Contributors

HRO Pricing: 2005 in Review

Last year marked the first time price per employee began creeping up. Signs of value-adds and a more sophisticated vendor base are apparent.

by Mark Hodges

During the past two years, EquaTerra’s benchmarking group has had the opportunity to review or collect data on more than 50 HRO contracts, which not only provides a tremendous amount of insight and benchmarks on HRO but also allows us to analyze important HRO trends such as pricing. Our database covers the majority of HRO contracts awarded from 1999 to the present.

To meet our definition of an HRO, a contract must fulfill the following criteria: covers five or more HR processes; has a total contract value exceeding $100 million; and was awarded to a single, prime contractor.

In a review of pricing trends, the statistical sample we reviewed covered the 2000 to 2005 timeframe, incorporating more than 60 HRO contracts. All of these were with commercial organizations that had active employee counts of 2,000 on the low end to 102,000 at the high end. Average cost per employee per year ranged from $300 to $1,900 during this time period.

The wide pricing range is due to the level of complexity of different comprehensive HRO contracts, e.g., scope (processes, systems and regions); pricing (resource usage, volumes, and method of pricing units); organizational complexity (number of business units, countries, employee, and executive demographics); and market maturity (the HRO market is still relatively new.) All these factors impact the ultimate price and service delivery model offered by the HRO provider in any given agreement.

Nevertheless, an important finding from our HRO knowledge base has emerged: price per active employee has fallen, on average, 15 percent every year from 2000 through 2004. Was 2005 any different?

In the early days of a new market, unit pricing always appears “too high” to future buyers. The year 2000 marked the very early days of HRO (in 1999, only two contracts were awarded). Of the six contracts awarded in 2000, the average price per active employee was $1,141. While this sounds high, remember that HRO providers and buyers were still learning how to craft long-term relationships. HRO providers were taking on an enormous amount of risk, not to mention employees, assets, and other liabilities.

EquaTerra was able to review six contracts awarded in 2001. In that year, pricing per active employee per year averaged $1,064. This represented a price decrease of $77 per employee, or 7 percent, compared with 2000.

Of the nine contracts reviewed with 2002 commencement dates, HRO price per employee averaged $967. This was a decline of nine percent, or $97, per employee. It was in 2002 when many new entrants began to compete in the HRO space. Prior to 2002, the primary HRO competitors were Exult, PricewaterhouseCoopers, and Accenture.

In the following year, EquaTerra reviewed 19 contracts announced. Pricing declined dramatically in 2003 compared with 2002, to $654 per active employee. This represented a decrease of $313 per employee, or 32 percent! Compared with the previous year, anchor clients (a client who is the first HRO client of an HR outsourcer) and new competitors were the major reasons that pricing fell so precipitously.

We reviewed nine HRO contracts that commenced in 2004. Price per active employee in 2004 averaged $602 per employee, or an eight percent decrease from 2003. This was a minor decline compared with the year before. This was the year when pricing power started to shift toward HRO providers from HRO buyers.

EquaTerra reviewed 13 contracts inked last year. HRO price per active employee averaged $625. Looking at the numbers, you’ll see 2005 was indeed a different year. It was the first in which pricing per active employee increased for HRO (barely, little more than four percent). This increase was due to a number of factors including: provider consolidation in the industry; sophisticated buyers understanding that price is not everything and that scope, service levels, and employee satisfaction are just as important; stronger bid discipline by HRO providers (we observed in 2005 more “decline to bid” decisions by HRO providers than in any previous year); and supply/capacity constraint (“good” HRO providers have more prospective business than they can effectively chase). To be sure, a number of enterprise providers such as Fidelity kept a very low profile during the year.

Now that HRO pricing has started to stabilize, emphasis on capability, transition skills and employee satisfaction will become the primary determinants in choosing an HRO provider in 2006. We should know by this time next year whether the numbers bear this assertion out.

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