Hewitt Update – Temperance Warranted?

If you are looking for hype, skip this article — if you appreciate a viewpoint based on balanced insight read on. A spate of recent articles, research papers and analyst reviews have sprung up in response to recent announcements by Hewitt of the departure of three of its senior executives – Dale Gifford, Chairman and Chief Executive Officer; Bryan Doyle, President HR Outsourcing; and Mike Salvino, HR Outsourcing Sales and Accounts leader. The fervor of these articles would be amusing if not for the nervousness that they have helped create in the outsourcing client community, particularly among current Hewitt clients. Some temperance is in order.

Consider the following: In the past three years there have been significant management restructurings in the HR business leadership at Accenture, ACS, CitiStreet, Fidelity, Mellon HR Services, and now Hewitt. Just this week, EDS announced a major reorganization of its own outsourcing business (beyond HR). Yet, none of these other announcements caused the furor we have seen in the past week. We should ask, “Why is there such a fascination with the Hewitt announcements?” Rather than jump on the bandwagon that seems to be forming, which suggests there are major problems within the HR industry’s leading outsourcing provider, let’s consider what other forces are likely at work.

First, let’s examine the timing of the Hewitt announcements. Unlike any of the other service provider management restructurings, the Hewitt announcements are directly on the heels of the vesting of the restricted shares, which many of the senior leaders have held for the past four years, since Hewitt first became a public company in June of 2002. On June 27, 2006, the last of the restrictions that affected the ability of Hewitt employees to sell their shares on the open market expired. It should not be a surprise that some of the senior leadership has been waiting for this vesting to occur before announcing their intentions to pursue other opportunities or merely to retire having reaped ample reward for their service. In fact, TPI has been expecting some turnover among the Hewitt management team during the second half of 2006.

With this understanding, let’s look at who has left. Certainly, Dale Gifford’s leaving is not a shock. Dale has been the CEO of Hewitt for nearly 20 years and was responsible for taking the firm public. He is 56 years old, an age at which many leaders retire from professional services firms. We can also assume that the value of his Hewitt stock was substantial, more than sufficient to allow him to retire to a life of comfort.

Mike Salvino’s announcement this week that he is leaving to become an operational executive at Accenture was perhaps more of a surprise at first glance. However, on further scrutiny, Mike has had a long personal and professional relationship with Kevin Campbell, who currently heads up Accenture’s outsourcing business, dating back to when they were among the founding leaders of Exult. Based on our own interactions with Hewitt, we have reason to believe that Mike’s departure is completely unrelated to the announcements by Dale and Bryan. Despite the claims made in some of the recent media articles of it being difficult for Hewitt to find a replacement for Mike, from our vantage point there are several strong internal candidates, and we expect Hewitt to make an announcement regarding the appointment for that position soon.

That leaves us to speculate upon the reasons that Bryan Doyle chose this moment to retire from Hewitt. Bryan has led Hewitt’s HR outsourcing business since 2000 and overseen its growth from a several hundred million dollar business to nearly a US$2 billion business. Bryan was in charge during the years that Hewitt grew into the nation’s largest provider of benefits outsourcing services. He was instrumental in the company’s decision to purchase Exult, which catapulted Hewitt from its benefits roots into the leading provider of multi-process HRO services. Additionally, he has been part of the senior leadership team that has been under the increased scrutiny that comes with being a public firm.

I suspect that only Bryan can tell us why he has chosen this moment in his career to retire from Hewitt. Nevertheless, Bryan’s contributions to the business during the past decade represent a career’s worth of achievement for most individuals. Perhaps, he has just had enough of the exacting grind of being an outsourcing executive in an emerging market. Or, he made the difficult personal choice of deciding it was time to make room for a new leadership team to direct the next phase of the evolution of the firm. Regardless of his true rationale, the new CEO will be able to set his or her own course without the turmoil associated with a legacy management structure.

Finally, let’s spend a little time addressing the conjecture of Hewitt spinning off its HRO business. This one has me entirely perplexed. Hewitt currently consists of three distinct businesses: consulting, benefits outsourcing and HR outsourcing. They represent approximately 30, 50, and 20 percent of the company’s revenues respectively. But only an ill-informed person could think for a minute that Hewitt would want to spin off its outsourcing business so that it could focus on its consulting business. The HR consulting business matured nearly a decade ago with a number of successful firms vying for a tepid growth marketplace. HR outsourcing is the one high-growth exception to the rule in that marketplace. Most of Hewitt’s consulting competitors (i.e., Mercer, Towers Perrin, and Watson Wyatt) are all investigating alternatives to expand their outsourcing opportunities — not shrink away from them.

If Hewitt spins off its HR outsourcing business, what becomes of its benefits outsourcing business? We have increasingly seen the commoditization of the benefits administration services in HR outsourcing transactions. Hewitt would create a significant business risk for its flagship benefits outsourcing business by selling its HR outsourcing business.

The real question isn’t whether Hewitt would sell its HR outsourcing business but whether or not some other company might purchase all of Hewitt or want to merge with Hewitt. This alternative has always existed and been a possibility, before and after the recent departure announcements. We doubt that there is any more or less interest in this alternative today than there was a month ago or six months ago. The real issue is whether or not an “HR pure play” outsourcing company is viable in the long run. Or, instead, will enterprises want to put all of their eggs in one basket and hire a single firm like IBM to run their IT, HR, and Finance departments. Today, more than 95 percent of all clients making HR outsourcing decisions are electing to outsource the function on a best-of-breed basis rather than an integrated basis. However, that is the statistic that bears watching. Can Hewitt (and the same goes for Fidelity) continue to limit itself to HR opportunities?

In summary, I continue to maintain that my best insights into the recent management turnover announcements are that they are just that — management transitions. Like all changes of the guard at the senior most levels, it will take some time before we can tell whether they were positive or negative. In the meantime, I would recommend temperance. Hewitt clients should continue to monitor the changes going on within Hewitt as part of their normal oversight of a key service provider. But taking any specific actions as a reaction to these recent announcements is premature at best.

[Editor’s Note: As this article went to press, Hewitt announced two replacements as co-leaders of Global Sales. Sue Thompson and Mike Wright, both 20-year Hewitt veterans, will take over responsibility for benefits and HR outsourcing respectively.]