As economy heads into a downturn, building rather than buying HR services will be a hard sell in the near future.
The HRO market appears headed for uncharted waters. Since its inception in 1999, the country has largely enjoyed an economic climate of low interest rates and rising productivity. Even during the economic recession of 2001, the business community’s access to cheap capital seemed endless.
Fast forward to today. After 17 straight rate hikes, the Ben Bernanke finally took a pause in August, with a cautious Fed Chairman Ben Bernanke watching for any signs of runaway inflation. That’s because the economy is showing clear signs of sluggishness, with real GDP growth tracking at an annualized rate of 2.5 percent in the second quarter of the year. Even more disturbing to the Feds is that gains in productivity—a measure of output per hour—has come to a screeching halt, rising just 1.1 percent in the second quarter after a blistering first-quarter improvement of 4.5 percent.
According to the U.S. Bureau of Labor Statistics (BLS), productivity posted magnificent gains in the 1990s. It reported that between 1995 and 2000, productivity on average rose 4.1 percent annually, significantly higher than the 2.5-percent rate recorded from 1973 to 1990. With offshore manufacturing and IT outsourcing accelerating in the 1990s, the BLS In its own comments on outsourcing concluded that offshoring had little impact on overall productivity gains.
What does this mean for the HRO marketplace? I suspect it’s a positive development. Much of the productivity run-up so far has been fueled in part by technology and other investments brought about by cheap capital. With interest rates higher, the argument of buy versus build has been tipped slightly in favor of buy. Capital investments have become more costly so outsourced solutions suddenly look more attractive.
At the same time, organizations must consider new ways to boost productivity. A basic tenet of the outsourcing proposition is providers deliver services more efficiently than in-house resources. I know, I know, those of you still happily processing payroll internally question whether this theory really holds water. Studies and benchmarks aside, common sense tells us that the one-to-many delivery model offers many benefits than the go-it alone approach.
The truth is that outsourcing raises productivity for any organization. By transferring non-core activities to a provider for which these services are a core, you’ve suddenly raised the productivity of the buyer. It’s akin to lopping off the bottom 20 percent of any population to raise the average.
Raising productivity at your company during an economic downturn is a good thing, and for this downturn, it’s looking like a great thing. With consumer spending—which accounts for two-thirds of all U.S. economic activities—headed for a rough landing, businesses must prepare themselves. That’s because when John and Jane Smith stop pulling out their wallets, we may be in economic doldrums for some time. Unless the Fed is prepared to reverse course and start cutting rates, don’t expect much help from consumer spending.
As HR leaders, your plans for a significant HRIS rollout might have to take a backseat during these times because IT and marketing may be facing budget cuts in the near future. It will be a difficult sell to the CEO or COO that now’s the time to invest in self-service when any number of competent providers in the market can cost effectively and painlessly deliver these services on their established platforms.
Still, outsourcing is about making an effective business case, and don’t let anyone tell you otherwise. Sure cost savings are just one aspect, but if businesses can’t grow because the current platform is a bottleneck, isn’t this a business case as well? So as you ponder whether productivity has come to a crawl in your own organization, remember there’s always the HRO fix. After all, it is a primary reason behind convincing the C-suite that HR does deserve a seat at the table.