Contributors

HRO Enters a New Phase

Reaching quality goals has proven elusive, but as large providers eye value-added services, expect an explosion of new offerings to draw more buyers to the table.

by Scott Gildner

The media is full of stories covering the rapid adoption of multi-process outsourcing in human resources. As of today, the number of large organizations with more than 10,000 employees that have outsourced their workforce administration services now exceeds 70, or about eight percent of all such companies. The number of new organizations to adopt multi-process HR outsourcing hit its highest level in 2005. In the media, we read about outsourcing’s potential to reduce costs, improve quality, and introduce new technologies faster. But what is the reality?

As a practical matter, the vast majority of the outsourcing strategies implemented to date were driven by cost-reduction motives. Nearly 40 percent of companies choose to outsource to reduce overall HR service delivery costs, according to a 2005 study by Towers Perrin, “HR Outsourcing: New Realities, New Expectations.”

The second-most popular driver in an HR outsourcing decision is to give HR management more room to focus on the bigger picture and add strategic value to the organization as a whole. By outsourcing HR functions, companies not only strive to improve overall service quality but also to standardize IT and HRIS processes and implement self-service portals across their organizations. All of this helps to trim cost, enhance efficiency, and bring more strategic focus to the role of HR in the organization.

Given the range of reasons that motivate companies to outsource HR, how satisfied are they, and what have they discovered? The results, published in the Towers Perrin study, indicate some rather surprising developments. According to that survey, cost-reduction objectives have generally been achieved with some level of success. Quality, on the other hand, is another matter. Here we see lower levels of client satisfaction than we do for cost reduction. Fewer than 30 percent of HR outsourcing buyers, at least two years into their contracts, had success in making distinct strides in service quality relative to their expectations at the outset of the contract. To some extent, this reflects on the immaturity of the marketplace providers in the HR outsourcing business. In addition, these comparisons probably suffer from a lack of a baseline measure of client satisfaction with the services provided prior to outsourcing.

But what we hear almost nothing about are the technology and services being offered by the outsourcing providers. In 2006, that should begin to change. In particular, more mature outsourcing markets are defined by the following characteristics:

  • Stable or falling prices year over year
  • Acceptable levels of employee and client satisfaction
  • Competition based on value-added services offered by the providers.

As the HRO marketplace begins to mature, we should observe several key developments. First, the basic quality of services should begin to stabilize. Measures of client satisfaction are unlikely to go significantly higher, but there should be fewer examples throughout the industry of truly troubled outsourcing relationships.

Next, we will begin to see the provider selection discussion migrate from a predominantly price-driven discussion to more of a services-driven discussion. Providers such as ExcellerateHRO, Fidelity, or Hewitt, with their roots in the ultra-competitive benefits outsourcing business, are likely to lead the way with new service offerings in compensation administration, performance evaluation, and talent development. We would expect to see the introduction of job evaluation tools, salary surveys, online performance reviews, integrated e-learning options, and internal search capabilities based on skills databases, to name a few. The list is endless.

And once this wave of innovation begins, you can expect to see an explosion of growth in the adoption of HRO. Today, the marketplace mostly consists of clients who need to do something. These are organizations seeking to capture immediate operating savings or that wish to avoid making additional capital expenditures. There are still other organizations considering HRO, but many of these firms shy away from the current services offered by the providers if they don’t have immediate financial needs. But with the combination of some new, innovative capabilities and greater experience over recent years, along with the attraction of financial opportunity, we will see this marketplace really start
to accelerate.

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