Embracing the Next HRO Wave Requires Refocusing on Purpose

Everest Research’s database provides a glance at industry trends and reveals what’s needed to satisfy the now-educated enterprise HRO buyers.

by Michel Janssen, Marc Pramuk

Since its inception, the Everest Research Institute has focused on creating and analyzing an extensive database of benchmarking data on HRO deals with the goal of delivering actionable insight to the buyer and supplier communities. As we approach the publication of our mid-2006 market update, we are examining the 135 HRO deals that have occurred to date.

From a definitional standpoint, Everest tracks data on deals that have at least 3,000 employees and at least three HR processes in scope. These deals date back to the earliest ones in 1999. Everest’s database offers significant information on adoption rates, process scope, use of technology, and pricing models and how these attributes vary by time, geography, company size and industry.

Over the past six months, Everest has engaged in an unprecedented benchmarking effort in conjunction with the HR BPO Buyers Advisory Board, also known as the Buyers Group. This effort is a complement to the ongoing research performed by Towers Perrin in its annual HR BPO Effectiveness Survey and is part of the goal of The Buyers’ Group to address the lack of available benchmarking data on HRO deals.

While this benchmarking effort is still in process, we want to begin sharing some of the early observations of the industry, as a number of the trends unfolding impact companies currently involved in outsourcing HR and those considering it.

One of the more meaningful, early observations stemming from our research has been in the area of HR process scope. There has been tremendous evolution in the scope of HRO deals over the past few years. Many of the earliest ones were more of a “big bang” as suppliers sought a fast means of entry into a then-new market. For many early deals, a “lift and shift” implementation approach transferred the majority of client HR departments and assets to the supplier.

Soon, however, it became clear that some suppliers were overreaching, accompanied by a pulling back of scope to focus on delivering better quality and lower costs in the core area of HR administration. These processes can be categorized either as transaction-intensive (e.g., payroll, benefits) or as supportive (e.g., HRIT platform, HR contact center). As can be seen from the included chart, these core processes now are quite mature. Data show that these processes are in scope in nearly every HRO deal, and that their delivery by the supplier includes process execution as well as technology platform provisioning.

However, while delivery of these core processes is appreciated by many HRO buyers, there is still a need for more comprehensive outsourced HR services. Everest’s own research shows that a second cluster of HR processes is frequently in scope and is likely to include not only technology platform support but process execution and support as well. 

These processes tend to be less transactional and not as standardized across clients. Instead, these emerging HR processes are more judgment-intensive (i.e., they require the supplier’s team to make informed choices during delivery that have a lasting impact for the buyer, its employees, and the supplier).

Examining these emerging HR processes in the context of deal scope over time, two things become clear: processes are more frequently in scope in recent HRO deals and that service delivery for these processes is evolving beyond the mere hosting of enterprise modules or best-of-breed applications and towards the more comprehensive management and delivery of these processes in their entirety. Clearly these HR processes are growing in importance to buyers and will be increasingly in scope in future HRO deals.

The implications for this trend are clear.

• First, buyers need to be clear in their goals and the desired outcomes from having these emerging processes in scope, and they need to have a strong sense of the key performance indicators and service delivery requirements that suppliers must meet.

• Second, suppliers need to invest in expanding beyond their comfort zone from the more transactional, highly standardized core HR processes to building high-quality, cost-effective solutions for these less-standardized, judgment-intensive processes that are of interest to buyers.

We still are, for the most part, experiencing first-generation in the HRO deals to date. As suppliers get stronger at delivering a broader set of HR services, and as buyers go through renewals and enter the second generation of HROs, we will experience a dramatic rise in the number and quality of deals. Until then, we can look to trends in emerging HR processes as a foreshadowing of things to come.  

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