How can outsourcing help companies cope with the current economic dilemma? These leading voices explain how HRO can elevate HR’s role with the business.
by HRO Today Staff
It dominates our thoughts as a nation. We stay up nights fretting about it. Fears over its decline has many organizations paralyzed in their planning. If the economy continues to spiral downward, there’s no telling what will happen through the end of the year.
While some things in this economic climate are out of our control, others are not. For instance, raising productivity while slashing costs within the HR organization is a very achievable goal, even when resources are limited. Just ask any HR executive who has implemented outsourcing—whether multi-process or point solution—in his or her organization. In fact, many industry observers point out that distressed organizations are taking a closer look at HRO these days as a way to reduce capital expenditures, change fixed costs to variable ones, and still deliver excellent service to employees. In fact, the value proposition of HRO in this climate seems more appealing than it has ever been.
But don’t take our word for it. We’ve invited seven industry veterans—a buyer, three providers, two private equity partners, and an analyst—to explain why HRO in all of its forms is a good initiative to consider these days. Each of them has been involved with the industry since its early days, and they’ve explained in their own words how outsourcing remains a worthy effort that can bring practitioners significant returns. Our pundits include Phil Fersht of AMR Research; Peter Hart of Rideau; Scott Lacy of International Paper; Kay Mason of NorthgateArinso; Jeff Miller of Mercer; and Nick Nash and Jimmy Franzone of General Atlantic.
Winning buy-in for an HRO initiative is never easy because it affects all stakeholders, from the rank and file to the C-suite folks. Ensuring change management adequately addresses the transition is no small task, and governance requires input from various quarters. Still, HR leaders, if they were ever to get a seat at the table, need to take bold steps to demonstrate their value to the organization, and according to our roundtable of HRO experts, outsourcing is the low-risk way to achieve such a goal. Read on to find out how.
Why the Global HRO Market will Continue Growing in This Era
Phil Fersht is director of research, global business and outsourcing services, AMR Research
The growth-path of HRO since its inception in 1999 has been a rocky one, as many clients have struggled with poorly integrated service delivery, overly complex operational issues, and the lack of common HR standards and HR technology platforms. However, new AMR Research shows that this market has picked up significantly since 2006 as a direct result of HRO engagements being less complex, the bundling of HR technology and processes, the increased maturity of global outsourcing providers, and the rapid deployment of offshore HR delivery models.
The multi-process HRO market grew by 24 percent in 2007 and is on track to maintain a double-digit growth rate, when taking into account the number of new contracts signed during the first half of 2008.
The core question now centers on whether the deepening global recession is going to impact this market growth. We believe that while some engagements will inevitably be put on hold as a result of conflicting corporate priorities, the upward growth trajectory of this market will continue throughout 2009 and into next year as a direct result of the following factors:
- Less complex HRO engagements. The focus of HRO is centered on empowering the HR executive to move from a local into a global role and manage outsourced HR support functions. Earlier engagements were often geared toward the outsourcer replacing the HR executive role, and this clearly failed. The focus on HRO providing operational efficiency at a global level that leverages lower cost and promotes a global HR operating model while leaving HR strategy in the hands of the buyer has helped turn the market around in recent years.
- More efficient deployment of HR technology platforms bundled with HR processes. Some 90 percent of HRO engagements have involved enhancements to the HRIS platforms. This has helped clients adopt common HR standards based on HR-XML protocol and helped service providers create a utility model that allows them to deliver services across multiple clients at lower cost.
- The increased maturity of global outsourcing providers and the rapid deployment of offshore HR delivery models. The entrance of the global service providers into the market has created a much more mature global delivery model that works effectively with global clients. For example, service providers such as Infosys, TCS, and Wipro have brought a new offshore dimension to HRO that has added competitive bite to the incumbent providers, namely Accenture, Convergys, Hewitt, HP(EDS), and IBM.
- The mid-market has opened up substantially. As providers such as ADP and Ceridian have embraced global payroll-based HRO models that enable mid-size enterprises to move into global HRO models, this sector of the market is going to drive continual growth during these recessionary years.
- Benefits outsourcing is branching off into best-of-breed solutions. As market leaders Fidelity, Hewitt, and Mercer have focused heavily on their core business, it makes more sense in many HRO cases for the lead service provider to keep the benefits services separate from the multi-scope engagement (for example, Kraft Food’s recent global engagement with IBM).
- The vast majority of HRO engagements being centered on global payroll models. In these challenging times, the need for companies to have access to their global employee information is critical, and these maturing HRO models are providing this—usually at lower cost to the client despite the technology and process transformation requirements in most instances. To put it simply, the business benefits of having global payroll and compensation data is simply too valuable for business decision makers in a tough global market.
With a challenging 2009 ahead for enterprises, the availability of these maturing HRO models is proving to be enticing offerings for firms seeking to reduce overhead and move onto a global HR operating model. Just as people were writing off this market, it has found its feet. Tough times create new models, and global HRO is one of those. The future is challenging, but HRO has become a standard offering for global enterprises in today’s environment.
All Together Now: Achieving Savings and Raising Employee Engagement
Peter Hart is CEO of Rideau Recognition Solutions, a provider of employee incentive programs.
Clients like to ask for the impossible. Can you deliver in half the time? How can you make a more measurable impact on my business? Could you shave the budget and still deliver what we need?
Organizations are under cost and performance pressures at the best of times, but with the economy in seemingly virtual free fall, these questions are becoming both frequent and urgent. Small companies are worried about cost. Larger companies are showing concerns about the way the press instantly categorizes incentives or reward and recognition as wasteful spending instead of as a valuable investment.
We’ve seen this first hand. One client recently came to us searching for a way to cut millions from his overall incentive and recognition budgets. Our solution: Think holistic.
Rideau proposed a complete, single platform for the organization’s service awards performance, cash, and instant rewards. In the end, the platform was more effective at just 70 percent of the original investment.
Holistic programs are powerful allies for organizations. Developing holistic programs in partnership with a single vendor does offer significant advantages. Here are some reasons why:
- Stretch the value of your investment. The most obvious advantage of a holistic system is the ability to save costs. Multiple programs are managed from a single database to leverage common elements like branding and backend processing. Billing and reporting become more powerful and can accurately reflect more data points. Award fulfillment becomes streamlined. All these approaches can result in significant cost savings.
- Enhance the depth of programming. A complete look at your incentive and recognition programs means that you can clearly define what each is designed to accomplish within your organization. I’ve seen the lines between programs become blurred when managers don’t understand when to apply an incentive strategy versus recognition for a job well done. A holistic system brings clarity to those that use each part of the program.
- Improve timeliness. When one service provider—and often one common team—works on a program, it can make informed decisions more quickly. It’s similar to having a complete, internal department dedicated to your initiatives. The intellectual capital that’s built by the team means websites are updated more quickly, rewards are more appropriate, and programs are more effective.
- Extend the credibility. Incentives and recognition are key drivers of improved customer service and behaviors that lead to a better bottom line. Finding ways to maximize the impact of your overall program goes a long way to improving your organization’s overall sales success in a difficult market.
When it comes to cost, timelines, and impact, there is a way to manage the “impossible.” Unifying programs under a single platform can benefit not only your programming, it can also ensure longer-term security, expansion, and success.
Market Dynamics Further Underscores HRO Values
Scott Lacy is manager, HR operations for International Paper.
Why would the CEO of any company at this time of financial and economic difficulty seriously consider committing millions of dollars over multiple years to an outside vendor for a non-core business area? This is the obvious question that comes to mind when one considers the potential impacts of today’s economic climate on the HRO industry. Yet, according to current indications, the HRO market is forecast to increase at nearly double-digit rates through 2009. Why?
More than any other time in the past 35 years, companies large and small are faced with difficult choices involving spending, allocation of scarce capital, and the organization’s strategic focus, at a time when forecasts, sales, cash flow, and the legislative and compliance environment for business are less predictable than any other time in recent memory. The basic HRO advantages of improved service delivery at a lower cost are still in evidence; however this unpredictability combined with weakening economy has created an urgency to examine every area and process for optimal value.
Many companies realize that contracting for the outsourcing of the non-core, yet critical area of HR processes can help stabilize operating expenses and headcount, lock-in cost savings for the organization over a long term, facilitate rapid changes in strategic direction, and allow the organization’s managerial and technical talent to more fully focus on their core business with less distraction. Companies recognize the opportunity to achieve a competitive advantage through the workforce by being able to train, re-train, and otherwise align with the organization’s changing strategy.
Moreover, companies realize that a competitive advantage of increased productivity can be gained at this critical time by providing managers and employees with more analytics and 24/7 access to information and integrated services. As organizations and people are asked to do more with less, the need to for managers to access state-of-the art information systems becomes increasingly important. However, in today’s climate, many companies do not have the time, resources, or inclination to implement, maintain, and upgrade their own integrated information system to enable HR process management.
Likewise, employee access to state-of-the art information systems enables them to “own” their data and effect their own transactions. This not only reduces low-value transaction costs to the organization, it also obviates the always-painful data quality projects that only consume resources to correct current-state inaccuracies from an out-of-control process.
The needs and opportunities created by today’s economic climate are most compelling in large companies due to the sheer scale of the operations and impacts. Small and mid-size companies may be even more motivated to accelerate transition to HRO in today’s economic climate, based on access to fewer resources, tight credit, and a general overall higher exposure to the climate’s risk factors.
Even in Uncertain Times, HRO Can Help Companies Weather the Storm
Kay Mason is president, North America for NorthgateArinso, a leading global provider of HRO and payroll services.
At first glance, it is challenging to predict what effect the economic downturn will have on the market for HRO services. On one hand, HRO can provide companies with efficiencies as well as lower and more predictable fixed costs, which can help them remain viable and competitive throughout the economic crisis. On the other hand, an HRO implementation may require a large, upfront investment and time commitment, which always, but especially now, is a concern for organizations. However, the numbers tell a mixed story.
According to the TPI Index of Q4 2008, the total contract value (TCV) of all outsourcing contracts globally was nearly $89.5B, exceeding 2007 figures by 5.6 percent. However, there were fewer “mega deals” in the second half of 2008, and HRO contracts with a TCV greater than $25 million fell by almost half.
Proving the business case for HRO presents a challenge even in the best of times, and today it is more so. As service providers, it will be critical for us to help clients identify the projects that will provide the greatest benefit in the midst of the recession. Nonetheless, opportunities do exist.
First, by leveraging HRO, an organization can benefit from the efficiency and scale a provider can achieve. We’ve seen a reprioritization of outsourcing drivers as a result of the recession. By outsourcing core HRO functions such as HR administration, benefits, and payroll, an organization can focus on critical business processes and challenges, accelerating HR business transformation to increase the strategic value of HR. By doing so, organizations can better utilize scarce HR executive talent to drive the company forward.
Predictability in the fixed-cost base is key when companies are planning to weather the economic storm. By outsourcing core processes, and the infrastructure on which those processes are delivered, companies are able to bring certainty and predictability to the cost base. Furthermore, by leveraging the scale and efficiency benefits of an HRO provider, companies may actually reduce the overall cost of delivering HR and payroll processes within the organization—or at the very least lock in known costs for the duration of the contract. In addition, HRO offers access to offshore models, a major potential source of cost reduction.
Retaining top talent is as critical in these difficult times as ever, and effective delivery of HR services is key to retaining the buy-in of staff. Through leveraging the experience and domain knowledge of HRO providers, employees can be serviced more accurately and in a more timely fashion, increasing satisfaction. HRO enables standardization of processes and practices across the organization. Employees benefit from greater efficiency, consistency, and predictability in HR services.
In many large global corporations, HR service can vary widely from country to country. By choosing an HRO provider with local knowledge and local language capability, businesses can ensure that each employee has consistent access to effective HR services.
Of increasing importance, certain HRO providers can provide an organization with access to talent management processes such as learning and development, performance management, and succession planning, facilitating focus on and development of key talent.
There is no question that HRO is impacted by the economy, but we have yet to fully understand the implications. The downturn in 2001 resulted in a surge in outsourcing and offshoring. While it is dangerous to assume that the current economic crises will give rise to the same level of growth, the opportunity exists for HRO providers to demonstrate their value in working with clients to address core challenges and to position those clients to emerge from this period in a stronger position to take on opportunities during economic recovery.
An Unprecedented Time for Total Benefits Outsourcing
Jeff Miller is president of Mercer’s outsourcing business, based in Norwood, MA.
When Mercer decided to focus its outsourcing business on total benefits outsourcing (TBO), the global economy was thriving and the specter of a recessionary downturn was distant. Still, Mercer’s approach was based on a keen awareness that employers faced increasing cost, complexity, and challenge in managing and delivering benefits to their employees, especially in an era of spiraling healthcare premiums and dwindling retirement savings rates.
Today, we’re facing unprecedented economic times that test an organization’s ability to ride out the downturn, sustain a competitive advantage, and retain a workforce for future growth. In this environment, outsourcing providers must deliver additional levels of value and efficiency to support clients’ strategic shifts and contingency plans. Thus, the benefits of TBO—an integrated approach that typically consolidates defined benefit (DB), defined contribution (DC), and health and benefits (H&B) administration services with a single outsourcing provider—are becoming more evident.
TBO’s basic role – which is especially important in turbulent times, is to create economies of scale and scope by bundling multiple benefits services with one organization. Employers can outsource administration, transactional, and employee support functions that are traditionally performed in-house, allowing HR personnel to be redeployed as businesses address strategic issues. Nothing could be more in tune with today’s business imperatives, yet this emphasis on cost and efficiency isn’t everything. In addition to addressing these priorities, providers must also deliver a better, more comprehensive benefits experience for employees to help retain a well-trained workforce. In doing so, companies may stand a better chance of making it through these intensely competitive times while they keep a hopeful eye for the downturn’s end.
In our view, the positive potential of such an outsourced solution has never been greater. In terms of reducing and controlling expense, the cost certainties of outsourcing contracts are crucial, while the broad efficiencies of global service delivery—through online portals for employees and management, vendor-neutral databases, and software platforms managed and upgraded by providers—will be vital.
Many organizations are dealing with complex issues such as the potential freezing of their DB plans, adding increasingly complex health plan options, driving DC plan metrics, and rising retiree medical costs. Through an experienced administration partner, a TBO strategy can begin to address this complexity with targeted employee communication and integrated resources such as a benefits web portal, self-service benefit election, and decision-making tools. In addition, by reinforcing key business strategies and corporate initiatives, such a strategy can help ensure a successful client-provider relationship.
Ultimately, these qualitative advances are where cost efficiency and employee satisfaction meet. In one example, a manufacturer with more than 2,700 employees had administered its health and benefits programs internally and sought a more efficient outsourced solution. A solution was developed with a customized self-service enrollment website with decision-support tools, a fully staffed call center to field employee questions, and a customized communications campaign.
As a result, almost 90 percent or employees chose to enroll in the benefits program online. Call center volume decreased 29 percent from the prior year, indicating the target communications program had been successful.
This scenario is also playing out in many other companies that now recognize the holistic value of TBO in today’s deeply troubled economy. Indeed, we view TBO as more than a cost or complexity solution but also as a major force for sustaining business practices and, just as importantly, maintaining employee well-being.
Crisis-created Opportunities Abound for the HRO Industry
Jimmy Franzone is vice president with General Atlantic, one of the leading private equity funds specializing in the BPO sector. Nick Nash is vice president with General Atlantic.
Against the backdrop of the highest unemployment rates in a generation and the worst one-year decline in the Dow Jones since the Great Depression, it’s only natural to be cautious about the outlook for the HRO market. But, looking forward, we see more opportunities than challenges, especially for innovative clients and creative vendors who work hand-in-hand to realize the value of HRO. Quite simply, there’s a very real possibility that the next 10 years will be HRO’s golden decade.
Why? Let’s focus on the bigger picture: Yes, the economy is tough, but like all cycles, this recession will eventually end, and long-term growth will return. What won’t end as quickly, though, is an unavoidable decline in the size of America’s mid-career workforce, the experienced individuals between the ages of 35 and 54.
On average, since 1950, we’ve added about nine million new individuals to this age group every 10 years. It’s not too much of a stretch to say that our economy is based on the assumption that this number will keep growing, which makes the decade ahead of us all the more startling. For the first time in our history, this number will decline over a sustained period of time: a fall of almost two million from 2008 to 2018 before it starts to rise again.
This combination of economic growth and demographic stagnation means one thing: a war for talent, with HR as its generals. It’s inevitable that there will be winners and losers, and the winners will be companies that focus on what’s core—creating an optimal environment to attract and retain talented people. We’ve long talked about HR as being strategic; now, more than ever, strategy will matter. Just about everything else—whether running payroll, workforce administration, or HRIT—will be increasingly viewed as non-core, ideally provided by specialists with economic scale and high-throughput technology.
That’s the big picture. But what about the next 12 months? Does HRO matter in a downturn? We think it does. Three points bear mentioning.
First, despite the well documented growing pains of multi-process HRO’s first decade, at the end of the day most customers are getting a decent level of service relative to what they had before. As reported in the June 2008 issue of HRO Today, 87 percent of buyers thought their outsourcing partners either maintained or improved service levels. Almost three-quarters of customers were “very satisfied’ with their provider. And, importantly, few customers are voting with their feet, as evidenced by AMR’s findings last year that only three percent of large HRO deals had reverted to in-sourcing. It’s not perfect yet, but enterprise HRO is working.
Second, the fundamental economics of outsourcing—turning fixed costs into variable and turning capital expenditure into operating expenditure—take on heightened importance in a recession. Too important ever to be a hackneyed phrase, cash is king. Why invest millions in a new HRIT system and raise corporate overhead allocations to stay competitive when a third-party provider can share costs across multiple clients? The promises of 40-percent savings in HRO’s early days proved illusory (and unprofitable), but on the margin, outsourcing helps lower costs and frees up capital.
Third, while many over-levered Fortune 500 firms are stumbling, many nimbler mid-sized firms are taking advantage of the opportunity to take share from their larger rivals. It’s in the mid-market—not just companies with fewer than15,000 employees but even those with fewer than 2,000 employees—where the value proposition of HRO really shines. In many ways, the end-to-end offering of a TriNet or Administaff is a glimpse of what bulge-bracket HRO will eventually become: a highly software-enabled, more standardized offering that maximizes self-service interactions and economies of scale. Keep an eye on these firms; with strong cash flows and management teams, they’ll be increasingly important competitors going forward.
It’s prudent to be cautious in a tough environment, but it’s also times like these that bring out the best in entrepreneurs and encourage buyers to address their needs in creative ways. GE, HP, FedEx, and Microsoft were all started during or close to a recession, and all found a way to thrive. We’re looking forward to meeting the next generation of HRO firms that will help us manage through this one