Report Summary. The HR Consulting and Outsourcing Markets: Key Data, Forecasts & Trends. Market Data and Forecasts

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1 Report Summary The HR Consulting and Outsourcing Markets: Key Data, Forecasts & Trends Success in the HR consulting and outsourcing markets shines on some firms and eludes others completely. The difference in growth between these markets is like night and day: Outsourcing is seeing increasing demand, and consulting is not. This distinction is one of the key factors helping to explain the success of some firms and the lack of success of others in the current environment. There are examples of select HR consultancies experiencing extraordinary growth, though there are many more firms experiencing mediocre growth at best. With general demand for HR consulting lagging in 2004, the standout firms have been those that have developed distinct offerings that intersect nicely with market opportunity at this point in time. In other words, their success has been one part preparation and one part good fortune. The conditions prevalent in 2004 have been sustained through 2005, but the consulting market is expected to begin a slow climb toward a general recovery in 2006 on through Meanwhile, the outsourcing market shows consistent, strong growth through Kennedy Information s report The HR Consulting and Outsourcing Markets: Key Data, Forecasts & Trends provides in-depth analysis on the global HR consulting and outsourcing markets. The report s coverage of these two dynamic markets includes market data and forecasts, rankings of leading firms, competitive landscape details, and client trends. This summary highlights some of the findings emerging from key sections in the report. Market Data and Forecasts The recovery of the HR consulting industry that had been widely anticipated for 2004 never materialized. While strategy and operations management consulting firms are seeing improved client demand for services, the HR consulting industry has yet to rebound. In 2005, HR consulting demand is expected to pick up slightly in the latter half of the year, but on the whole, firms will not begin to see an upswing until Figure 1 shows that the $13.3B HR consulting market is expected to see low growth through Among the factors hampering growth in this market are: Limited Budgets for Consulting Spending Corporate HR budgets are beginning to bounce back, but this has not translated into increased spending on HR consulting. Companies Are Not Investing Heavily in Their Talent Even though companies are increasingly turning from a cost-saving agenda back toward a growth agenda, they are not spending more on talent management. Talent management including the recruiting, retention, and rewarding of employees has not been a major consideration for companies because talent has been plentiful in the current labor markets. Retirement Benefits Consulting Remains Sluggish There is a wave of uncertainty that has overtaken benefits consulting clients about changes in the marketplace governing pension plans. Clients are hesitant to take action with their benefits plans because of changing government regulations and accounting standards. Continued Caution Around HR Technology Spending Although some firms are finding pockets of opportunity to assist clients in certain markets within HR-ERP-related work, the broader market for these services in the current environment is limited. Pricing Pressure in Consulting Benefits consulting, in particular, is experiencing a high degree of pricing pressure. However, fee pressure is common for most HR consulting services today. 1

2 Figure 1. Global HR Consulting Market Size and Growth, $15.5 $ % CAGR $14.5 Revenue ($B) $14.0 $13.5 $13.0 $12.5 $ Source: Kennedy Information See the full report for precise market size and growth data for the overall market, as well as by segment and geographic region. The report also includes market sizing and growth estimates for the HR outsourcing market, including HR BPO. Opportunities for Growth Although growth for the consulting market as a whole will be subdued, there are certainly firms within the marketplace that are finding ways to capitalize on demand for consulting in specific areas. The report discusses a number of these areas of opportunity, including: Corporate Mergers and Acquisitions Drive Consulting Activity Compensating Executive Talent Advising Clients on Rising Healthcare Costs Dealing With Change The Shortage of Highly Skilled Talent Enhancing HR Effectiveness While Reducing Costs Advising on Outsourcing We re seeing a huge pickup in the M&A market, not just in the US, but globally. M&A is starting to create a flurry of work. I think we re seeing the front end of what I expect to be a protracted period of activity. John Caplan US Leader of Human Resource Services Practice PricewaterhouseCoopers 2

3 The full report details a number of distinct opportunities for HR consultants, particularly with respect to differences by country and region, market segments such as healthcare and HR technology, and outsourcing. The HR Consulting and Outsourcing Competitive Landscape Although the HR consulting market is experiencing low demand, the competitive landscape is anything but static. The market is undergoing fundamental change on a number of fronts. The Shift from Consulting to Outsourcing The HR outsourcing market has been awash with competitive activity in recent months. Vendors are developing outsourcing practices and reducing their exposure in consulting. The Future of Retirement Benefits Consulting Taking a long-term view of the market, demand for retirement benefits consulting is on the decline, meaning that firms must develop new businesses that will provide them with scalable, sustainable growth. Tax/Audit Firms Reassert Their Position in the Market While Deloitte has been consistent in maintaining its presence in the HR consulting space throughout the past several years, PricewaterhouseCoopers and Ernst & Young faded from the competitive scene. Now, these latter two firms are re-emerging in the HR consulting space, albeit pursuing different go-to-market strategies. The full report discusses the re-emergence of the tax/audit firms. Consolidation in the HR BPO Market: Evaluating the Transactions and Partnerships The past two years has wrought consolidation in the HR BPO market. The full report analyzes the major deals, discusses the competitive strength of leading players, and describes the challenges facing these firms and the broader HR BPO market. The full report analyzes these deals, discusses the competitive strength of leading players, and describes the challenges facing these firms and the broader HR BPO market. IS IBM Going to Acquire Mercer s HR Consulting and Outsourcing Business? For months the rumors have been flying that IBM may acquire Mercer s HR consulting and/or outsourcing business. Kennedy Information suggests that such a transaction is highly unlikely. The two firms have established an informal agreement to go to market together to serve clients. There is no exclusivity to this deal the way we see with some other partnerships, such as CSC and Aon, or EDS and Towers Perrin (the latter partnerships have provisions that permit flexibility in instances where the client already works with another HR or IT services vendor). Instead, these firms have agreed that partnering for the foreseeable future is mutually beneficial. More information on this partnership may be found in the full report, which features an exclusive Kennedy Information interview with Brian Storms, the Global CEO of Mercer Human Resource Consulting. 3

4 Developments in the HR Outsourcing Market The $32.7B HR BPO market, which is distinct from the HR transaction processing market that is also discussed in the report, represents a large and growing opportunity. Within the HR BPO market, demand for comprehensive HR BPO services is taking off this segment of the market is expected to see 25% growth through The following is a sample of some of the key trends and developments taking shape in the dynamic HR outsourcing market. These developments, along with others discussed in the full report, will have significant bearing on the HR BPO competitive landscape, and the players operating within this market. Getting the house in order and winning deals To varying degrees, the major players in the HR outsourcing market need to establish credibility, get their service delivery house in order, and achieve multiple client wins. Opportunities to serve middle-market clients The battle for clients will increasingly move to the midmarket. At present, no one vendor has a significant share of business from middle-market clients. Outsourcing expands beyond the US Although there is still plenty of room for growth in the US market, some firms are already positioning themselves for future growth in Europe s HR BPO market. And while the Asia Pacific market has not matured sufficiently to adopt HR BPO, we do see consulting firms growing their practices in these markets. Further consolidation The full report lists the firms that are probable candidates for alliances and acquisitions. More deals are likely among late market entrants and vendors that seek to round out their HR BPO offering. Figure 2. Segmentation of the Broader HR BPO Market: Comprehensive HR BPO Sees 25% Growth Comprehensive Outsourcing Majority of processes to one vendor 25% CAGR $32.7B Multiprocess Outsourcing Outsource more than one process to a vendor Single-process Outsourcing Outsource one process such as health and welfare, defined benefit, or defined contribution to a vendor 4

5 Source: Kennedy Information More About the HR Consulting and Outsourcing Markets Report Among the many firms featured in this report are the following: Accenture EquaTerra Merrill Lynch ACS Ernst & Young Milliman Global ADP Everest Group Morneau Sobeco Aon Consulting ExcellerateHRO PricewaterhouseCoopers ARINSO Fidelity Right Management Consultants Black Mountain Group Gildner & Associates Russell Investment Group Ceridian Hay Group SAP CitiStreet Hewitt Associates The Segal Company CSC IBM Global Services Towers Perrin Curcio Webb LogicaCMG TPI Deloitte - Human Capital Manpower Watson Wyatt Worldwide Development Dimensions International (DDI) Mercer Human Resource Consulting Xchanging Following the Executive Summary and Introduction, the remainder of the report is organized as follows. SECTION III MARKET TRENDS, DRIVERS, AND INHIBITORS looks at the market trends and factors affecting growth for services in the HR consulting market. SECTION IV HR CONSULTING MARKET DATA AND FORECASTS details the size of the global HR consulting market and its projected growth. This section slices the market by type of HR consulting service (i.e., segment) and by region. SECTION V THE COMPETITIVE LANDSCAPE presents in-depth analysis of recent actions by leading players in the market and discusses the implications these moves have on the future of the market. SECTION VI OUTSOURCING/BPO discusses how this dynamic market will continue to grow and evolve, providing thorough coverage of the leading players in this market, how they are positioned, and the challenges they face going forward. This section features proprietary research by Kennedy Information as well as additional research gathered from several other sources. SECTION VII DETAILS ON SELECT CONSULTING PRACTICES profiles select HR consulting and outsourcing practices featured in this report. SECTION VIII METHODOLOGY includes more information about Kennedy Information s research process and guiding definitions. 5

6 TABLE OF CONTENTS Table of Contents... v Table of Figures... vii I. Executive Summary... 9 A. Consulting Market Size and Growth Market Opportunities B. Outsourcing Market Size and Growth HR Transaction Processing HR BPO C. The Competitive Landscape The Future of Retirement Benefits Consulting The Re-Emergence of the Audit/Tax Firms The Shift From HR Technology Consulting to Outsourcing Realignment in the Outsourcing Market Themes Shaping the Development of the HR Outsourcing Market Challenges Facing HR BPO Providers II. Introduction III. Market Trends, Drivers, and Inhibitors A. Market Drivers Client Mergers and Acquisitions Drive Consulting Activity Advising Clients on Rising Healthcare Costs Dealing With Change The Shortage of Highly Skilled Talent Compensating Executive Talent Enhancing HR Effectiveness While Reducing Costs Advising on Outsourcing B. Inhibitors Tight Purse Strings Hamper Investment in HR Companies Are Not Investing Heavily in Their Talent Retirement Benefits Consulting Remains Sluggish Continued Caution Around HR Technology Spending Pricing Pressure in Consulting IV. HR Consulting Market Data and Forecasts A. Overall Growth Projections Ranking Details B. Practice Area Projections Benefits HR Technology Talent Management C. Geographic Region Projections North America Europe Asia Pacific Latin America

7 V. The Competitive Landscape A. The Shift From HR Consulting to Outsourcing B. The Long-Term Prospects of Benefits Consulting The Re-Emergence of the Audit/Tax Firms C. The Many Facets of Competition in HR Consulting IT Consulting and Services Firms Staffing and Recruiting Firms VI. Outsourcing/BPO A. Sizing the Transaction Processing Market B. HR BPO Segmentation by Depth of HR BPO Relationship The Competitive Landscape Consolidation in HR BPO What s Next? Challenges Facing HR BPO Providers VII. Details on Select Consulting Practices A. HR Consulting Firm Profiles VIII. Methodology About Kennedy Information Other Reports by Kennedy Information The Authors

8 TABLE OF FIGURES Figure 1. Size and Growth of the Global HR Consulting Market (2003 Through 2008) Figure 2. HR Consulting Market Size and Growth by Service Line Figure 3. HR Consulting Market Size and Growth by Geographic Region Figure 4. HR Consulting Growth Relative to Strategy and Operations Management Consulting Growth ( ) Figure 5. Market Size and Growth of the HR Transaction Processing Market Through 2008 (US and Rest of Market) Figure 6. Market Size and Growth of the HR BPO Market Through 2008 (US and Rest of Market) Figure 7. Top Providers of HR Outsourcing Services, by Service Type Figure 8. HR Outsourcing Prices per Employee by Size of Transaction Figure 9. Segments of the Global HR Consulting Market Defined Figure 10. Firms Providing Independent Advisory on HR Outsourcing Figure 11. HR Budget as a Percentage of Operating Costs (Median) Figure 12. HR Budget as a Percentage of Operating Cost by Workforce Size Figure 13. Trend in US Unemployment (2000 Through 2005) Figure 14. Trend in US Employment Costs for Private Industry Workers (Wages and Salaries Only) Figure 15. HR Managers Three Most Effective HR Department Cost-Control Strategies Figure 16. Size and Growth of the Global HR Consulting Market (2003 Through 2008) Figure 17. The Largest Human Resources Consulting Practices by Revenue ($ Millions) Figure 18. Estimated Size and Growth of the Benefits Consulting Market ( ) Figure 19. Estimated Compound Annual Growth of the HR-Related Healthcare Consulting Market Figure 20. Strategies Clients Are Using to Redesign Health Plans: Opportunities for Consultants Figure 21. Size and Growth of the HR Technology Consulting Market ( ) Figure 22. Clients Report on Successes and Shortcomings With HR Technology Systems Figure 23. Estimated Size and Growth of Consulting Services on Talent Management (2003 Through 2008) Figure 24. Data on Select Compensation Consulting Practices Figure 25. HR Consulting Revenues by Global Region (2003) Figure 26. Estimated Size and Growth of the North American HR Consulting Market (2003 Through 2008) Figure 27. Estimated Size and Growth of the European HR Consulting Market ( ) Figure 28. Examples of Firms Providing Consulting and Related Services to the UK Pension Market Figure 29. Estimated Asia Pacific Human Resources Consulting Market Size and Growth ( ) Figure 30. Headcount of Select HR Firms in China (2004) Figure 31. Estimated Latin America HR Consulting Market Size and Growth (2003 Through 2008) Figure 32. The Market Positioning of Top-Ranked HR Consultancies: Consulting and Outsourcing Figure 33. The Total Number of US Defined Benefit Plans From 1985 to Figure 34. Total Number of US Defined Benefits Plans with 5,000 or More Employees Figure 35. The HR Consulting Industry and Related Industries Figure 36. The Size of the HR Consulting Industry Relative to the HR Transaction Processing and HR BPO Markets ($ Billions) Figure 37. Summary of the Definition of HR Transaction Processing Outsourcing and HR Business Process Outsourcing (BPO) Figure 38. Market Size and Growth of the HR Transaction Processing Market Through 2008 (US and Rest of Market) Figure 39. Market Size and Growth of the HR BPO Market Through 2008 (US and Rest of Market)

9 Figure 40. US BPO Back-Office Processes Spending Market Share by Subsegment, 2004 ($ Billions) Figure WW Human Resources BPO Segmentation Figure 42. Prevalence of Outsourcing by HR Function Figure 43. Predictions From Kennedy Information s 2004 HR Report and How They re Playing Out in the Marketplace Figure 44. Services Offered by the Leading HR Outsourcers (see Accompanying Notes to Interpret) Figure 45. The Estimated Size of Select HR Outsourcing Practices Figure 46. The Prevalence of ERP Systems in the HR Outsourcing Market Figure 47. HR Outsourcing Market Share of Leading Vendors Figure 48. Workforce Administration Market Share by Number of Clients (US Private Sector With 10,000 or More Employees vs. All Contracts With 10,000 or More Employees) Figure 49. Top Outsourcing Providers Based on Market Share: Workforce Administration, Learning, Recruiting and Staffing, and Payroll Administration Figure 50. How HR Outsourcing Consolidation and Alliances Benefit the Firms Involved Figure 51. The Attraction to BPO for IT Services Firms Figure 52. Sampling of Smaller HR Software and Solutions Vendors in the Learning and Development; and Recruiting, Selection, and Workforce Management Arenas Figure 53. Market Positioning of Select Firms Providing Outsourcing Services Figure 54. HR Outsourcing Prices per Employee by Size of Transaction Figure 55. The HR Consulting Industry and Related Industries

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