Where can mid-market buyers turn for information about the right outsourcing solution for them? For the longest time, nowhere. But all that’s about to change.
In the expanding world of HR transformation, mega-deals get all the print. That’s a problem for midsized companies considering HRO. While dozens of contracts in this segment have been signed in recent years, try finding data on them. Consequently, many mid-market firms are at a loss to grasp best practices and benchmarking data to make informed decisions about whether outsourcing is right for them.
The HRO Association is doing something about the paucity of data. It recently formed the HRO Middle Market Special Interest Group and charged it with this mission: Establish and continuously improve industry standards and marketplace practices by providing research, data, and tools to mid-market companies and service providers. It’s all in the hopes of creating a more educated segment.
“There really wasn’t a place for middle-market companies to get information related to HR outsourcing; that need is now being filled,” said Lisa Knutson, chair of the special interest group’s executive committee and vice president of HR operations at The E.W. Scripps Company, a Cincinnati-based publishing and multimedia concern.
The special interest group, which launched in January but has been percolating on the back burner for more than a year, defines the mid-market as companies with 2,000 to 15,000 employees who outsource three or more HR processes. E.W. Scripps fits this profile perfectly, and its own outsourcing experience gives a sense of the possibilities available to the mid-market (see sidebar). During the past six months, the special interest group has attracted a small but growing list of other members besides Scripps, formed a variety of committees tasked with different goals, and recently launched a major survey to solicit perspective and data about HRO trends, issues, and the level of satisfaction among the mid-market outsourcers.
The special interest group is ecumenically geared toward all stakeholders. According to its charter, the group will seek to “provide a platform for consumers, providers, and other stakeholders to contribute research, data, and tools to make informed decisions related to the evaluation, purchase, implementation, and management of HR process outsourcing.”
Getting Out the Word
A key factor in the formation of the group was recognition that the number of deals involving large companies has been waning and will continue to decline in the future.
“When you look at the growth of HRO in the future, there are only so many big deals out there to get,” said Kevin McDonald, director of HR operations at E.W. Scripps and the co-chair of the special interest group’s research and tools committee. “Having an organization focused on the needs of the middle market, given the pure volume of middle-market companies out there, and figuring out if there are differences in how large market providers should treat them drove the need for the group.”
Both business process outsourcing advisors and service providers concur with this assessment. “Tier one providers have spent the bulk of their time on the large deals, but they are beginning to recognize, from both a growth perspective and a sustainable business model perspective, that the middle market represents a good opportunity,” said Mark Trepanier, client executive at Houston-based sourcing advisory firm EquaTerra, and McDonald’s fellow co-chair on the research and tools committee.
He is not alone in this view. “When HRO got off the ground, certainly the early adopters were the large enterprise-type deals involving big companies and large upmarket providers,” Mike Hogan, division vice president of sales for ADP’s comprehensive outsourcing services division, said. “It was just a matter of time before mid-market organizations started to look at HRO as a strategic option versus providing in-house HR services in a shared services environment.”
Knutson, McDonald, Trepanier, and Hogan say they believe, as do others, that many mid-market companies were passing up on HRO because of their inability to define standards and best practices, or to compare and contrast different solutions. They attribute the inertia to a pronounced lack of data and the virtually unpublicized nature of the deals inked. “What is exciting about the special interest group is helping to shape the offerings of the providers that choose to play in this space,” said McDonald. “This would make it a ‘win, win’ situation for both sellers and buyers.”
Particularly compelling from a provider standpoint is that middle-market engagements may be less risky than those involving much larger clients. “Frankly, the record is uneven on the financial performance for a provider on the mega deals, so there is a feeling that perhaps smaller deals offer an opportunity for which there is less risk,” Trepanier contended. “When you are trying to implement an HRO transaction with a company that has a presence in 60 countries speaking 12 different languages, it is far more complex than the average company in the middle market. I’m not saying it’s simple, but typically there will be less of a geographic footprint and fewer language considerations.”
Knutson agreed: “Large providers are trying to standardize processes and practices so they leverage the same efficiency across all clients, but that’s hard to do when you have a client operating in 70 countries worldwide. Consequently, for large market providers, it is more difficult to make money in HRO. The model actually lends itself to being more efficient and effective for mid-market folks.”
Hogan, who is the vice chair of the special interest group’s executive committee, noted that HRO for mid-market companies is a good fit because of their capital limitations. “HRO is a stronger value proposition for the middle market,” he asserted. “As the market evolves to a global economy, everyone is looking to become more efficient and reduce their administrative costs. Most mid-market companies cannot justify a substantial capital investment in a full-blown HR shared services environment or, for that matter, best-in-class call center technology from Siebel. It’s very difficult to go to the CFO and say you need a couple million dollars to put in a set of tools to deliver a higher level of service to employees because the ROI (return on investment) isn’t there.”
On the other hand, providers such as ADP offer mid-market companies the ability to procure sophisticated HR technology, processes, best practices, and self-service and call center tools more efficiently and cost-effectively. “Our traditional discrete process outsourcing started as one-to-many (as opposed to the customary one-to-one model in large outsourcing engagements, due to their inherent geographic complexity),” Hogan said. “We are able to leverage those economies of scale for the middle market.”
Of course, ADP is not alone in this regard. “Just about every provider is making a move into this space,” Trepanier said. “It’s the next frontier.”
Blazing the Trail
Currently that frontier has been characterized by mostly niche deals and so-called single-process engagements, where the client has shed a sole function such as benefits administration, recruitment processing, or payroll to a service provider. The Scripps outsourcing engagement with provider ADP, in which end-to-end process outsourcing is the paradigm, represents the future in mid-market outsourcing, according to Trepanier. “That’s certainly where the providers want to take it, but we’re not sure the buyers are there yet,” he commented.
While the value of HRO as a business strategy is well understood in the mid-market, awareness of its applicability to individual companies is “another question,” he explained. “Everyone knows what it is, but they tend to think of it in terms of the mega deals. They think they’re not big enough (for HRO to offer strategic value). Providers need to put time in the marketplace waving the concept of ‘if you call us, we will return your call.’ Our job (at the special interest group) is to assist this by educating the marketplace about what is available. We see ourselves as the ‘thought leader’ in the marketplace.”
Adam Bleifeld, executive director of the HROA, echoed this assessment. “The mission of the association is to be a place where buyers and providers can go to discuss best practices, network, learn from each other, and thereby set some standards and protocols going forward so that buying and selling HRO in the middle market is more understood and an easier process,” Bleifeld said.
The HROA has developed several other special interest groups in the past charged with a similar purpose, including the RPO Alliance and Public Sector Group. Through these, the association enables members to organize themselves to interact with peers and find the experiences and information most relevant to them.
Members of the middle market special interest group include Knutson and McDonald from the buyer community; Trepanier and Rosemary Collins at TPI from the sourcing advisory community; and a larger group of representatives from the provider community, including Hogan and representatives at Accenture, ADP, Ceridian, Fidelity, and Trinet. All are involved to a different extent in the three committees recently formed within the special interest group: research and tools; standards and practices; and education and outreach.
The research and tools committee, which is more established than the others, is focused on establishing baseline data and information about the segment. The committee has put together the aforementioned survey, which has been dispatched to 16,000 mid-market and larger companies. The results will be analyzed and published at the HROA Summit in October. Among its objectives is to exactly define the middle market.
“We have it as companies with 3,000 to 15,000 employees, but maybe there is a better standard of definition out there,” McDonald said.
The survey also will underscore differences between the needs of large companies versus smaller ones. McDonald explained that it will examine issues such as budgets as well as organizational complexity.
Trepanier called the survey “job one” for the committee. “Our role is to get a perspective on what the mid-market is in terms of thinking about HR transformation and related strategic imperatives,” he said. “We want some baseline data first so we can track HRO in the middle market in terms of shifting trends and terms. And we want to make sure the conclusions can be compared with surveys of the larger market to determine any differences. Right now no one really knows.”
As for the other committees, standards and practices is a group charged with developing a draft on HRO standards and practices similar to one published by HROA last year on larger organizations. “We’re not sure the same findings in the large market segment are applicable to the middle market,” Knutson said. “Determining this is the goal for the coming year.”
The education and outreach committee is focused on increasing the group’s membership. “As a buyer, my passion is for other buyers to have a place where they can find out about outsourcing, see how others have made their respective journeys, and learn how they arrived at where they are today,” she added.
The committee is charged with growing the membership base by 20 percent a year, in addition to building a buyer mentoring program providing direct, personal input from organizations that have already been through the HRO experience.
Bleifeld is sanguine that the middle market special interest group will achieve all its goals. “If you’re a middle market organization thinking about transforming HR, this is the ‘go to’ place,” he said.
|Scripps: Spelling out What It Means to Be A Mid-markeT HRO Buyer|
| Midsize media company E.W. Scripps’ HRO contract with ADP may not be the first such engagement to occur in the mid-market, but it ranks as one of the most comprehensive. Unlike most other deals in the mid-market segment, this contract addresses nearly all HR functions.
Scripps comprises a variety of media offerings in the U.S. and the U.K., ranging from newspapers and television stations to cable networks to Shopzilla, its interactive search and comparison shopping service. In February, the company signed a five-year contract with ADP calling for outsourcing benefits administration; payroll; leave administration; job applicant tracking and other recruitment processes via an employee self-service module; a call center; and an HR management system.
The only HR functions not included in the broad engagement are learning management and performance management, which Scripps still handles internally. “With everything else to accomplish, we felt those two were areas that would have to wait,” said Lisa Knutson, VP of HR operations at the Cincinnati-based Company.
The partners are set to go live with the HRO strategy in October, although one function—payroll—will be up and running in the U.K. two months prior. While a number of similar HRO engagements have been struck in recent years, what sets the Scripps-ADP deal apart is the size of the buyer. “We have about 8,500 employees, which is certainly a lot less than most other companies engaging in full HRO have,” Knutson said. “Like they, we had a strategic objective of transforming HR.”
Knutson was tapped to head the outsourcing effort. Before coming to Scripps in 2006, she had piloted an HRO engagement with Convergys for her employer, Pittsburgh Bank, a financial institution with 22,000 employees also located in Cincinnati. “I was hired by Scripps to lead what was called the ‘HR Remodel Project,’” she added. “As we started to look at what we needed to improve HR, we felt we didn’t have the technology we needed. Administration was still being handled in the field or at corporate headquarters, and we were buried in paper and manual processes. This is not surprising—it’s what a lot of companies endure.”
The solution was to outsource HR. “Scripps decided they needed a better solution—to have HR focus on the strategic direction of the organization and not on the administrative effort,” said Mike Hogan, division vice president of sales at ADP’s Comprehensive Outsourcing Services. “They hired a thirty-party sourcing advisor (EquaTerra) and worked with them to determine whether or not there was a business case for full HRO.”
After gathering data on the types of services being delivered by internal shared services organizations, and the cost structure and service levels involved in this alternative option, a business case was put forth to outsource HR. The key factors were its potential to drive costs out of Scripps’ current infrastructure while improving the level of employee service via access to ADP’s technology, employee contact center, and best practices—what Hogan calls the provider’s “multiservice HR business process outsourcing solution.” In effect, Scripps replaced its existing in-house PeopleSoft system with ADP’s proprietary “one-to-many” HRO platform.
A factor in selecting ADP as its HR transformation partner was the provider’s promise of a quick implementation. “Once we signed the contract, we told Scripps we’d have the solution up and running within a six- to nine-month timeframe, and we expect to succeed in this pledge,” Hogan said. “This gives Scripps the ability to achieve a return on investment more quickly, in addition to realizing the service advantages of this model in a shorter time frame.”