Despite having matured for more than a half-decade, dissatisfaction with service delivery and innovation are cited by buyers. Will the market ever get it right?
If the HRO market were a retailer, you can safely say that it began life as the Wal-Mart of BPO. That’s because with each successive year since 1999, prices have been continuously pushed lower until 2005—a trend driven by buyers demanding more for their money. What they got in return were Wal-Mart-like services: bare bones with minimal frills and little innovation.
Today, corporate shoppers are changing the rules of engagement, pressing the same HRO retailers to add value. In fact, last year marked the first time in which the average price per employee for all contracts signed during the year rose, up from $602 in 2004 to $652 in 2005, according to sourcing advisory firm EquaTerra. While still sharply lower than the $1,141 average in 2000, the 2005 average indicates the market has moved the vendor selection criteria beyond pricing to a value-added realm.
While there’s no question that pricing remains one of the key determinants of who makes it into the round of the final three during the RFP process, cost is not the only deciding factor. Instead, buyers seek better service, true global delivery capabilities, continuous improvement initiatives, and an overall better customer experience. The bottom line: lower costs will bring buyers to the table, but HR transformation is what captures their interests.
“We are starting to see renewals, and in these renewals the bar is being raised,” said Mark Azzarello, the director of HR operations for International Paper and the head of the biggest organization representing HRO clients, the Buyers Group.
As a member of the group, Azzarello and his counterparts at other large companies had formed the informal association a few years ago after growing concern about their HRO deals. Many members are among the first to sign outsourcing contracts and blazed a trail for others to follow, despite bumpy roads early on. The group’s mission was to help the market develop more quickly and address capability gaps it saw among the vendors. More ambitious goals included elevating service delivery to a higher level to potentially benefit both new and existing HRO buyers.
Azzarello said while HRO has been around since at least the turn of the decade, some issues keeping buyers up at night these days are the same ones they worried about a few years ago, despite a couple of years of market growth later. While the industry has definitely made progress in some areas, it hasn’t moved quickly enough in others, he added. And that has some buyers frustrated and even possibly considering bringing HR services back internally.
“The preference is not to change ships (vendors) or bring processes inside, but we’re willing to do that to ensure quality and service,” Azzarello added.
Michel Janssen, managing director with benchmarking firm The Hackett Group, who as a sourcing consultant had previously worked with the Buyers Group developing metrics for effective outsourcing, said through his work with buyers, it seems their main concern is whether enterprise providers can perfect delivery through a one-to-many instead of the prevailing one-to-one model embraced in most large deals to date. Providers who are able to achieve this will be able to establish a more stable, consistent platform, he said, while leveraging existing resources to help it stay solvent and even profitable. Those who win deals only on customized service risk eroding their margins and becoming inefficient because of the different platforms they operate.
“The issue we’re still struggling with is going from one-to-one to one-to-many. We [the industry] have been talking about it for the past six months, but that doesn’t mean it’s going to happen,” he said.
Janssen pointed out that buyers and their providers face a number of challenges to maximize HRO. Collecting metrics is one way to improve operations, but conventional methods may not paint a true picture. Reducing days to hire might seem to be a common goal, but if new hires don’t contribute to an organization’s effectiveness or are retained for a short period of time only, better metrics don’t necessarily lead to desired results.
But developing more meaningful metrics can be tricky, and some buyers won’t be able to baseline the results because they were never measured prior to outsourcing. They can only use them as reference points to gauge effectiveness of outsourcing from one year to another.
Still, any reference point is better than none, and future buyers may benefit from the group’s work today. At the same time, employers say vendors need to weigh in on the development of qualitative metrics and not just focus on throughput. Whether they are capable of doing this—or even amenable to it—remains to be seen.
EXPANDING SERVICE SCOPE
Delivering a high quality of service remains high on the priority list of buyers, but because some early deals have now reached a steady state, these employers are able to tend to other issues. For instance, the Buyers Group identified a few other areas they’d like to see improved, including upgrading provider capability and staff when turnovers occur; expanding global reach to more markets; and the introduction of additional HR functions in enterprise deals. Functions such as recruitment process outsourcing (RPO) and learning are increasingly integrated into these buys, which traditionally have not involved third-party recruitment arms or comprehensive learning technology.
Buyers say delivery of integrated service across many markets is one attribute they look for in providers. Being able to provide myriad HR functions—either on its own or with a partner such as an RPO provider—is critical because integration of data has emerged as one of the critical drivers in HR transformation. Just ask Dominique Grau, VP of global compensation and benefits and HR services for Palo Altos, CA-based Agilent Technologies, which is a member of the Buyers Group.
Grau, who oversee HR services in 31 countries, said Agilent outsourced payroll several years ago, but because it didn’t feel any single provider was capable of offering services in all of its markets, it chose to use three different vendors—one each in the U.S., Asia, and Europe—to serve some 20,000 employees. Grau pointed out that the company has common tools and processes for managing workforce, staffing, and administration for all business units but laments that Agilent has to operate more than one database for payroll. He said providers still have not reached a competency level to serve all HR functions on a truly global basis.
“A lot of suppliers have a global brand so you can call them in Europe, the U.S., and in Asia, but from a systems perspective and from a platform and service perspective, they are really providing on a regional or country basis,” he said. “We haven’t found one [that perfectly suits our needs], and frankly speaking, you have vendors with global brands but not global capability.”
Grau said the pairing of solid technology with world-class service in the HRO market remains elusive. Today, the company still seeks a seamless delivery of services such as payroll and time and attendance but must settle for its current system of a best-of-breed model for payroll. Eventually, he added, provider competency will catch up to market demand.
“What we want is a one-to-one relationship with a provider,” he said. “Hopefully, in a couple of years, we will have solid, proven technology and bundled services.”
Stan Lepeak, managing director of research at sourcing advisory firm EquaTerra, said Grau and others essentially have changed their view of HRO from a cost saver to a transformation enabler.
“It’s a general assumption that when you outsource HR, things will improve. Therein lies some of the challenges,” he said. “Some of the innovations promised have not been achieved.”
In some ways, Lepeak blames vendors for hyping HRO too much in the early years, promising service improvements during the RFP process without fully having developed capabilities. Their hopes were to build out infrastructure and workforce once clients signed contracts, but this approach sometimes backfired because they couldn’t get caught up with the work. As a result, the market may be pulling back from outsourcing until quality of service delivery improves. “We define it as capacity constraints,” he added.
At the same time, he said buyers may need to adjust their expectations as well. They may have to accept the fact that early on in the outsourcing journey, service quality will fall short of internal capabilities. However, once the contract reaches a steady state, providers will be able to focus on delivery enhancement, innovations, and other improvements buyers want for the long haul.
As the HRO industry continues to mature, buyers as well as providers and advisors realize that outsourcing has not reached its potential. Nor are buyers still getting Wal-Mart-like quality delivery, but their dissatisfaction will inevitably push the industry forward. In any case, most employers are not about to turn back, Lepeak said. “They see that pain and realize how difficult it is to bring it back in or make a major change,” he added.
