The RPO market might see a significant drop in volume, but the reasons to outsource recruitment services remain sound.
In today’s difficult economic environment, no outsourcing segment is expected to be more negatively affected than recruitment process outsourcing (RPO). That’s because as hiring comes to a screeching halt, the volume of candidates processed by service providers is expected to drop precipitously. Still, some industry observers say now is a good time for employers to consider outsourcing their recruitment functions, despite a slowdown in hiring.
Patrick O’Brien, a BPO analyst at research firm Datamonitor who earlier in the year predicted strong growth for the RPO sector, said in light of the severity of the global economic downturn, the demand for outsourced recruitment services will likely fall as well. However, he dismissed the notion that the sector will collapse as a result.
“I don’t think RPO will go into a tailspin. There are, even in a downturn, compelling reasons to outsource recruitment processes, but obviously volumes in existing contracts will fall,” he said, but added: “Earlier in the year, Datamonitor believed that the fall in volumes would be more than offset by new business, but this view has to be revised in view of the severity of the current recession.”
According to Datamonitor, the global RPO industry was estimated to have reached $720 million in 2007 and had appeared to be headed for a 22-percent increase this year and possibly more than $1 billion by 2009. O’Brien, however, said that those forecasted numbers will have to be adjusted downward because of the current recession, although he didn’t say by how much.
What is clear, however, is that RPO offers a compelling alternative to staffing an internal recruitment function, he pointed out. In fact, he predicted that vendors will continue to win new business in the months ahead, but they will likely experience many peaks and valleys in volume as employers themselves try to determine their own human capital needs in these uncharted economic waters.
“While some major RPO contracts have been put on hold, I would expect RPO vendors to continue their successes in signing new business,” he said. “In a downturn, recruiting becomes quite lumpy. You might recruit a number of new hires one month and then very few for a number of months. In such a scenario in-house recruitment maintains a constant, high-cost base, but in an outsourced environment, costs vary with usage, allowing the client to save substantial amounts.”
Fundamentals Are Sound
Indeed, the fundamental business case for outsourcing recruitment has not gone away. And although the economy had dried up hiring for now, it doesn’t mean employers will lose their opportunity to garner savings. Moreover, RPO has always offered additional benefits besides costs such as reduced time to fill and better quality of candidates. Still, with all eyes on cost-cutting, outsourced recruitment will likely attract companies who are looking for an immediate solution to lowering operating costs.
“While the key driver for RPO is to bring in higher quality workforce additions, cutting costs is growing in importance,” O’Brien added. “Compared to other processes, recruitment outsourcing can offer quite a quick win for companies looking to cut costs, with a relatively short and uncomplicated sales cycle.”
One result of the impetus to cut costs could be a shift in the market to more offshore delivery of services such as sourcing, preliminary screening of resumes, and other highly administrative tasks. Although RPO providers have largely tried to move much of their operations offshore, O’Brien said he believes that in this economy they must take advantage of labor arbitrage to deliver greater savings to clients.
Furthermore, he predicted that only the nimblest providers will manage to hang on to or grow market share. In addition, they will need to partner with providers in other regions or countries to cater to clients’ desire for one vendor across multiple areas. He noted that in the past year, plenty of market consolidation has already occurred, in addition to partnerships announced between various providers. The key to survival is to make inroads with new clients and prospects even if their hiring volumes have declined sharply. By doing so, vendors will develop a pipeline for more plentiful times.
“The vendors which will be in the best position to survive will be those with the agility to scale up and down as volume demand dictates, and which can reassign resources across clients,” O’Brien added. “Those vendors that can achieve this, while continuing to price new contracts with a heavy variable price element, will be successful in the long term. Long-term contracts with major companies that have low recruitment volumes now may not look like particularly lucrative wins currently but could develop into extremely profitable deals as the employment market returns.”
For more information about Datamonitor’s report on RPO, O’Brien can be reached at pobrien@datamonitor.com .
