Contributors

Five Big Predictions for the HRO Industry in the New Year

Expect more mega-deals in 2007 despite constrained supplier capacity. In addition, a more educated buyer community will consider expanding project scope, both geographically and by service.

by Marc Pramuk, Vipul Taneja

As we wind down the days of 2006, our thoughts turn to what the New Year will bring us. First, let’s recap some of the memorable events in 2006.

We saw a number of important deals, most prominently Accenture winning one of the largest HRO deals in a $1 billion, seven-year global HRO deal with Unilever; IBM winning a 10-year agreement with CVS/pharmacy as well as a deal with Avon; and ADP becoming the sole HRO provider for IKEA’s 90,000 employees across 40 countries.

There was also a dramatic number of acquisitions this past year. Some significant ones include:

Accenture acquiring Savista, a mid-market F&A and HR BPO services provider; and Pecaso, a firm specializing in SAP human capital management (HCM) consulting and integration services;

ACS acquiring Intellinex, an integrated learning solutions practice from Ernst & Young;

ADP acquiring Employease, a provider of web-based HR and benefits solutions; VirtualEdge, a provider of recruiting and talent lifecycle management solutions; and Taxware, LP, a tax content and compliance solutions provider created by First Data Corp.; and

Kenexa acquiring BrassRing, a provider of talent management solutions.

Several high-profile regulatory and accounting issues surfaced during the year. These included missteps at Accenture, ACS, Convergys, and Hewitt.

So what will 2007 hold for the HRO industry? Here are five predictions from Everest.

Prediction 1: After a modest ’06, 2007 will see an increase in deal announcements and continued growth in buyer interest in HRO. There is strong buyer interest in HRO, as evidenced by the significant volume of requests Everest has received in the form of RFIs and RFPs. Prospective buyers are demonstrating a greater knowledge of HRO, the desired scope of services, the nature of service delivery, and clearer goals.

There will be an expansion of supplier capacity shortly as Hewitt and Convergys approach completion of the implementations related to the strong win records they had in 2005. The solid year that Accenture is having in 2006 has the potential to drag on them in 2007 for similar talent capacity reasons, but their deep internal resources will likely mitigate this problem during the year.

• Prediction 2: 2007 will see some of the largest deals yet in HRO. While DuPont and Unilever were impressive wins in ’05 and ’06, respectively, several bigger deals are on track to be awarded in early ’07. Look for the coming year to feature the return of the “mega deal.”

• Prediction 3: The scope of HRO will change, with workforce management growing in importance. Buyers are strongly interested in recruiting, learning, and performance management, as this is solidifying as the focus of the retained HR staff. However, while workforce management processes increasingly will be in scope, the nature of this scope for suppliers will be limited to technology integration and the provisioning of HR reporting tools and analytics.

• Prediction 4: The frequency of global scope for HRO deals will begin to increase. Most HRO buyers to date have a global workforce, while most contracts thus far cover only a single geographic region. However, buyers increasingly are answering the question, “what’s next?” with the answer, “global.” As suppliers enhance their capabilities, new buyers with a global footprint more often will explore the potential for a global solution. Data privacy, cross-border security, and the lack of harmonization in laws and rules for process execution will drag on the pace of this trend.

• Prediction 5: Supplier profits will continue to challenge the industry in 2007. While smarter pursuits, better scoping and pricing, more clients live, higher operating volumes, and greater experience will benefit suppliers. HRO deals are too lengthy to be fixed quickly. The legacy of executed deals will linger for years to come. That said, things will improve for many providers during the next few years.

There will be additional M&A activity in ’07, much of it as Tier 1 providers add needed capabilities. However, there will be at least one major event to make you stop and go “wow.”

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