Contributors

Market Maturity at a Crossroads

Assessing the maturity of HRO: wunderkind or ready for reform school?

by Robert H. Brown

Assessing a singular “maturity of HRO” is difficult to pin down. On one hand, discrete offerings such as payroll and benefits administration services have been around for years, and nearing what Gartner terms “plateau of productivity”; that is, their maturity has been demonstrated, they are accepted as mainstream market offerings, and their methodologies are increasingly stable.

Contrast these discrete offerings to end-to-end comprehensive HRO, and the maturity picture changes to that of early adolescence. Comprehensive HRO has recently reached what Gartner terms a “peak of inflated expectations,” where concerns about vendor profitability and acquisition and some buyers preferring internal shared services to HRO may signal the “awkward teenager” years.

The market has reached a crossroads. We predict a lower growth rate for the $14.6 billion U.S. market—the biggest geographic market in the world—at 3.8 and 4.2 percent, respectively, for 2006 and 2007. Still, at 4.2-percent growth, the market will have expanded by more than $500 million. As the market reaches adolescence, what are the key drivers and how long will it take for HRO to reach true maturity? Here are some:

• Revenue Demands. Currently, there is much Wall Street scrutiny of vendors’ profitability on their larger, comprehensive BPO. Assuming that a digestion time-out among some of the top providers improves margins on larger BPO contracts, there will be a gradual improvement of the current U.S. HRO growth rate as we move into the 2008 to 2010 period. Providers currently are scrutinizing their prospective clients like never before. New vendors may be willing to “buy their way into the market” by underbidding competitors and taking on HR assets and staff to serve as their HR outsourcing platform for service delivery. Often this will be at a loss to their bottom line but will grow top-line revenues, resulting in a bigger market.

• End-to-end Processes. Customers, especially in North America, are increasingly looking at outsourcing end-to-end, comprehensive processes. Vendors report that demand has picked up for holistic, comprehensive HR outsourcing. In the past, many point solutions were outsourced. For example, in HR, companies only outsourced benefits, payroll, or recruiting. In 2005, more organizations sought a holistic solution. They also wanted to integrate globally, as more organizations sought solutions across geographies.

• Automation Scenario as a Driver. More companies are looking to leverage HRO as a way to drive increased amounts of automation to achieve reduced costs and improved service levels. Easy-to-adopt, automated services may make HRO “easier” to digest, especially among mid-sized businesses, which could propel more greenfield adoption. Also, many organizations that look to HRO have already created shared-services centers and standardized processes. Benefits administration and payroll are highly automated and standardized.

• Niche Growth. We predict room for continued growth in niche areas. While payroll is generally mature, there’s room for evolution and growth, even with an established buyer clientele. For traditional payroll, most buyers service single-country operations; multinational/global payroll outsourcing in multiple countries to a single provider isn’t yet mainstream and has limited customer adoption.

• Mid-market Growth. HRO is gaining greater traction among mid-market buyers, who have begun to diversify their sourcing strategies away from professional employer organizations (PEOs) co-employment model toward a more standard use of multi-year, contractual BPO
models. Smaller-tier providers such as TriNet, HR Access, and Gevity will have an easier time penetrating this market, as will larger providers such as Ceridian and ADP, which can leverage a standard platform and an array of channel partners for cost-effective customer reach.

• Talent Needed. Onset of demographic changes will drive HRO uptake to compete in the war for talent. Many businesses in the U.S. and Europe will become talent-constrained as an increasing number of baby-boomers retire. Therefore, more businesses will look to outsource aspects of HR that give them world-class services to keep key employees happy.

• Multi-domain. More companies will exploit the back-office synergies of HR & F&A by pursuing multi-domain BPO opportunities. Chief among these synergies for HR and F&A are high levels of transaction processing, shared data elements, regulatory compliance, set deadline-
driven deliverables, e-enablement for process automation, and key data needed for management reporting across multiple business units. Multi-domain contracts are still in their infancy (approximately 5 percent of deals), and thus proof-points of their success are limited.

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