Multi-process HRSourcing

What Will Be the Next Big Trend in the HRO World? Hint: It’s FAO

Look out, HR leaders, CFOs have learned from you. And now they want a part of the outsourcing gain and glory for themselves.

by Jay Whitehead

In the HRO field, I have regularly been accused of being able to see around corners. Often, my skills as a futurist have been over-exaggerated (mostly by me). Other times, I have been very right, and far too modest.

This column is about one of those forecasts in which I am very right. I have been to the future and seen how the HRO movie ends. And HR leaders should pay very close attention to this prognostication.

What you are about to read is a dangerous prediction. I can name a few HR leaders who will never speak to me again for what you are about to read.

But I take my role seriously. HR futurists, like economists, practice a dismal science. Often, our only friend is loneliness. But enough with the martyr act already. 

Over the next 10 years, financial and administrative outsourcing (FAO) will consume virtually every HRO domain—yes, even HRO darlings such as RPO. At the same time, HR leaders will increasingly report to CFOs. If the number of HR leaders who report to CFOs right now were 20 percent, it could be as much as 80 percent by 2016. With that new reporting structure will come a huge increase in accountability. In addition to employee-related accountability, HR leaders will increasingly take on accountability to three more corporate stakeholder groups—shareholders, customers, and community. And here is the ironic twist: because HR leaders will be more accountable, they will become more valuable.

So there. The prediction is now in writing, published and indelible. Now please excuse me while I defend myself.

First, why will FAO gobble up HRO? I see two bigreasons. One, FAO providers have become more highly standardized, automated, and profitable than HRO providers. Just look at the recent F-1 prospectus for the initial public offering of upstart FAO provider WNS. It is more profitable at this stage of development than any HRO provider at the same stage. As a result, it will be priced at a higher EBITDA multiple—the company seeks a price of approximately 20 times EBITDA—than any HRO firm currently enjoys. If you peer into WNS’ top 10 private and public rivals,  you will see that nearly all of them have similar profit characteristics. HRO providers, on the other hand, have had a much harder time making money.

Two, because they are proving to have more reliable business models, FAO guys are attracting considerably more investment capital. There will be several high-profile IPOs of FAO providers in the next four  quarters. With their big bankrolls, the FAO guys will be in a position to buy HRO providers to broaden their offerings. And the inevitable result of these acquisitions will be to smash HRO and FAO deliverables together into one big service package, all primarily responsive to the needs of the CFO.

Another subtle shift is happening in the role of procurement. Today, nearly 80 percent of procurement functions within the Fortune 500 now report into finance, compared with 65 percent in 1997. And anecdotal evidence indicates that procurement is now controlling a significant portion of HRO service buying, especially those functions involving staffing or temp services, payroll, and benefits-related administration. Procurement people are often willing to tread into the detailed financial minutiae that HR people fear and loath. And with the inevitable commoditization of certain HRO functions, procurement’s role will just get bigger.

Just as the New York Times fashion section recently declared that white is the new black, I am declaring that FAO in the future will be the new HRO.

So, HR leaders, there you have it. Read it and weep. Assuming you have yet to make a point of it, start making close friends with your CFO. That alliance is almost certainly your most reasonable strategic career move. Who knows, by moving closer to finance, you may learn something. And you may be able to teach finance a bit as well. If you are uncertain about how to start the conversation, here is a hint: start talking about HRO. From a CFO’s perspective, that topic will provide solid, common ground.

Tags: Multi-process HR, Sourcing

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