Ownership has its privileges, but who really owns HRO? The partnering of primary providers with suppliers offers benefits to the buyer.
In HRO today, a dozen suppliers define, deliver, and manage HR service delivery for 124 clients in the mid-market and large employer segments, providing HR solutions to four million employees. In most HRO deals, these suppliers assume the role of prime contractor and replace and/or manage the previously used service delivery platforms.
Requirements for quality, consistency, and economies of scale affect solution design. As these suppliers exert their influence on optimizing service delivery models, they will be making decisions about other supplier relationships within the channel in the course of day-to-day business. These suppliers include standalone HR processes and sub-processes as well as the software and IT infrastructure that enable service delivery.
Immediate examples that come to mind are the core HR processes of payroll and benefits, where much of the transactional volume within HRO occurs. Many leading HRO suppliers—with backgrounds in payroll, health and welfare, and pension and retirement benefits—want to leverage the strengths of their existing infrastructure and process expertise. These services will largely be centralized and will affect, if not outright replace, existing providers.
Recruiting and learning also are impacted by centralization. These areas often are outside the main strength of HRO suppliers, and in many contracts best-of-breed technologies and third parties are employed.
The examination of cost structures has led several suppliers to include proprietary platforms in their service delivery infrastructure. These strategies range from maintaining a thin HR ERP as the system of record with proprietary tools as the middleware and an HR portal front end to replacing the ERP with a proprietary back end.
As an example, SAP is responding to cost structure concerns with proactive strategies. Several suppliers are developing SAP-based platforms that leverage the strength of an HR ERP while minimizing the build and operations costs through a more configurable interface with back-office operations.
IMPLICATIONS FOR SUPPLIERS
It is clear that the leading dozen of HRO suppliers hold the keys to channel management. They are responsible for delivering value, so a key concern for them is the integration of solution design into a delivery platform.
Central within this is the establishment of new ways of doing business together for all the suppliers within the delivery model. Examples include establishing configurable interfaces to optimize process, software, and data flows within the overall solution and tightening executive and team relationships between providers. In short, ask how channel-friendly are the stakeholders.
Another key consideration is differentiation. While suppliers want consistency in how they deliver services to clients, they also want certain aspects of their delivery platform to reinforce their market strategy and to meet certain client needs. This requires a delicate balance for sub-contractors who need to balance meeting “exclusivity” needs for certain HRO prime contractors without jeopardizing neutrality.
On one hand, a sub-contractor that becomes the dominant niche supplier can become the standard for that area and be embedded within all deals. Establishing yourself as the standard, though, may require the sharing of both risk and reward with the prime contractor. Alternatively, a sub-contractor with many peers within a niche may derive a strong position through competitive differentiation. Doing so will require creating a compelling value proposition for the buyer, if not the prime contractor as well.
Buyers need to ask themselves: “Do certain suppliers we currently use offer extraordinary benefit to our organization?” The focus is on the outcome delivered and what it does for your organization, identifying the business case for why something is done a certain way, and assessing whether it can be cost-effectively replicated or should be maintained as is.
If there is a clear case that a current supplier delivers extraordinary value, then the potential prime contractor must be made known of this in the early stages of the deal. Also, the buyer needs to understand that this option may require certain tradeoffs within overall pricing.
The rationalization of the HR service delivery value chain is the natural outcome of buyer pressure for greater quality at lower costs. It also is a natural result of the competitive dynamics of newer industries as they seek scalable models for rapid growth. Still, these disruptions to the value chain are only just beginning to be felt. This trend is here to stay, and the disruptions throughout the HR value chain will continue to expand as deal scope broadens.