Now that HRO practitioners have mastered keeping their heads above the water, is it smooth sailing as renewal time comes around? Look for early adopters to keep splashing to a minimum as they leverage the lessons learned.
When HR leaders first waded into the murky depths of HRO during its infancy, they could hardly stay afloat much less sail effortlessly in untested waters. Some seven years later, they are still trying to avoid the reefs despite the industry having overcome a few shipwrecks. And with many of the original deals now drifting toward contact renewals, it’s time again to test these organizations’ sea legs as they sign a new generation of deals.
But as these HR organizations begin negotiating with existing and new providers for a better deal—a few are expected to bring HR services back in-house—they have experience on their side and will profoundly reshape how the next generation of contracts will be constructed, balancing both their self-interest against the needs of more sophisticated vendors. In fact, industry observers point out, now that they are wiser, battle-scarred, and more certain of their goals, HRO buyers will look for second-generation contracts to deliver the pieces that had been missing from their first-generation accords.
When the first end-to-end enterprise engagements were inked at the turn of the century, the forces of blind faith, a burning desire for an improved HR, and sweat equity from buyers and providers cobbled the young HRO market together. Despite facing the unknown, employers forged ahead with their plans to lift and shift critical HR services to a then-unproven service provider community. Initial results were mixed, with many HR leaders saying expectations were unmet, quality of services delivered was questionable, and the amount of actual savings inflated. Other than that, everything was fine.
Needless to say, early market stumbles didn’t win the critics over, but nevertheless, buyers forged ahead to today, when billion-dollar deals such as those signed by DuPont and Unilever set new watermarks for the HRO market. What HR leaders at those companies learned are lessons that you will see not only in the next generation of HRO deals but also clearly spelled out in excruciating detail. That’s because the first-generation contracts created too much ambiguity, which was one reason for the gap in service delivery and expectations, according to industry analysts.
The disparities were also reason for the emergence of the HR BPO Buyers Group, an association of large, end-to-end HRO practitioners. First formed in 2004, the informal group set out to address many of the industry’s shortcomings, and its work will surely influence how G2 contracts will shape up.
DOZENS OF CONTRACTS
According to Stan Lepeak, managing director of research at sourcing advisory firm EquaTerra, many of the first contracts signed in 2000 and 2001 are up for renewal this year, with large, enterprise deals numbering between 10 and 20, and smaller, point-solution deals tallying up to 10 times as many. As these organizations look to renew, they’ll find that not only have their expectations and goals changed, but also the market has evolved as well, Lepeak said.
For one, the frenzy among service providers to secure their initial batch of clients has gone away. In fact, the opposite is true today. While many providers are still actively pursuing new buyers, the reality is the HRO market has hit a capacity bottleneck, with some vendors simply unable or unwilling to take on new clients under first-generation terms. Lepeak noted that providers have grown much more selective in their engagements and are as likely to vet the client as the client is to vet them. What it means is the days of cut-throat pricing are long gone.
“The service providers are less likely to chase the business from a low-ball perspective,” he said. “You have some providers that are pure-plays or semi-pure-plays that have a lot of pressure on them to improve margins.”
This shift in provider attitudes is perhaps best reflected in recent pricing trends. According to EquaTerra, cost per employees in HRO contracts had steadily dropped since 2000, but 2005 reflected a reversal of that trend, with pricing edging up slightly again in 2006. This change indicates that providers who were willing to let customers drive down pricing in the market’s early years have decidedly turned back those demands, instead taking on only deals that make economics sense (see p. 20 for detailed pricing information).
DEAL STRUTURES CHANGE
Pricing is just one fundamental change in how G2 deals will differ from the first generation. Fundamental shifts in how buyers have come to view HRO mean sourcing models have evolved as well, starting with the big one—the lift-and-shift. Under this arrangement, which was very common among first-generation contracts, vendors agreed to acquire the client’s HR facilities, processes, and personnel and operate those sites as their own.
This customized approach required little acclimation from buyers because services were provided the same way, call centers remained intact, and providers usually operated on the same technology platform. Lift-and-shift models were perhaps the least painful method of outsourcing, but they also yielded the least amount of cost savings.
Today’s HRO deals are all about transformation—whether pre-outsourcing or post. According to a number of industry analysts, a majority of new HRO practitioners want to clean house before they outsource, sometimes stopping to build share services before reaching a final state of HRO. Or buyers are
seeking providers’ help to align processes and make them as efficient as possible.
For instance, Whirlpool HR leaders last year in the midst of a global outsourcing rollout told HRO Today that the company was more interested in how the engagement could help business leaders than in HRO’s potential savings. It’s this kind of shift in buyer goals that has both sides reassessing how to build the next generation of deals.
To avoid some of the problems they experienced early on, buyers will likely insist on much more concrete terms, said Debora Card, project director, HR advisory services, at TPI. She said early deals left many issues open-ended, and buyers were frustrated when they realized these issues were not addressed in the contract. In other instances, ambiguities in terms at times left the two sides pushing unassigned responsibility onto each other. And then there are service level agreements that failed to adequately address HR’s real needs. Card blamed the problems on too much room for interpretation.
“One of the biggest areas where the relationship can fall apart is through a misunderstanding of who’s going to do what or what’s in scope,” Card pointed out. “What we’ve found is that if the client had not carefully thought through and documented what they wanted, there was often a disconnect at that end.”
She noted that this was one result of an immature market. While providers have worked on shoring up their own frailties, buyers also have come to realize the need to be more clear about their intentions. “We now see new contracts with much more solid statements of work,” Card added.
Under the first generation of contracts, many buyers that received exactly what they asked for were still dissatisfied with HRO outcomes. By their own admissions, these HR leaders said they also wanted more innovation introduced by their providers. But because they failed to specify what kind of innovations, it made it nearly impossible to deliver this service.
Renewals will likely better address the innovation issue, explained Gartner analyst Rob Brown, who pointed out that HR leaders this time around have a clearer understanding of their organizations’ needs.
“Innovation means many different things to different people….It’s hard to put classic statements of work or SLAs around that,” he said. However, in addition to meeting SLAs and cost-saving mandates, they want from providers business benefits-based contracting, gainsharing opportunities, and consultative services, he added. These requirements show that HRO needs to deliver beyond the basics as buyer expectations have grown.
This has all the hallmarks of the next phase in what Gartner describes as the hype cycle of outsourcing, a process in which outsourced services—from HR BPO to ITO to FAO to CRM—grow from infancy to volatile stages to a steady plateau. He said that HRO is expected to reach a plateau over the next several years. In the meantime, the market needs to further hone its offerings. To do so, providers must continue to improve service delivery, roll out integrated global offerings, and make HRO a more attractive value.
As buyers contemplate their options in the next round of contract renewals, they undoubtedly will bring the wisdom they’ve won during the past seven years. Whether it’s more concise contractual terms, demand for innovations, or just calls for service improvements, look for G2 deals to reflect the coming of age in the global HRO market.