Large Market HR Outsourcing Takes Another Hit
The sheer magnitude of the quarterly write-down is unprecedented in the HR outsourcing industry - $272.9 million. This is what Convergys Corporation (NYSE: CVG) reported in their quarterly earnings announcement earlier today.
To put that number in perspective, this represents ~40% of CVG’s consolidated revenues for the quarter and is nearly 5x the quarterly revenue of the HR Management business unit. And as you can imagine, investors were thrilled (insert sarcasm here). On a day when the market rose nearly 11%, CVG lost ~28% of it’s value and closed at an all-time low. That’s right…the lowest price in it’s history at $7.16/share.
So what did CEO Dave Dougherty have to say?
“….In HR Management, we continue to make progress with our two large HR outsourcing implementations; however, our financial results are not satisfactory. As a result, we are taking a series of actions to reduce the implementation risk and improve the future earnings and cash flow in this business.”
The two deals are Johnson & Johnson (signed in May of ‘07 as a 10-year, ~$1B HRO contract) and DuPont (announced in November of ‘05 as a 13-year, $1.1B global HRO account). Due to the complexity of the change management initiatives, scope and scale of implementation, and revenue recognition ties to go-live, BPO providers must float their cost basis on a forward-funded model. This creates undue pressure on the P&L and results in the outcome we see today.
So the age-old question once again raises it’s head - is large market HRO sustainable? Can it be deployed profitably? Will clients embrace standardization and will providers effectively innovate and deliver? Unfortunately, today’s results continue to reinforce an increasingly negative perception of holistic HRO’s value proposition. Let’s keep the conversation going.
October 29th, 2008 at 10:20 am
Wow - this is a huge hit to Convergys, but is hardly surprising. Convergys’ margins on these mega-deals were razor-thin, which left them open to these types of implementation risks. Those were magnified by their aggressively customized approach to each engagement, which did not allow them to capitalize on economies of scale across clients.
I wonder what changes this will drive not just at CVG, but in the industry as a whole? Will this change the way that advisory firms and customers approach deals? Will they be willing to accept more standardization to ensure the viability of their vendors? Not that anyone is shedding any tears for CVG today, but if this industry is going to survive, it seems like we all might have to move in a different direction.
October 29th, 2008 at 10:49 am
@Tim H - If large market HRO is to survive, the steps you suggest will have to be adopted. Otherwise I anticipate we will see a continued increase in sub-process outsourcing (talent mgmt, RPO, benefits, payroll, etc.). Thanks for the comments!
October 29th, 2008 at 8:10 pm
You think anyone will want to buy Convergys’ HRO business? With Deloitte taking all the transformation dollars, might be challenging…
PF
October 30th, 2008 at 8:53 am
@Phil Fersht - There is absolutely an asset there to buy. However, CVG’s CEO made an interesting comments per the analyst call that pertains to the ongoing implementations (reported by Workforce):
‘Specifically, Dougherty cited “two significant global outsourcing implementations” where the company is talking to the clients about changing the implementation approach.
For these two clients, the company is looking at passing on the implementation to third parties, Dougherty said in the analyst call. However, the company would remain “the ongoing operator, potentially,” he said.’