EDS and Towers Perrin (TP) recently announced a joint venture combining Towers Perrin’s administration solution business and EDS’s payroll and HR outsourcing (HRO) business.
The deal is the culmination of a yearlong discussion between the two companies and calls for EDS to pay $420 million to Towers Perrin, with EDS retaining 85% ownership of the new company. Therefore, while the company is ostensibly a separate entity, for practical purposes we believe it can be thought of as a part of the overall EDS BPO suite.
The combination of Towers Perrin and EDS offers deep HR expertise with technology and outsourcing capability, making the new company a major HRO provider. However, we expect integration and coordination will prove challenging – especially given EDS’s weak track record leveraging acquisitions.
We expect the majority of 2005 will be required to establish the new offerings and solidify the working relationships between the three organizations.
EDS and Towers Perrin are following a different approach with a unique division of responsibility between the three organizations. Towers Perrin can be thought of as the “HR strategy company,” providing plan design, communication, and change management consulting to clients of the new company through a marketing alliance.
The new venture is the HR people/process design company, providing day-to-day HR operational execution. EDS provides the new venture with leverageable BPO expertise (e.g., contact center) and plays the role of the “technology delivery company,” providing application and infrastructure management and outsourcing.
Theoretically, this division of responsibility provides focus and will force each element – strategy, process design/execution, and technology/service delivery – to provide optimized value since an enterprise may choose to buy any one or all three elements.
Given the ownership arrangement, the new company is likely to operate more as a captive EDS division than an independent company. By combining the outsourcing offerings of the two companies, the new organization will have a comprehensive set of HRO offerings. However, a key challenge for the new company will be to integrate the various offerings from Towers Perrin and EDS.
This challenge is exacerbated by the nature of the larger EDS HRO deals. While there is more homogeneity between the individual client implementations from the Towers Perrin side, the EDS HRO deals are typically highly customized one-off solutions with little cross-client leverage.
The new organization must build a leverageable best-practice process model on a repeatable service-oriented architecture technology model. The EDS Agile Enterprise framework is the basis for development of these models.
Ideally, this will provide a model that enables a company to select the right level of standardized “utility” process versus customized process based on business need. However, this model is immature and largely unproven.
In addition, it is unclear how the new company, Towers Perrin, and EDS will work together to define the ideal best-practice process standards. We note, however, that all HRO vendors are similarly challenged, and we expect 2005/06 to see intense competition between vendors as they all try to create reusable best-practice models.
The ability to deliver a common best-practice process and technology platform to minimize costs is critical to long-term viability and profitability for the HRO vendor in the face of increasing price competition. Those that can deliver this while also providing flexibility to address a wide range of user needs will be the true market winners.
Customers then must evaluate not only the current state of the HRO offering, but the strategic plans to exploit next-generation adaptive application and infrastructure capabilities (e.g., SOA, composite applications, virtual infrastructure).
Ultimately, success for the new company will hinge on execution. The bad news is that EDS has not done particularly well integrating and leveraging previous acquisitions – most notably AT Kearney.
The good news is that specific governance models have been established between Towers Perrin and EDS, with representatives of both organizations plus the new joint venture meeting to review business opportunities and new offerings on an ongoing basis. A joint executive team also will meet to review strategic directions for the three companies. Although we are cautiously optimistic, only time will tell whether this approach will bear fruit.
Until the new company can provide more concrete business assessments, architectural models, and best-practice process definitions, users are cautioned to focus on the merits of individual offerings rather than claims for an integrated but flexible end-to-end HRO offering. The new company will have initial revenues of approximately $600 million – equal parts of which come from current Towers Perrin and EDS revenue.
Of the 400 client companies serviced by the new organization, approximately 75% come from Towers Perrin, which had a number of smaller, focused benefits/pension clients with EDS, bringing a number of broad-based HR deals to the new venture. Another challenge for the new company revolves around go-to-market sales and account management models.
The new company will develop a dedicated sales force as well as leverage EDS and Towers Perrin as sales channels, raising the potential for channel conflict. Strategically, EDS needs to build up its broader business strategy consulting expertise and a consultative sales staff to move beyond a transactional technology sell, as well as present broad business process or industry-optimized solutions.
We also believe Towers Perrin will be reluctant to take a subordinate role to EDS, and indeed, we believe most HR BPO initiatives must start with the type of strategic process analysis provided by Towers Perrin. We are concerned that this will inevitably lead to a degree of overlap, inefficiency, and market confusion as the entities struggle to define models for account control.
End users poised to leverage an HRO relationship that the new company brings to bear must be prepared for incremental and continuous organizational change management initiatives, throughout the evolution the relationship, as the two providers determine the optimum model. Users should not look for a single account model, but rather engage with the three companies in a way that makes sense for the consumer.
Companies focused specifically on HR should look toward a Towers Perrin-led engagement, while those integrating the HRO initiative to broader BPO and other IT initiatives would be better served by an EDS-led engagement. When viewed as part of the overall HRO market, the joint venture marks a continuation of the consolidation trend we have seen for the last 18 months.
There have been numerous acquisitions and a few key strategic partnerships as both IT and HR companies attempt to collect HR process, application, and IT outsourcing expertise within a coordinated offering. We expect this trend will continue and even accelerate during 2005/06. IBM, HP, and ACS represent the leading outsourcing vendors with a strong IT base, and we expect them to remain leading players and potential points of consolidation.
Coming from the HR strategy realm, Hewitt has been aggressively acquiring technical capabilities and has established itself as a leading player. With the EDS partnership, many of the remaining HR strategy and smaller niche HR players (e.g., Mercer, Mellon, Hay Group) are prime acquisition candidates.
These vendors, if not acquired, will need to establish strategic partnerships with broader HRO players. Despite this move to broader HRO offerings, we expect both Fidelity and ADP to remain strong players, albeit more focused on a particular segment of HRO.
Bottom Line: The combination of HR expertise from EDS and Towers Perrin creates a serious new entrant in the HRO market.
As HRO consolidation continues, users must look carefully at integration (both technical and process) within vendor offerings and across partners. Business Impact: Successful HRO vendors will deliver leverageable best-practice process/technology models that provide both cost reduction and business flexibility