The ailing economy is both driving and hindering HRO growth. Smaller deals that can be implemented more quickly may be the way ahead.
How is the ailing economy affecting the HRO market? It is both helping to drive growth and slowing would-be practitioners to execute their outsourcing plans, according to a recent report released by sourcing advisory firm EquaTerra. In fact, outsourcing across all service towers (IT, F&A, HR) is outpacing all other business investments, according to its research.
In its third-quarter Pulse Survey of service providers and advisors, EquaTerra reported that respondents were more optimistic about the prospect of business process outsourcing (BPO) than IT outsourcing, and they saw higher demand for outsourced services in Europe than in North America. Furthermore, the nature of deals is shifting from long-term, capital-intensive engagements to smaller, point solutions that require less time to implement and produce savings more quickly.
These trends are just some of the fallout from the global recession, according to Stan Lepeak, managing director of research at EquaTerra. He said large, transformational deals that require significant capital investments from both buyer and provider are being put on hold as funding is held back in the wake of declining demand for goods and services. Moreover, buyers may be looking to cut corners as they implement their HRO deals so their organizations can realize savings more quickly.
“There is not a lot of appetite for transformation. Buyers don’t want to pay for a lot of extras,” Lepeak said. “If a bigger scope means more complexity, there may not be appetite around that.”
Lepeak said buyers should be cautious about rushing through a deal signing and implementation. He said shortcuts made today may result in unwanted repercussions later on and force buyers to redefine scope, pour more resources into contract management, or look to switch providers. In any event, they should be mindful of governance requirements and the internal skills necessary for managing the provider.
These concerns are reflected in the survey, which reported that 38 percent of suppliers and advisors at the firm said the economy is causing buyers to slow or defer outsourcing programs—the highest level during the past three quarters. At the same time, however, 42 percent of those surveyed said the sinking economy is driving practitioners to outsource more services. As an indicator that corporate leadership increasingly sees outsourcing as a way to hold down costs, more deals are being established at the corporate levels, whereas in the past deals were mostly initiated at the functional and business unit level.
Is now the time to buy?
But is this a good time to engage in HRO? According to Lepeak, the signs are mixed, with encouraging developments tempered by some negative trends. For instance, EquaTerra reported that providers have become more aggressive with pricing, which may further support a buyer’s business case. But despite some greater pricing competition, HRO supplier capacity remains constrained. Providers facing their own economic pressure are more selective when asked to bid on contracts. After years of being burned by unprofitable contracts, they have become highly discretionary when invited to submit request for proposals. That’s because deal pursuit costs continue to be significant, and vendors are only willing to bid if the services a prospective client is seeking a match to their own set of competencies.
“The buyers are just getting turned down” in the RFP process, Lepeak said. “There is a great amount of attention being paid to pursuit costs. There are cases where buyers are not getting the level of responses they had hoped for.”
He lamented that the industry continues to be hampered by capacity constraints, but on the other hand some buyers already outsourcing some HR services are bypassing the RFP process altogether when deciding to include additional service for outsourcing; they are simply asking the incumbent provider to assume new responsibilities if it has the competency. Another strategy is for prospective outsourcing buyers to seek out providers who have experience in their particular industry. That way they can be sure that the vendor can deliver the experience and service they need.
EquaTerra’s research further confirmed earlier findings—that Europe continues to outpace North America in market growth. That’s largely because the European HRO market trails the market here by several years and is now discovering the value of outsourcing. But unlike the U.S., European practitioners also benefit from the lessons learned by their U.S. counterparts and are implementing deals in a more deliberate and cautious way. A clear example of leveraging American experience is that European practitioners have much more clearly defined scope of service as well as establish clear goals from the outset, Lepeak said.
“For instance, they may be operating in 10 European countries on 10 different payroll platforms, and they want to get to one platform,” he cited as an example of being more defined.
Will the European market eventually also reach a point of saturation like the U.S.? Lepeak said it’s not clear how current economic conditions will drive HRO adoption, but if cost cutting emerges as the central directive for most European employers, expect many more deals to be inked over the next year.
