A few high-profile terminations may grab the headlines, but HRO remains fundamentally sound and is here to stay.
Based on some recent press about HRO, one would never know that not only is the market holding its own, it is in fact turning in some real success stories. Granted, market growth has been modest in the past few years, and we predict a relatively slow growth of five percent in annualized contract values through 2009. However, we continue to see strong demand and activity in here to fore, underpenetrated markets, including the mid-market, Europe, and Asia Pacific—growth in those segments is expected to outpace the overall market.
Some announcements in the past year related to HRO grabbed headlines, including the termination of the Starbucks-Convergys relationship and the decision by UBS not to pursue HRO. Not surprisingly, a vast majority of the press saw these developments through a single lens: HRO does not work. True, the HRO industry continues to mature, and there are some real problems with the current business model, but we need to look more closely at each situation to understand what is happening (which is not the demise of the HRO industry).
The deal between Starbucks and Convergys was called off only eight months after it was announced. In the interim, Starbucks’ stock price dropped 35 percent, and it named a former CEO that resulted in a stark change in strategy for the chain, including significant product and program announcements that may have caused diversion of capital from back-office initiatives. This led Starbucks to terminate the deal—in essence, the deal fell apart because of its internal economic issues and had nothing to do with Convergys or HRO (as confirmed by Starbucks).
The case of UBS is even more interesting, as it had not even signed an HRO deal yet but merely changed its intent to outsource. The reason it decided not to go ahead was because of its own financial problems as a result of the subprime mortgage crisis. HRO, in this case, would have required UBS to make some upfront capital investments, a consideration which undoubtedly played a part in the decision.
It is clear from both of these cases that it was internal organizational issues that caused a rethinking about HRO, rather than any outsourcing-related operational issues. Yes, as we all know, there are situations in which the relationship hasn’t worked; many of these are related to the original lift-and-shift implementations. We won’t be surprised if we see a few more such deals fail. The point here is that it is not the HRO concept that is at fault, rather the way it is modelled, structured, and executed.
Our research indicates that fewer than five percent of deals (out of more than 225 signed to date) were
terminated before the contract period or did not get extended after the contract expiration. Out of these, a majority were due to restructuring on the buyer side (mergers, sell-offs, closure of business, etc.). So, why does HRO get so much negative publicity? We believe there are several reasons behind this.
- The notion that HR’s role is to “take care of the employees” is a politically sensitive issue. There is still a pervasive discomfort with the idea of outsourcing employee care. For employers with “best employer” brands and those with strong community and social responsibility, in particular, HRO can become a highly politicized issue.
- HRO touches the whole organization. Unlike other functional areas (IT and F&A), HRO affects the entire organization rather than just the functional department. HRO fundamentally changes the way employees receive HR services; thus any developments (or problems) are extremely visible within the organization and quite often communicated outside the walls as well.
- The nascent nature of the HRO industry. Multi-process HRO industry is just over 10 years old. Buyers, suppliers, and advisors are still undergoing a learning curve to understand what works and what doesn’t. As with any evolution, there are bound to be hiccups. HRO has naturally experienced some of them. Some large suppliers have reported financial losses related to their HRO business that grabbed headlines. But that is hardly a valid indicator that the fundamental value proposition espoused by HRO is just a pipe dream.
Finally, as we all know, bad news or “failures” make much more compelling press than a routine success story. But it’s premature to predict the demise of HRO based on a couple of unrelated events (as it turns out, valid business decisions in both cases). As with the evolution of any other nascent industry, HRO is going through a transition phase. With both buyers and suppliers having learned some key lessons, the shape of HRO deals may change—more mid-market deals, more regional activity —but HRO is definitely here to stay.