Multi-process HRSourcing

A Precious Bundle

Buying integrated HRO and FAO together is a growing phenomenon, but these bundled deals still represent a small portion of the overall BPO market. Still, the potential for greater cost savings is apparent.

by Kerry Ann Vales

The BPO market has done a lot of growing over the past 20 years, spanning from the first introduction of internal shared-services centers in the early 1990s, where processes were centralized, to the mega deals cut earlier this decade to today’s latest movement towards multi-sourcing. Over the years, many lessons were learned, and best practices were developed for completing a successful contract.

Today, the arrival of the BPO market is complete and the future is bright, but this did not come without a significant learning curve. The early BPO pioneers of this market—including Arthur Anderson, Accenture, and PwC—came onto the scene with a marketing philosophy and thought leadership that focused on the value of integrating and bundling BPO services. But the early market may not have been mature enough to handle the increased complexity involved with multi-process outsourcing. After only a short period, the number of bundled contracts declined, and their pioneering fathers were forced to re-examine their processes.

These days, however, the market radar has picked up new activities in the number of multi-process outsourcing of HR and F&A services contracts being signed. A new wave of vendors has emerged with a fresh set of best practices leveraged by technology and global delivery models. They aim to take on the challenge of integrating key processes in HR and F&A in a bundled solution and succeed where the market once failed. They may only represent a small share of the market to date, but they come with a promise of a break-through value.

In today’s BPO market, only a small portion of the market is involved in a bundled HR and F&A solution. The Gartner Group estimated that bundled BPO contracts represent approximately five percent of the total market, with bundled HR and F&A contracts representing only about one percent. Any activity in this area is considered buzz-worthy as industry analysts cover these contracts more closely than single-process deals. Multi-process contracts grab headlines because they tend to be large in size, long in duration (typically 7 to 10 years), and are aggressively touted by the service providers.

John Wilmott, CEO of Nelson-Hall, noted that there is very limited European activity in bundled back-office contracts and added that he believes these services on a global basis represent less than one percent of the market. Nevertheless, Wilmott said he sees much more bundling of customer care and industry-specific processes, compared with what he classifies as front- and middle-office activity in FAO and HRO.

Phil Fersht, a VP at Everest Research Institute, predicted that an increase in the bundling of processes together but not necessarily to a single providers. He said that it is still too difficult for service providers to demonstrate the synergies and benefits of multi-tower deals, in which several processes are outsourced to one provider. In tracking the impact of multi-tower deals, the Everest Research Institute identified more than 200 transactions since 1991 involving FAO, HRO, and procurement. Six percent of these deals were bundled FAO and HRO contracts.

Robert Brown, a principal analyst at Gartner Group, said he sees growth in the bundling of F&A and HR, but not at an explosive rate, especially with demand being relatively miniscule at this point.

“Even though the demand for bundled services may be small, the bundling of HR and F&A services together is slightly higher in demand than that of other back-office processes,” Brown said.

The demand for F&A and HR may be higher for a number of reasons, according to Brown. Both are highly transaction-based, and each involves a high number of compliance-related issues that can benefit from outsourcing. In addition, Brown stated that both have very definitive sets of time tables for executing their processes, and in many cases, the internal customers of HR and F&A overlap, with the CFO playing a central role in shaping both functions. Fersht added that he expects F&A and HR coming together due to bridging processes that impact both functions.

Two of the most common bridging processes in F&A and HR are payroll and accounts payable. Payroll connects the finance department and the HR department. According to Everest, payroll is bundled into 50 percent of F&A deals and 87 percent of HRO deals. Accounts payable cuts across procurement into F&A but also HR when temporary staff recruitment is included in the contract.

While there are bridges between F&A and HR, there are a number of dissimilarities as well. HRO focuses more on horizontal solutions, while F&A tends to be industry-specific. Providers of HR services tend to take over the technology of the customer, which can make outsourcing more complex. FAO providers, however, tend to work with the client’s existing technology, making it easier to implement. In addition, FAO also has a large labor arbitrage and offshore component to pricing and delivery, as opposed to HRO providers who are only just starting to build their offshore capabilities.

Despite clear distinctions between their processes, two multi-process contracts are consistently cited by industry analysts as examples of how the bridging of services can succeed in a single contract. The first is a mid-market deal serviced by Accenture BPO Services. It provides integrated F&A and HRO solution for the Catalina Restaurant Group, a restaurant chain with more than 190 outlets. Sam Borghesi, president of the group, described the benefits of bundling both processes.

“By using our service provider, we didn’t need to build a finance and accounting or payroll department. Instead, we leverage the expertise and technology of our service provider to provide cost-effective and comprehensive services,” he said. “We no longer have to deal with the administrative issues related to running our own operation, and as we expand the number of restaurant units we own, we do not have to add administrative staff.”

Jeff Bizzack, CEO of Accenture BPO Services, said he sees a growing trend to outsource F&A and HR to a single provider, especially in the mid-market. Defining these firms as ones with 1000 to 15,000 employees, Bizzack said these organization are seeking an integrated F&A and HR platform that provides a broader value proposition and higher return on investments (ROI). He added that mid-market clients tend to look at ROI in two areas. The first is focusing on the dollar savings through labor arbitrage and the bundling of back-office processes.

The second, Bizzack stated, is, “when leadership of the mid-market firms can focus strategically on building their top and bottom lines versus getting weighed down by day-to-day HR and F&A transactions. That is the real ROI. The mid-market is so receptive to the outsourcing of both F&A and HR to a single provider because the ROI is so high.”

The second contract consistently referred to as a prime example of a successful multi-process outsourcing relationship is in the larger, Global 2000 market. Capgemini established a landmark contract with TXU, a Dallas based energy company, in 2004. Under the 10 year agreement, Capgemini Energy Limited Partnership provides IT, call center, billing, HR, supply chain, AP, and accounting services to TXU.

When the contract was initially signed, John Wilder, chairman and CEO of TXU praised the deal. “This contract will contribute to TXU’s commitment to better service, improved competitiveness, and reduced operating costs,” he commented. Initially estimated at $3.5 billion, the contract by all industry standards is one of the largest of all time and a model for integrating FAO and HRO.

Rick Tober, VP, chief sales officer of Capgemini Americas, described the TXU relationship as providing dramatic economic benefits to the client as well as enhanced service while reducing the level of risk. Tober said he believes that by owning the process end-to-end, organizations optimize the economic benefits of outsourcing as well as take the risk out of the equation.

“If you own both the technology as well as the business process, there’s a greater opportunity to make investments in relation to business value and realize the benefits of becoming a process-driven organization,” Tober said.

Tober is not alone in his assertions of the importance of technology as Gianni Giacomelli, head of strategy and marketing of SAP BPO, noted that the integration of HR and F&A is typically facilitated by a common technology platform or interface technology (for example, Netweaver in the case of SAP). He pointed out that the core of HR and F&A share a number of links, especially around financial flows.

In more sophisticated enterprises, there can be implications in activity-based costing as well. Platforms powered by large-scale ERP systems are fairly complex and can perform that cross leverage efficiently. Giacomelli also pointed out a key factor that may limit the growth of multi-process type deals.

“While technology can drive the integration process, it is crucial for service providers to have a robust change-management process. In many cases, CFOs may resist integrating HR and F&A because the change management issues are just so large. They can appear overwhelming in a bundled approach and, therefore, some CFOs may prefer to outsource their processes on a discreet basis,” Giacomelli said.

BEST IN CLASS OR JACK OF ALL TRADES?
While some buyer organizations prefer to consolidate all of their services to one provider, some question whether such a strategy is wise. Typical discreet providers, such as Ceridian and OPI, have decided not to dilute their capabilities by remaining committed to offering a single-process solution for their clients. Kishore Mirchandani, president of Outsource Partners International, added, “To offer another service like HR without having the deep domain expertise would be a challenge for any service provider. We choose not to build an HR function because we focus on what we do best for our clients: F&A outsourcing.”

Whether the market is mature enough to handle the complexities of multi-process HR and F&A deals is a question that elicits varying answers, depending on which industry leaders you talk to. However, there are clear examples of how bundling of F&A and HR services in one contract serviced by one provider can be done successfully in both the mid-market and Global 2000 market.

Whether bundling will happen in a big-bang, all-at-once approach or in an incremental, process-by-process approach isn’t clear, but there are clear indications that an interest is developing in the market. Current growth rates might not break any records at first, but industry insiders will be keeping a close watch to see if this new wave of outsourcing providers, driven by technology, can break through and build market demand to successfully overcome the same obstacles that faced early pioneers years ago.

Tags: Multi-process HR, Sourcing

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