Taking on HRO in a more measured way than North American counterparts, European HR leaders are careful to make their outsourcing effort a more successful experience.
If there were only one truly bright spot in the HRO market today, you could find the illumination across the Atlantic. After having watched outsourcing take off in North America for the past several years, European organizations are finally jumping on the bandwagon, with a number of firms engaging in strategic outsourcing in end-to-end deals as well as selective processes.
With the beacon of hindsight lighting their way, European HR organizations are no longer timid about embracing outsourcing, emboldened by a growing number of success stories stemming from both European engagements and North American buyers. Although typically smaller, selective deals, the contracts executed throughout Europe are also less risky, focused on specific pain points, and appear to produce more satisfaction for the buyer.
Perhaps the most startling aspect of the HRO movement in Europe isn’t that organizations have come to accept outsourcing or that works councils (unions) have become less antagonistic toward the concept. The fact that HRO is making inroads into holdout markets such as France is a testament to its irresistible allure. And at the other end of the spectrum, the U.K., the birthplace of HRO, has comfortably embraced the practice on all levels, including both commercial and public sectors.
Just recently, two of the largest HR outsourcing contracts ever recorded emerged in Europe: The U.K. Ministry of Defense’s multi-decade learning contract with a potential value of $32 billion (expected to be awarded later this year) and the $1 billion Unilever comprehensive HRO deal signed with Accenture in 2006. These show that while most of the headline-grabbing deals that have graced the pages of HRO Today have been U.S.-born, European buyers are no less willing to enter into highly complex, multi-process engagements.
For a variety of reasons—cost savings, standardization of processes, implementing best practices, a greater ROI—outsourcing is winning the hearts and minds of European employers. But unlike their North American counterparts, British, Dutch, German, and other practitioners are not driven by the allure of big savings that once motivated many first-generation buyers. Instead, they are more attracted to process efficiencies and platform standardization than cost savings, which have not really manifested as promised in a number of first-generation deals.
“The effort to develop consistent practices across different business units is a tremendous deal,” said Jeff Croyle, head of sourcing consultant TPI’s HR practices in Europe. He explained that standardization of platforms and practices is viewed as a more lofty goal among European employers than in the U.S. After all, multinational companies operate tangled systems and processes across various countries. And while they may never be able to standardize all services—payroll, for instance—they realize this kind of transformation is necessary to elevate HR to world-class status.
Market Drivers
European HRO practitioners these days are feeling more confident about outsourcing than their North American counterparts. You can attribute that to several factors. Although the continental European segment is the most immature part of the market, U.K. organizations have been feeding from the HRO trough for a decade. Their successes, particularly among multinationals as well as in the public sector, are proof that outsourcing can work. For instance, when Europe-based Unilever signed its contract, it demonstrated that it could pull off a deal spanning the globe, further assuring the HR community that they had nothing to fear. Similarly, the $1.1 billion DuPont deal—while originating from the company’s Delaware headquarters—had a global scope that included the transfer of its Spain-based shared-services center to provider Convergys. These deals all speak volumes that HRO is no longer just a North American phenomenon.
“Everyone is looking to see that that is successfully implemented,” said Tim Palmer, a former managing director of sourcing advisory firm EquaTerra in the U.K. He explained that these deals are leading the way for European HR leaders to outsource services because they want to make sure they are not pioneering the market. And as large, announced deals stabilize, and as more industry-specific contracts are executed, these developments will further instill confidence among practitioners.
But confidence can only get you so far. Building a business case is necessary to sell HR transformation to C-level leaders. As organizations throughout Europe look to focus on core competencies, they are also seeing what can be shed from their internal capabilities. For a number of companies that operate a shared-services center, outsourcing is the next logical step in removing the administrative burdens from their back offices while procuring some returns on those assets.
Croyle said unloading the centers to providers could have tremendous benefits despite the perception that companies with shared services have already done the heavy lifting. In reality, he said, some European organizations simply centralized the services from a number of facilities but have not taken up the effort to rationalize and standardize processes and procedures. As a result, their shared services don’t operate at peak efficiency.
“They’ve not made that much effort to standardize; they’ve centralized,” he added. “What happens too often is they say, ‘We need to get it done fast, so let’s lift and shift, and afterwards let’s go back and look at standardization.’”
Bringing in HRO can help bridge the final step to HR transformation, and many European HR leaders are beginning to realize this. Furthermore, the final step also tends to be the most complex and costly part of the transformational effort. Because European companies face multi-jurisdictional rules, these overhaul efforts tend to be significantly more costly than similar programs in North America. By executing in increments—first through shared services and then outsourcing—they can spread out the costs over time and in stages.
One Process at a Time
Aside from engaging HRO in steps, a number of European HR organizations are taking on outsourcing on a limited scope. While “big bang” HRO is still carefully watched, some HR leaders view single-process outsourcing as a viable alternative to complex deals that take significantly longer to implement. Some want to road test HRO through services such as payroll and benefits administration first before adding on more components. Still others that have invested heavily in an ERP system but need a specific domain expertise or market footprint will turn to a recognized solutions or market leader rather than outsource everything.
For example, last year Philips, the consumer electronics giant, decided to award the largest payroll contract ever in the Netherlands to Randstad Holding, a well-recognized outsourcing provider in the region. Although Philips has global presence and had sourced its payroll from an internal shared service, the company wanted to improve delivery, and it felt that a single-country payroll was the only way to ensure outstanding quality. In discussing the eight-year contract, company officials also pointed out that Philips has reduced its workforce from 42,000 to 17,000 through a series of divestures, and the business case for internally delivering payroll was no longer there.
Philips’ situation is not unique because many multinationals view payroll as an especially thorny problem, and to centralize and standardize services to one provider could lead to compliance difficulties. Although pan-European payroll remains a Holy Grail of outsourced services, both providers and buyers recognize the complexity of delivering it.
Some engagements start off with a limited service scope, while others are limited in geography. TPI’s Croyle said it’s not unusual for a practitioner to enter into an deal in one region—out of the U.K., for instance—before expanding the relationship into continental Europe. This allows the HR team to evaluate the provider on a limited basis first and minimize risk to the overall organization
U.K. the Leader
The U.K. is often the starting point for a broader HRO engagement because outsourcing has become de rigeuer in the back office of many organizations. With a commercial market maturity rivaling that of the U.S., the British have not only overcome the stigma associated with outsourcing, but their government has even endorsed it. Through a series of publicly funded studies in the 1990s, U.K. authorities found that they could save billions of pounds by using shared services and outsourcing.
Francesca Okosi, director of people and performance at the Department of Environment, Food, and Rural Affairs in the U.K., explained that when her department set up shared services, the goal was to direct more internal resources to serving the public rather than run back-office administration. Moreover, she said, government agencies are incapable of keeping up with constant technology investments needed to improve efficiencies and processes. That’s why the department cobbled together HR, finance, and procurement under one roof. It then outsourced payroll to LogicaCMG and its employee assistance program to Atos. She added that the department is also considering outsourcing recruitment services because providers have greater resources.
“How can we do more for less? They are looking for me to reduce my expenditure while still improving the delivery of the business,” she said. “The challenge for us at the moment is a reduction in costs. There is a will to reduce public expenditures and, where possible, improve the quality.”
The interest in HRO comes from not only the U.K. national government but also regional and local bodies. Scores of payroll and HR administration contracts have been signed with city council, regional utility authorities, and regulatory departments throughout the country, and the trend will continue.
Will the acceptance of outsourcing spill over to the public sector in continental Europe? So far, there appears to be little appetite since few public bodies outside of the U.K. have even shown an interest in learning about HRO. Perhaps, just as it has taken outsourcing some time to penetrate the commercial segment on the continent, it may take more time before Dutch, German, or French bureaucrats sit up and take notice.
Whatever the case, HRO has clearly made strides in the European market. With greater promise of growth than North America, the continent appears poised to wholeheartedly embrace outsourcing as a way to achieve HR transformation—if it hasn’t done so already. And that’s something the industry could really take a shine to.
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