Contributors

Industry Outlook Remains Positive

 Despite current economic conditions, latest NelsonHall survey reveals that business in the outsourcing market is down only slightly and that buyers have good reasons to take on new scope and engagements.
 
By Helen Neale
 
Recent NelsonHall research on the HRO industry suggests that there is only a slight reduction in confidence within the industry, despite the current global economic crisis. Leading provider executives were interviewed about their confidence in current and future revenues and pipeline activity at the end of 2008 and the beginning of 2009 to produce the NelsonHall HR Outsourcing Confidence Index (HROCI).
 
The overall level of confidence in HRO, reflected by an HROCI of 93 (100 equals no change in confidence), is slightly lower for 2009 than for 2008. This is extremely positive considering the alarm bells that many have been ringing in light of economic turmoil and shows that one of the industries that can and will ride through times of economic difficulty is outsourcing. Considered by many a dirty word in boom times, those same executive detractors can turn to it to help reduce their cost base in tougher times.
 
This minimal reduction in HRO confidence reflects lower HRO supplier revenue and pipeline growth in Q4 2008. Average revenue growth was 0.5 percent across the HRO supplier base, with expectations that it will rise slightly in Q1 2009 to 0.8 percent. This revenue fall is largely due to:

  • Declining transaction volumes in the face of the recession, which are outpacing increases in new buyer activity;
  • A continuing freeze in decision-making within organizations; with outsourcing decisions being put on hold;
  • A pullback from larger transformational deals as organizations look to quickly gain cost reductions.

 
Future contract signatures, reflected in the research focused on HRO pipeline activity, are being affected by different factors. Figure 1 illustrates the key factors affecting HRO pipeline activity.
 

Click here to view Figure 1
 
Negative impacts on pipeline activity are naturally similar to those affecting revenue growth. However, it is refreshing to see that some positive impacts include scope expansion and the re-evaluation of outsourcing opportunities that have previously been rejected.  This reflects the increasing role that HR has to play in reducing overall financial risk and operating costs within organizations. Given reductions in transaction volumes, it’s also interesting to note that nearly a quarter of organizations reported an increase in contract scope going forward. This is due to organizations potentially looking to outsource more transactional HR services for a greater return.
 
Buyers are more likely to reject contracts and/or services with certain characteristics. Those characteristics showing decreased levels of acceptance were identified to involve implementation and fixed fees, the client taking on financial risk, minimum volume guarantees, and investment in replacement of legacy HR systems.
 
Despite scope increases, contract lengths and values are reported to be shortening slightly, probably to ensure certainty of short-term cost reduction.
 
Prospects within benefits administration services and HRO in support of geographic expansion into emerging markets appear to represent the greatest opportunity for suppliers. Buyers are looking to reduce cost to serve within benefits administration while improving participant experiences, and expand into further geographies across learning, recruitment, and payroll services.
 
Helen Neale is HRO Research Program Manager for NelsonHall. She can be reached at helen.neale@nelson-hall.com.
 
 

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