Sure they don’t grab headlines, but mid-market HRO deals may offer something that has eluded providers of enterprise deals: Profits.
By Paul Davies
Much of the growth in full-scope HRO has come from large multinationals. Perhaps the providers have targeted regional and global markets in the hope that high-revenue models would deliver a proportionate level of income.
Medium-sized companies, on the other hand, may have outsourced single-stream activities such as benefits and payroll, but they have not so far been regarded as the big ticket for HRO. Things, however, may be changing.
Large multinationals have not turned out to be the easiest beasts to handle, let alone make money out of. Entry deals rarely break even, and for those vendors established in the market, there is strident competition, some of it from companies looking for an entry deal.
Then there is the matter of nailing down the content of big HRO contracts. Big-spending buyers have resisted the simple commoditization of their HR offering, and providers expecting to deliver one thing found their client wanting something else. Usually, that something else has been more costly to deliver than the provider expected.
In some blended service and transformation models, the costs of changing a large global corporation have been underestimated, and where the pricing is fixed, this also has hit profit expectations.
Equally, buyers may not have participated as robustly as they should have in the transformation effort, taking on the mantle of customer expectations spokesperson in denial of the fact that the expectations were supposed to change. After all, it’s much easier to beat up the provider than to tell the CEO that your flagship deal was intended to slash costs and not deliver new heights of customer indulgence.
If it turns out that big-ticket, front-page HRO deals do not deliver the bacon, even in the second generation, the providers will have to look somewhere else for HRO profits. Such a search could lead providers to pay more attention to the mid-market.
The obstacles in the case of full-scope HRO, however, could be substantial. Midsize companies probably want HR technology as much as the next guy, but they won’t want to pay enterprise system prices unless, of course, they’ve got spare cash to burn (invest).
Additionally, the in-house HR functions of midsize companies may not have reached the bloated size seen in large multinationals, or achieved the equally bloated salary levels. This leaves less internal costs to save and consequently a lower baseline for provider’s to aim at.
Midsize companies may also be spread across fewer countries, perhaps even being proportionately more based in single jurisdictions with less to gain from process standardization offered by HRO transformations. In some cases, even if hideously bespoke, smaller organizations might simply not require common process to operate effectively in the same way that large corporations do.
Then there is the matter of the importance of transaction processing in companies with several thousand employees. Sure, there is a transaction proposition to sell to global organizations, but what about those with fewer than 10,000 employees? They may be more interested in how to cost effectively purchase high-value HR services such as course development, job evaluation, change management, and employee performance improvement than managing a few hundred life event changes.
However, it’s not all doom and gloom for HRO providers in search of margin because taking HRO to the midsize market needn’t involve a full-scope offering. Providers can concentrate on payroll, benefits, and related administration without getting dragged into the other things involved in HR management.
Also, they may be able to dictate to the market what is on offer and thereby get out of the endless costs and risks of reproducing large company processes. Just imposing strict process standardization across the whole client base and allowing zero bespoke systems development would change the HRO implementation risks dramatically.
Another critical aspect of succeeding in the midsize market may be effective customer targeting. High margin, white-collar management and financial service companies whose HR departments may have grown too much during a decade and a half of soaring profits are out there. Such companies could be multinational, in need of an HR systems platform, and suffering from a high cost base. Small manufacturing companies, on the other hand, will rarely present the same opportunity.
The question, however, remains whether mid-sized companies will value transactions management as highly as large ones, or whether the prospective of a “grown up” systems upgrade will be enough to tempt them into more general outsourcing than the payroll, benefits, and resourcing buckets to which they are accustomed.