BenefitsEngaged Workforce

Department Market Trends: Study: Multi-process HRO Continues Downward Slide

NelsonHall quarterly report finds HRO and BPO in general accounting for smaller piece of overall outsourcing industry.

by Andy Teng

Further confirming that multi-process HRO has given way to a best-of-breed outsourcing approach, analyst firm NelsonHall in its index report for the first half of the year reported that contract signings have declined significantly compared with even just a year ago. Moreover, HRO is accounting for an ever-shrinking portion of all BPO activities even as outsourcing remains robust globally.

The findings, while not surprising, do confirm the significant decline in multi-process, enterprise HRO in the past 12 months. For the firs time since NelsonHall’s quarterly survey began, finance and accounting outsourcing (FAO) now accounts for a bigger percentage of business process outsourcing (BPO) than does HRO.

In fact, the firm found that FAO accounts for eight percent of the global outsourcing contract value, while HRO has dropped to just four percent. Even as HR organizers have shied away from end-to-end deals, NelsonHall also reported that they have instead pursued external solutions in areas such as RPO, absence management, and occupational health. By adopting point solutions to address specific service gaps, HRO practitioners are realizing that they don’t necessarily need to embrace a Big Bang contract to transform HR.

According to John Wilmott, CEO of NelsonHall, the multi-process, comprehensive HRO market has dried up for several reasons. For a number of buyers, they’ve realized that adopting point solutions may be more effective than an end-to-end engagement. After all, internal HR may deliver some services better than an outsourcing partner, so they really need to focus only on making some improvements. In addition, because of past problems reported in a few enterprise deals, some buyers are concerned with the risk of a broad engagement.

At the same time, providers themselves have grown significantly less aggressive about pursuing business, Wilmott said. Many first-generation contracts led to huge losses for enterprise HRO providers such as Hewitt, so for the past two years, many have retrenched and become much more selective about the kinds of clients they seek out. Today, providers are mostly interested in transformational projects in which they can help client organizations realign their processes as well as provide technology and service.

“A lot of the big service providers are still looking at signing two deals a year on their terms and not just any two deals,” Wilmott said. “Everyone is a bit more careful.”

That caution has markedly dented the BPO market overall. In all outsourcing including IT, the market has seen a significant decline during the past two years. In 2006, the market was $75.1 billion, with BPO accounting for 44 percent of the overall market. By the end of last year, the overall outsourcing market declined to $53.3 billion, with BPO accounting for just 34 percent. In dollar terms, BPO contract values declined 46 percent in that period.

The most conspicuous decline was in multi-process HRO, which Wilmott pointed out had witnessed few large deals in the past year. An exception was the recent signing of a $1.2 billion comprehensive contract awarded to Lockheed Martin by the Transportation Security Administration (TSA). He pointed out that this segment will continue to attract buyers because some organ­izations prefer having one provider responsible for the majority of its HR services. And he said he believes the market will likely see an increase in signings in the near future, but it will never return to the active level it experienced three or four years ago.

“Multi-process was always a small part of the market. Although they were highly visible, they were only a small part of the overall outsourcing market,” he said. “I would expect between 4 and 10 deals for the next 12 months. It will be the same half dozen people chasing the same dozen deals.”

Wilmott added that he believes the provider landscape will continue to segregate into three segments: multi-process, enterprise vendors; best-of-breed providers; and benefits and payroll organizations. He added that the enterprise market, which has been capacity constrained, will also benefit from an influx of new providers, including offshore IT players offering low-cost, standardized services.

Regardless of the vendor, one thing is clear, Wilmott said: all of them will continue to refine and improve their services, whether it’s standalone or multi-process. “It’s hard to find people who are mature across all the service lines you want. Even single-service providers are still upgrading. It’s hard to find anyone who can do everything right,” he concluded. 

Tags: Benefits, Engaged Workforce

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