As the industry matures, a cornucopia of positive developments will further span HRO growth. Expect the provider landscape to shift in the new year.
Next year will be a watershed year for human resources outsourcing. Whereas 2005 saw the customer, supplier, and consultant battle with complexity, compliance, security, and cost issues, the outcome in 2006 will see a realization of the hard work, evaluation, and investment with a succession of ground-breaking multinational contracts. Bottom-line, HRO has proved more complex than even the most cynical of us believed, but the industry has held fast to the reality that huge business benefits can be had for organizations moving towards an HRO model: focusing core people-management areas of HR, accessing better technology, and reducing unnecessary transactional and administrative overhead.
Last year proved to be the transition year between the much-vaunted Generation 1 and Generation 2 of HRO. As painful as it has been for some, the experiences of the past 12 months have proved necessary for this industry to succeed. Having worked intimately with the service providers, sourcing advisors, and buyers, this has been a tireless year for me personally. I have witnessed the industry’s infrastructure being built, metrics developed for real business cases, and intelligent strategies being formulated. What is most encouraging going into 2006 is the fact that we have an established set of service providers, most of whom are deep in multiple, large contract negotiations; are building out their global delivery capabilities; have recognized their challenges in addition to their strengths; and are—perhaps most importantly—deadly serious about this market. The following are my key predictions for the industry in the year ahead:
Prediction 1: Confidence will rebound. The growing confidence coming out of this transition year will see multi-process HRO expenditure increase 20 percent in 2006 to reach $4.3 billion worldwide, according to market data released by NelsonHall this month. The industry initially moved too quickly during Generation 1, with new market entrants eagerly grabbing market share and several high-profile HRO failures holding the industry back. Now that we have arrived at a new wave of HRO evaluations, the situation has moved full circle: HRO service providers have been getting nervous, buyers are realizing their ideal end-state will be more complex to achieve than originally anticipated, and sourcing advisors have found themselves caught in the middle of the scenario.
What is plainly apparent is that 2005 failed to produce the large number of high-end, enterprise deals many had hoped for; many contracts have taken (and are still taking) much longer to come to closure than anyone predicted, and the whole industry has taken a more cautious approach than some of the gung-ho forecasts a few analyst firms previously predicted. This painful transition has proved necessary to get us to the next stage—this Second Generation HRO, where we are beginning to see HRO delivery balance the operational process, technology, and HR domain capabilities to succeed.
Key forecast assumptions for this area include:
- The market remains largely untapped. Fewer than 5 percent of Fortune 2000 and 1 percent of mid-market companies have engaged in multi-process HR BPO contracts.
- Increased delivery capabilities of HRO and BPO service providers. As Tier 1 HRO providers take on large, complex contracts that necessitate investment in leveraged, regional shared-services centers with HR expertise, contract negotiation cycles will shorten, and buyer confidence will increase. New entrants into the HRO middle-market (1000 to 10,000 employees) are driving higher demand and interest with increased offerings.
- Utility offerings in employee care, benefits administration, and payroll will continue to drive down pricing. As service providers further leverage offshore resources and refine their delivery models in the utility areas of HRO, contract pricing will consistently offer cost savings that drive rapid adoption of HR services.
- Increased interest in multinational contracts. Multinational organizations’ interest in taking advantage of multi-country HRO deals will increase. The multinational HRO capabilities of service providers continue to develop.
- Intense HRO evaluations will result in increased contract closures. The large number of contracts under evaluation and exploratory diagnostic exercises currently underway will start to result in increased contract realization as the market continues to mature.
- Increased number of bundled BPO contracts. HR is becoming part of a large number of multi-tower BPO contracts under discussion that include finance and accounting as well as procurement elements.
- Increased use of workforce performance- management metrics within organizations. The focus on linkages between workforce productivity, aging workforce, and the cost of healthcare and pensions will continue to increase as organizations strive for greater efficiency and better quality of information for management decision-making. As cost savings become standard within HRO contracts, the focus will rapidly shift towards the development of business-case metrics to highlight the impact of a streamlined and more strategic HR function that can be aligned with corporate strategy.
Prediction 2: Buyers, service providers, and consultants will get the HRO balance right. In 2006, HRO buyers will become better educated from the sourcing advisor, service provider, consultant, and analyst alike to find a common ground with the provider community and build pragmatic and cost-effective solutions that work for both sides. The lessons of the past couple of years have been learned, and both service providers and industry advisors alike will educate the buyer from the get-go on the realities of HRO and the metrics needed to reach the desired end state. Many sourcing advisors will strive harder to work with their clients to find a common ground between what is realistic and what is wishful thinking and construct solutions that are financially feasible for both sides. Give-and-take is needed between both service provider and buyer. Where the sourcing advisor is present, they may find more success in finding this balance. Bottom-line: The industry must find this middle ground or there will not be an industry.
Prediction 3: We will see increased global BPO solutions, with HR as a key component. The successful service providers will be braver and take on more of a financial burden in global BPO deals so it can develop the kernel of the ideal utility model. Tier 1 HRO service providers have realized this business is extremely complex and requires a great deal of investment and patience as well as the acquisition of new skills and not simply a repurposing and repackaging of existing resources.
More to the point, they are intensely examining how to deploy a genuine utility model in this business, or they will never turn a profit. Buyers who think they can score a quick cost-savings hit because they already have a shared-services center infrastructure are mistaken. What has largely occurred to this point is that most service providers who have taken on the existing shared-services resources of their clients have struggled to leverage these across other clients; these centers are too customized and it is extremely costly and cumbersome to attempt to service additional clients. So how will the service provider offer cost savings of 20 percent when it cannot turn new clients to a utility model?
The answer is that they simply cannot. The alternative model is for vendors to take on clients who can leverage the providers’ own service centers. If a provider adopts this policy and goes about acquiring a handful of clients, it will eventually turn a profit on these deals. The recent DuPont contract with Convergys is a clear example of this move, where the sourcing advisor worked tirelessly with DuPont to find a provider prepared to invest in its own global delivery capability. Convergys is now investing heavily in its regional HR services centers with employee-care staff and building a genuine global delivery infrastructure.
A similar global focus can be seen with IBM, Accenture, Hewitt, ADP, ACS, and ExcellerateHRO, who are striving to invest in new global clients to develop a genuine HRO utility model. These companies have been plowing significant resources into building regional service hubs across Asia, Europe, and the Americas.
We are also in the midst of a wave of new multi-tower BPO contracts—many of which will be kicked off in 2006. Accenture, for example, has steadfastly pursued its multiple domain skills across HR, finance and accounting, and procurement/supply chain as it seeks to develop its position as a leading, multi-domain BPO vendor.
Some of next year’s multi-tower deals will include major business functions such as accounts payable, payroll, and benefits administration in single-vendor deals. IBM is also likely to remain aggressive in multi-tower deals as it builds out its Business Transformation Outsourcing practice.
More encouraging is the willingness of some major HR services companies to partner with each other on global deals, almost unheard of in HRO in the past. The outsourcing acumen and diligence required to effect a successful HR partnership across domains such as payroll, benefits admin, and employee care are extremely demanding, but we are already seeing competing service providers working hard together in a pragmatic fashion to secure clients on a global basis.
Another key factor that some aspiring HRO service providers are considering is whether to develop a genuine utility model in one of the key domains to reap key competitive advantages that can be leveraged across the end-to-end HR delivery spectrum. The example of Hewitt in North America is the clearest example yet on how to deliver profitable, multi-process HRO centered on its established benefits administration utility services model. Hewitt has such a command of the benefits admin service market that it has been able to leverage its profits in this area to invest in other HR functions such as recruiting, learning, and payroll. This will make it extremely competitive as a multi-process HRO service provider. Not only that, the company has developed and acquired HR domain expertise and adopted this to an operational outsourcing model that works.
When we look at the European market, the key utility domain is payroll. Without owning this component, it is hard to see how service providers are going to carve out these promised, 20-percent savings. Bottom-line: Ambitious HRO service providers will have to realize that HRO is plainly much more than being strategic and transformational; they also need to possess the operational capabilities in transactional process areas to provide utility services that work and are profitable.
Prediction 4: Some significant mergers, acquisitions, and partnerships will emerge as Tier 1 service providers continue to develop their HRO delivery infrastructure. The new year will witness some new entrants, and at least one major HRO-focused acquisition will occur. The challenges of 2005 deterred companies from making bold acquisitions in HRO. However, with the emergence of the HRO utility model, the intense activity of HRO evaluation at the sourcing advisor level, and the clear winning business scenario of a successful HRO transformation, we are going to see some major market moves.
Successful HRO companies must possess operational process expertise, HR domain skills, and IT implementation know-how—or at least some of these skills—supplemented by strong alliances to fill gaps in their delivery portfolios. In addition, we are seeing several BPO vendors look at HRO seriously and are ready to make their move; 2005 (and earlier) proved too financially risky for many firms, but now that demand is clearly there, they will make their move. Expect new entrants to come from other BPO areas such as finance and accounting and from functions such as benefits administration, payroll, and recruiting. The major question is: how will they enter this market?
We have seen several failures in HRO from companies who made tenuous partnerships but never invested significantly. Those that simply did not have the HR acumen, technology platform, or global footprint have not been taken seriously in the vendorselection process.
We will also see more focused HRO positioning next year, with companies such as Accenture, for example, focusing on global, multi-tower deals in which HR is a key element. Others, such as Ceridian, are focusing heavily on the mid-market for future growth. IBM will surely make a strong play after a year of investment in its global HR footprint; however, do not expect Big Blue to make any quick-fire purchases. If it makes a move, it will likely be in a niche expertise area or inherit HRO assets as part of a wider corporate acquisition.
The continual speculation of a Hewitt acquisition will no doubt remain, but at the end of the day, none has been bold enough to make a multi-billion-dollar play in HR, and takeover deals of this size are few and far between these days. ADP has to be considered a major dark horse in 2006 as it quietly goes about developing an expanding client base on its SAP-based GlobalView platform. ARINSO’s new euHReka HRO platform will also have a strong part to play in 2006, particularly with its pan-European payroll expertise. However, the company needs to decide how to position itself on a global basis—i.e., as a payroll implementation provider that partners with HRO service providers or as a bona fide, end-to-end HRO vendor in its own right.
ExcellerateHRO is working hard to make up for lost time and should find its continual development in 2005, combined with a solid fiscal year for EDS, to its advantage as it seeks to bring customers onto its new Towers Perrin-based solution. ACS has worked hard to consolidate its clients in 2005 and is clearly making moves to focus on more HR transformation-focused client wins next year. The company clearly has the outsourcing acumen to be successful, but it remains to be seen whether it can truly leverage the expertise acquired from its MellonHR acquisition.
Convergys is arguably the star of 2005—despite Hewitt’s dominance—considering it is the recipient of four client wins, including the recent mega DuPont contract. In 2006, it will face numerous challenges as it brings clients along smoothly, develop its global delivery model, and integrate its newly acquired F&A business. Hewitt finds itself in the most dominant market position in HRO. It will be almost impossible to unseat at the leadership position in the U.S. high-end enterprise deals. The key challenge for Hewitt is to make the strategic decision on whether it works on consolidating what it has on an Anglo-U.S. level, branches out to pick up some major global deals, or expand further with offerings across BPO towers into finance and accounting or procurement. Bottom-line: The HRO service provider market has never been healthier, and 2006 is surely the time to see some real competitive bite.
Prediction 5: Technology remains a key enabler of successful HRO. Next year will witness increased momentum towards HRO among many organizations, to improve alignment of IT as an enabler of successful business process redesign in an outsourced model. Most of today’s current IT systems are primarily focused on administrative tasks that are optimized within the four walls of the enterprise. Many organizations still persist in tying themselves to tightly integrated and monolithic business processes, where integration was a mere afterthought. The movement towards more flexible sourcing options and the Sarbanes-Oxley experience are highlighting many of these shortcomings.
The movement towards HRO has been emphatic over the past five years but has reached a state of flux with today’s providers realizing that this is a complex business, and you can’t simply deploy outsourcing solutions with the vain hope that the associated technology morass miraculously untangles itself. Moreover, every organizations’ business processes are unique to themselves, much to the chagrin of ambitious outsourcers trying quickly to leverage common processes across multiple clients. Whereas some organizations can easily adapt to an outsourcing model and rapidly transition many or all existing business processes to the management of a third party, others need to adopt alternative sourcing solutions when it is more cost effective or beneficial to their particular business. The one major constant in the equation is the need for flexibility.
HR data is the fulcrum of any business; the ability to have real-time, integrated information about staff profiles and performance, compensation, and location is paramount to providing management with crucial information to make decisions about their organization. Hence, there is a vital need for an integrated system that can consolidate all of this data to enable staff to be managed, monitored, compensated, organized, and trained more effectively. Moreover, for the international corporation, it is one benefit to manage HR operations at the country level, but the benefits of managing an integrated global HR operation increase exponentially in today’s markets.
The problem many of these companies face is that outsourcing decisions are usually made at the CEO/CFO level to reduce costs and improve HR service delivery and strategy. This is often done without a great deal of investigation into how the organization can redesign its existing business processes to accommodate the introduction of a third-party provider. Many of today’s HR systems have been built around business models developed in the early 1990s; with integration of systems and business process a mere afterthought. Today’s organizations are dealing with a much more fluid, less hierarchical organization of information workers and complex process networks of managing partners, suppliers and customers. And if these complications were not enough, there is also the necessity to build controls—namely Sarbanes-Oxley and SAS 70—into business processes, which are increasingly shedding light on many companies’ shortcomings in business process management.
The answer lies in mapping out an organization’s business processes to understand the sourcing break-points where data leaves the organization, thus enabling the outsourcer and its customer to develop flexible systems that can reuse componentized business services within an outsourcing data model. Outsourcing is providing real business case examples of why and how IT infrastructures need to change to accommodate today’s changing business models and organizational structures.
HRO has a real opportunity to bring the worlds of operational business services, people management strategy, and technology together in an integrated fashion that has only really been promised, but not delivered upon very successfully, in recent years. The tough lessons of 2005 are good news for the future: Today’s key service providers are more serious than ever; they have learned where they need to invest, with whom they need to partner (or acquire), and how to better educate both their existing and prospective customers, who have wised up to this industry.
We have witnessed an immature industry go through essential growing pains in 2005 to reach this stage where customer, buyer, and consultant are much more mature and patient regarding how to tackle HRO. The new year will see the beginnings of new growth and a new maturity, despite the constant challenges and increasing complexity that make life difficult for today’s business leaders looking to develop truly competitive modernized global organizations, where they can leverage the benefits that can be gleaned from an outsourced model.
I personally would like to thank leading industry minds who have actively offered their insight and predictions to this article.
