Approaching 2010, globalization continues just as the quest for quality does. Buyers now turn their focus on service delivery as they once did on cost savings.
Increased globalization of services, stronger focus on quality—in discussions on outsourcing, these two concepts aren’t always in the same sentence. But it’s precisely this dichotomy that’s shaping the HRO market of the future.
As comprehensive HRO nears its 10-year birthday in 2010, more services will migrate to locations such as India, China, the Philippines, and South Africa. Simultaneously, buyers will begin to accept lower savings in exchange for higher quality after early deals of loose service levels have failed to deliver the quality expected. Cost reduction, of course, will remain important, but it will take more than labor arbitrage for providers to keep up with HRO demand.
American monopoly ends
Comprehensive HRO—that is, the outsourcing of at least five core HR processes—has come a long way since the landmark Exult-BP Amoco deal in 2000. After seven years of finding their footing, many of the major U.S. service providers still base their models on U.S.-centric systems, but they’ve realized that overseas locations are key to long-term pricing competition. To serve domestic and European clients, for example, U.S.-based providers such as Accenture, ACS, Exult (now part of Hewitt Associates), Convergys, and IBM have bought or built service centers in Latin America and Asia.
Meanwhile, some of the India-based providers, which long furnished services for U.S. providers and helped them open local centers, have since tapped the opportunity to provide services directly to European and U.S. buyers. In 2007, the first such direct HRO service contract was signed by Caliber Point, the HR services division of Mumbai-based Hexaware. This is but the beginning of these direct deals from Indian providers.
With the continued globalization of HRO, the relative reign of U.S. providers is coming to an end. Instead, U.S. providers are likely to partner with service providers in India, China, the Philippines, South Africa and, notably, Sao Paolo (a major IT service cluster that will become just as important for BPO and HRO). These offshore providers will furnish low-cost labor, systems, and operations centers, while their U.S. partners deliver services in marketing, legal compliance, and the integration of complex systems.
There’s a reason why many HRO buyers in the U.S. and Europe refuse to accept call center services delivered from Asia. It’s because, after years of using HRO to support the organizational goal of reducing SG&A, buyers are now looking for something else; namely, higher-quality services for employees and retirees. And the language barrier in Asian call centers is no longer an acceptable tradeoff for the cost savings. More and more employers are restricting their call center services to the U.S., Canada, or Western Europe.
Trends such as this signal a shift from mere cost savings to a focus on quality as organizations realize the importance of taking better care of their internal HR customers. And that’s requiring the HRO market to adapt its services. Heretofore, providers have struggled to deliver high-quality services that are consistent across all volumes, seasons, and other variables. With HRO seeing compound annual growth of 15 to 18 percent during the past three years, providers simply haven’t been able to train and develop enough top-notch service people to keep up. They need people who can consistently make payroll, coordinate open enrollments each year, and deliver quality training and other HR services. The providers who can attract and keep these quality delivery personnel are the ones who will succeed in the next decade.
So, as comprehensive HRO turns the corner in 2010, it will usher in a new era that builds on the lessons of the past and the promise of the future. As globalization takes hold, there will be fewer U.S.-based providers in 2010. And providers’ capacity will be challenged not by systems or market acceptance of HRO, but instead by the availability of visionary people who can deliver quality. That’s because service quality—albeit with cost savings from an international location—is becoming the key deliverable for buyers. Happy birthday, HRO.