First-generation deals are done, the landscape is maturing, and the momentum shows no signs of slowing. Transformational engagements will lead the way.
After a relatively slow start in the late 1990s, the European market is seeing growth in HRO and is poised to continue to strengthen. The number of new HRO transactions originating from Europe has steadily increased, with some high-profile transactions—e.g., Unilever/Accenture—taking place in the recent past. With the success of first-generation deals and a maturing supplier landscape, the momentum in HRO adoption in Europe is expected to continue.
Currently, 74 percent of HRO transactions originate in North America (primarily the U.S.), compared with only 19 percent in Europe. But the North American market slowed slightly in 2006, due to supplier constraints and buyer wariness; the European market has seen increased activity in the past several years, both among companies with more than 15,000 employees and those with fewer than 15,000 employees. (Little activity originates from Latin America and Asia Pacific, although many transactions cover employees there.)
Significant differences exist between North America and Europe. Some reasons for these differences are straightforward—more large companies are headquartered in the U.S. than in Europe; further, the U.S. has led the market in adoption of full-scope HRO (rather than a fragmented, process-by-process approach).
The European market also faces cultural challenges. Diversity presents itself on many fronts, including language across (and often even within) countries, organizational structures, and HR platforms (companies have multiple ERPs and legacy point solutions). This diversity can pose challenges to implement an integrated system and solution that can be economically deployed and scaled in multiple countries. In addition, many companies have a small number of employees in a large number of countries—another challenge to building a sustainable business case. And Europe has trailed the U.S. and U.K. in embracing offshoring.
Further, EU regulations regarding job transfers can hamper adoption. Work councils and labor unions must be included in the process, often resulting in scope reduction, delayed or staggered implementations, and high statutory redundancy compensation costs, which weaken the business case.
In spite of the challenges, several factors indicate increased European activity. Suppliers’ capabilities are maturing—large global suppliers as well as key regional players continue to develop delivery capabilities. Expansion of European operations by global corporations headquartered in North America should lead to increased adoption of HRO in Europe.
Traditionally, payroll has been the backbone of most European HRO transactions and has been just as likely to be bundled with finance and accounting outsourcing (FAO) transactions. However, the growing importance of benefits administration and HR-related regulatory and compliance administration, as well as a burgeoning demand for bundled talent management processes—recruitment, performance management, learning and development, succession planning, and compensation—means that payroll will be increasingly bundled with other HR processes.
The trend toward transformational HRO, rather than the lift-and-shift model, will also drive European growth. The very cultural and systems diversity that makes the market a challenge presents an opportunity to suppliers that can help buyers harmonize and standardize processes and systems regionally and even globally.
Currently, Accenture dominates the European market, with 48 percent of the total contract value; it has some of the largest deals in the region, including BT and Unilever. SAP is the underlying technology in 39 percent of the transactions in Europe, leveraging its global capabilities and its strong partnerships with a number of suppliers. In the 3,000- to 15,000-employee segment, ADP and ARINSO (recently acquired by Northgate) are leveraging their payroll expertise and installed client bases to expand into HRO.
But other suppliers are eagerly eyeing this market. Indian IT and outsourcing suppliers, including Genpact, TCS, and Infosys, are already supporting pan-European payroll processing as part of an FAO bundle, and they are or will be moving into the HRO transaction processing space. Patersons is establishing a strong payroll client base in Europe, both on its own and in partnership with IBM. And Convergys will substantially increase its share of the European market with its recent win at J&J.
While demand in North America will stay strong, we can expect demand for large-scale HRO in Europe to grow and the market to flourish.