Tremendous customer demand has the outsourced recruitment business in a frenzy, but will this immature market lead to buyers getting burned?
If RPO stood for a stock symbol, it would rival GOOG (Google). That’s how hot this segment of the HRO market is—dripping gold for some of its providers. Interest in outsourced recruitment is so high in the U.S. and Europe that many vendors can barely keep up with demand.
In our annual look at the Baker’s Dozen of RPO service providers, we see the market expanding not only in the number of vendors participating, but also in the scope of services they provide. Today’s RPO providers have made quantum leaps in their capabilities, portfolios, and delivery quality. In fact, the market has matured to a point in which there is distinct differentiation among competitors, with different players staking claims in various niches. For instance, some have become specialists in healthcare recruitment, while others have established high-volume, highly automated systems for large-scale engagements.
For buyers, it is a bountiful time.
From downtown Los Angeles to downtown London, RPO is helping employers recruit in better, faster, and cheaper ways. With cost savings the primary driver behind the RPO market’s phenomenal growth, HR departments are discovering that outsourced recruiting services in some instances can replace the services of traditional staffing and placement agencies at a fraction of the cost. Even when these firms are still needed, having an RPO provider to manage these vendors results in greater efficiencies and lower overall costs.
“They are looking for cost control, and when I talk to buyers, they are mostly looking to improve the cost of hires,” explained Lisa Rowan, program manager, HR and talent management services, at consulting firm IDC.
Rowan, who published a study on RPO in February, pointed out that as a nascent-stage market, RPO is still loosely defined, even though demand for services is frenzied. She explained that RPO in all its various incarnations can satisfy just about every recruitment need.
IDC, which narrowly defines RPO as outsourced services in which ownership of the recruitment function is transferred to a third party, said the market in 2006 was estimated to be $296 million. With a compound annual growth rate of 18 percent, it is expected to reach $676 million by 2011. (Broader definitions of RPO put the market at a much higher level.)
In addition, sourcing firm TPI estimates that deal size is growing, as well, with some now reaching $50 million in total contract value (TCV). A few may even reach the $200 million mark, putting these deals on par with full-scale, end-to-end HRO engagement. Brett Gerard, RPO advisory leader with TPI, pointed out that of the 100 deals involving employers with more than 10,000 employees in the U.S., two-thirds are with stand-alone RPO providers, while one-third are embedded in full-scale HRO deals. Under its definition of RPO, TPI estimated that the global RPO market may reach $12 to $15 billion within
One of the challenges of estimating the size of the RPO market stems from the difficulties of defining RPO itself. That’s because there is no industry-wide agreement on what constitutes RPO, although some common characteristics exist, Gerard said. He contended that five elements usually found in an outsourced recruitment process separate these transactions from traditional staffing procurement. They include:
- The provider reengineers the client’s recruitment process;
- The full cycle of recruitment services—from sourcing to onboarding—is outsourced;
- Management of other vendors such as staffing and temp agencies is handled by the RPO vendor;
- The provider has some ownership of the recruitment technology, either supplying it to the client or adapting the client’s existing technology to its own;
- The deal covers a minimum of three years with service level agreements tied into the contract.
“At the highest level, the provider is taking over a significant portion of the internal recruiting,” said Gerard, who disqualifies project work as true RPO.
However, many RPO projects currently are project-based with buyers handing off end-to-end services for a predetermined number of positions. In these contracts, providers are still responsible for the entire gamut of services, from sourcing candidates to screening and assessment to pre-interviews through onboarding. For some purists, however, these projects might not be considered RPO because vendors only supplement the buyer’s internal recruiting capabilities instead of replacing them. Nevertheless, RPO providers have become a safety net of sorts for employers needing to beef up their internal capabilities quickly.
That was the case for banking giant National City, which turned to an outsourced solution when it needed to improve recruiting efficiencies at one of its call centers in Ohio. So nearly two years ago, the company decided to supplement its internal resources with an RPO solution. Company officials haven’t looked back since.
“We were looking for ways to be efficient for the volume of hiring that this unit needed to do. It didn’t make sense to keep putting in internal resources. We needed to look at new ways of doing this,” said Pat Porter, the talent strategy and sourcing group manager for National City in Columbus, OH.
He said at the time the company needed to make approximately 600 hires a year in non-exempt areas, with internal resources stretched as a result of an acquisition of another bank. While the company could have invested more internally, a more effective alternative was to bring in an outside service provider that could scale up or down accordingly.
Porter said for National City, the scalability and efficiencies of RPO were more alluring than cost savings. While many practitioners initially engage in an outsourced solution based on the business case, others like Porter say it’s the intangible qualities that are most appealing. For instance, being able to bring in many recruiters immediately to a particular project is just not possible internally.
“At the end of the day, we found one (a provider) without fixed capacity. They demonstrated the ability to perform screening with unlimited capacity and could manage increased and decreased candidate flow,” Porter noted, adding that National City has since improved key metrics such as time to fill and overall recruitment efficiencies.
Still an Immature Market
Porter and National City are fortunate to have had a pleasant experience implementing RPO. Not all buyers have had the same luck. In fact, a number of deals have floundered in recent years, with some high-profile flops that resulted in buyers either switching providers or brining services back in-house. For a variety of reasons, these failed engagements have hindered the market’s growth as frustrated buyers swear off recruitment outsourcing while others adopt a wait-and-see approach.
As a result, the RPO market’s credibility has been dented in some instances because too many new vendors are coming out of the woodwork—with many not quite ready for prime time. But because of the market’s hyper growth, it seems just about anyone with a recruiting background can claim to be an RPO provider.
“If you really look, there are 70 or more [providers] in the market. This all grew out of mass purchasing of recruiting services,” said TPI’s Gerard. “Among the guys who are doing the process reengineering and taking over the organization, I find there are only 15 providers out there.”
Despite some questionable players in the market, buyers have not pulled back much in taking on RPO. The reason: too many benefits to ignore, and as more employers sign deals, providers are gaining momentum and helping the industry to mature more quickly. In turn, buyers benefit from cost efficiencies and improved service.
To hear one early RPO adopter tell it, that gain in productivity has helped his company become a more effective recruiting organization. Steve Mueller, acting director of staffing operations at aerospace giant Boeing, noted that when the company first outsourced recruitment in 2004, its goals were to boost capacity and better manage the process and people. One of the fastest growing companies in its sector, Boeing also found that RPO can help its business units—in both civilian and defense sectors—meet their strategic personnel needs. Currently it is using two RPO vendors.
“The real issue for us when we started with RPO was to add capacity and to help us with our downstream management of our resources,” he said. “As we moved through it, we realized the other benefits from it; specifically, the level of service they could provide.”
With three years of engagement under its wings, Boeing said outsourcing has not only helped with meeting its initial goals, but also yielded other benefits. As Mueller explained, the recruitment process became more efficient once it was handed over to a third party.
“I think the real pleasant surprise is the volume of work that our partners can provide as opposed to internal staff. They aren’t labored by meetings and special projects. They are 25 percent more productive than internal staff when you are looking at straight transactional services,” Mueller added.
And that’s the mantra many providers reiterate these days—that they focus solely on recruitment, while HR may charge generalists with recruitment responsibilities, even though many of these employees don’t have the skills to adequately perform the task.
“Our business is putting people to work. When we sit down and talk to clients about that, we point out that we put 4.5 million to work last year,” Sheldon Schur, the vice president and general manager for Manpower Business Solutions (MBS), said of the company’s parent organization, Manpower, Inc.
Schur, whose company provides stand-alone RPO services in a number of markets, stressed that in today’s fierce competition for talent, employers must have strong recruitment capabilities or lose out on talent.
Indeed, reducing time to fill is a key benefit for outsourcing recruitment processes, as are cost savings and scalability. But they also come at a potential risk, because companies that outsource may end up laying off internal recruiters or turning them over to become employees of the service providers. So if the RPO engagement goes awry—keep in mind a number of deals have, including some involving very large enterprises—an employer may be left with poor internal recruiting capabilities.
And that’s a risk that accompanies any outsourcing deal—swapping internal capabilities for third-party management and delivery of services. Whether the risk is worth undertaking is a tough question facing many HR organizations today. They must determine whether the pain points they suffer today are dire enough to warrant a foray into the unknown realm of RPO and if the rewards are lucrative enough.
For some, today’s RPO market clearly is incapable of meeting their needs, especially those who operate around the world. RPO providers for the most part are regional or national in scope, and while a few are expanding into international waters, none have demonstrated that they can service a client across all of the major industrialized markets.
But just as the HRO market was once incapable of comprehensive service delivery, the RPO segment is quickly maturing, and it may be only a matter of time before the providers develop global competencies. For sure, they are already under pressure to do so.
“We’re having a lot of good conversations around RPO services with our multi-national clients who wanted to leverage their talent acquisition strategies globally, said Jason Krumwiede, vice president of Aon’s Human Capital business. “Aon is building a global network of local recruiting partners, very similar to our Global Benefits practice, to deliver consistent and quality service on a global scale.”
Aon is not alone. Other providers are also looking for ways to offer a global footprint as well. With more buyers seeking this from their existing providers, vendors will have no choice but to comply or face losing market share to those who can be a global player.
It’s clear that these and other changes are afoot in the RPO market. Whether they do so in the time frame desired by buyers remains to be seen. To be sure, as providers continue to bring more capabilities online, buyers will continue to enjoy this bountiful time.