Targeting RPO market analysis published soon

• Revenues were $5,759m, down 9.3% y/y, and down 1% sequentially
• EBIT was $255m, a margin of 4.4% down 223 bps y/y.

Fiscal Q4 2013 revenue (and y/y and sequential revenue growth) by service type was:

• Infrastructure technology outsourcing $3,563m (-9%, -3%)
• Application and business services $2,196m (-10%, +1%).

IT outsourcing contributed 62% of HP ES business, application and business services ~38%.

Q4 bookings were up over 30% y/y, driven by strong renewals

FY 2013 results for HP ES were:

• Revenue of  $23.5bn, down 8.2%, down 7% in CC
• EBIT of $679m, a margin of 2.9%, down 119 bps.

FY 2013 revenue (and revenue growth) by service type was

• Infrastructure technology outsourcing $14,682m (-7.0%)
• Application and business services $8,838 (-10.0%), primarily due to softness in the applications business.

12-month trailing book-to-bill at end FY 2013 was approximately one in line with prior guidance.

For HP Group overall, fiscal Q4 2013 revenue was $29,131m. Revenue (and y/y revenue growth as stated and in CC) by region was

• The Americas $13,400m (-2%, -1%)
• EMEA $10,195m (-4%, -5%)
• Asia Pacific $5,535m (-1%, +4%).

For HP Group overall, fiscal 2013 revenue was $112,298m (-7% y/y, -5% CC y/y).

- See more at: http://research.nelson-hall.com/sourcing-expertise/view-all-vendors/?avpage-views=article&id=201480&fv=2#sthash.O34tiq29.dpuf

HP Enterprise Services (ES) today announced its fiscal Q4 2013 results, for the period ending October 31, 2013:

• Revenues were $5,759m, down 9.3% y/y, and down 1% sequentially
• EBIT was $255m, a margin of 4.4% down 223 bps y/y.

Fiscal Q4 2013 revenue (and y/y and sequential revenue growth) by service type was:

• Infrastructure technology outsourcing $3,563m (-9%, -3%)
• Application and business services $2,196m (-10%, +1%).

FY 2013 results for HP ES were:

• Revenue of  $23.5bn, down 8.2%, down 7% in CC
• EBIT of $679m, a margin of 2.9%, down 119 bps.

FY 2013 revenue (and revenue growth) by service type was

• Infrastructure technology outsourcing $14,682m (-7.0%)
• Application and business services $8,838 (-10.0%), primarily due to softness in the applications business.

On the face of it, the decline in revenue across the board does not look very impressive, but in fact, the data shows that the "fix and rebuild"  is broadly heading the right way.

Firstly, the revenue performance at HP ES throughout FY 2013, the "Fix and Rebuild" year, has been better than the guidance a year back of revenue decline of 11% to 13%. This is partly due to slower than expected ramp downs. However, the delayed revenue run-off will put further pressure on services revenue in FY 2014, negatively impacting Q1 growth and putting pressure on H1 results overall. Management highlighted that signings for "strategic" enterprise services, which include cloud, big data, application modernization and security, were up double digits. In FY 2014, HP ES is focusing in a sales force retooling program.

Secondly, FY 2013 operating margin of 2.9%, boosted by the 4.4% margin achieved in fiscal Q4, is at the high end of prior guidance of between 0% and 3%,

HP ES continues to focus on changing the mix of its portfolio towards services using the "new style of IT". This is being boosted by the added emphasis on innovation and an increase in engineering headcount announced today.

The group-wide focus on innovation has seen HP bring out new capabilities that HP ES could potentially leverage in its pursuit of "new style of IT" deals. Examples of recently announced technologies include HP OneView, unveiled in September, a new integrated software-defined management capability for converged infrastructure, extensively in virtualized BladeSystems and Rack server environments. Also new is Salesforce Superpod which was announced at Dreamforce 13. It is a dedicated instance in the Salesforce multi-tenant cloud, to run on HP's Converged Infrastructure for enterprise data centers. The Superpod is targeted at very large clients and will be offered to existing Salesforce clients at an additional fee.

HP ES continues to work on its turnaround strategy. Measures currently underway include:

• Flattening the labor pyramid, in terms of both skill sets and locations
• Focus on getting better at taking contracts away from competitors
• Building up HP ES’ advisory offerings
• Building client road maps in every area to help clients go from the traditional to the “new style of IT”.

These measures were covered in a recent NelsonHall blog "HP ES Turnaround Strategy Update - New Style of IT, New Style of HP ES" - See more at: http://research.nelson-hall.com/blogs-webcasts/nelsonhall-blog/?avpage-views=blog&type=post&post_id=73#sthash.b0nY9tIP.dpuf .

HP Group as a whole delivered >$9bn of FCF, well above its most recent outlook of ~$8bn. Net debt was reduced by >$1bn for the seventh consecutive quarter and HP has now achieved its net debt goal ahead of plan.

NelsonHall will be shortly updating its Key Vendor Assessment in HP ES to include these results.

• Flattening the labor pyramid, in terms of both skill sets and locations: currently HP ES is weighted towards high-cost location with over-skilled personnel in relation to their duties. In future it will take more advantage of its  global delivery centers including those in Bangalore, Manila, Sofia, and Costa Rica
• Focus on getting better at taking contracts away from competitors: in FY 2013, ~ 4% of HP ES’ sales force has been deployed on proactive new logo wins. In FY 2014, this is going to increase to 29%, with a clear focus on new business and selling the new style of IT
• Build-up HP ES’ advisory offerings, to put itself in a stronger position to shape the transformation activity that comes from advisory work
• Build client road maps in every area to help clients go from the traditional to the “new style of IT” e.g. for workforce or workplace mobility with the addition of advanced analytics and integrating multiple devices with enterprise applications.
• - See more at: http://research.nelson-hall.com/blogs-webcasts/nelsonhall-blog/?avpage-views=blog&type=post&post_id=73#sthash.b0nY9tIP.dpuf

Pindar has become the third CEO of a major U.K. outsourcing company to resign this year. The other two, Nick Buckles of G4S and Chris Hyman of Serco, both left behind companies that are being investigated for fraud by the British Government. No such allegations have been directed at Capita.

The company has done extremely well under the leadership of Pindar. In the past ten years alone:

• Its revenue has more than doubled (from £1,081m full year in 2003 to £1,891m in H1 2013 alone)
• The share price has increased by > +316% over the last 10 years, compared with the FTSE (>+52%).

Pindar leaves the company in good shape, with:

• £2.9bn of major new contract wins so far this year
• An anticipated organic topline growth of 8%
• An operating margin that is expected to stay steady at 12.5% to 13.5% for the foreseeable future.

Today's announcement coincides with the news that Capita has resolved the problem of its under-performing personal insurance BPO businesses. It is selling Lancaster Insurance Services, Sureterm Direct, BDML Connect and Delta Underwriting to Markerstudy Group for an undisclosed price. The four businesses (685 personnel based across three locations) are expected to generate ~£47m in revenue and make a combined operating loss of £15m in 2013. Capita is also closing its SIP administration business based in Salisbury.