Is the HRO Marketplace On Target for a Strong 2009?

After a tough 2008, can the industry expect a breather from bad news? Some signs point to yes.

by Andy Teng

If you thought 2008 was a tough year, you’re not alone. If you thought 2008 was a tough year for the multi-process HRO business, you might want to reconsider. Although there were just a few large, headline-grabbing contracts announced during this economically challenged period, the market was not completely idle.

The optimists among us would point to a strong surge in point-solution outsourcing in areas such as recruitment, learning, and others. Even mature processes such as benefits outsourcing managed to post moderate growth. In comprehensive HRO, mid-market buyers continued to invest in enterprise HRO, according to AMR Research, which reported that as of the first half of the year, there were 35 companies in the segment that had signed contracts. Even among employers with more than 15,000 employees—the minimum threshold to be considered a large-market buyer—22 multi-process deals were signed in the first six months. And according to Everest Research, 10 large HRO buyers renewed their contracts, reflecting confidence in the delivery model. Considering how disastrous the rest of the economy has performed during 2008, you might say the HRO market fared considerably better.

Still, there is no getting around the fact that deal activity as well as contract values in historic terms declined significantly in 2008. According to Everest, the multi-process market was estimated to have reach $2.9 billion during the year, with 28-32 deals expected to have closed by year’s end. In contrast, 2007 posted 47 new deals. Even so, a number of analysts and advisors believe a turnaround could take place in the new year. So, could the HRO business outperform the general economy in the near future? After all, some aspects of outsourcing have an inverse relationship with economic growth, and with many organizations looking to shed fixed costs, can HRO expect a healthy 2009?

According to industry observers, the market in the new year will be shaped by several trends other than the global economy, although it will still weigh heavily on decision makers who have the final say on adopting HRO in their organizations. However, with the industry still maturing, a shift toward equilibrium is likely to occur because for the past several years there has been a constraint on supplier capacity due to providers’ unwillingness to take on new deals. And with all eyes on cost savings, the way employers plan to outsource will mark a return to the early days of the HRO market.

“In 2007, everyone was talking about transformation. In 2008, the conversation was changing a bit, and now it’s all about cost savings,” said Rosemary Collins, a partner and practice leader with consulting firm TPI.

Collins pointed out that because of the economy, the business case has emerged as a more pressing driver for considering outsourcing HR services. In the previous two years, many organizations were attracted to the transformational aspects of HRO, specifically how it could help them align services with their business goals, enable HR leaders to focus on strategic functions rather than tactical ones, and improve service quality through providers’ best-practice expertise.

But the shift in focus occurred quickly in 2008, Collins noted. Instead of embracing long, drawn-out comprehensive HRO, many looked to point solutions that could be implemented in a short period and offer quick returns on investments. “These large, transformational end-to-end deals are not the way to go” in 2009, she said.

Indeed, a movement toward de-scoping contracts had been underway for sometime already, with a number of buyers opting to shift delivery of recruitment services from multi-process HRO providers to either internal teams or best-of-breed vendors. Other buyers who were new to the outsourcing marketplace also benefited from lessons learned by their predecessors in this space by transforming first before outsourcing processes they deemed not essential to HR’s core mission. This selective approach was especially evident in 2008 as the level of engagements with point-solution providers sig­nificantly outpaced those for end-to-end outsourcing. Moreover, according to Everest, the average contract value in 2008 fell, reflecting a smaller deal scope and a desire to quickly capture cost savings.

“Pretty much every buyer of HRO is looking for cost savings or redistribution of how they invest in HR. This factor is becoming much more influential and is outweighing any other outcome, at least in the near term,” said Monica Barron, vice president of research at Everest.

She noted that even though the market experienced a decline in the number of accords and average contract value, the industry remains sound. Moreover, in wanting to cut costs, buyers may also be growing more accepting of standardized solutions with fewer customizations.

Sizable Deals in 2008
Despite a decline in the number of deals, there were a few notable contracts reached during the year. In one of the largest public sector deals ever, the U.S. Transportation Security Administration awarded Lockheed Martin a $1.2 billion, eight-year comprehensive contract. The provider will develop a fully integrated HR solution to support the recruiting, assessing, hiring, paying, and promoting of all TSA employees.
In another sizable contract, ADP won a comprehensive payroll deal to deliver services to 100,000 Sodexo U.S. employees. Under the agreement, the provider will be responsible for processing, administration, and service center support. It was the largest U.S.-based payroll contract in recent years, even dwarfing a 43,000-employee payroll contract Scotiabank had signed with NorthgateArinso earlier in the year.

IBM registered a significant win in June by signing Bristol-Myers Squibb to a 10-year, $324 million contract which covers payroll administration, compensation management, benefits administration, recruiting, learning services, call center support, and related IT support. IBM will also implement an SAP HR solution and integrate Bristol-Myers Squibb’s global workforce data into a single HR portal for access by employees, managers, and HR personnel. IBM is also supporting Bristol-Myers Squibb’s operations in the U.S., Puerto Rico, U.K. Ireland, France, Germany, Italy, Spain, and Belgium, with limited support for 40 other country operations around the globe.

There was a number of deal renewals as well, including Convergys’ contract with Avaya. The renewal calls for the provider to support Avaya globally from service centers in Jacksonville, FL; São Paulo, Brazil; Budapest, Hungary; and Kuala Lumpur, Malaysia. Convergys delivers HR and finance transactional management, payroll administration, HR administration, benefits administration, service center support, and employee and manager self-service navigational support.

Of course there were many point-solution contracts inked during 2008. Some notable ones included a comprehensive learning outsourcing deal signed by Hertz with ACS; a nine-country RPO contract inked by KSS with Manpower; Intellecor’s larger relationship with Shell Canada to expand recruitment service; and a CUNA Mutual Group RPO deal signed with Pinstripe.

According to some advisors, 2009 may indeed bring more significant signings, even if the largest contract values aren’t more than $100 million each. Lowell Williams, executive director, HR advisory, at EquaTerra, pointed out that some market shifts are occurring to help encourage deal-making.

Providers that had signed many first-generation comprehensive HRO deals have shied away from taking on new clients during the past two years because many of those deals were money losers for them. As a result, there was pent-up demand in the marketplace. And with buyers more inclined to accept standardized solutions, and with some of the providers having completed implementation of earlier contracts, vendors appear ready to take on new accounts, Williams said.

Furthermore, a number of offshore providers are forging into the domestic market, including India-based and European competitors looking to establish a foothold in the U.S., the world’s largest HRO market. Making a more aggressive push recently are providers such as U.K.-based Patersons Payroll, Xchanging, and NorthgateArinso, and Indian vendors Hexaware, Infosys, and TCS.

Williams said Indian provider, especially, will play a bigger role in helping the end-to-end industry grow in the new year. He noted that a number of them are poised to make investments in acquisitions if not simply grow a bigger footprint in the domestic HRO market. And because of their IT heritage and existing U.S. IT client base, these providers may add significant supplier capacity that will encourage buyers to embrace HRO.
“They have checkbooks, they understand parts of this business, and they will be looking for market share,” he said. “I think one good thing about 2009 is we’re beginning to see the [supplier-buyer] equation come back.”

But even greater capacity in the marketplace doesn’t assure growth in the year ahead. And some of the existing larger-market HRO providers may still remain on the sidelines, hobbled by profitability difficulties. Providers such as Hewitt and Convergys have each reported margin issues with their HRO business.

Point-solution providers may end up being the biggest winners in the new year because HR organizations are under pressure to cut costs. For some, outsourcing is a quick way to shave fixed costs; for others, it offers them access to new technologies without a major investment in software. In the area of learning BPO, buyers can more easily implement a learning management system through an outsourcing vendor than if they did it themselves. It remains to be seen whether RPO can sustain its continued growth because with unemployment on the rise, hiring volumes will be down significantly. Already, at least one large employer, Hertz, has terminated its RPO contract.

Still, there is cautious optimism for the industry in 2009. More supplier capacity, a growing mid-market segment, and buyer flexibility all seem to support that optimism. And with greater pressure on organizations to reduce costs, the COOs may be the ones helping to move their organizations closer to HRO. AS Collins pointed out: “It’s going to be interesting next year. Buyers will have more choices.”

Posted December 10, 2008 in Talent Acquisition

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