Nearly 10 years after the industry first began, quality of service delivery is stabilizing. But can the market elevate its game to truly keep customers happy?
As the HRO industry approaches its 10th anniversary, questions remain about the effectiveness of comprehensive, end-to-end outsourcing. As any industry observers will point out, buyer satisfaction is improving, many first-generation deals are stabilizing, and some of the benefits initially touted by service providers are now coming to fruition.
By many accounts, these gains have been hard fought. And even though market engagement has slowed—large, global deals have nearly dried up in the past two years—practitioners are still helping to evolve HRO best practices and guide providers to better servicedelivery. Through participation in affinity groups such as the HRO Association, the HR BPO Buyers Group, and others, many enterprise HR organizations are weighing in with their experience, sharing effective strategies with cohorts, and helping to standardize the model in an effort to accelerate the industry’s maturity. And while the market has grown markedly since the pioneering days of outsourcing, many observers are still asking: has the industry finally been able to overcome some of its early-day maladies and to deliver all the value that was promised?
Through HRO Today’s own enterprise HRO buyer survey conducted last month, HR organizations say they are mostly satisfied with their deals (see data starting on page 38). That seems to reflect their behavior in the marketplace because by several estimates, only three percent of all HRO deals signed so far have resulted in termination. So with an overwhelming majority happy enough to retain HRO as a tool for back-office transformation, meeting compliance requirements, and cost reduction, it seems clear that outsourcing is more than just a passing fad.
By the Numbers
According to input provided by dozens of HRO buyers who participated in HRO Today’s anonymous survey, 73 percent said they either agreed or strongly agreed with the statement that they are very satisfied with their providers; just six percent were dissatisfied, with the rest being neutral.
These findings were in line with the results of a Towers Perrin study released last year in which 70 to 77 percent of enterprise HRO customers said they were somewhat or very satisfied with outsourced services. For instance, 77 percent were satisfied with self-service tools, while 75 percent were happy with DB retirement administration. Satisfaction rates were in the 70-percentile range for other areas such as stock option, DC retirement, health and wealth, contact center, and HRIS. The only category in which a majority of comprehensive HRO buyers expressed dissatisfaction was in staffing and recruitment, which only had a satisfaction rate of 36 percent.
Although overall satisfaction seems high among enterprise clients, they also expressed a dichotomous view of outsourcing. When asked if they felt HRO improved their HR operations, fewer than half (46 percent) said it did; 39 percent were neutral, while 13 percent didn’t think so.
According to buyers and industry observers, this seemingly conflicting position of being highly satisfied while disappointed by lack of operational improvements can perhaps be explained by several developments: Although providers have been able to meet their service level agreements, their struggle with profitability has pulled them away from introducing more innovation into their clients’ HR operations. The result is that while providers are delivering to expectations, they haven’t necessarily moved beyond the service levels buyers were accustomed to when they first outsourced. Furthermore, some observers point out, many deals were “oversold” to HR organizations, and some of those early adopters have finally adjusted their expectations after some initial letdown; however, the shortcomings remain fresh in many HR leaders’ minds.
Cynthia DeFidelto, a principal at Towers Perrin and one of the authors of its study, said buyers and providers have changed their expectations during the past few years. She said practitioners with prior experience in outsourcing have closely watched the market mature during the past few years. Although they are more realistic about what HRO can do for their organizations, they are also less tolerant of providers struggling to perfect service delivery. As part of their own maturity, buyers realize that they can’t always demand customized services, she noted.
“Buyers need a true awareness of where they stand and need to be truly ready to give up the customization. That’s what makes this successful—to make it a one-to-many model,” she said, adding that HR organizations weren’t always willing to make compromises in the past. “Conceptually, they were ready to do that, but when they got into it [the deal], they couldn’t do it.”
It’s a lesson that Karen Feld is familiar with. As vice president of corporate HR for Duke Energy in Charlotte, NC, she oversees the company’s HRO relationship with provider Hewitt, who delivers a number of services including payroll and HR administration to the company’s 15,000 lives. When Duke Energy originally entered into the 7.5-year contract, it held a realistic view of the gains it could achieve and the sacrifices it needed to make. She advises other buyers to make trade-offs in HR services delivery; otherwise, contracts will have a hard time achieving their goals.
“It (outsourced service) is going to be more plain vanilla and less customized than we are used to. When you are running it yourself, you want to make it more employee-specific,” she said. But when services are outsourced, “The buyer side needs to change its view or mental model of what’s acceptable. That needs to take place before you enter into an HRO relationship.”
That buyers have changed their expectations is an indicator of how far the industry has come since its nascent days, when promises of 30-percent operational savings and flawless service delivery were often accepted as gospel. Since those early-day letdowns, there have been concerted and coordinated efforts by enterprise buyers to better document and benchmark HRO performance. At the same time, providers have grown their business models, with some having made much-needed investments, others dropping out of the segment, and still others merging with competitors. Even sourcing advisors have grown more tempered in their outlook on HRO, becoming more cautious in their counsel to clients who want to transform HR.
“I think expectations [in the beginning] were too high, potentially with the advisors as well, where they were creating nirvana where nirvana could not be reached,” said Monica Barron, vice president of research for Dallas-based Everest Group.
Barron noted that both buyers and vendors after a few years began to realize that HRO was not a panacea for all of HR’s woes and have since adopted a more realistic view of what it really is: a tool for saving money in some instances, procuring better services in others, and accessing improved technology. However, organizations are satisfied enough that most have decided not to abandon their outsourcing strategy.
According to Everest, as of the end of 2007, out of 31 comprehensive deals that have reached an end-of-life status—terminated, extended, or reduced in scope—22 percent of those were cancelled. That figure might seem high until you realize that that means only seven of all the contracts signed so far have fallen apart. Barron said upon a closer look, 4 of the 7 were terminated due to buyer reorganization and not because of service delivery failure. HRO’s success rate, so far, then is around 97 percent.
Barron noted that stakeholders have endured quite a bit of give and take to achieve such a high success rate. In services in which expectations were not met, buyers have either decided to retain the services internally or parse the work out to a best-of-breed vendor. In either case, most HR organizations are not abandoning their original HRO contract; rather, they are collaborating with providers to make improvements where possible.
“I don’t think any one party can claim sole ownership of the gains. It’s a series of give and takes,” said Stan Gallinger, director of financial services at Lake Forest, IL-based Pactiv Corporation, one of the first clients of Exult, which was later acquired by Hewitt. “We’ve learned and they’ve learned, with some cuts and bruises, what happens when you don’t deliver on time.”
Since 1999, Pactiv has outsourced payroll and tax services to Hewitt. Gallinger said that as a long-time customer, his company is particularly demanding on its provider, counting on Hewitt to be sensitive to needs such as not allowing employee data to be accessible to anyone outside the U.S. At the same time, however, he said buyers should recognize providers’ needs to be profitable and therefore help them become more efficient when possible.
“As a partner, you should help them drive some profitability,” he added. “You have to have an outlook that you need your BPO partner to be profitable and successful. Otherwise, they will cut corners and cause audits.”
Gallinger said the two companies have labored to make the relationship successful to the point where very few issues require executive-level attention. He said that’s an improvement from the early days, when intervention was more frequent. Today, these types of problems may occur just once a year.
He credited both Hewitt’s responsiveness and Pactiv’s own internal governance for minimizing problems. For instance, his company is able to ensure continuity of key personnel while the provider has reciprocated by also retaining critical talent. Without the efforts on both sides, he added, the relationship would have suffered many more cuts and bruises.
“We are attached to their personnel and think highly of their competencies,” he said, adding that vigilance has been key to keeping the relationship on track. “You can’t just let this thing sit in your parking lot and expect it to nurture and feed itself. If you do, one day you’ll wake up with a surprise.”
Still Not There
Although HRO buyer satisfaction has improved dramatically during the past few years, it’s also clear that buyers feel that the industry still hasn’t fulfilled its promise. One reason often echoed by HR organizations is a lack of innovation in outsourced services. According to Towers Perrin’s survey, customers said “little progress” has been made in the area of innovation among other aspects of HRO operations.
Paul Kerre, vice president of HR at International Paper, which signed with Exult in 2001, said his company commissioned a third-party advisor to examine the state of its outsourcing efforts. The findings showed that International Paper was achieving savings at or better than what it had originally envisioned when it first contracted Exult. He added that performance has surpassed levels set for the end of the contract, meaning that Hewitt was delivering improvements ahead of schedule. Still, he lamented, he would like to see additional innovations.
“They haven’t pushed us, in our view, to the next level, such as in the area of better self-service. I am disappointed in that aspect,” he said. “We’re realizing the efficiencies and savings that we expected out of the relationship, but how do we move it to the next level?”
Kerre is not alone in his outlook. Many practitioners have expressed disappointment with the pace of innovation in HRO service delivery, and some providers freely admit that they haven’t been able to do more in this particular area. However, this may reflect HRO’s high-touch nature because innovation is often not easy to pin down. What one company may view as innovative could simply seem run-of-the-mill to an HR executive at another organization.
Furthermore, very few contracts specify how innovation is delivered; the best they can do is to include SLAs and require benchmarking.
And even if providers want to deliver innovation, they haven’t been able to in the past because of their own struggles to stabilize operations. During the past few years, most of the enterprise providers have experienced profitability difficulties as well as build-out challenges. They have been essentially treading water during this time.
How will the industry be able to narrow the gap between buyers’ expectations and the provider’s ability to deliver innovative tools and services? It’s not an easy answer, but Everest’s Barron said she thinks it may require developing new sets of competencies and technologies to achieve better results, whether that’s in recruitment, learning, or other functional areas. She added that as providers achieve profitability, they will eventually turn their attention to developing new solutions.
So as the HRO industry approaches a decade of deal-making, it can reflect on how attitudes have shifted, how service delivery has changed, and how the turbulent practices of yesterday have given way to more standardized and rigid processes. With many pioneering companies now looking to renew their contracts during the next few years, you can expect even more discussions among buyers, providers, and advisors on not only how to ensure uniform service but also how to raise it to a new level.