Contributors

HRO Pricing:What Is It Telling Us?

Learning from the past.

by Mark Hodges

Over the past two years, EQuation (EquaTerras benchmarking arm) has hadthe opportunity to collect and review data on more than 40 HROcontracts. This knowledege database provides a tremendous amount ofinsight and benchmarking data on HRO, and allows us to extrapolate onsome important topics facing the HRO industry such as HRO pricing. Ourdatabase covers the majority of HRO contracts awarded from 1999 to thepresent. Here, were defining HRO contracts as those that: 1) containfive or more HR processes; 2) have a total contract value in excess of$100 million; and 3) were awarded to a single prime contractor.

Thestatistical sample we reviewed was predominantly from the 2000 to 2004timeframe, incorporating 41 HRO contracts. All of the contracts werewith commercial corporations (public sector was not included), whichhad active employee counts of 2,000 on the low end all the way to102,000 at the high end. Average price for delivery of HR services peremployee per year ranged from $300 to $1,900 over this same timeperiod.

The wide pricing range is due to the complexity ofeach organizations HRO agreement. The ultimate pricing is driven byscope (processes, systems, regions); pricing (resource usage, volumes,method of pricing units); organizational complexity (number of businessunits, countries, employee and executive demographics); and marketmaturity (the HRO market is still relatively new). These factors alsoimpact the service delivery model offered by the HRO provider.

Animportant finding from our knowledge base is that price per activeemployee has fallen an average of 15 percent every year since 2000.Will 2005 be any different? Lets take a historical view.

2000–Theyear 2000 was very early in the days of comprehensive HRO. EQuation wasable to review six contracts awarded that year. The average price peractive employee was $1,141. In these early days, providers and buyerswere still learning how to craft long-term relationships. HRO providerswere taking on an enormous amount of risk, not to mention employees,assets, and other liabilities. In the early days of a new market, unitpricing always appears too high to future buyers.

2001–EQuationwas able to review five contracts awarded in 2001. In these contracts,price per active employee averaged $1,064. This represents a decreaseof $77 per employee, or 7 percent, compared to 2000.

2002–Ofthe eight contracts reviewed with 2002 commencement dates, HRO priceper employee averaged $967. This was a decline of 9 percent, or $97 peremployee. In 2002, many new providers began to compete in the HROspace. Prior to 2002, the primary HRO competitors were Exult,Pricewaterhouse-Coopers, and Accenture.

2003–EQuationreviewed 13 contracts, and found that pricing declined dramatically in2003 as compared to 2002to an average of $658 per active employee. Thisrepresents a decrease of $309 per employee, or 32 percent (!), comparedto the previous year. Anchor clients (the first HRO client to an HRoutsourcer) and new providers were the major reasons why pricing fellso significantly.

2004–Wereviewed nine 2004-awarded HRO contracts. In that year, HRO price peractive employee averaged $602, an 8 percent decrease from 2003. A minordecrease when comparing 2003 to 2002. In 2004, pricing power started toshift toward HRO providers and away from HRO buyers.

2005–EQuationexpects 2005 pricing to trend toward a range of neutral (i.e., zero) to5 percent decline, compared to 2004. This conclusion is based upon: 1)provider consolidation; 2) sophisticated buyers understanding thatprice is not everything, and that scope, service levels, and employeesatisfaction are just as important; 3) stronger bid discipline by HROproviders (we have observed more decline to bid decisions by HROproviders than in any previous year); and 4) supply/capacity constraint(the good HRO providers have more prospective business than they caneffectively chase).

Even with a 15 percent decline in HROpricing year over year, we see price as only the number threedifferentiator in provider selection. Now that HRO pricing has begun tostabilize, emphasis on capability, transition skills, and employeesatisfaction will become the primary determinants in choosing an HROprovider.

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