Despite the unique requirements of various HRO buyers, establishing a baseline in definition, pricing, and service levels will help the industry better grasp what it’s getting for its money.
The multi-process HRO market is beginning to mature. While not yet approaching the maturity of the IT outsourcing market (now in its 30s) or even its closer cousin, benefits administration outsourcing (in its 20s), HRO is no longer a child.
Multi-process HRO is clearly showing all of the signs of entering into adolescence—complete with growing pains, a little wisdom gained through experience, and the beginnings of conformity around some key norms.
According to TPI’s Prevalence Database, the number of companies with more than 10,000 employees that have outsourced HR has nearly doubled from 2004 to 2006, growing from 52 to 94 organizations globally. A majority of these companies have multiple outsourced HR processes.
TPI spent the last year working with leading HRO service providers, including ACS, Convergys, ExcellerateHRO, Fidelity, and Hewitt to develop a
common view of HR services taxonomy, pricing methodologies, and service levels. With their input, we were able to identify common themes and approaches foundational to successful outsourcing. The result is a common vernacular to describe HR administrative services, standard pricing units, and a robust, yet manageable set of service levels across all HR processes.
In the early years of HRO, everyone had a different way of describing and categorizing HR services. Because many early relationships were of the lift-and-shift variety, they reflected myriad approaches these clients had adopted in their own operations. While we still see variations in the detailed service descriptions from one relationship to another, the overall construct of process areas and underlying services is becoming more common.
“We compared the taxonomies of most of the leading HRO providers and found many similarities,” said Rosemary Collins, TPI HR practice leader. “From these, we created a high-level taxonomy that can be applied across the industry.”
Within each process area, buyers can choose from identified common service-bundles. For example, in recruiting, a buyer may wish to purchase only a recruiting technology solution; a full administration solution that includes support for postings, interview scheduling, and pre-employment screening; or a full recruitment process solution that includes sourcing and selection of candidates. Understanding the basic options allows buyers and service providers to more quickly and effectively come to a common understanding of client requirements and service provider capabilities. It’s more feasible to compare market pricing from deal to deal.
Two basic types of pricing methodology are used in HRO. One is straight variable pricing on a per unit basis, where the pricing is simply based on multiplying the number of units (generally employees or participants) by the per unit price. This allows the total price to automatically adjust to the number of users. The second method establishes a fixed total charge with adjustments applied for changes in the pricing unit beyond an established range, or deadband.
Within either of these methodologies, agreement on the resource units that drive pricing is key. For most HR services, the appropriate pricing unit is the service user (employee or participant). However, there are some common exceptions to this rule. In recruiting, for example, the workload is driven more by the number of new hires than the number of existing employees. So, pricing is generally based on a per hire (or per requisition) basis. Similarly, in learning, content development services relate more to the amount and complexity of course content developed, rather than the number of employees it might be delivered to.
A primary objective of the industry standards initiative was to combine input from the service provider community with TPI’s broad experience with HRO contracts to establish common service levels reflecting emerging standards. The result is a comprehensive set of service levels divided between those that apply to all process areas, such as application availability or case management, and those that are process-specific, such as payroll accuracy or time-to-fill in recruiting.
As the marketplace continues to mature, we expect increased standardization around service offerings, pricing norms, and service level metrics. While clients will most certainly continue to have unique requirements, the power of outsourcing is in leveraging standardization.