A Fourth-Quarter Summary

Is 2005 turning out to be a disappointing year for HRO?

by Jason Corsello

As 2005 quickly comes to an end, service providers, sourcing advisors, and industry analysts alike are assessing the years progress in HRO. The definition of
market success is just as complex as the market itself. Although many observers and participants consider the year a disappointment, others think significant advances have been made toward fulfilling end-to-end HRO. These recent achievements include expanded global service delivery competencies, enhanced technology capabilities, and stronger customer satisfaction, which are all signs that point toward continued market maturity.

So what did we learn this year?

  • Widespread adoption has been slower than originally anticipated. Many observers predicted that 2005 would be a watershed year for the industry. That didnt happen. Although interest in HRO is at an all-time high, the conversion from interest to contract has been lackluster. Enterprises, nonetheless, continue to have sourcing advisors evaluate the range of options. As a result, customers postponement strategies have extended sales cycles to more than a year, forcing vendors short- and long-term strategies to adapt accordingly. Potentially, this could affect the long-term viability of many vendors.
  •  Customer engagements have been more capital- intensive and resource-constrained than expected. Customer satisfaction has been the number one priority for Tier 1 BPO providers. Market adversaries are quick to report on any soured BPO relationships, and vendors realize any negative publicity could have a detrimental impact. Therefore, in an effort to make those engagements successful, these vendors are cherry picking the most opportunistic deals and investing only in those clients at the expense of prospective customers. Resource constraints are becoming a critical issue for all BPO providers. More established vendors are challenged by resource scale and delivering on multiple contracts. New entrants must invest in acquiring and managing resources before actually achieving resource ROI by using and deploying them.
  • Increased BPO complexity creates more sophisticated buyers. Dont be fooled. Enterprise buyers are still in the drivers seat of the BPO relationship. Customers are more demanding than ever. Negotiating favorable pricing has been compounded by a growing laundry list of terms and conditions. Exit clauses, renegotiation options, and benchmarking frameworks are now becoming more prevalent as customers continue to become more educated in their BPO strategy.

Despite all the signs of conflict, this market is not in trouble. Quite the contrary, these growing pains are part of the markets natural evolution.

In fact, the future is very bright and some strong signs are pointing toward a more rapid mainstream adoption of HRO, including:

  •  Global interest in HRO is strong and growing substantially. Increased HR complexities and changing government regulations, especially those in European countries, have forced companies there to accelerate deployment of outsourced models in an effort to maintain compliance.
  •  Vendor solution capabilities including global service delivery are progressing quickly. Although a heavy emphasis of HRO revolves around core payroll processing, many vendors, through acquisition and partnerships, have successfully deployed true end-to-end HRO solutions, including talent management, performance management, and learning management solutions.
  •  BPO is no longer a question of if but when and how much. The questions of Is outsourcing for real? or Is outsourcing truly strategic to my organization? are now off the table. Vendor viability, customersuccess stories, and delivered BPO value have been proven in the market. Enterprises are deploying strategies to evaluate what to outsource and when, versus considering outsourcing as a business strategy. Pent-up demand is quickly outpacing supply and enterprises that continue to postpone their outsourcing strategy will quickly lose out on first mover advantage. Near-term pricing pressures and lack of economies of scale will quickly become a thing of the past.

This year turned into a success as the market moved toward maturity. This experience provides lessons for 2006, which is shaping up to be another defining year for HRO.

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