Assessing the Mid-Market

Is this the next big thing or a needless distraction for HRO vendors? With HRO providers looking downstream for revenues, how will the mid-market embrace outsourcing?

by Robert H. Brown

At Gartner, we have been hearing from some of the largest HRO vendors about growing interest in going “downmarket” to troll the waters of the mid-market. Long sales cycles in the large market and the perception of a “greenfield” in the mid-market are fueling this push.

Additionally, the acquisition of back-office mid-market player Savista by Accenture in April added to the momentum of providers to want to take a second look.

But it may take vendors five to 10 deals in this segment to equate to the contract value of one large enterprise deal. While some process specialists have long profited from this sector and professional employer organizations (PEOs) have continued to actively stake their claim, midsized businesses in the U.S. remain underserved by the largest vendors and consequently under-outsource.

Despite the reticence, HRO is one of the more common areas of early adoption for a small but growing legion (see Fig. 1) of small and midsized business (SMB) buyers. Gartner’s annual user survey of SMBs (under 1000 employees) confirms this. Not surprisingly, payroll leads all HR functions for outsourcing because it is relatively easy to outsource, and vendor choice and offerings in the marketplace are more mature than other HRO services.

There are also stable choices: ADP and Ceridian have successful, targeted payroll offerings for SMBs in addition to their work with large-market companies, whereas Paychex, TALX, and Intuit almost exclusively target such services mostly at SMBs. Benefits administration offerings follow in uptake, led by defined contribution benefit administration. Background screening was also consistent with previous surveys, ranking No. 3.

But most mid-market buyers will cautiously consider more comprehensive approaches to HRO due to:

  • Fear of losing too much control;
  • The “not-invented-here syndrome” of one-size-fits-all offerings; and
  • Fear of here-today-gone-tomorrow vendors. Most mid-market buyers are rightly suspicious of providers “dabbling” in their segment as a supplement to their core constituency of large enterprises. Most SMBs want to know that today’s partner will be there for the long-haul, has delivered HRO to similar-sized businesses (especially in the same vertical industry), and developed a track record while attaining hard-dollar results.

Vendors must also do their homework. Segmenting the mid-market will be critical. Outsourcing is a game of scale, and many vendors focus on organizations with 1,000 to 10,000 employees. However, understand that HR structures and requirements of a 1,000-person business are radically different from those of a 10,000-employee organization. The bigger the business, the more its operations are regionally diffused and savvy in its sourcing acumen, often led from the C-level.

Smaller businesses tend to rely on personal networks for HRO references, are stretched in their HR resources, and notoriously averse to offshoring. Furthermore, they often fail to utilize metrics and benchmarking and look to HRO vendors as an ad-hoc extra pair of hands for relief.

Success in the mid-market also requires vendors commit and invest for the long term. If your business plans require an ROI in the first year or two of your mid-market initiative, invest resources elsewhere. Consider a limited pilot program in a single municipality or region or vertical industry such as manufacturing or financial services. Be prepared to manage cost of sales diligently, and carefully balance channel partners (such as the PEOs) and telesales. Remember, direct selling can also help bring these costs in line for maximum profitability.

Tags: Consultants & Advisors, HRO Today Global, Professional Contribution

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