Based in Lincolnshire, Illinois, Hewitt Associates (HEW) is one of the leading providers of human resources outsourcing and consulting services in the world. With more than 60 years of experience in human resources, Hewitt now provides human resources services in 33 countries. Through the first fiscal quarter of 2007, the company operated in two business segments: 1) Outsourcing (which contributed 70% of revenues in fiscal 2007) and 2) Consulting (30%). However, effective with the second fiscal quarter, the company began operating the HR BPO business on a stand-alone basis. Therefore, the company now has three business segments: 1) Benefits Outsourcing, 2) HR BPO, and 3) Consulting. Hewitt provides services such as core process management, talent management, and workforce management (transaction processing, recordkeeping, and administration of health and welfare and retirement programs, and personal financial services) to more than 340 client companies through the Outsourcing division. In addition, the company offers web-based tools that enable clients to analyze the return on investment in their benefits, compensation and human resource programs. The company is also the leading player in the emerging human resources BPO (business process outsourcing) market by providing client services such as payroll & payment, recruitment, learning & development, performance compensation administration, leave administration, domestic relocation, and global mobility services. The Consulting division, which serves more than 2,300 companies and administers, provides health management, retirement & financial management, and talent & organizational consulting services.
Near term results continue to be negatively impacted by the early stage of a large majority of the company's higher margin human resources BPO contracts and the lower margin of mature contracts. Sales cycles lengthened through the early part of fiscal 2006, which has caused fewer new contracts to be signed in fiscal 2006. Although the margin for HR BPO contracts is expected to improve over time, client service delivery costs will remain high in the near term due to the accelerated roll out of the company's global sourcing capability and new developments for the company's service offering. The company has also had a hard time managing initial implementation costs, which forced the company to record an additional loss reserve during the second quarter of fiscal 2006 for one of its human resources BPO contracts signed in early 2005.
The company's Benefits Outsourcing revenue growth was negatively impacted by the loss in fiscal 2005 of the Bank of America contract, which generated approximately $180 million in revenues in fiscal 2004, and the acquisition of Exult. Outsourcing revenue declined 3.3% in fiscal 2006 from the prior year, while segment income significantly declined from a profit of $177 million to a loss of $77.9 million. In fiscal 2005, company-wide income was flat with the prior year despite a 28% increase in total revenue, primarily as a result of the Exult acquisition. The revenue from Benefits Outsourcing continued to be weak throughout the 2007 fiscal year, with the segment reporting a modest revenue increase of 0.7% for full fiscal year. However, adjusting for the favorable effects of foreign currency translation, Benefits Outsourcing revenue was essentially flat. In fiscal 2007, Outsourcing income decreased 5% to $306.2 million as the operating margin was compressed to 20.8%, compared with 22.0% in the prior year due to the impact of lost clients and longer implementation cycles required for some of the company's large, complex clients.