Contributors

With New Contracts Exceeding $4B, HRO Is Here to Stay

Continued growth, consolidation, and new providers expected in the new year.

by Scott Gildner

As this year comes to a close, consider the following: We have had the most active year in HRO ever. More than 25 companies established broad-based relationships, surpassing the previous record set in 2003. The total contract value of new services outsourced by large HR departments exceeded $4 billion, according to the TPI Index.

Perhaps not surprisingly, we leave the year with renewed competition in the HR marketplace. While Hewitt has had a string of successes after purchasing Exult, more recently we have seen the distribution of wins across a broader set of providers. While 2004 winners Hewitt and ACS have been focusing on implementing their clients, several other providers have re-emerged. Convergys seems to have been a clear beneficiary, establishing new relationships with Whirlpool and DuPont. ExcellerateHRO is attracting a following among potential future clients as its message of agility and analytics takes hold. And IBM and Accenture continue to gain traction in the market. The competition is expected to increase, with Fidelity re-entering the competitive marketplace in early 2006. So with this backdrop in place, we offer some predictions for next year.

Quality of service will become a key competitive issue. To date, competition among providers has largely focused on capability to meet clients’ needs. But with the number of organizations that have outsourced workforce administration nearing 100, attention should shift from capability to demonstrated ability to satisfy. Each provider’s track record will come under careful scrutiny in 2006.

Global service offerings will become standardized. So far, the provider community has been reactive to the specific needs and requests of each prospect. The result has been the promise of a variety of solutions across disparate countries around the world. For 2006, anticipate market leaders to rationalize their service offerings outside the U.S. into a specific strategy that can be managed, starting with a specific service offering on a country-by-country basis.

Industry consolidation will continue. Look for a continuation of consolidation in HRO. Just as Convergys  purchased DigitalThink, Hewitt acquired Exult, EDS bought Towers Perrin Administration Solutions, and ACS snapped up Mellon HR Solutions, there will be more consolidation as the market enters its real phase of growth. As dramatic as growth has been in the past five years, still fewer than 10 percent of the Fortune 500 have adopted broad-based outsourcing. The new year may represent the last chance for some providers to “get in the game” via a critical acquisition.

Outsourcing will receive more scrutiny, but growth will continue. HR transformation is not for the faint of heart. And many of the early outsourcing relationships were established between visionary clients and novice providers. Not surprisingly, mismatches between expectations and delivery will emerge and receive lots of attention. However, in parallel with the discussion of client dissatisfaction with outsourcing, the more successful providers will be able to demonstrate real advancements in technology, global sourcing, and international scalability that will provide a counterbalancing effect. By the end of the year, the market should gain strong momentum and move into its real growth phase for the remainder of the decade.

Service provider management will emerge as the hot topic in the industry. As previously indicated, client satisfaction with post-transition service levels is likely to be modest at best. Furthermore, the service provider management techniques which have been employed by HR departments to manage their existing benefits, payroll, or learning relationships will prove inadequate for the task of improving provider performance. Look for companies with large outsourcing relationships to revisit their service provider management responsibilities and structure, perhaps consolidating them within their shared-services organization.

In short, outsourcing of the delivery of human resources administration is here to stay. It will still take another year or two to sort out the real competitors from the also-rans. Outsourcing as the preferred solution to meeting the needs of today’s complex global organization is expected to steadily gain favor. At the same time, new challenges to improve the effectiveness of this strategy will be identified, providing fertile ground for innovation and shared learning among the early adopters in this brave new world.

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