Several weeks ago we addressed the issue of vendor sustainability, with acquisition activity one of the confounding variables in the constantly shifting sands of the HR vendor community.  Many thanks to my good friend Bridget Boix of Krill Northgate for pointing me to a an article in Mergers & Acquisitions Magazine entitled, “The Sideline Offensive”.

The premise is as follows - When Company A acquires Company B, competitive firm C should have a field day by overtly targeting the best customers, employees and suppliers of both A & B, thus effectively attacking from the sidelines.  Said the article:

“The most vital area up for grabs is the combined customer base of the merging companies. As anyone who has gone through an integration process can attest, attention very easily gets diverted in a merger. It might mean customers’ calls go unreturned or maybe… pricing gets ratcheted up. Even if these scenarios don’t develop, clients may habitually think about alternatives as a precaution.” (The Sideline Offensive, M&A Magazine, page 40)

So when should such an offensive begin?  Jeff Gell of Boston Consulting Group recommends:

“The best times to strike are when deals are announced. There’s a lot of uncertainty and an initial paralysis. People can’t make decisions,” Gell says. The other time to strike, he adds, is “shortly after the close,” when the attention is focused on executing the 100-day plan. After 12 to 18 months, however, it’s usually too late to capitalize.  (The Sideline Offensive, M&A Magazine, page 40)

The larger vendors in our marketplace tend to have a fairly well established mechanism for monitoring consolidation among the niche providers.  When instability arises, prepared players may trump rising uncertainty with stability, targeted messaging and superior service.  Needless to say that both HR providers and buyers need to pay close attention to these issues.  With thousands of vendors in our glorious HR marketplace, consolidation via M&A may accelerate out of necessity versus design.

Let’s keep the conversation going. 

More companies are starting to look at the back of their India-based outsourcing agreements to assess what impact March 31, 2009 will have on their business.  This is the date that the Software Technology Parks of India (STPI) tax break is scheduled to expire, a 10-20% development incentive program designed to foster net-new growth across the country.  

For those who are interested, I’d call your attention to two fantastic blogs that are examining the impact of this pending expiration in further detail:

1. Phil Fersht’s Horses for Sources questions how such a sudden increase in costs would impact and Indian outsourcing industry, or if, in fact, the Indian government will heed the cry of industry and extend the STPI.
2. Tony of 360 Vendor Management emphasizes the need for buyers to start planning for the real fiscal impact of such changes within their vendor agreements.  

Both touch upon an issue that Inflexion is increasingly concerned about, vendor sustainability, and how buyers assess current and future risks associated with their most deep and meaningful relationships.  Follow the advice of Phil and Tony and stay educated, start preparing for scenarios which represent likely outcomes, and communicate with your Indian partners on a regular basis.  One year is a very short period in today’s environment and the STPI expiration may arrive sooner than you think.

Let’s keep the conversation going. 

Earlier this week we addressed a growing concern surrounding sustainability of HR vendors.  Issues such as financial solvency, management turnover, ongoing investment into product portfolios, backwards compatibility and support, legal action, and acquisitions (among others) can cause significant disruptions to both near and long term value propositions.  So how should one address these concerns, and does a system exist that can quantify the risk portfolio of an HR vendor prior to purchase?

The short answer is no.  Inflexion has yet to find an appropriate single source mechanism or formulaic that combines risk mitigation and sustainability with deep functional domain expertise.  That being said, we believe there is tremendous opportunity in the development and deployment of an impartial decision support tool to aid HR buyers in assessing these and other risk factors.  Several existing assets, if properly leveraged and supplemented, could help to solve some portion of this significant industry problem:

• Dun & Bradstreet:  This is perhaps the most obvious, as most large procurement departments will require a DUNS review prior to contract execution.  D&B will provide visibility into the credit risk of the provider, locations, ownership structure and financial solvency.  One can also get a sense of fraud, supplier codependency (i.e., does the contemplated contract mean you would represent a disproportionate share of ongoing revenues) and other helpful metrics.  However, it really addresses risk with no domain expertise, thus a great tool for procurement but less so for HR executives.
• CERT’s V-RATE:  The Vendor Risk Assessment and Threat Evaluation taxonomy was developed by the good people at CERT, the federally funded R&D center of Carnegie Mellon University.  CERT is widely known for being five to ten years ahead of the market (as was the case with now-renowned CMM model), and V-RATE is no exception.  This early-stage tool provides an important framework for not only assessing the “survivability” of your vendors solutions, but also helps to assess your organizations preparedness in dealing with anticipated and unanticipated vendor risk.  The goal is not to attain a single overriding score, but instead to capture all internal and external factors which may contribute to ones sustainability and likelihood of mission critical application.  If configured for the unique circumstances of HR, one could see great promise in this instrument.
• LexisNexis:  The Accurint line of products offers an interesting supplement for bankruptcy filings, liens, civil judgments, individual background checks on specific executives, licensing and Better Business Bureau reports.  It also can incorporate much of the DUNS data from D&B.  Again, a great toolkit for looking at that information which is publicly documented on a potential vendor.
• Analyst Reports:  Many industry analysts do some limited due diligence on sustainability, but most of their value comes from the ability to assess one’s position in the marketplace relative to competition, feature functionality, market penetration, globalization and likelihood of successful implementation on time and within budget.  These are all critical factors in your choice of providers, but still leaves a gap to be filled.

So what’s the answer?  For the time being, leverage all the market intelligence you can capture.  Assess whether vendors in your domain of interest are being acquired, if venture firms are backing them, if IPOs are occurring, if lawsuits are flying or impropriety is dominating the space.  Leverage the tools we’ve listed and most importantly, talk to your peers and subject matter experts.  Until someone derives a more transparent mechanism of applying these instruments to the specific needs of our HR community, we must do the best we can with what we have.

Let’s keep the conversation going. 

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.

In case you hadn’t noticed, the New York Times has recently changed its online policy to promote readership. That means you can go to http://www.nytimes.com and register, for free, thereby gaining access to one of the most widely read newspapers in the world.

As a business owner, consumption of this invaluable service ensures that I remain at least on par with over 20 million other individuals and businesses. In an era of overwhelming choice in information, the Times still carries disproportionate weight over many other news sources. You don’t have to agree with every OpEd to observe that coverage in the Times can make (and break) the back of emerging solutions and ideas. Hired media relations staff froth at the opportunity to place their clients wares within the highly selective pages of this paper, and like others I’m often surprised at what does make the cut. However, when I see an article such as Sunday’s piece on “For Entrepreneurs: A Crash Course in Accounting”, I can’t help but think that somewhere within the caffeinated walls of the twenty-four hour newsroom, someone is looking out for the little guy.

Let’s keep the conversation going.