Co-authored by Julie Fernandez.
Late Thursday, Aon announced it had signed a definitive agreement to sell its benefits administration, HR business process outsourcing and related consumer experience capabilities to multinational private equity firm Blackstone.
This sale had been rumored since December, when a Reuters article indicated that Aon was looking to sell its benefits business. Since then we’ve had some time to ponder the implications for current and prospective Aon Hewitt (now NewCo) clients and for the HR/benefits outsourcing market in general.
What Exactly Did Blackstone Buy?
Those familiar with Aon’s outsourcing business will quickly identify several key components of this sale that remain intact as part of the NewCo organization, namely benefits administration, HRO administration and cloud services (created from the purchase of Workday systems integration and application management providers OmniPoint and Kloud). What is not a part of NewCo is the benefits and talent consulting that fit more closely with Aon’s brokerage and risk services. The private exchange business will split similarly between design/brokerage and administration. Aon will be involved in the architecture and design, carrier relationships and risk management, while NewCo will manage all technology, call center and back-office operations. Chris Michalak, Jonathan Schembor, Bryan Sansbury and other key leaders will be at the helm of the NewCo organization and its 22,000 employees, signaling continuity that will be important in the coming months, while Aon Hewitt CEO and former benefits leader Kristi Savacool remains at Aon.
Breadth of Services is Still a Key Differentiator for NewCo
First of all, keeping benefits administration and HR services, including Cloud deployment services, together is critical to ensuring the value of NewCo’s core service proposition. Eighty-five percent of Aon Hewitt’s HR services clients, many of which also are Total Benefits Outsourcing (TBO) clients, utilize the firm for benefits administration. More than 60 percent have core HR, Payroll and Benefits in-scope. Clearly, breadth of services has been a core tenet of success for Aon Hewitt’s outsourcing business.
The business Aon is selling to Blackstone is number one in the large-enterprise market for health and welfare and defined benefits administration, and in the top three for defined contribution. The HR Outsourcing business includes nearly 40 large enterprise clients and 1.6 million employees, 35 percent of which are on hosted ERP platforms and 65 percent of which are on newer HCM SaaS technologies. The new entity continues to have the greatest market share and experience delivering HRO services on Workday (with more than 20 clients) while it begins to expand its SuccessFactors HRO client-base, adding two companies in deployment.
The integration of Cloud services – for deployment and ongoing Application Management Services (AMS) – is an equally critical component for NewCo. This has been one of the fastest-growing segments of Aon Hewitt’s business, reflecting robust activity in the broader marketplace. Three quarters of Aon Hewitt’s Workday HRO clients also used Aon Hewitt as their deployment partner. Companies that have outsourced their core HR and/or Payroll administration often find the functional and process knowledge necessary to configure their new SaaS solution resides primarily with their outsourcing partner. Further, NewCo has been able to create synergies and scalability around its Workday model by re-using the standard Workday configuration and leveraging the delivery processes it has developed to ensure a common way for utilizing its system.
The New Normal and Its Impact on Outsourcing Buyers
Prospective buyers should always weigh the risks of change of ownership when evaluating a potential outsourcing partner. However, every potential partner carries this risk. The HR/benefits administration market has been particularly fraught with mergers, acquisitions, spin-offs and other ownership changes over the past few years. The recently rebranded Conduent organization has undergone more changes of control and name than you can say in one breath (Kwasha Lipton, PwC/Unifi, Mellon, Towers Perrin, Buck Consulting, ExcellerateHRO, ACS, Xerox … gasp … Conduent). NGA HR survived a similar cycle of acquisitions, divestitures and private equity owners. ADP has grown its HR/benefits business through a number of acquisitions, including Workscape and SHPS in compensation and benefits, The Right Thing in recruiting and, most recently, Marcus Buckingham in talent. Bank of America bought Merrill Lynch; Empower Retirement is the rebranded combination of Great Life West, Putnam Investments and JP Morgan; Mercer acquired Jeitosa and CPSG to build out its Workday deployment, then sold its defined contribution business to Transamerica and purchased leading global benefits platform Thomsons Online Benefits; and the list goes on. This growing trend makes it increasingly important to build change-of-control terms and protections into every sourcing agreement, even when it is with a recognized market leader.
In the case of Aon Hewitt, the HR/benefits administration business did not materially change when Aon acquired Hewitt in 2010. And, for the most part, we anticipate minimal disruption for existing Aon Hewitt outsourcing clients as the relationship unwinds. In general, clients will experience no changes in terms of the technology, service center locations or teams that have been providing services to date. While outsourcing clients that use Aon Hewitt for benefits and talent consulting will need to form separate relationships with Aon and NewCo, these services are typically contracted for and delivered separately with the exception of private exchange models. ISG does not expect any material client departure as a result of this sale.
Insiders anticipate a better focus on investment and growth for NewCo than it experienced as a specialized portfolio within the much larger Aon organization. Blackstone has a strong reputation for investing in growth opportunities for its holdings. New growth areas could include finance and accounting services on the Workday platform, which further leverages its Workday deployment client-base. As a private company, NewCo is no longer driven by the need to meet quarterly targets and “street” expectations and therefore can focus on longer-term, strategic growth. While private equity deals always raise a question about exit strategy, Blackstone does not have a track record of fast-flipping its investments, so we do not anticipate significant instability in NewCo’s management or strategy.
Uncertainty around the future of NewCo may give some competitors an opening. However, as we point out, only a handful have gotten where they are without their own series of buy-and-sell maneuvers. Of greater concern to the HRO market is whether buyers will consider the current market uncertainty as reason to re-evaluate their overall HR delivery strategy. Buyers must weigh these risks against the benefits of scalability, innovation and cost savings they get from outsourcing and their broader Global Business Services strategy. As emerging technologies drive changes in HR service delivery, many companies are re-examining their mix of automation and internal and external services. And successful HR service providers will continue to evolve to remain relevant in these changing times.About the author
Deb leads ISG’s Human Resources Technology practice, drawing upon extensive in shared services, outsourcing and HR management to help clients define and implement their HR technology and service delivery strategies. Deb helps enterprises assess the business case for Human Capital Management software-as-a-service (SaaS) solutions, understand the capabilities and experience of leading HR SaaS providers and integrators, and formulate and execute effective negotiation strategies for HR SaaS software and implementation. She has authored ISG’s annual survey on HR Technology and Service Delivery Trends since 2014. Deb has 29 years of experience and has been involved in more than 150 HR engagements across HR administration, payroll, benefits, talent acquisition and HR technologies.