From nature of deals to technology implementation, the market evolves with shifting expectations and practices from both buyers and providers. Choice of platform is crucial to your endeavor.
The HRO market is no longer in its infancy; most would agree that the industry is around 10 years old—not mature, by any means, but old enough to have gained acceptance in the corporate community (albeit grudgingly by the HR community).
As it enters its second decade, however, the HRO industry is struggling to define a business model that allows flexibility yet leverages across multiple clients; creates global platforms, especially for HR administration and payroll, balanced with regional and local requirements; and, most important, delivers high-quality
service at a price point that is palatable to buyers while maintaining profitability for suppliers.
It’s this last mandate that is causing some consternation in the market. Recent data from the Everest Research Institute shows that the HRO market slowed in 2006 after steady gains in previous years (based on number of transactions signed from 1999 through 2005). Some of the softening was due to buyers delaying decisions because of some suppliers’ financial losses. (On a positive note, the annual contract value [ACV] of those transactions increased in 2006.) However, the primary factor affecting the number of deals completed in 2006 was on the supply side. HRO providers, many still digesting large global deals from 2004 and 2005, were extremely choosy about what new business they would take on, with some suppliers sitting out the market entirely.
Constrained supply from existing suppliers will have a clear effect on market growth in the coming years.
But there are other factors in play, as well. Consider the following:
• There is a clear shift in the market from “lift-and-shift” deals—in which providers take on HR processes systems, and sometimes people, “as is”—to a “transform-and-transfer” model, which can mean a longer implementation period, but generally results in bigger benefits for the buyer.
• Suppliers are pushing to create leverage across multiple buyers and achieve better consistency in their solutions and delivery models; buyer considerations regarding cost and value creation are helping this shift to take place.
• Technology and suppliers are playing a much greater role in the RFP, selection, and decision phases, with SAP taking the lead in creating formal partnerships with suppliers and educating buyers about the criticality of the underlying technology for all outsourced functions.
What does this mean? If you’re a buyer looking for a lift-and-shift approach to outsource your HR and payroll departments, your options are increasingly limited. This model, which results in a portfolio of highly diverse, “one-to-one” deals and solutions, is unsustainable in the long run and even in the short term limits cost savings for the buyer.
The transform-and-transfer approach allows buyers to partake of the suppliers’ process knowledge and domain expertise, and the one-to-many model should result in greater efficiencies and lower costs in the long run. However, many buyers and suppliers tend to underestimate the amount of change management required and the disruption to the organization during the transition, resulting in missed deadlines and disgruntled employees.
Technology plays a significant role in HRO, back-office transaction processing, and delivery of services. Unfortunately, many buyers might be tempted to treat the technology platform as a given—i.e., if an organization is on SAP HR currently, employing a supplier that will support it means smooth sailing. While this is not entirely untrue, buyers need to pay more attention to the technology implications earlier in the evaluation process. When you consider that each subsequent step of the implementation and rollout is completely dependent on the successful implementation of the technology platform, you start to realize why many projects go awry in the early stages. Buyers need to understand that whatever technology approach they choose—ERP-based, proprietary, or a mix—and regardless of the legacy platform, the transition will require a good deal of time, effort, and resources to implement the technology.
All these factors contribute to a shift in the HRO market and how suppliers sell and deliver. Buyers may need to reset their expectations from HRO and how long it will take to achieve them. They should also be willing to use a supplier’s standard solution (i.e., not highly customized) to the greatest extent possible to get the greatest cost savings and faster implementation. Combined with more rational and standard solutions from suppliers, these shifting dynamics will lead to a healthy and sustainable HRO industry—a desirable outcome for both suppliers and buyers.