In today’s changing market, who has the advantage: End-to-end or point solution?Industry experts weigh in.
By Russ Banham
In the beginning, there were the single-solution HRO deals—the outsourcing of payroll or benefits administration to a single service provider. Virtually overnight, this morphed into the really big deals. Large multinational corporations including DuPont, Johnson & Johnson, Motorola, Goodyear, BP, and Unilever outsourced all or nearly all of their HR functions to a single service provider. The term “end-to-end HRO” surfaced, and a cottage industry hatched at the beginning of this decade.
And then new deals arrived in their wake; some were the end-to-end variety, but many others were of a different stripe. In these engagements, buyers of services typically pitched the more transactional type functions to a single vendor and kept other more strategic HR functions such as recruitment processing and talent management in-house—that is, until a new crop of specialty HRO vendors came on the scene to service them. End-to-end HRO now confronted the newer best-of-breed HRO model. Many articles were written and panels assembled to debate the wisdom of one methodology versus the other, with no clear victor apparent.
Today, a victor of sorts—and sorts is key here—stands tall. And it is not traditional end-to-end HRO, which has endured its share of ups and downs. Even end-to-end buyers such as DuPont acknowledge that the model end has proven imperfect. As Ernie Lareau, the chemical company’s director of HR shared services, puts it: There “does not appear to be a single vendor today that can be everything to everybody.”
Is end-to-end HRO your grandfather’s HRO? Yes and no, it seems. Interviews with a fair sprinkling of HRO vendors, buyers, sourcing advisory firms, consultancies, and a law firm that have put together many HRO deals indicates that most believe the best-of-breed or point-solution model in terms of functions and geographic effectiveness seems to be the HRO model of the moment. The disclaimer is that a single vendor for multiple functions, particularly highly transactional functions, also remains highly viable.
“The fact that we’re seeing fewer end-to-end deals doesn’t mean there is less interest in it; it’s just that companies are taking a more measured approach,” said Stan Lepeak, managing director of global research at Houston-based sourcing advisory firm EquaTerra. “Shoppers are more sophisticated and smarter than they were and are still looking to get to an end-to-end model, the difference being they are seeking to do it over time with several vendors, as opposed to in one big bang with a single vendor.”
Consequently, many deals being negotiated may involve one vendor for multiple functions, another vendor for recruitment processing, another for talent management, and yet another for benefits administration. This process may be repeated in Germany, France, and variations thereof. The goal, from a strategic standpoint, is integrating the different outsourced solutions from a technological standpoint to provide a single view into meaningful data for decision-making purposes. Although there may be several vendors involved, it’s still end-to-end.
EquaTerra segments HR functions into 22 discrete areas, although Lepeak conceded that not everyone agrees on the actual number. The firm also defines multi-process HRO as the engagement of five or more functions such as payroll and benefits administration to a single vendor; again other firms have their own definitions. Like AMR Research and Gartner, EquaTerra tracks the number, size, and scope of HRO deals around the world, focusing only on contracts worth $25 million or more in total value. The numbers tell Lepeak that “large multi-geography, multi-process deals—however you define them—are becoming fewer and fewer over the years,” he noted.
Others read the same tea leaves. “There have been a fair number of successes in the multi-process world, and we continue to see large multi-process deals, but there are definitely fewer of them,” said John Haworth, consulting principal and head of the HRO practice at Pillsbury Winthrop Shaw Pittman LLP, a Washington-based law firm that has handled roughly 1,000 HRO transactions worth nearly $500 billion in total value. “But, this is not a zero sum game where one type of HRO will win and one will lose,” he adds. “It’s just not that black and white.”
The analogy resonates with Rosemary Collins, partner and managing director of sourcing advisory firm TPI’s HR services team in Alexandria, VA. “People tend to talk about this as one end of the spectrum or the other, but the truth is somewhere in the middle,” Collins said. “Multi-process HRO is still alive, and there is still a market for it, and there are still vendors like Accenture eager to provide multiple solutions. Regarding true end-to-end HRO, where you are essentially outsourcing the entire HR department including recruiting and learning, that has been really scaled back.”
She elaborated that many vendors never promoted themselves as full, end-to-end services providers, noting that both IBM and Accenture would unlikely service benefits administration alone. “At one time there was this vision of trying to pull it all together into one enterprise with one provider managing it. The reality is that this is going away. We’re seeing two different components—the more transactional HR functions handled by one vendor or more, and the more specialty processes like recruitment processing handled by one vendor or more. Nevertheless, the ideal is to still have it all managed by one provider.”
This is happening for several reasons. Buyers have recognized that unlike IT outsourcing and finance and accounting outsourcing, the very nature of HR involves multiple user groups, in some cases crisscrossing the globe. “Some early adopters have acknowledged that end-to-end HRO was harder than they thought,” said Lepeak. “Quite often the HR professionals (in these deals) said early on that they thought it would be difficult, but there were others in the organizations that tended to push it forward.”
The candor of these HR executives today is a factor why fewer end-to-end deals are being recorded. He explained that some HR executives were essentially scared away by the highly publicized problems with a few troubled deals.
John Higgins, senior director of innovation deployment at Accenture HR and Learning BPO Services, agreed that end-to-end outsourcing was tougher to achieve than many initially believed. “People went into it with great fanfare because they’d seen the success of IT outsourcing and said ‘If it works for IT, it should work for HR,’” he said. “But, the truth is that just a single area like pre-employment screening is one of the most complex processes imaginable. Does the client want you to recruit white-collar or blue-collar workers, to recruit just in the U.K. or in Paris and Germany, where you have to deal with union contracts, or perhaps in Ireland where it is common for a lower-level manager to be provided an automobile in his compensation package? The various combinations and permutations are intricately complex.”
Haworth has a different opinion of why end-to-end HRO isn’t the big game in town. He blamed the slowing interest in part to the inordinate time it takes to seal the deal. “You pick up the paper and read two different Nobel laureates arguing at opposite ends of what will happen next year. My point is that end-to-end HRO takes longer to execute and longer to realize the benefit, and right now everyone’s time frames are compressed.”
Haworth doesn’t attribute the malaise purely to economic musings. He also cited the upfront costs of the end-to-end model as potentially prohibitive in the current economic environment. Large-scale, multi-process, multi-geography deals require large implementation and transition expenses, and as processes are strung together, implementation costs can run into the tens of millions of dollars. This doesn’t jibe with current economic conditions, he said, when executives are pushing for compressed time frames on projects while looking to conserve cash.
Yet another reason for the evolution away from big-bang, multi-process HRO engagements is declining interest among service providers. Different HR functions often require specialized skill sets that not all vendors have. Over the years, the providers learned what they were really good at and not so good at after all. As Collins puts it, “Just because you’re good at implementing HR ERP systems doesn’t make you a good recruiter or good learning organization.”
Haworth noted that the end-to-end trend started with the outsourcing of a single function such as payroll to single vendors, who prematurely thought they could build competencies and integrate data to offer a single view to clients. “Frankly, it was hard for even the best, most technically proficient providers to deliver on that promise. The modules that applied to these processes within the ERP system weren’t mature enough or specific enough so it became hard to be good at a lot of things,” he said.
The concept of consolidating HR services with one vendor turned out to be a field of dreams. Recruitment is a complex art, and it turned out that large multi-process HRO players aren’t particularly good at it. Even in benefits administration, these providers don’t have the competencies of specialists such as Watson Wyatt or Mercer, although Hewitt, once the market leader in multi-process HRO, is one of the leaders in all aspects of benefits consulting and administration.
Lepeak said the end-to-end market has turned around so much since its earlier days that many vendors themselves are leery of taking on the wrong kind of deals. Early deals just didn’t have a lot of clarity on the cost of running an end-to-end service, and some providers bought business that drained their bottom lines. He said multi-million-dollar deals drew a lot of attention, but they ended up costing the providers a lot of money. As a result, Hewitt has pulled back on large, multi-process deals while Fidelity has exited the market altogether.
“They had visible problems with accounts, and the equity analysts that tracked them beat them up for it,” Lepeak said.
While other providers such as IBM, Accenture, Convergys, and NorthgateArinso still eye large, multinational accounts, some of these vendors are clearly aware of the trend moving toward single-solution deals. “Certainly, the notion a few years ago was that one provider would meet all the needs of the organization—all the technology and all the processing—but there were reality checks along the way,” said Cay Gliebe, vice president of sales and marketing at NorthgateArinso.
Many organizations have struggled with the use of a single technology solution responding to all its process requirements, she said, noting that NorthgateArinso, in partnership with SAP, continuously gauges feedback from clients about their specific needs. In some cases, they want integration of different solutions compared with outsourcing just one service.
Integration is where multi-process vendors such as Accenture, IBM, and Wipro are headed, if they’re not already there. “The model is evolving to where there will be a primary vendor with the IT platform handling the core transactional processes like payroll, benefits administration, time and attendance, and perhaps a couple or more unique functions,” DuPont’s Lareau said. “At the same time, contracts will be inked with specialty, best-of-breed providers who then link up with the primary vendor, which is entrusted to manage the interfaces and coordinate the data.”
He equated this cooperative model to the typical contractor and sub-contractor relationship in construction projects.
The New Paradigms
The new model seems to involve several vendors, each with expertise in a certain function, and having their applications or technology solutions integrated in a single platform by the primary service provider. At least that’s Phil Fersht’s view. The director of global business and outsourcing services research at AMR Research in Boston sees vendors moving in four areas—recruitment process outsourcing from soup to nuts, payroll, benefits administration, and a category he calls systems integrators. The first three are staffed by best-of-breed providers; the latter is a company with technology chops such as H-P, IBM, Accenture, and others who can make money tackling the integration issue.
Buyers such as Lareau said they see value in the notion of a primary vendor running the show. He predicted a series of partnerships and alliances that large, tech-oriented vendors will take on with specialty providers—in line with his contractor/subcontractor model. However, he said he doesn’t believe buyers will relinquish their direct relations with third-party vendors. He predicted ongoing dialogue around strategy between buyers and primary vendor around specific processes, but the client more than likely will want to take the discussion to the subcontractor level. Just because the primary vendor takes care of the integration doesn’t mean it is in charge.
So exactly who will be in charge is redefining HR responsibilities? With all the different outsourcing partners and the need for an integrated view, Collins explained, “Someone in the organization or some group will need to be responsible to manage it all.” (See Chief Bottle Washer.)
Back to the Future
End-to-end outsourcing to a single vendor is not going away, many observers say. There will always be mid-sized employers who will want one vendor to take on most if not all of its HR functions.
“We don’t want multiple vendors,” said Sreekanth K, senior vice president of global HR operations at Islandia, NY-based CA, a provider of IT management solutions. “Being a technology company, we want ease and integration from a technological perspective. We also believe in the value of end-to-end data in a single repository, from which we can create business intelligence. With several service providers and no integration, you lose that single view.”
CA outsources HR functions (other than payroll) to NorthgateArinson; ADP, with which it has had a long relationship, manages payroll. It also outsources its recruitment to CDI, an accord that NorthgateArinso manages.
Clearly these types of service arrangements will continue to be in demand as some businesses simply value integration above everything else. Moreover, with NorthgateArinso, ACS, and Wipro having rolled out standardized technology offerings that elevate integration to new heights, end-to-end engagements may get a shot in the arm from these lower-cost solutions. Still, large engagements requiring long implementation cycles and lots of customization will unlikely gain many new supporters in the near future. Right now, the market is all about quick return on investment and cost savings. As Lareau pointed out, “HRO will come in different flavors.” The goal, of course, is to make it all taste good.
Chief Bottle Washer
With more HRO buyers opting for piecemeal solutions from specialized vendors, someone in the organization has to manage the various relationships. Such a person has materialized in the guise of chief sourcing officers, outsourcing program managers, vice presidents of service delivery, or staff vice president of HR operations—take your pick.
Not that the job is easy. “With one-stop shopping not working and companies going more into best-of-breed solutions, they’re learning that it is a complicated challenge to manage several vendors,” said Stan Lepeak, managing director of global research at EquaTerra.
“You still need to have all 22 functions running smoothly and to understand, for example, what your payroll is globally even though you have three different payroll providers around the world.”
Savvy executives must be well grounded in their organizations’ strategic HRO objectives, while congenially managing supplier relationships. “It’s a tricky job, being conversant with the provider network and cultivating those relationships, while balancing it with the company’s goals,” said John Haworth, consulting principal and head of the HRO practice at law firm Pillsbury Winthrop Shaw LLP. “They need to be one part diplomat and one part technocrat. It’s a new competency for HR.”
It is also one that is growing in number. “We’re not seeing chief sourcing officers happen in a big way yet, but certainly as we see companies engaging more service providers, the need to manage those relationships becomes critical,” said Rosemary Collins, partner and managing director at TPI. “Providers in some cases will be handing off data from one to another, requiring some sort of central oversight. It could be a single person or a team, but there has to be people in charge.”