Contributors

HRO and Shared-Services Centers

How will the establishment of HR shared-service-centers—often considered as a half-way house on the journey to full HRO—impact the European market?

by Jemima Fitzgerald

The establishment of shared-services centers (SSC) is set to become one of the key trends in Europe. Whether this is cross-departmental, combining the likes of HR and finance, or simply sharing HR services across multiple geographies and departments, public and private organizations are set to embrace this approach.

There has been much debate on whether an SSC is an effective operating model for organizations in their own rights or merely a step in the preparation for outsourcing. If you consider some of the deals that have dominated the HRO market in the past few years, it is apparent that many had established, effective SSCs before moving to full outsourcing. Indeed, the long-term health of HRO specifically depends on leverage, and if this leverage can be created internally, why outsource?

It is not surprising that there are some distinct advantages to the SSC approach. As with any outsourcing deal, there is a need to standardize and consolidate processes to avoid the “my mess for less” scenario, and standardized processes are fundamentally easier to migrate, thereby avoiding risk. The difference, however, is where clients in the U.S. have demonstrated speedy adoption of standardized processes with few hindrances, in Europe this is proving far more difficult.

Disparate employment laws, unique payroll regulations, data protection, language, cultural, and social issues all play their part in complicating the ability to standardize within an organization, let alone through an external provider. The result is an increasing number of organizations looking for internal transformation through shared services and selective outsourcing at a later stage.

There is nothing new to this progression. When HRO began emerging in Europe, organizations had a flood of providers keen to take on established SSCs to build their offering. As the market evolved, most key HRO providers now look to gain economies of scale by absorbing new clients into existing SSCs without taking on new people and assets, which will make it much more difficult for these clients to capitalize on their investment when moving to HRO.
So what will be the impact for these organizations, and how might it change the dynamic of the HRO market?

With many of the established players reluctant to take on additional assets, organizations will look elsewhere to identify a way of migrating from shared services to outsourcing. They will look to gain the cost advantages of outsourcing and need to identify service providers willing to take on infrastructure, people, and processes. With some smaller providers unable to step up to this challenge, it leaves a clear opportunity for one group to move in: Indian service providers. Will we see Indian providers picking up SSCs to expand into Europe? Why would this happen?

The majority of large Indian service providers (TCS, Wipro, Infosys, etc.) desire to expand their skills and market reach. Although they have a strong background in ITO, they lack BPO and particularly HRO experience. This opens up a real opportunity for companies that can identify and capitalize on this.
Many providers are looking to expand capability and may be willing to pay for people, processes, and other assets that another provider can no longer economically take on. This creates an advantage for them in deals where clients are looking to get a return on their SSCs. It provides them with the immediate skills and experience required from people who have “been there, done that,” rather than having to start from scratch.

On the other side of the coin, the market is becoming increasingly competitive with the long-established American and European players all leveraging offshore/near-shore capability. As these vendors buy or build capability in India and around Asia, Indian vendors must bring the fight to Europe and the U.S.
We have already seen this competition start with the extension of consulting skills in the Indian providers’ portfolios. The clever ones have spotted opportunity to advise clients on SSC design-and-build, enabling clients to leverage savings and themselves to gain consultancy fees before going on to buy the SSCs outright.

Only time will tell whether Indian providers are ambitious enough to identify and make use of this opportunity. In turn, how the current large players will react to this challenge to their market dominance will have an obvious impact on their success. However, what can be said is the future map of the HRO marketplace in Europe has the potential to be very different indeed.

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