Finding Leverage to Make Money

The development of some form of standards will be a key component.

by Michel Janssen, Marc Pramuk

The HRO market is clearly in the rapid- growth phase. Last year was a banner year with the number of HRO transactions growing 44 percent over 2004; and 2006 looks to be a similarly strong year in terms of number and scope of deals.

For all the recent success, though, the market is still early in its evolution. Current HRO penetration remains relatively low across buyer segments, with just 4.3 percent of companies with more than 15,000 employees having signed HRO engagements, and an even lower one-percent rate for companies with 3,000 to 15,000 employees. In looking at the 124 major HRO deals tracked by the Everest Research Institute, 58 percent (72 deals) have occurred in just the past two years. This sets up the potential for significant growth and adoption in the coming years.

A key component of a successful industry is its ability to drive supplier profits. Today, most suppliers are reporting that they are still in the investment mode. Many are investing heavily in capital expenditures such as technology while at the same time still honing their operating tradecraft—meaning that they have yet not achieved operating profitability.

From the buyer perspective, this growth also masks an important question: what happens with the earlier deals, and how will this impact the further evolution of HRO? Once pioneers in signing the early HRO deals, will they be pioneers again in shaping the degree and scope to which standards are adopted?

As buyers and suppliers get wiser in their journey, there still is the legacy of the 42 percent of deals formed more than two years ago in the “exuberant youth” of the industry to be addressed. At present, suppliers increasingly are looking at ways to achieve greater scale in their service delivery across clients to enhance quality and performance. Many suppliers, as they entered the HRO market several years ago, used “lift and shift” as their strategy, acquiring client assets in the effort to build infrastructure and time-to-market more quickly.

The effort required on suppliers’ part to adapt this collection of people, processes, and technologies—originally conceived to support a one-to-one environment—into a scalable one-to-many service-delivery model is not without challenge. Like the adage, expect it to take twice as long and cost twice as much to complete.

On top of this, there is the looming obstacle of buyer acceptance. Buyers face the perceived trade-offs between a solution that delivers quality at a reasonable price and is unique to their specific organization, versus a solution that is high quality at a lower price but is more standardized in its design and delivery across multiple companies.

The idea of HRO industry standards is seen as anathema. As one HR executive quipped, “I’m happy to accept any standard the supplier offers me—so long as it is my standard.” But some degree of standards is required to deliver the outcomes and results sought by buyers. Suppliers need a critical mass of clients and employee lives served that are delivered through a set of configurations of process and technology elements to achieve cost and quality levels sufficient for the needs of stakeholders.

The initial belief was to get critical mass and from there to migrate clients to the common technology and process platform. This has proven harder in practice than in theory. More recently, several suppliers have placed bets on varying degrees of ERP-based and proprietary technology platforms in conjunction with
best-of-breed tools to build a standard for the middleware and back-end of their delivery platform. Its ultimate success remains to be seen, though there has been growing buyer acceptance of proprietary HRO technologies among companies with fewer than 15,000 employees.

While 2004 was the breakout year in HRO, and 2005 was the year of execution, 2006 will likely be seen as the very early days in a movement to the age of HR standards. Suppliers will focus more on optimizing their service delivery platform and underlying costs to serve. This is not to say that we have seen an end to “lift and shift,” as it still has a value to both buyer and supplier, and as we still hear the rumblings of potential new entrants to the market.

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