The provider community faces a credibility problem in this nascent industry. The business model evolves to serve emerging needs, address previous shortcomings.
The past two years have seen the HRO market grow significantly, led by a number of major global deals whose fees in the contract period total more than $1 billion. These signature deals, including Accenture’s win with Unilever and Convergys’ with DuPont, represent new frontiers for the HRO providers.
These global contracts are characterized by a major provider acting as a “best of breed” integrator delivering services to decentralized organizations with multiple business units, operating in a plethora of countries over hundreds of sites, with multiple legacy systems and processes and differing legal and compliance regimes. This huge level of complexity presents HRO providers with a significant challenge in migrating processes and systems and providing a consistent and effective service that meets agreed service levels and client requirements for innovation and service improvement.
However the challenge of making these deals work, and managing complex transitions through to “business as usual” is absorbing huge amounts of effort, attention, and management time in a market where both effective transition and operational managers are at a premium. Importantly, complex transition processes are also absorbing large amounts of the providers’ cash reserves, which impact on both future project and company profitability. The consequence of this situation is that a number of leading HR outsource providers are at the limits of their operational and management bandwidth and struggling to be profitable.
We can see the obvious signs of upheaval in several of the major HRO providers where senior executives have been replaced and existing contracts are being reviewed and, in some cases, renegotiated to deliver future profit potential.
This well publicized situation raises a fundamental question for the HRO industry: does this upheaval represent growing pains and a challenge to providers’ capabilities in absorbing and managing new business, or is there a fundamental issue with the HR outsourcing model, as some of the opponents of HR outsourcing would have us believe?
Reviewing the state of the market, the overwhelming conclusion is that it is indeed the growing pains of a relatively new industry. Some of the providers have pursued new business to the point where they have bitten off more than they can chew and are now struggling to make good on contractual promises. However, we are now seeing a greater sense of realism in the market where, from the author’s own experience, major providers decline to bid on potential deals in which they know their capacity and capability will be challenged.
The HRO industry has done much to address the current capacity and capability issue in the longer term. During the past three years, major providers have changed their economic models in four key ways.
Firstly they have invested heavily in low-cost locations. Secondly they have built up strong HR ERP systems and software tools to compete with internal business cases for HR ERP upgrades. The combination of these two factors allows them to more legitimately claim global delivery capability. Thirdly, a number of key providers have exploited previous experience in systems integration to become process integrators, bringing together best-of-breed providers with particular process and regional knowledge, and integrating their offerings for the client’s benefit. Fouthly, they have moved away from the new-client-equals-new-service-center model to the one-to-many operating model. Following the same precepts as manufacturing, they are able to exploit the cost-volume ratio to deliver effective and cost-efficient services to clients while meeting profitability targets.
Provider operational capability still presents a credibility issue that needs to be urgently addressed. For potential clients, perception is reality. Providers need to communicate to their clients that moving to a successful HRO relationship is a difficult and time-consuming process for which there are no easy answers and where mutual accountability is the order of the day. They have expressed their market offerings, their transition and operational capability, and bandwidth with honesty and realism based on market experience. Making complex global HRO deals work is, and always will be, very difficult and challenging for both provider and client. There is no panacea, only hard work and a supportive relationship.
