The meaning behind the drop in large multifunction HRO deals depends on your longitude and latitude.
By Jeff Croyle
By all accounts, interest in broad-based human resources outsourcing is down considerably from the heyday of 2005 when 26 large multifunction HRO deals were signed. In fact, TPI’s Prevalence DatabaseSM shows only five large HRO deals signed globally in the first half of 2009. Such results indicate that buyers and sellers of HRO services remain cautious as the financial expectations for each group have not materialized.
Buyers complain about a lack of financial savings, the need to retain more staff than anticipated, and other pricing and contract surprises. Service providers complain of higher than expected volumes and the unanticipated scope that prevents them from achieving their profit targets. After many years of trying, both Fidelity and ExcellerateHRO have decided to exit the multiprocess HRO market altogether. Instead, they will focus their attention on their more profitable benefits administration businesses. Not surprisingly, the India-heritage service providers see this newly created void as an opportunity to push harder into the end-to-end market.
With all the turmoil in the market today, let’s explore how buyers in different geographies are looking at HRO.
Where Buyer Interest Is Today
As companies struggle with the outsourcing business case, we see more firms prioritizing their needs and deciding to opt for point solutions instead of a more integrated HRO approach. This less transformational approach is also seen as more achievable since these projects are smaller and more manageable.
Most of the end-to-end HRO deals have been and will continue to be driven in the near term by companies headquartered in the U.S. and the U.K. HRO uptake in continental Europe has been very slow as the majority of firms have been investing in shared services. Interest in building out internally shared service centers has been growing for the last few years, and we expect to see more attention devoted to driving standardization of HR policies. The lack of policy harmonization results in significantly higher delivery costs, whether internal or outsourced. Driving greater standardization will likely increase the longer-term demand for HRO services because companies that have done this will find their outsourcing costs more affordable as they consider migrating to a multi-tenant environment.
A strong interest remains in payroll outsourcing as firms are increasingly looking to expand from the traditional gross-to-net sourcing to more of a fully managed payroll service offering with the provider responsible for all data management, tax filings, and employee inquiries. Finding a true global payroll provider is still elusive.
For companies with headquarters in the Asia Pacific, there have been few, if any, signs of life in the HRO market since 2007. U.S.-based service providers have found little buyer interest in their U.S.-centric solutions and have mostly withdrawn from the region. The greatest level of buyer interest is in the stand-alone area, and the India-heritage service providers are aggressively pursuing this market. Asia-Pacific firms with sufficient scale to entertain the idea of HRO generally have grown by investing in existing offshore assets, with established in-country management and labor forces. Typically these firms have had no plans to integrate these investments into their home base operations, partly to avoid host country political entanglements and also to preserve the strategic opportunity to trade these assets.
The dearth of HRO transactions originated in the Asia Pacific has little to do with a reduced appetite for investment due to the global financial crisis. Instead, the relative lack of transactions is associated with a culturally different business model in which centralization of business information and decision making are less valued.
Similarly, we see little buyer interest in HRO services from companies headquartered in Latin America and South America. Much of this can be attributed to the inability to build an HRO business case for companies in this region. With already low labor rates, there is little comparative benefit from the labor arbitrage opportunities frequently leveraged for deals supporting North America and Western Europe. In addition, these firms generally don’t have large HR technology investments that can be eliminated by migrating to an HRO model. It will likely be a few more years before we begin to see more HRO activity in this region.
From a global perspective, until the worldwide economy begins to turn around, we expect to see a slight increase in HRO activity. However, until the market recognizes more success stories, buyers will continue to look very cautiously at HRO.
Jeff Croyle is a partner in TPI’s CHRO services group. He can be reached at 845-323-0039 or e-mail jeff.croyle@tpi.net. Russell Taylor and Frank Wolfsteiner contributed to this article.
Geography is HRO Destiny
