Even if you don’t plan on outsourcing some internal services today, consider your future needs and choose providers who can address those needs later on.
Welcome to the inaugural column of “Research Radar” on HRO. HRO Today has asked me to deliver a column of our insights at Gartner on the trends in the HRO market and why those trends matter to both buyers and suppliers. For this initial effort, I wanted to hone in on a mega trend we are seeing with increasing regularity: the move of buyers from discrete to comprehensive HRO.
While big-ticket, end-to-end HRO deals may grab the headlines, the current growth of the HRO market has come primarily on a solid base of discrete contracts. An example of discrete HRO is buyers outsourcing payroll or benefits administration alone (compared with being bundled with other HR services).
Conversely, while the growth of comprehensive, end-to-end HRO is on the rise, Gartner estimates that at present, only 25 to 30 percent of HRO deals are comprehensive in nature (these deals include multiple HR sub-processes under a single contract). But that is beginning to change, as more buyers lean on their incumbent suppliers for incrementally more add-on services over time. As an example, Hewitt Associates announced a 10-year HR BPO deal with Catholic Health Services, which added a slew of HR services to an existing contract.
While the allure of best-of-breed, selective outsourcing of discrete HRO vendors for different sub-processes may have initially sounded attractive, many buyers have found mastering the management of multiple suppliers—most of whom are likely competitors with one another—difficult, let alone getting these same suppliers to coordinate their efforts to cooperatively execute the HR business vision for the buyer. This comprehensive HRO-by-increment trend runs counter to what Gartner sees in IT outsourcing.
Why is the drive to more holistic HRO options happening now? Four major factors seem to underlie the growth in this trend.
Scale. Vendors have increasing numbers of reference accounts for comprehensive BPO deals, which display hard-dollar results for keeping the HR domain together through the integration phase and scaling service up or down over time, making it more affordable in the long run.
Competency. Companies have difficulty mastering selectively-sourced HRO contracts for various processes such as selecting a payroll specialist and a different benefits specialist. If a company has to outsource multiple, discrete processes, it may not want to invest in the management overhead required of multiple, competing suppliers.
Choice. HRO competitors are offering more choice and capabilities. Marketplace consolidation during the past few years is a sign of a maturing market, where bigger providers are acquiring components to offer a comprehensive solution.
Regional requirements. The largest companies seek to integrate globally with common standards where possible and to eliminate redundancies and cost. Ultimately, these buyers will want to work with a trusted HRO vendor that can “think locally, but act globally” and deliver consistent HR services across geographies.
What does this mean for buyers? HRO buyers should look for providers that can offer up additional sub-processes incrementally to the contract as their needs change over time. Try to foresee and anticipate potential, additional BPO requirements down the road as a part of the vendor selection process.
Relationship management will be critical—users who have a high probability for outsourcing additional processes over time should work with vendors that can “tee-up” seamless process delivery through their own service portfolios or partnerships. Users will find that some vendors will not include ongoing consultative time and attention as a prelude to adding processes. Plan on separate statements of work and prepare to pay higher monthly minimums for additional services delivered.
If you have incumbent HRO suppliers that you’ve worked with for a long time, talk to them about your comfort level in expanding the outsourcing relationship. If you like their service levels, and the price of service delivery beats your internal costs, strongly consider the expansion to a comprehensive deal. You’ll likely become a more “valued” customer of your HRO vendor and likely reduce or eliminate most of the bid-and-proposal costs.