What’s really driving mid-market outsourcing buyers? Inflated expectations in some cases, propped up by overzealous providers bearing unrealistic promises.
In light of major HR BPO contract announcements such as that of Unilever and Accenture or DuPont and Convergys, we analysts cover every angle and do thorough anatomies of each deal. By the time it’s said and done, there’s a pretty high level of transparency around the drivers, how the buyer was doing before the decision, and what else the buyer might outsource.
This is not often the case with mid-market deals, where the total contract values have far fewer zeroes. The allure of a million-dollar deal is not quite as strong as that of a billion-dollar one. But according to IDC research, 75 percent of HR outsourcing contracts in 2005 were signed by small and mid-market firms, up from 65 percent in 2004. With that kind of volume, the mid-market bears closer examination.
There have been numerous mid-market deals that have come about due to a cataclysmic change in status on the part of the client. A freshly divested firm wakes up one day and realizes it has no HR infrastructure and is an excellent candidate for outsourcing.
Beyond these cases, what else might drive future mid-market outsourcing adoption?
The answer is primarily the potential for cost savings. Taking a look at Fig. 1, cost reduction was the overwhelming driver of future outsourcing behind the thought process of mid-market executives surveyed by IDC earlier this year. What also comes through is that the mid-market has far fewer concerns about software upgrades. Where larger firms are faced with inconsistent ERP implementations throughout their many business units and far-flung locations, this is not the case for their smaller counterparts.
When it comes to cost savings, however, it’s death to caveat emptor (buyer beware) and the rise of caveat venditor (seller beware) for vendors looking to target the mid-market.
Case in point: among this same group of executives, a whopping 40 percent had no idea what their HR costs were as a percentage of company revenue. From this, it’s pretty clear that these company leaders do not understand or are not given visibility into how much the HR function actually costs. In addition, mid-market HR chiefs tell IDC that they expect to save between 20 and 30 percent by outsourcing. For most firms of in the mid-market tier, that’s a relatively unrealistic target.
And, if you don’t know how much something costs, how can you predict how much cost you can take out? When your team somewhat inflated expectations around cost savings with an overwhelming drive to bring costs down, it’s clear that education becomes the No. 1 priority. Providers will need to help buyers work through a thorough sizing of current costs as part of the sales process. There will also need to be a candid exchange with buyers on what is realistic in terms of potential savings.