BenefitsEngaged Workforce

Defining RPO: Getting a Handle on a Rapidly Evolving Business

As the outsourced recruitment market matures, practitioners and providers settle on standards to help dispel myths about RPO. More consensus is needed, and industry observers say it’s coming.

by Andy Teng

Think of recruitment process outsourcing (RPO) as Jell-o. Just a few years ago, it was a liquidy, amorphous practice few could put their arms around. How one HR organization defined RPO might have been wholly different from how another practiced it. And the confusion wasn’t limited to buyers, as providers and sourcing advisors alike also grappled with the concept. It was Jell-o still on the stove.

Today, however, RPO is gelling. A common definition on what constitutes RPO is emerging, and the party-goers assembled under its big tent seem more capable of agreeing on the traits of recruitment outsourcing. Consensus on scope of service, fee structure, important metrics, and other deliverables is apparent, and while various forms of implementation continue taking place, market growth is vibrant, steady, and expected to continue during the next few years. In fact, expect RPO to be the fastest-growing segment of HRO well into 2008 and possibly the rest of the decade.

Rolling Momentum

By many accounts, the outsourcing of recruitment services—whether end-to-end, enterprise adoption or project-based, selective implementation—is growing by double digits. For some providers, revenues are, in fact, doubling annually as demand for services jumps through the roof. Lured by cost savings as well as back-office improvements, access to technology, and scalability, employers are flocking to RPO as a way to find top talent more quickly.

But while RPO is becoming more clearly defined, the market remains immature, and the entrance of recent providers ranging from small, regional companies to large, established staffing giants has added to the confusion. Seizing on RPO’s momentum, many firms are trying to reinvent their business models to add RPO services to their offerings. As a result, these vendors sometimes muddy not only their identities but also the broader market as buyers try to sort out the most appropriate choices.

Furthermore, even the analyst community disagrees over what constitutes RPO. For instance, IDC estimates that the market in 2006 totaled $296 million, with growth expected to reach $676 million by 2011. However, TPI puts the market at only $150 million this year and will reach $200 million by 2008. The disparity is largely due to differing definitions of RPO and what sorts of deals are considered process-altering in nature and which ones are not. (HRO Today estimates that RPO engagements are significantly more than $200 million in the U.S.) It’s just one indication that recruitment outsourcing is a practice still under development.

“I think it’s still very nebulous, and there is definitely not a bright-line definition,” said Jason Berkowitz, vice president of business development at RPO firm Hyrian and the chairman of the industry trade group RPO Alliance. The Alliance, which was established to help HR buyers better understand recruitment outsourcing, boasts a membership of nearly all providers delivering RPO services.

Berkowitz said one of the issues still to be worked out in the industry is to standardize RPO definitions so that when buyers specify one kind of service, they don’t get another. He gives this analogy: like ice cream, RPO comes in different flavors: vanilla, chocolate, and cherry Garcia. Which flavor a buyer prefers isn’t important. “What’s important is that when you order a bowl of vanilla, you want a bowl of vanilla, not cherry Garcia,” he added.

A Common Definition
Berkowitz said buyers and providers sometimes still fail to see eye to eye when it comes to scope of RPO services, and this breakdown in communications can lead to the wrong choice in service delivery. Need exempt or non-exempt? Are you interested in permanent or temp hires? In which locations do you need services? How broad is the scope of service needed? The answers to these questions help determine the appropriate service provider, but buyers still tend to view RPO as a homogenous offering, with little differentiation among providers.

However, in interviews with industry observers, it’s clear that even with various implementations, RPO should include a few key deliverables. They include:

An assumption of processes by the provider, including key services such as requisition, job description, screening, candidate management, interview scheduling, and on-boarding. While not all engagements include the full spectrum of services, most RPO should involve pivotal hiring-decision support.
Pam Berklich, senior vice president of Kelly Services’ outsourcing and consulting group, including its HRfirst RPO business, points to a key determinant of whether a deal is truly RPO. “I would ask the provider ‘Do you own the outcome? Are you 100-percent responsible for the positions and hires?’” she said.

Unlike contingent staffing arrangements, RPO fees are not based solely on hiring success. Rather, providers are paid a management fee with variable components that may be tied to the number of hires. In some cases, buyers may continue to use contingent and other staffing services, with the RPO provider typically managing these third-party vendors. Also, a successful RPO engagement should help an employer reduce its contingent costs by reducing agency usage.

Providers usually manage or install a robust applicant tracking system as part of their services. Regardless of whether the client already operates its own ATS or is in need of one, RPO vendors usually rely on technology to help gain process efficiencies and automate the recruitment process.

Buying RPO can be implemented on an enterprise or project basis. While some purists contend that true outsourcing should be rolled out throughout the client organization, the fact is many engagements are taking place on project terms. That’s because some buyers only need support for a defined number of positions, specific job types, or geographic regions.

As with any outsourcing contract, service level agreements and benchmarking are integral to program success. How quickly vacancies are filled, the retention of new hires, and even new-hire satisfaction may all be used to measure the effectiveness of the program. An RPO engagement should demonstrate its value to the buying organization.

While most RPO programs contain many of these elements, buyers ultimately decide all the features they want. Some employers may want a full plate of services that’s end-to-end in scope, while others may prefer a low-cost engagement to shift highly manual, administrative tasks away from HR to the provider.

“It totally comes down to what your organizational needs are,” said Mike Marinaro, senior vice president of HR governance at Chubb Insurance. Marinaro, whose organization this year turned to a third-party RPO provider after realizing its HRO provider could not adequately address its recruitment needs, said Chubb’s engagement with The RightThing has immensely improved its process. The vendor is responsible for all recruitment services for non-executive hires and support services for high-level employees.

Marinaro added that he believes RPO will continue to be defined by the market and the individual needs of buyers. In Chubb’s case, its provider is responsible for end-to-end services, but he said another organization may only want components of its process managed externally. Adopting a selective strategy doesn’t diminish a client’s recruitment needs, he noted.

He pointed out that Chubb chose its RPO provider after an extensive search involving soliciting proposals from three other providers. Turning to a sourcing advisory firm, the insurance giant determined that the RightThing offered all the services it needed, but Marinaro said the market remains muddied by various offerings and “ill-defined” vendors who try to position themselves too broadly. He said this exemplified a lack of maturity in the RPO segment.

“Companies have to define the services they are providing and the niche they are in. Recruiting is not a place that’s broad in offering,” he said, adding that with the recent push by staffing entities such as Manpower, Adecco, and Kelly Services to gain market share in RPO, they further “blur the lines” between RPO and traditional staffing services.

As these household names reinvent themselves, will their efforts help or hinder the market? Maybe, said Harry Bottka, project director at sourcing advisory firm TPI, which has advised on a number of sizable RPO deals. He pointed out that some of the staffing firms have been able to establish a distinct identity in the RPO market that’s separate from their staffing business, and their brand recognition may help to attract buyers to the market.

“We’re seeing clients wanting a lot of flavors,” he said. “Clients like the flexibility of using RPO where they need it.”

Indeed, as the market continues to evolve, RPO models will continue to change and adapt to unique requirements. Providers say what the industry needs as that happens is the development of common terminology and standardization so that buyers and providers speak the same language. Fortunately, as Terry Terhark, president of The RightThing, noted, buyers, providers, and sourcing advisors are all working for a common goal.

“We have clearly seen movement toward standardization for what buyers are looking for. We’re not there yet,” he added. Still, through buyer organizations, the RPO Alliance, and other collaborative efforts, Terhark said market education continues. He noted that significant improvements in buyers’ comprehension of RPO have been made during the past couple of years, and while there is still some confusion over fee structure and deliverables, buyers are clearly more savvy. Instead of asking elementary questions, they are digging deeper and looking for referenceable success stories within their own vertical industry. He said it’s just a matter of time before the RPO community shares a common language.

Just as enterprise HRO took its time to mature, expect the RPO segment to also develop over time. But with the wisdom gleaned during the past few years, buyers, providers, and sourcing advisors are well positioned to accelerate the maturation of recruitment outsourcing and improve the industry’s success rate.

Tags: Benefits, Engaged Workforce

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