With demand for outsourced services underserved and a new crop of providers ready to enter the market, look for growth to rebound in the new year.
The news lately in the HRO market has been mixed at best. Our own research (2007 Global HRO Annual Report) shows that the market, in terms of number of transactions, has been relatively flat since 2005—certainly a departure from the explosive growth we saw from 2000 through 2005. And the broader market as measured by total contract value (TCV), while still growing, is decelerating in the same comparative timeframe.
Further, suppliers that report revenues from their HRO business are still showing large operating losses, although not as sizable as in previous years. So why am I still bullish on the HRO market?
First, the fundamental drivers for outsourcing human resource processes and technology are still sound. Outsourcing suppliers can provide HR services at a lower cost, even with a broader scope—and with higher quality service and technology than most companies can achieve internally. Many HR processes are highly transactional, predictable, repeatable, and automatable—in other words, prime candidates for outsourcing.
Our research shows that there is still a strong demand for HRO. The flatness of the market in recent years is due primarily to supply constraint; many large global suppliers were very choosy about the business they would take on, chasing after only large, global transformational deals that met their operational and economic criteria. Other suppliers simply sat out the market while they implemented deals won in 2005 and 2006. In sum, a lot of real business was turned away by large global suppliers. By several suppliers’ estimates, up to 75 percent of the RFPs they had received did not make it through the first round of qualifying criteria and were not even considered. (These were global or at least multi-country; covered more than 20,000 or employees; and were multi-process and transformational.)
That’s a large chunk of the market not being serviced by the large global suppliers. The obvious question is, what did those buyers do? They have few alternatives: break their outsourcing requirements into silos and source them to single-process suppliers; create shared services centers or captives; or keep it in house. Some buyers would be satisfied by proprietary offerings from suppliers such as ADP and Ceridian. But what if you’re a mid- to large-market company (say, 10,000 to 20,000 employees) with global operations, are already on an ERP platform, and want to stay on it in the context of an HRO engagement?
This is where my optimism comes in. Our research tells us that HRO penetration in both the mid-size and large markets is significantly low, and therefore both segments have strong growth potential. We know that demand is strong—buyers still understand and want the value proposition that can be derived from HR outsourcing, whether it’s pure cost reduction or global transformation. The last variable—supply—is a key factor, and we see more good news here.
First, large global suppliers are moving existing customers onto more standardized solutions and implementing new clients onto those same standardized solutions. While these suppliers will always allow for some configuration to meet specialized requirements, the increased pervasiveness of standardized processes and technology platforms means that suppliers can create more leverage and scale across clients—and thus free up capacity for increasing numbers of new clients.
Second, we are seeing new suppliers entering the market in a couple of categories. India-based suppliers that had been primarily focused on ITO, and in some cases, FAO and procurement outsourcing, are starting to enter the HR market. Some of this is organic radiation of existing ITO and FAO deals into payroll and other HR-related transaction processes. But these suppliers, including TCS, Infosys, and Wipro, are putting together solid business cases for net-new HRO deals based on their experience in transaction processing, call centers, and ERP support.
Another category of new offerings comes from existing suppliers who, due to acquisitions or partnerships, are creating alternatives for smaller organizations (10,000-20,000 employees) already on an ERP platform and who want to outsource but do not want to use a proprietary technology platform. These suppliers include Northgate ARINSO, ADP, and the recent partnership formed by LogicaCMG and Oracle to focus on HRO offerings for the U.K. public sector market.
The bottom line? More alternatives for buyers, more confidence in the HRO market, and a healthier market overall—with sound fundamentals still in place and the right reasons for outsourcing. Sounds like a cause for optimism to me.