While this segment is expected to lead the market in growth, meeting the needs of its diverse population won’t be easy.
by Andy Teng
You might say that companies are like snowflakes: No two are exactly alike. And so it goes for the mid-market, which at times defies classification. While most industry observers characterize this group as organizations with anywhere from 500 employees to 15,000, this broad definition is just that: a vague attempt at describing a large class of businesses typically experiencing high growth, organizational chaos, and constant change. That’s why in the development of HRO practices, the mid-market remains one of the last frontiers.
Although the HRO industry has attended to the mid-market for years through point solutions such as payroll and benefits administration, comprehensive, full-service outsourcing has been slower in development. That’s because mid-market companies present particularly thorny challenges and are often hampered by their fixed resources.
Furthermore, some mid-market businesses boast HR operations that are just as complex as larger enterprises, especially those that have undergone rapid growth through mergers and acquisitions. Because of disparate systems, limited internal domain expertise, and inefficient workflow, mid-market companies may find selecting and implementing an HRO solution even more burdensome than when their larger counterparts take on outsourcing.
These difficulties, along with the nebulous definition of mid-market, have contributed to the segment being underserved, many in the industry contend. They cite the price-sensitive nature of these companies and their need for robust, customizable solutions as conflicting requirements that act as barriers to entry for some providers while testing the business models of others delivering services to mid-market companies. As a result, many HRO providers during the past few years have been scratching their heads to figure out a way to construct sustainable, cost-effective solutions that can also address many of the HR needs of these businesses.
Some providers have been able to develop attractive solutions to the segment. Global brands such as ADP, Accenture, and Ceridian have established beachheads in the mid-market, and they continue to add on new services as part of the build-out of their comprehensive outsourcing strategy. Others such as ACS, traditionally a global enterprise provider, have gone back to the drawing board to develop segment-specific solutions that they plan to launch very soon or have recently rolled out.
Clearly, interest in the vendor community is growing. In fact, the race to tap the mid-market has never been more frenzied because sales of comprehensive HRO in the large market—enterprises with 15,000 or more employees—have declined significantly due to sagging interest among buyers and providers alike. The mid-market, on the other hand, offers providers the greatest opportunities because market penetration is still low. And with many mid-market companies under pressure to cut costs, the allure of outsourcing may drive more to market.
A $21 Billion Market
According to Gary Bragar, senior HRO research manager at NelsonHall, the mid-market remains the most dynamic segment in outsourcing today. Including point solution and multi-process HRO, the segment was estimated to be worth $21 billion in 2008, and growth is expected to rise to nearly $30 billion by 2013. If those projections are correct, the segment would continue to lead overall market growth for the next five years.
Bragar said more than ever, mid-market companies are undertaking cost-reduction initiatives in this economy, and in doing so, they see outsourcing as a quick and low-risk avenue for downsizing their back office. Whether they are implementing a best-of-breed solution or multi-process outsourcing, mid-market companies are able to gain clear and real savings. (NelsonHall’s study of the segment revealed that buyers of multi-process HRO had an average workforce of 5,800; buyers of single services had an average workforce of 4,800.)
“The drivers for the mid-market are focused on cost reduction,” explained Bragar. “Buyers are trying to reduce fixed costs to a more variable model.”
NelsonHall found that buyers of various HR services achieved double-digit savings in services spanning from payroll to comprehensive HRO. They included:
- Payroll produced savings ranging from 15 percent to 30 percent, with an average of 22 percent.
- Benefits administration produced savings ranging from 15 percent to 30 percent, with an average of 26 percent.
- Recruitment process outsourcing had savings ranging from 20 percent to 30 percent, with an average of 26 percent.
- Multi-process outsourcing had savings ranging from 15 percent to 40 percent, with an average of 27 percent.
He added, though, that while cost is the primary reason for many companies to consider outsourcing, many mid-market organizations continue to view HRO as a way to transform processes and gain access to best-practice knowledge. A key consideration also is the efforts by these organizations to drive adoption of self-service.
Of course many of the pain points driving mid-market buyers to HRO are the same ones leading larger-market buyers to outsourcing. However, that’s where the similarities end. Large enterprises engage in HRO deals that typically cover a broader geography, employee population, and functionality than those of mid-market counterparts, but that doesn’t always mean they are more complex. Depending on the industry and structure of the company, mid-market organizations may have a smaller employee base, but their back office and infrastructure may also be surprisingly chaotic and undisciplined, which could pose significant problems when outsourcing.
That’s a reality clear to Lisa Knutson, the vice president of HR operations at E. W. Scripps Company, a Cincinnati-based media conglomerate. As chairperson of the Mid-market Special Interest Group within the HRO Association, the industry’s trade group, Knutson is helping the segment to mature more quickly and develop new products and services to better meet market needs. And in her role at E.W. Scripps, she is overseeing her company’s own 6,000-employee outsourcing deal it has with ADP.
According to Knutson, who was also an HR executive at Fifth-Third Bank—a large-market HRO buyer—when it signed an HRO deal covering its 20,000 employees, a mid-market deal can be even more complex than that of a large market for a number of reasons. She pointed out that size is not the sole indicator of deal complexity; rather, it’s the internal structure and distributed nature of the organization that determines it.
“I can tell you complexity in the Scripps deal was 10 times more with half the employees of Fifth-Third. What happens is that larger companies tend to have more consistent practices across the enterprise. They may have implemented PeopleSoft or something like that where [the platform] is consistent,” she said. “At Scripps, we are in 15 newspaper markets and 10 TV markets, and have a little bit of a U.K. presence. We could not have designed it more different in terms of location and HR practices.”
Indeed, that’s one of the characteristics of many mid-market companies—inconsistent workflows aggravated by inconsistent policies. Because these organizations are so focused on growth, they tend to invest less on back-office functions such as HR.
Furthermore, many of them are engaged in M&A activities, which can further disrupt the building of a consistent HR workflow because businesses are being added and sold all the time. Add in the fact that these companies lack the domain knowledge to even know how to realign HR and it’s easy to see why implementing HRO is no small task.
Knutson said in E.W. Scripps’ case, the company built a knowledgeable operations team as part of its HRO initiative. By having a strong governance team in place, it was better able to effect changes in foundational services such as payroll, which she described as complicated before the company standardized the process. In addition to handing payroll over to ADP, the company also outsources its applicant tracking system and recruiting, benefits administration, employee and manager self-service, call center and knowledge base support, and leave administration to the provider.
One particularly difficult challenge facing mid-market companies, Knutson added, is that large organizations can better address compliance issues because they can dedicate resources to this critical area. Often, they have teams to address issues such as Sarbanes-Oxley, the Family and Medical Leave Act, and others that could have a profound impact on their organization if not adequately addressed. “Large market companies have a better handle on policy around compliance,” she noted, adding that resource limitations are a key consideration for this market segment.
Indeed, this handicap of mid-market buyers is a limitation of which providers are well aware. During the past few years, a number of HRO vendors have looked to this segment for opportunities and have been turned back by the economics of it. The dilemma they face is on one hand, mid-market companies may operate HR processes as complicated and disparate as any global enterprise; on the other hand, they can’t budget the kinds of dollars that a larger-market buyer could in implementation and service fees. For providers, they’ve had to carefully craft offerings that address buyer needs as well as turn a profit that will sustain them. This has proven to be such a difficult challenge that some industry observers lament that buyers in the segment still don’t have enough choices today.
“The mid-market has traditionally been underserved in the comprehensive HRO space,” commented Mark Squiers, executive managing director for HRO at ACS, a global service provider. As one of the pioneering vendors in the large-market segment, the Dallas-based provider is making an aggressive push to reach down market, where it sees tremendous growth opportunities. The company will announce in April a new solution targeting the mid-market through the use of a standardized, configurable Oracle-based platform. Although details about the offering were not available at press time, Squiers said the company will leverage its partnership with Oracle and other best-of-breed vendors to deliver a robust and cost-effective service.
Squiers contended that in this economy, cost is the predominant factor in the decision-making process about HRO. To address their concerns, providers must figure out ways to slash their own delivery costs through either automation or partnerships with suppliers who specialize in certain services. Moreover, he added, it’s critical that buyers consider a full suite of services rather than just one or two because they can capture greater economies of scale. It also reduces the number of vendors they need to manage, which in turn lowers the internal resources they need for governance.
“I think the economy is helping to drive [the dialogue around cost savings] and the mid-market has always been more honest about this. Things like transformation are being pushed lower down on the list,” he said, adding that to help spur growth in the segment, providers need to show HR leaders how to build their business case for outsourcing.
Indeed, providers themselves are taking a leadership role in building out the mid-market. A number of them have in the past unsuccessfully ventured into the segment, but their struggles with cost structures led to abandoned efforts. Companies such as Accenture, which today has a noted mid-market unit under its Accenture BPO Services brand, were able to establish a strong presence for this segment only after acquiring Savista several years ago.
As providers have matured, the market has as well. This has translated into the industry growing more sophisticated and acknowledging the limitations mid-market buyers face. In the past, even though they could not afford the pricing that large-market buyers paid for services, many mid-market buyers still insisted on customized services, and there were providers who acceded to these demands. Today, however, buyers are less rigid in their approach, said Trey Campbell, CEO of Accenture BPO Services.
“There is clearly more of a willingness to accept a standardized solution,” said Campbell, a veteran of the industry who served with Exult early on in the decade during a seminal period of HRO. “Ultimately they (buyers) have to accept something materially different [from a customized solution] for this to work economically.”
Campbell said while the market has made strides in its maturation, some areas of mid-market practices still need consensus among buyers and providers. For instance, process standardization is something everyone speaks about, but even in the industry there are disagreements about what standards should be adopted. Moreover, buyers need education around change management and realizing their responsibilities in implementing a deal. And, Campbell stressed, providers are now more cognizant of their own need to make a profit after years of trying to buy business.
“We’ve become more balanced in our view of what we will take on versus what the client will do. It used to be that we would say, ‘We will take [a deal] and finance it,’” he noted.
What will this mean for the mid-market? Although many providers are rushing to capture shares of this segment, they are also learning from mistakes made in the large market, missteps that have cost some of the biggest providers huge sums. But with a buyer base that’s growing more sophisticated, a provider base more adept at delivering cost-effective solutions, and growing consensus between the two sides, it seems the segment is well positioned to make greater inroads into HRO.