No longer laggards in the market, EU members show they’ve grown serious about outsourcing. Expect this region to report higher rates of growth than anywhere else on earth.
The terms “growth market” and “HRO” have not been associated much in the recent past. The global market has been flat in the last couple of years, and the European HRO market saw limited activity from a deal origination perspective.
However, in the past two years, Europe has become a bright spot in the HRO market, becoming a growth engine for the space. Europe’s share in the global HRO market increased from 20 percent to 30 percent in terms of number of deals in the post-2005 period and is growing at a faster pace than the global or the North American HRO markets.
The 11-year-old, global, multi-process HRO industry has been dominated by North American-headquartered buyers. Of the more than 225 HRO deals signed through the end of 2007, more than 70 percent originated from the region. North America was also the origin of 32 large global deals covering employees on more than one continent.
In comparison, the European HRO market saw limited activity until recently. European organizations have been more conservative than North American counterparts in embracing outsourcing; various legislative and demographic considerations that affect HRO also contributed toward a lower adoption level in the European region.
However, Europe has been experiencing recent increased activity. In terms of Annual Contract Value (ACV), the market grew at a two-year compound annual growth rate of 31 percent to reach $742 million in 2007, compared with just a 13 percent growth rate in North America.
The European market does pose unique considerations and challenges. Europe reflects a mix of languages, cultures, and regulations. Languages across and frequently within countries differ. Some countries (e.g., Germany and France) have a highly regulated labor market, while others (e.g., the U.K., Switzerland) represent a more flexible labor environment. In addition, the cost of operations varies across the region.
From an HRO perspective, we divide the European market broadly into three key regions based on their inherent characteristics that impact HRO adoption: the U.K. and Ireland; Western Europe; and Central and Eastern Europe. It is apparent that the business environment in the U.K. is more conducive to outsourcing.
In fact, it is the origin of more than 45 percent of the HRO deals in Europe to date, representing 74 percent of the market in terms of ACV.
The U.K. market continues to show a steady growth pattern. The healthy expansion in the U.K. is due to a combination of factors, including common language requirements, acceptance of outsourcing, a vibrant supplier landscape, and a relatively favorable labor relations environment. The higher cost of operations in the U.K. only makes the business case all the more compelling from an outsourcing and offshoring perspective. Also, not only has the private sector embraced HRO but the public/government sector sees outsourcing as a way to improve service levels and save costs and is increasingly considering it as a viable option.
Central and Eastern Europe have not seen much activity from a deal origination perspective. However, nations such as Poland, the Czech Republic, Hungary, Romania, and Bulgaria, have become an integral part of suppliers’ strategies, serving as HRO hubs to support the U.K. and Western European operations. Lower costs, multi-language availability, cultural similarity, and time-zone affinity make these locations very attractive from a service delivery perspective. Increased outsourcing in Europe, along with regulatory restrictions on movement of sensitive employee data outside of the EU, has led suppliers to increase their scale of operations.
But in spite of the challenges, some factors positively influence HRO adoption in Europe. These include globalization, changing employee benefits policies, and increased acceptance of global sourcing. As market momentum grows, it attracts new suppliers. In fact, of the 39 multi-process deals signed in the HRO market in 2007, four (10 percent) were signed by Indian-based suppliers.
With the entry of new European-based and offshore suppliers and offerings, European buyers have more options. Depending on their needs (transformational versus cost-saving) and scope (geography, process), they can choose from a range of suppliers that can capably support their requirements. Despite significant differences from their North American counterparts, Europe is now growing more quickly and has clearly transformed from a laggard to an emerging and exciting opportunity.