by Marc Pramuk

HRO providers expect continued growth in 2003, fueled by companies’ desire to reduce costs while increasing service levels.

These are interesting times for business service providers. As I review 2002 to prepare a recap and forecast for 2003, there is a lot to take in. A year ago, we were assessing the impact of the dot-com bust, the emergence of a global recession, the decline of the telecom industry, and reeling from the impact of September 11. The signs showed, however, that a recovery was underway and that things would be on track by mid-2002 with full recovery by early 2002. Today, we instead are facing a series of accounting scandals that are shaking the faith in business reporting and ethics, weak performance in stock prices on Wall Street, a potential war in the Middle East, a potential shock in oil and energy prices, and a continued slowdown in corporate profitability and spending. Not the best way to begin a forecast… But there is reason to be hopeful, even optimistic, about the outlook for 2003 and 2004.

The impact of the economic slowdown on HR spending is inescapable. But in many ways the current macroeconomic conditions are serving to drive growth in HR service and technology spending rather than curtail them. Specifically, HR business process outsourcing (HR BPO) is continuing to make strong gains.

When business profits and performance are unpredictable, a focus on cost containment tends to drive spending decisions. This has resulted in stronger interest among client organizations-especially COOs and CFOs-in leveraging HR BPO as a means of maintaining or improving service levels. Outsourcing, in part, addresses the growing leanness of corporate staff levels, while in part it addresses concerns over the complexity of business processes and technologies by streamlining the systems and vendors used to execute and deliver administrative processes.

Because of this, HR BPO has become the hottest segment in HR services. Fueled by companies' desire to reduce costs while increasing services levels, often through the greater use of technology and self-service capabilities, many organizations are exploring HR BPO as a means of realizing these goals. As such, providers of HR outsourcing have reported moderate growth and strong pipelines throughout 2002 and they expect continued growth in 2003 due to the delays in economic recovery and the realization of revenues from beginning delivery on recently signed contract wins.

Looking forward, IDC predicts that there will be continued slow recovery but no "double dip" recession. Recovery will be slow in the United States, with tepid growth in Europe and continued recession in Japan until 2003. Cost-cutting measures will play some role in a return to business profitability, and some of this may, in fact, be related to cuts in spending, but until profitability returns along with the gradual economic recovery, businesses are unlikely to ramp up their spending plans.

As a result, IDC projects that HR BPO will remain the fastest-growing segment in HR services in 2003. Spending in the U.S. during 2002 is currently projected to total more than $5.7 billion, representing 39% growth over the results in 2001 of more than $4.1 billion. This trend is expected to continue in 2003 as HR BPO will grow to more than $7.7 billion-a 35% increase over 2002 levels. The weak and delayed recovery of the U.S. economy, combined with the continuation of lean organizations and the jobless recovery, will perpetuate the need for comprehensive management and delivery of HR services on an outsourced basis.

Further driving growth is the complexity of HR technology and data management. Software is in a complexity crisis. The software industry is influenced by economics to a greater extent as it matures. However, software was headed for a crisis even before this economic recession. Corporate and IT strategy have both been oriented around saving on short-term costs for the last two years. Almost all available resources are being consumed by the maintenance and extension of existing software assets. Often, business process integration means removing costs from legacy processes that have been customized into ERP suites. Companies are looking to add a solution in the niche area that will simplify and amplify the vast store of digital information that is exponentially accumulating.

Complexity is the driver-both of this challenge facing software and technology providers and the resulting opportunity it has represented to outsourcing service providers in the HR space.

In the next column, we will look at the leading service providers driving the growth in HR Outsourcing and HR BPO. In the meantime, if you have any questions or comments on this article or suggestions for future topics, please let me know.