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The Mid-market Accelerates in 2006

One mid-market provider offers up his observations about the needs of the mid-market buyers, whose ranks is experiencing explosive growth this year. With a different set of needs and expectations than enterprise practitioners, mid-market buyers are increasingly embracing HRO.

by Jeffrey Mortland

Since our inception more than eight years ago, HR XCEL’s target market has been mid-market companies between 1,000 and 10,000 employees. Back then, there was virtually no competition in that space because other HRO providers didn’t think they could profitably provide a service with lower-cost service delivery and a higher level of expertise better than a full-time staffer could provide to companies of that size.

Eight years later, the mid-market is not only profitable but has even become attractive to the ”big boys” who are moving down market in hopes of increasing their market share. This move to the mid-market in the past year has been punctuated by several key trends. Here’s what we saw in 2006:

• Fundamental differences between mid-market outsourcing and enterprise outsourcing become clearer. A key difference in the service expectations of mid-market companies versus larger, enterprise HRO buyers is that they are looking for a non-traditional approach to providing benefit services. It has been our experience that most mid-size companies want relationship-based partnerships. They are not content with a “vanilla cookie cutter” solution backed by a call center staff that often has limited HR expertise.

Mid-size companies are also looking for a one-stop shop solution for transactional activities within HR. They are looking for a company to grow (or not) with them that offers a scalable solution.

We have witnessed quite a few mid-size companies that “test the waters” by choosing to outsource benefits aministration and then realize that by focusing their HR staff on people work and not paperwork, they are more successful in their recruitment and retention efforts, as well as reaching their overall HR strategic goals and objectives.

• The mid-market has embraced outsourcing. This year saw record-breaking sales for HR XCEL, a clear indication that the concept of outsourcing is no longer an unheard of strategy for the mid-market. More executives see the value and return on investment of HRO and understand it’s a move needed to keep the company competitive.

In the beginning, part of our sales process was spent in educating prospects on exactly how HRO would work for them. That’s no longer the case. Prospects are much savvier now, looking for a best fit in an HRO provider rather than just exploring outsourcing as an option. A recent NelsonHall study found that nearly 42 percent of mid-size companies expect to expand their HR outsourcing in the next year, so the growth shows no signs of diminishing.

• The mid-market is embracing benefits administration outsourcing. We have found that benefits administration is increasingly the HR function that the mid-market is outsourcing. The increasing costs of benefits coverage, combined with the shape and complexity of the plans, make it an administrative nightmare to handle in-house. In addition, in order to attract and retain employees, mid-size companies need to offer healthcare and related benefits that can compete with those offered by larger organizations. Along with those options come more complex administrative tasks.

• The mid-market wants a non-traditional outsourcing model. Mid-market companies want their employees to feel comfortable with the outsourcing provider by being able to speak with benefits professionals. They want the HRO provider and its benefits representatives to truly become an extension of their HR organization. Mid-market companies want to make sure their employees are taken care, and they want an HRO provider that will make the commitment to understanding their organization and its unique culture.

• Mid-market outsourcing is viable for all types of industries. Companies with disparate internal systems, multiple benefit plans, multiple locations, and a fluctuating workforce are all ideal candidates for HRO. Although these are some of the common needs of mid-size companies, more than just a few industries can benefit from HRO. HR XCEL’s new business in 2006 came from firms in a variety of industries, including pharmaceuticals and biosciences, manufacturing, professional services, textiles, technology, engineering and retail.

• Mid-market outsourcing decisions are not based solely on price. Although in many cases, companies will see a positive ROI over the course of their outsourcing contract, we have seen several instances where the cost of outsourcing was breakeven compared with keeping it in-house, and the decision was still made to outsource. These companies cited increased experience and expertise as the motivator for making the change. When spending the same amount, they felt they could gain better service and knowledge from a specialized provider than they could experience in-house.

ASP technology is a large part of the outsourcing decision for mid-size companies. For smaller organizations, HRO allows them to take advantage of a sophisticated HRIS solution—a luxury they couldn’t afford on their own. Outsourcing allows them to have access to a system that is constantly upgraded at a cost that makes business sense.

• Mid-market outsourcing triggers are numerous. Some of the decision triggers we saw in 2006 included: technology costs/obsolescence; the retirement/termination of a key employee responsible for HR with no succession plan; lawsuits; botched open enrollments; and COBRA processing gone bad.

In our experience, the technology factor has been a large impetus for change during the past year. Many mid-size companies have purchased enterprise-based solutions with the hope that it will help “pull the company together” on one common platform. The reality has hit home, and companies are realizing that those dreams are seldom a reality.

Implementation time for an ERP can take six to 24 months, and that’s not for the entire application. By the time HR is finally launched, laws and policies impacting compliance have changed several times over. To be “up to date,” an upgrade needs to be purchased, and more money needs to be spent on implementation. This challenge of expanding an existing ERP, and the sizable investment that goes with it, has caused many companies to consider outsourcing.

In many cases, today’s ASP technology can easily replace and even improve on a company’s enterprise-based solution. For many organizations facing an expensive, long-term investment, switching to a combined HR service and ASP solution is an easy lease-versus-buy decision.

Other triggers that can motivate mid-market companies to evaluate HRO are growth, change, or internal problems. When companies are experiencing rapid growth, a change in organizational structure, or financial difficulties, outsourcing can often be the strategy that helps them get past their internal hurdles and refocus on their core business.

We have also seen several clients facing the challenge of consolidating benefit plans, administration models, and HR systems from multiple locations that all had unique and disparate systems. By creating a shared-services center that utilized HRO, these clients were able to gain economies of scale, reduce their costs, and consolidate their HR systems for more effective and efficient procedures and improved service.

In other cases, outsourcing actually allowed our clients to completely eliminate the need for a shared-services center. Outsourcing was the most efficient and cost-effective solution for the challenges they faced and allowed them to have a substantial ROI.

CONTRACT LOGISTICS
The mid-market doesn’t differ all that much from larger firms in terms of the logistics of their outsourcing contracts. The average HR XCEL contract is for five years. We have a 60- to 150-day implementation schedule, depending on the size and complexity of the services being provided and the unique circumstances of the client. We have run into a few instances in which clients were in trouble and needed help ASAP. These companies were up and running in 30 days or less—although my implementation VP will probably put out a contract on me for disclosing this.

Our average new client in 2006 was 3,500 employees, with benefits administration accounting for 90 percent of new business and full HRO services accounting for 10 percent.

• The mid-market outsourcing decision-making process varies with the function. In our experience, the decision maker in mid-market deals depends on what is being outsourced. For benefits administration, for example, we typically work with a management team that has the approval of the executive team. The logistics of the negotiation and implementation are handled by a management team from IT and HR.

The landscape is completely different for a end-to-end HRO deal, however. For those clients, the decision-making process is handled completely at the executive level with little or no input from the management side. We work with CEOs, CFOs, and presidents on end-to-end HRO deals, depending on the company size and organizational structure.

Tags: Engaged Workforce, Multi-process HR, Payroll, Sourcing

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