HR BPO’s Quest for Profitability
The HR BPO market took another shot to its increasingly thinning armor last week when Hewitt announced their second quarter results. This was the first quarter in which they elected to break out the HR BRO operating unit as a distinct P&L.
HR BPO segment revenues increased 5% in the second quarter, to $131.2 million, from $124.9 million in the prior-year quarter. Adjusting for the decline in third-party supplier revenues of $10 million, and the favorable effects of foreign currency translation of approximately $1 million, HR BPO revenues increased 15%. Hewitt said that growth was driven primarily by contracts that went live within the twelve-month period.
The HR BPO segment loss was $61.2 million in the second quarter, compared with a loss of $41.5 million in the prior-year second quarter. They stated that the increased loss was primarily due to $15 million of pretax charges related to the anticipated restructuring of an HR BPO contract and asset impairments. The delta would have been larger, but they also had a $7 million charge recorded in the prior-year quarter associated with the recognition of a loss provision for an HR BPO contract.
Their HR BPO business is really dragging their corporate results. Their consolidated income for the quarter was $12.9 million and their HR BPO division generated 17% of the consolidated revenues but contributed $61 million in losses for the quarter. Unfortunately, they only disclose revenue and operating income for the HR BPO segment. Therefore, we don’t know whether losses are mainly attributed to heavy SG&A or their contracts are just plain losing money. I suspect it’s the latter.
They mentioned in the earnings call that more restructuring charges may be coming this year for their HR BPO business. They also mention that they are being more selective in deals they pursue (with only 3 qualified deals in the pipeline). This selective top line growth is a trend found in all of the HR BPO providers.
There is much postulating that Hewitt’s public disclosure of heavy HR BPO losses logically sets in motion shareholder support for full or partial divestiture of the former Exult assets. This then begins the game of determining - a) which large-market outsourcers would desire this asset as an anchor for entry into HR BRO (HP?); b) if the large offshore providers would acquire such an entity to establish a broader US presence (Wipro?); and most importantly, c) if anyone turn this business unit to profitability.
As the HR BRO market continues to struggle to maintain fiscal credibility, many will be watching future reports such as these.
Let’s keep the conversation going.