Why HRO still isn’t mainstream eight years since its inception. Lessons learned in IT still haven’t seeped through to HR leaders.
Despite the rapid growth of the HRO market, many Global 2000 corporations have not yet seriously investigated HRO. In fact, depending on how you count the numbers, there are 75 to 100 global HRO deals in place today. This represents, at best, a five-percent penetration rate. There are two reasons for the low adoption rate. The first is the current generation of HR leadership. The second is the immaturity of the HRO market.
The single most important reason for the low adoption rate among the Global 2000 is that HR heads are still in a “Generation 1.0” mindset. Simply, HR service delivery is viewed solely by them as an in-house function with some selective out-tasking. HRO is not viewed as a viable, desirable service delivery alternative.
The IT function provides an excellent example of generational functional leadership and helps explain the HRO conundrum. Over the past two decades, the ITO penetration rate among the Global 2000 has grown to above 40 percent, and some observers believe it is closer to 60 percent. Even though mainframe processing had been around for decades, the first, truly “comprehensive” bundled multi-tower ITO deal was signed in 1988 between IBM and Eastman Kodak. Another early and notable ITO contract was signed in 1989 between EDS and Xerox. Since 1988, the ITO market has grown steadily to more than $150 billion.
The HRO industry is now in its eighth year, yet is only a fraction of the size of the ITO market in its eighth year. Why?
The first generation of IT folks confronted by outsourcing in the late 1980s and early 1990s were data processing and MIS managers. They were not senior leaders in their corporations and viewed outsourcing as a threat. Very few corporations had an IT leader who was considered part of the C-suite. But “Generation 2.0” in IT leadership were VPs of MIS and VPs of IT who had experience in out-tasking and single-tower outsourcing. Some of the enlightened even pursued multi-tower ITO.
Then came the dot-com boom. There was an explosion of capital investment in IT infrastructure, and executive leadership soon recognized that a “chief” was needed to manage this IT infrastructure, hence the emergence of the CIO. The CIO represented “Generation 3.0” of IT leadership, a generation that was agnostic as to means of service delivery and is very outsourcing friendly. The CIO was not a pure technologist, but rather an executive well-equipped to view the organization’s IT function like a business.
Thus, CIOs had less heartburn about outsourcing transactional and administrative IT work to third parties. Further, available IT capability was very low, salaries were high, and good talent was scarce. As a result, CIOs started to look at IT outsourcing providers as a way to buy capability, not simply a cost-savings exercise.
Finally, the dot-com boom created considerable movement of CIOs between companies. A CIO who had outsourced at his previous company was likely toinvestigate ITO at the new company. The tremendous cross-pollination among Global 2000 corporations that took place at the CIO level during the dot-com boom should not be underestimated.
My contention is that the HRO industry is still in its first generation of HR leadership. Agreements signed to date have largely been by either very forward-thinking companies or corporations that had no choice. Very few senior HR leaders willingly chose HRO. Today’s HR leaders have largely come up through the HR ranks and have been trained in traditional HR disciplines. They are likely to view any downsizing of their operation with suspicion and, in some cases, even as a betrayal of their workforce and/or company culture.
In the HRO industry, we are beginning to observe cross-pollination as some HR leaders move to other companies and introduce the concept of HRO. Unlike IT, however, there has not been a corresponding explosion of capital investment; recognition that HRO can add capability (and not just cut costs); realization that HR should be managed like a business; and a balanced perspective on external versus internal service delivery.
As HR leadership becomes more business-oriented, we’ll enter the second generation. When will we know we have entered Generation 3.0? Probably when chief is added to HR title. At that point, outsourcing the technology, administrative, and transactional activities of HR will be just another business exercise, not the gut-wrenching, emotional roller coaster that HRO today represents for HR leadership.