Although still maturing, the mid-market offers challenges and opportunities for buyers and providers alike.
With the refrain, “Are we there yet? Are we there yet?” still ringing fresh in the ears of many summer vacationers, the same question is apt when discussing the journey to truly sustainable, viable, and cost-effective HRO for mid-market companies and providers. Consensus among buyers, providers, and advisors is we’re getting closer, but the market, model, and offerings must be better defined and refined.
That’s not to say there aren’t many successful mid-market HRO engagements in play. For example, the well-publicized E.W. Scripps/ADP deal has set the standard for comprehensive mid-market HRO. And Laura Domchick, director of global HR business process optimization at Veyance Technologies (a spin-off from Goodyear) said her payroll, benefits administration, and self-service outsourcing agreement with Ceridian is going so well she has to “pinch herself.”
Still, with observers citing low mid-market HRO adoption rates to date, a huge opportunity exists for buyers and providers alike. But before we drill down into what industry players must do to propel mid-market HRO forward, let’s clarify a few points that attribute to marketplace confusion.
The Definition of Mid-Market. Put simply, mid-market organizations are characterized by the number of employees in the organization; some put this at 10,000 or 15,000, although ADP noted the average size of what it classifies as a mid-market company is rapidly declining to approximately 5,000 employees. Further, mid-market organizations may be single region, multinational, or global, although the latter is quite rare.
The One-to-Many Model. Two delivery models are actually in play today for mid-market organizations. The first is a rigid, pre-configured, “HR-in-a-box” solution that essentially dictates how services (most typically benefits administration, payroll, and HRIS) are delivered to multiple clients from the provider’s service center/s. While this one-size-fits-all approach works for some buyers, a second, emerging model offers the client a bit more flexibility and the ability to configure certain process components to meet its own unique business needs.
Emphasizing “pre-configured” is critical when defining the one-to-many model. The customization prevalent in highly comprehensive, large-market HRO deals isn’t affordable, efficient, or sustainable for either the provider or the client in the mid-market. The models in this segment are being established by providers based on elements of and lessons learned from both small and large ends of the market.
“It would be foolhardy for providers to ignore already proven approaches and start with a clean sheet for mid-market clients, but scaling up a small-market solution or scaling down a large-market solution won’t work for the mid-market,” said Arthur Mazor, senior vice president, global offering management and marketing at Fidelity HR Services. “Understanding what problems need to be solved and designing solutions to address them by leveraging lessons learned from those other more mature models is absolutely appropriate and, in my view, the right way to design mid-market HRO solutions.”
The other vital hallmark of mid-market HRO is standardization. For clients, this means alignment and relative homogeny of processes, data, and systems across the organization. If this doesn’t already exist within the company, a resolute willingness and ability to standardize is mandatory. For providers, standardization means a model built to operate to scale and at peak efficiency across multiple clients.
Tying these imperatives together, Deborah Hamilton, vice president, benefits at TIAA-CREF, a $400 billion full-service financial services group said, “Buyers want [or think they need] customization, and providers want standardization, and they don’t mix very well. Where they both need to land is configurability.”
TIAA-CREF had previously outsourced benefits administration. After a recent marketplace evaluation, it decided to insource HRIS and payroll but outsource talent management to a specialist provider.
Because of the rigidity of the models, some mid-market companies simply cannot successfully outsource. These include companies that are a collection of franchises or brands operating under a holding company but with competing profit centers and different methods and processes for conducting their HR functions, and companies that have grown through acquisitions but have not assimilated them to operate in a centralized, standardized way of delivering HR processes and services.
“While there may be good and justifiable reasons a company must manage compensation in five different ways, a ‘five bobcats in a gunny sack’ company simply isn’t a good candidate for outsourcing,” said Lowell Williams, executive director of HR advisory services at EquaTerra.
There is general recognition among mid-market companies on the value and relative lack of risk associated with outsourcing, especially for commodity-type and more mature HR processes. And the number of in-process mid-market HRO engagements bears this out. For example, ADP said the number of mid-market clients it signed in fiscal 2008 grew 50 percent over 2007. Further, an increasing number of broad-based and niche providers including Indian offshore players are entering the space.
Still, the responsibility for industry and individual engagement success falls squarely on the shoulders of both providers and buyers. So what do each of these communities need to do to propel and support the viability and bidirectional value of mid-market HRO?
Collaboration and Partnership Orientation. As in the large market, each party needs to understand the business of the other. Buyers need to understand how providers deliver services and make margins and know there is a limit to what they can ask for without paying more. And providers must understand the client’s objectives and requirements.
“By viewing the outsourcing engagement as a partnership, we can set the stage for working toward mutual measures of success. Having an outlook in which both parties look at one another as extensions of the same team contributes to the long-term health and success of the relationship,” said ADP’s Terrence McCrossan.
Alignment and Standardization. The biggest challenge for buyers, according to Rosemary Collins, partner and managing director of HR Services at TPI, is getting their internal organizations in alignment with moving toward standardization.
“The mid-market HRO solution is based on streamlining operations and increasing efficiency. That requires standardization with customization only for ultimate business-driven requirements. Buyers must get their organizations and business leaders on board with driving that change.”
Trey Campbell, CEO of Accenture BPO Services, Solutions for the Middle Market, added, “As providers, we can go in and articulate that we are on a common platform for all our clients and that we have standard ways of measuring, monitoring, and delivering service. While lots of buyers say they’re going to the standard if that represents the lowest price for them, you have to get deep into the conversation for them to really get a clear picture of what they’ll have to change and evaluate if they can really do it.”
From the buyer’s perspective, Domchick from Veyance noted, “You have to be willing to look at those standards, and ask yourself, ‘Why can’t we do this?’ When our provider presented its standards to us, we knew we intended to stick to them unless someone came up with a good, logical reason why we couldn’t.” This underscores that some processes in many mid-market companies are legacy only, and if they don’t add value, the paradigm can be changed, even if it represents an initial challenge for employees.
Jodi Hayes-Roth, senior vice president, HRO service delivery at Ceridian, also emphasized the importance of cultural alignment. “A large component of buyers’ decision-making processes is what the employee experience is going to be in an outsourced environment. They must have a very strong sense that the provider is going to take care of their employees as they themselves do,” she pointed out.
Need to Better Define Industry Standards. The industry still lacks common standards in SLAs and contract terms unique to the mid-market.
Change Management and Communications. Change management and change communications are as critical in the mid-market as they are in enterprise HRO. “Many deals get into trouble because the client gets amnesia on what they committed to do once the ink is on paper and they’ve locked into a price point,” Campbell said.
ADP’s McCrossan added, “From a strategic context, buyers very much understand and value a best practices-based, standardized approach. Where it becomes difficult is at the practitioner, hands-on level, the folks that actually have to carry through the change, or adapt and do something differently than they used to.”
Cost and Knowledge. Potential buyers must have a good handle on their current operational costs as well as possible future expenditures that could be mitigated via outsourcing. They must also have a very clear idea of the business objectives they want to achieve, what they want within contract scope, and their willingness to tradeoff customization for cost savings.
Providers must have a deep understanding of their cost drivers, e.g., what can be standardized. To ensure a viable, sustainable model, they need to look at lowest cost of ownership, scalability, and fast and flexible configuration.
Snapshot of Provider Offerings. While there are quite a number of service providers targeting the mid-market, the following is a quick overview of the focuses of providers cited in this article:
- ADP. Its mid-market offering is called comprehensive outsourcing service (COS), which covers a wide range of HR processes. It plans on expanding its scope of services, adding components to remove the administrative burden from the client, e.g., greater automation and the ability to handle a greater volume of calls. It recently added for one of its clients an online, 24/7 knowledge base for access to the company’s policies/employee handbook.
- Accenture. A bundled, dual-sided HR and finance and accounting offering (clients may choose to engage in one or both services). On the HR side, it focuses primarily on administrative transaction processing including payroll, benefits administration, and workforce administration supported by HRIS hosting. It works with other Accenture divisions or partners to deliver specialized services. It also employs a global delivery model.
- Ceridian. Its core offering is payroll and benefits services. Current adjacent services are recruitment process outsourcing (RPO), human capital management (HCM), and learning. It has added adjacent services such as leave administration, and operates in a number of countries, sometimes partnering with other in-country providers.
- Fidelity. It takes a long-range view on any market it addresses, using focus groups and dedicated research teams to define and build solutions. Thus, while it is committed to servicing medium-sized companies, it has yet to launch a mid-market HRO offering. Company officials have pointed out a need for mid-market solutions to go beyond just low-cost service delivery by providing the client with more value to help them solve important business challenges.
Additionally, a number of PEOs are also testing the water in the mid-market segment. However, these companies typically cater to the very small end of the market whose clients boast fewer than 500.
So as the segment grows, buyers and providers are each defining their place. With HR organizations doing a better job of defining what they need and can accept, and providers rolling out improved solutions, their efforts can only help accelerate the growth rate of the mid-market and further its maturity for the betterment of all parties involved.