Can SaaS really supply all of a company’s e-HR platform needs, or does it lack the full range of capabilities?
In an interesting Dataquest Insight report earlier this year, entitled “Critical Issues Face the Long Term Growth of the HR BPO Market,” Gartner’s Rob Brown discussed some so-called “game-changers” of our HRO market.
One of the key findings from the report is the potential for Software as a Service (SaaS) e-HR platforms to emerge as a logical alternative for traditional HRO offerings. In my opinion, there are a few hard questions that need to be answered to understand the potential reach and limitations of SaaS.
What are the advantages and disadvantages that on-demand HR solutions can bring compared with HRO, and do they really address the same market? And for SaaS e-HR platforms to overtake traditional HR BPO as the preferred sourcing option, they would need to have a comparably strong yet decidedly differentiating value proposition.
First, the silo effect. SaaS vendors typically address specific functional HR domains with software solutions that can be deployed on-demand. Depending on the
specific situation, the functionality might be broader than what is provided by a comparable ERP or HRO solutions. Traditional HRO offerings provide comparable functionality as part of an integrated HRO platform. The difference is often a trade-off between functionality/ usability and integration with adjacent HR functions.
Is integration that important? As integrated functionality is key to improving business outcomes, the answer is “yes.” There is little that can be done in a silo in HR. Recruitment, learning, and performance management cannot be done in isolation. Therefore, integration is a must, including data-sharing to other HR domains, F&A, production planning systems, etc. And the more point solutions that must be integrated, the more expensive this integration will be.
Not integrating will be even more expensive though, as the quality of the business output or the cost of manually integrating processes take a massive hit. Hence, the existing alternative to leverage functionality already integrated might be all the more appealing.
Secondly, given the one-to-many nature of the SaaS business model, heavy standardization for the functional domain is required. Those who are willing to adopt significant standardization may get access to good economies of scale in full HRO and, thus, stand to gain even more by outsourcing because they will get economies of scale for both labor and technology. In fact, the biggest cost element in HR administration is the high ratio of HR staff per worker, which makes up the majority of the HR cost; SaaS doesn’t address this.
What SaaS does is reduce capital expenditure (no major upfront investment to own and implement your HR software). This is obviously true for HR BPO as well. In terms of avoiding skills shortage, implementation hassles, upgrade costs, etc., there is little difference between each model.
In conclusion, on-demand solutions typically accommodate buyers interested in a specific area of functionality but do not want to be bothered with either the technology or its costs and who do not regard software ownership a strategic asset.
This may address the needs of certain companies. I am not sure, however, whether it addresses the needs of the HRO buyers. Typically, the value proposition in BPO is not narrowed down to the technology aspect, but is broadened to address the overall HR cost structure and the potential for optimizing HR service delivery both in terms of lower risk (HR operations, legal/compliance) and better quality (overall service delivery—immediately and over time) by leveraging pre-existing, applicable knowledge, processes, and infrastructure.
Seen from that broader perspective, it seems to me that SaaS can be successful in a particular market segment. Whether it will live to be an alternative to the HRO market is really up to the HRO industry stakeholders. Service providers and other stakeholders need to continue to deliver value in optimizing HR service delivery through better business outcomes at lower cost—which indeed happens by leveraging technology.
Gartner rightly points out that on-demand is a legitimate alternative for certain customers. They do not say, however, that it is an answer for the broader HR transformational questions. The SaaS bandwagon’s music is sometimes so loud that some not-so-nuanced arguments get lost in the shuffle.