Acquisitions in HRO Are a Response to the Emerging As-a-Service Economy

In recent years, the Human Resource Outsourcing (HRO) market has been characterized by numerous acquisitions. The market experienced dramatic service provider consolidation in 2014 and 2015, with more than 27 publicly disclosed deals last year. The trend is not slowing down in 2016, with around eight acquisitions as of early March.

Is this dramatic number of acquisitions in the HRO market largely driven by service providers looking to position themselves and service clients that are already entrenched in the As-A-Service Economy? Or are more tactical goals, such as increasing footprint and filling gaps in offering portfolios, at play?

In what has traditionally been a severely fragmented market, characterized by numerous regional players, larger service providers are now beginning to pick from the collection of regional players to either bolster local capabilities or enter entirely new regions. For example, Altair Global acquired NOVA Relocations to expand operations in EMEA. More tactical regional acquisitions are also taking place where specific skillsets and offerings are sought by location. Payroll is one area where this frequently occurs, due to regionally differing tax regulations. In addition, non-U.S. firms have made benefits admin acquisitions to align with the Affordable Care Act in recent years, with Morneau Shepell’s acquisition of Ceridian’s H&W benefits admin business in July last year as an example.

What we are seeing emerge is a trend toward HRO service providers looking to better position themselves in the As-a-Service Economy with strategic acquisitions focused on two key areas: enhancing RPO capabilities and addressing digital enablement of HR processes.

First and foremost, the majority of M&A activity seen in HRO has been in enhancing RPO capabilities. This move is to address an ever-increasing need for digitally minded and analytically developed talent. For example, actuarial candidates who are needed to wrestle big data and programmers to deliver on platform enhancements are scarce and fought over commodities in today’s job market. As such, service providers need to be able to efficiently source this talent on behalf of clients.

Second are acquisitions solely aimed at enhancing HRO service providers’ digital enablement in e-learning and employee analytics. So far in 2016 ~40% of publically announced HRO acquisitions have been in support of enhancing the digital capability of service providers.

Examples of Acquisitions During 2016

Source: HfS Research, 2016

The face of HRO is changing and the market is auto-correcting to adapt to the demands of the As-A-Service Economy. Acquisitions are at the center of this correction, because when it comes to skills, it is faster to acquire than to build, and skills bring a unique differentiation to the table. There is no reason to believe the level of activity year-to-date in 2016 is going to slow down anytime soon.