During the recent round of earnings calls for Human Resources consulting firms, it became increasingly clear that these providers' growth strategies are shifting the dynamics of the HR consulting landscape, creating greater space for competition from the fast-growing HR advisory businesses of the Big Four.
The tension reflects challenges providers are facing around designing a business model that is client-focused and growth-oriented in the context of core consulting competencies, but also competitive in the open market. It was essentially a good quarter for Aon Hewitt, Mercer and Towers Watson, with organic growth ranging between 3 percent and 7 percent. However, much of that growth is coming from non-consulting businesses, such as private health exchanges and delegated investment outsourcing with their pricing models based on commissions and assets under management.
Don't get me wrong. These services have substantial consulting components during the assessment, design and execution phases. And once they go live, they become a source of recurring revenue, as well as a very sticky relationship that can generate further consulting opportunities. The problem is that it reinforces the market perception of HR firms as primarily benefits consulting providers.
Nowhere is this dynamic more clearly reflected than in Towers Watson and Willis Group's merger announcement. The strategic rationale for the deal emphasizes the synergies and growth opportunities to be derived from insurance-based services, such as private health exchanges and global health benefits broking.
While the deal will put the firm on a more equal footing with Aon Hewitt and Mercer, it does little to shore up its hard-earned and well-deserved reputation as an innovative human capital consultancy.
Furthermore, Tower Watson's sale of its HR Service Delivery practice to KPMG removes the firm from the lucrative HR transformation consulting market at a time when organizations of all sizes are reinvesting in the HR function.
Meanwhile, the Big Four HR advisory businesses continue to grow. According to Kennedy estimates, these firms exhibited HR consulting revenue growth between 5 percent and 10 percent in calendar year 2014 over 2013.
Some of this growth, of course, can be attributed to inorganic strategies, however, the Big 4 have come a long way towards improving service delivery by integrating HR offerings from adjacent business lines, including strategy, tax and transactions consulting.
But what I find most intriguing is the level of innovation coming from The Big Four. They are leading in the design of new HR operating models, the practical application of data analytics across all manner of HR engagements, and more. Most importantly, clients are responding with greater demand for integrated services to upscale HR operations.
The shifting dynamics of the HR consulting landscape were neatly summed up in a recent conversation I had with an HR executive at a Fortune 500 company who is currently working with a Big Four firm on a global project.
This HR executive said, "If I had known when I was in my prior position about the Big Four's capabilities, I would have been very nervous."
Liz DeVito is Associate Director, Lead for HR Consulting Research for KCRA where her focus is human resources (HR) consulting, covering the human capital management and HR transformation consulting segments.
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