BenefitsEngaged Workforce

Are You Being Served?

For those in the market still focused on taking costs out, here’s how to get your needs met.

by Monica Barron

Many of the recently announced HRO deals—think J&J and Unilever—are large, global, transformational implementations. These companies create their sourcing strategy with the goal of not just taking cost out—although that’s important to do where possible—but also by investing in value-based services. By using the cost savings in some areas to fund investment in more strategic activities, such as talent management, these buyers are accepting a net-neutral business case rather than looking for the historical 10 to 20 percent savings.

But there is another segment of buyers still focused on taking cost out of HR operations. Based on anecdotal evidence, at least 50 percent of the HRO transactions that are initiated and that go to RFP—but potentially as high as 75 percent—are pure cost take-out, with no transformation desired.

That is a significant segment of the market that would like to buy outsourcing services, but will not attract the attention of a large global supplier. Add to this the large number of mid-market buyers, especially at the top end (around 10,000 to 15,000 employees) that would like to outsource but remain on an SAP or PeopleSoft platform—i.e., not move on to a proprietary platform—and it becomes clear that there is a potentially significant HRO market that is underserved and undeveloped.

Where are these buyers going, if the big global suppliers such as Accenture, Convergys, and IBM can’t or won’t take on the business (because it does not involve transformation)? Some buyers do nothing. Others create some form of shared services capability in-house to cut costs across HR operations. For the buyer looking to outsource based on a cost-reduction business case, however, there are still some options.

Most often, the buyer will break HRO up into discrete processes and outsource them, one at a time, to various suppliers that specialize in the process. These suppliers excel at low-cost, highly accurate transaction processing, and of course in the subject matter expertise needed to deliver the process. Processes most often outsourced on a standalone basis are payroll, benefits administration, and recruiting and staffing.

Other buyers approach a supplier with which they have an existing relationship for another area and ask them to extend services into the HR space. We’re seeing this being done, for example, in Finance and Accounting Outsourcing (FAO), where the supplier extends its services to include payroll processing—which is a fairly easy and logical extension of financial transaction processing.

A growing trend, and one that we’ll see accelerate over the coming year, is non-traditional (for HRO) suppliers entering the market and going after the low-cost, transaction processing deals. By all accounts, a number of Indian ITO suppliers are avidly interested in the HRO market (and several of them have already gotten deals underway with existing clients). The strategy is generally to take over the client’s existing HR system and management of it, and provide transaction processing and contact center (with much of the service delivery through a portal) at a low cost.

The Indian suppliers feel that the investments they have already made in their infrastructure and staffing will allow them to take this business on and run it at a low cost. Whereas a U.S.-based supplier is incurring heavy capital costs to build out offshore delivery capabilities and trying to recoup the investment from new clients, the reasoning goes, the Indian ITO suppliers invested years ago to support their IT business and so are incurring only incremental costs to expand their service offerings to HRO.

A partnership or acquisition would make a lot of sense, and there are some well-established suppliers in the U.S. with good brand names that would make logical partners and “front ends” to the Indian firms, and which could use the business to pump up their own revenues. Some of these suppliers might make interesting acquisition targets, as well, although the Indian suppliers then take on the burden of existing and often unprofitable business and having to fix it—something they might not have the appetite for.

At the same time, existing HRO suppliers are working to bring down transition costs and timeframes by creating highly standardized offerings, thus making their solutions more widely appealing to a broader number of companies. We’ll start to see results soon, and it will be good for the HRO market. The market will grow; new clients will get up and running quickly and cost-effectively; and there will be some success stories to focus on. But there’s too large a portion of the market that is underserved today for smart suppliers to ignore.

Tags: Benefits, Engaged Workforce

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