The HRO market learns to leverage the one-to-many model to gain cost savings.
Pretty much every supplier in the HRO space for the last year has been talking about how they are striving to realize greater service- delivery leverage. Most often, they describe this as a strategy to adopt a one-to-many model.
Much of this is driven by the bleak, near-term profitability of most suppliers: some have operating losses of more than 20 percent in 2005 and don’t project break-even until 2008. Many of the deals included delivery models that require higher, up-front investments of time and capital, lowering margins, and delaying profits. Conservative accounting rules further have impacted suppliers’ time to profitability for their HRO practices.
An additional driver of the need for delivery leverage is growing client pressure for quality, consistency, and continuous improvement. The ability to achieve these targets is hampered, though, when a supplier has each of its clients on a different, customized delivery platform. As part of our ongoing research into
HRO deals, Everest Research Institute has been examining delivery leverage in great detail. We recently conducted in-depth interviews and data collection efforts with governance executives from a large cross section of the HRO deals.
Payroll is a good process to examine. Many large employers leverage their ERP as their payroll engine.
As a result, a mature, commodity-like service in large HRO deals becomes a custom service that inhibits the supplier’s ability to realize scale. Conversely, less mature, less standardized offerings such as recruiting or training are potentially realizing greater leverage in HRO deals because their scope is limited to providing the transaction platform and the delivery of primarily administrative sub-processes.
The implications from this are clear. Few companies would admit that payroll administration is crucial to their competitive advantage or that it was even a core capability of the firm. Yet deal requirements are driving resources to the customization of low-value administrative processes, while potentially value-creating processes such as recruiting or learning are being delivered in more generic ways. And for suppliers, the highest volume processes are unique to each client, while the lower volume processes are relatively highly leveraged.
So, what do we do to change this? HRO leverage can be thought of in a number of ways. It begins with process design striving for more consistent process flows across a supplier’s clients. In doing this, clients need to make informed tradeoffs in design.
Leverage also can utilize a common technology platform. The most obvious way to obtain this leverage is via a multi-tenant technology platform. This doesn’t mean all clients are required to operate with exactly the same processes, but it does prescribe that they work within a range of configurable options.
Finally, there are merits to sharing common resources where a center of excellence is providing access to a common pool of people who are managed for overall higher utilization and coverage. Most suppliers are already leveraging expensive subject matter experts but may not be leveraging other knowledge workers because they must be trained to meet specific process requirements of individual clients.
As an industry, we need to think hard about service requirements, the tradeoffs we need to make, and the resulting price, performance, and quality implications. Achieving one-to-many is not a panacea. However, we can be a lot better in what we do to realize greater industry leverage.
