The HRO market braces for the next generation of contract renewals. Look for lessons learned from past engagements to be incorporated in the terms of the new signings.
The full-service HRO market is still in its first generation. In this young market, the majority of transactions are either still in implementation or has only recently gone live. However, the next five years will see 68 percent of the contracts to date come up for renewal. This will pose a unique set of challenges to both buyers and suppliers.
Consider this: Many of the earliest transactions were “lift and shift,” with suppliers taking over clients’ people, process, and technology platforms. Buyers were unsure of what these inexperienced (at the time) suppliers could offer, but at the same time, wanted to retain their own way of doing things. Suppliers opportunistically used these transactions to accelerate their market entry.
However, lift-and-shift deals have a disadvantage—most are so customized that they limit suppliers’ ability to leverage the platform across clients. Vendors cutting deals today are emphasizing the importance of a more standardized or configurable offering and a “transform-transfer” model, where during the transition phase, the buyer’s processes and technology are first transformed to a more standardized platform and then transferred to the supplier.
At present, suppliers are still facing profitability issues due to high sales and implementation costs and strong price competition. Suppliers also have failed to gain the kind of efficiencies they had expected in the early deals. This is in part due to the failure to leverage early lift-and-shift deals across additional clients and partly due to the complexity of HRO delivery. Additionally, suppliers are dealing with ongoing investments to further build and expand their service both in process and geographic scope. Finally, the large number of recent wins has severely stretched their resources.
At the same time, buyers looking forward to renewal are expecting to benefit from advances in the market since their original deal was signed. Many newer deals have benefited from the pioneers in the space, and recent buyers anticipate reaping the benefit of these advances at renewal. With this, many early buyers have expressed their intention to push for significant price improvements over the original contract to align with what they perceive as downward prices in recent years. However, they will want to retain their existing deal structure. This expectations, however, fails to include the fact that recent deals have decreased in scope when compared with the early deals and that recent deals are closer to a configuration than a lift-and-shift.
Renewed deals need to be structured in a way that it is win-win for all stakeholders. Buyers need to understand how the market has matured since signing their deal and, more importantly, how suppliers have developed leveraged delivery platforms, and with them, implied delivery standards.
Suppliers, on their part, will need to clearly explain the trade-offs between a highly customized solution and a more leveraged, standardized offering, so that buyers can make an informed decision.
Needless to say, the upcoming wave of renewals is expected to be a critical event for the HRO market. As we enter into the second generation of deals, we will see a gradual “productization” of HRO scope and services. This will help to establish greater consistency in what is sought and delivered, greater predictability of service quality, costs, and greater clarity of financial benefits for all involved.