Using this taxonomy of RPO, buyers can better take on due diligence when outsourcing their recruitment services.
By now, most HR professionals have accepted and are living the reality of the war for talent. What first began as an exaggerated, apocalyptic phrase designed to attract attention to a demographic problem in Europe and North America is now the best shorthand we have for describing the predicament of meeting the specific talent shortages of organizations around the world.
During the same period that this demographic trend began to become obvious, a wave of management best practices swept through HR organizations. Focus on this management approach, now well established, has led many if not most HR organizations to examine their own core competencies and select which ones to develop internally or hand off through outsourcing. For many HR leaders, the questions they grapple with are, “Given the added pressures of recruiting in a war for talent, does my organization truly have a core competency in recruiting? And are we competent enough in a setting that is increasingly global and multi-lingual, and one that requires us to be technology-enabled to be truly competitive?”
These questions have become extremely important to companies, and they all must examine their own internal capabilities as well as those of the providers in the RPO market. At Pillsbury, we have helped several companies with this analytical process and have learned some of the nuances of this developing market, sometimes the hard way. We have also learned that to understand whether an RPO is the right solution for a given company starts at the very beginning: What does RPO actually mean?
An RPO Taxonomy
RPO is a buzzword in the HRO marketplace today. Countless numbers of providers tout RPO capabilities, yet there is no one industry-recognized definition of the term. Like most buzzwords, RPO means different things to different people. Providers, customers, and potential customers run the risk of talking past each other in this nascent market without some work to establish what this concept actually means.
A recent Aberdeen study found that 24 percent of respondents believe RPO requires inclusion of the entire end-to-end recruitment process for at least one category of hire, yet 73 percent believe RPO could be limited to a specific subprocess. These responses highlighted the broad lack of agreement on what RPO means, or what it should mean.
Pillsbury’s overview of the RPO market is summarized in Fig. 1. We tend to qualify those with proficiency across many dimensions as a “true” RPO provider, versus a vendor of various point solutions. Fig. 1 shows an evolutionary direction from lower left to upper right taking place in the marketplace, but currently there is tremendous market confusion because of various offerings available. We believe that a taxonomy would reconcile the various offerings and help buying organizations find the right fit. To do this, we established four major considerations when weighing an implementation:
• What is provided?
• For which markets?
• How is it performed?
• Using what charging methodologies?
• What Is Provided? As basic as it might seem, a service description is the most valuable starting point for both internal recruiting operations and externally provided solutions. Main services include:
–Talent acquisition strategy;
–Internal candidate administration;
–Candidate pool development;
–Third-party agency management/rationalization;
–Employment agreement administration;
–Talent management administration.
To complicate matters, recruitment professionals will quickly realize that the services listed above are still relatively high level and need to be augmented with more detail. And there are several subprocesses within each; for example, in requisition management alone the following may be included in scope:
–Assess needs with hiring managers;
–Assist in developing selection criteria;
–Prepare generic job descriptions;
–Develop particular requisitions;
–Manage open requisitions;
–Communicate status of requisition; and
A common understanding of scope is the single most important factor in the success or failure of a transaction. RPO is no different, and common understanding of scope is absolutely critical to success.
• For Which Markets? Each customer or potential customer of an RPO also needs a clear understanding of the markets to be covered. There are at least three major categories to consider:
A company may focus on a specific industry such as technology, healthcare, or manufacturing. Or the company may span a number of industries such as GE or Tyco. The need for hiring assistance may be more acute in some countries than others. Or the need may be most profound in the labor category of middle management, sales, or in high-turnover positions such as customer service representatives.
It is critical for companies to examine their pain points and understand what they specifically need from the market because providers are not equally capable across these dimensions, despite claims to the contrary. Careful examination of such claims may be the most important aspect of due diligence that a potential RPO customer can perform. Few offer broad-based competencies across all three dimensions.
• How Is RPO Performed? A third critical dimension of any RPO concerns the actual method of service delivery. Here, again, the market has examples of many different schemes, some of which can be tailored to customer requirements while others are not negotiable. Establish the answers up front to questions such as:
• Where will or could the services be performed?
• Does the provider offer a shared or dedicated environment and staff for a given customer?
• With what technology will the work be accomplished?
Services can be performed on-site, off-site, onshore, nearshore, offshore, or in a combination. Some providers want to reserve the right to move work to maximize their performance (and margins). Buyers should specify their willingness for such movements but also provide vendors certain leeway as long as service levels are being met.
The question of dedicated versus shared customer support environments is one that also tends to be more swayed by emotions than practical impact, so RPO buyers should be aware that insisting on a dedicated environment and a staff could well drive costs up without materially improving service levels.
The question of technology platform is increasingly important in RPO decisions because workflow integration among the provider, the client, and a network of third parties (job boards, etc.) is a key aspect of an efficient and effective RPO. Key decisions for buyers include whether to use existing licenses for technology (especially talent management or applicant tracking systems), adopting the provider’s proprietary system, or to use a third-party system agreeable to both provider and customer. Integration decisions also include e-mail system integration, corporate hierarchy integration for workflow routing, third-party assessment, background checks, and like-services integration, as well as potential integration with a network of subcontractors managed by the RPO provider. These decisions are often thorny, technical, and tedious, but they are worth your time to ensure that the RPO represents a true leap forward in capability for the organization and not a new point of failure in the system.
The last major dimension in our taxonomy is perhaps the most difficult to describe, and we believe is one that carries the most risks for buyers who fail to adequately grasp the trade-offs among the choices offered in the market. Quite naturally, providers have a preferred business model that tends to lower their risk by playing to their particular strengths. These vary widely in the segment, and it is imperative for buyers to have an equally clear-headed view of their own appetite for risk and the service delivery model that they should seek in the market.
Among the many business models in the market today, including hybrids of each, are the following:
• Staff supplement (rent a recruiter);
• Labor arbitrage—transfer of functions to low-cost locations;
• True integration into customer workflow—with rebadging of client employees;
• Needs-based services, much like a traditional contingent search firm;
• Third-party vendor management model—management of existing staffing firm relationships; and
• End-to-end function replacement—people, process, and technology.
Any and all of these models may be employed across the other three market dimensions: industry, geography, and labor category. It is easy to see why there is such confusion about the RPO market; there is a kind of Rubik’s Cube that can be created with so many aspects of the deal to consider. Buyers need to be very aware that the right solution may lie in a staff-supplement approach in one geography, coupled with a full end-to-end function replacement in the “home” geography. It could be that one provider is capable across these dimensions, but it is just as likely that they are not. Buyers will want to consider best-of-breed approaches, especially across geographies, and secondarily across labor categories and business models. There are countless service delivery models, often customizable to the particular customer/environment. Buyers have more power than they realize in dictating some of these terms and should be conscious in contract drafting so that providers’ default language does not override the buyer’s intent.
• Using What Charging Methodologies? Given the complexities described previously, it is not surprising that the market has devised many ways of charging for RPO services. There is a lot of risk inherent in agreeing to a given pricing scheme, so it is important that buyers understand some of the basic levers of the RPO purchase.
First, is the RPO provider looking for an exclusive right to perform the services? This means that all hiring done by the organization (subject to some carve-outs) is to be performed by the single provider. This is a big decision that providers will try to introduce in the discussion early on. By giving exclusivity to a provider, the company can more adequately enforce against internal “rogue” hiring (often to hiring managers’ sweetheart contingency firms), can meet the provider “floor” volumes, and can ensure a period of operation in which the vendor can make a name for itself without competition. Buyers need to drive an equitable trade-off in pricing for granting this right.
Other pricing schemes commonly offered include the following:
• Level of effort: Time and materials; FTE-based; and requisition-based;
• Pay for performance: “Fill to bill” and pay based on milestones (requisitions, interviews, hires, and start dates);
• License fees for technology;
• Third-party agency use; and
• Project based.
Among the above, by far the most important distinction for buyers to grasp is the difference between charging for “level of effort” and charging for “performance” against particular goals.
Effort-based pricing typically means the buyer agrees to source from the provider a certain number of requisitions, interview a certain number of candidates, or supply a certain number of interviewees in the expectation that a predictable percentage of these will be hired. Performance-based pricing means the provider may agree to put some or all of its fees at risk unless and until an actual hire is made.
Obviously, the risk to the customer is far less in the latter model, and while the pricing of the two offers should reflect this, there is a greater leap of faith involved in accepting the prior model that may not be offset by its lower price. On the other hand, results achieved by the effort-priced solution may be quite good and lead to a better business case. In either instance, buyer diligence, including direct contact with providers’ reference accounts, is essential in determining which is the better model.
John Haworth is principal consultant and head of the HRO consulting practice at Pillsbury Global Sourcing and has been involved with HRO and RPO engagement since the founding of the industry. He was a cofounder of Fidelity’s HRO business as well as the global head of HR systems for Raytheon and founder of PeopleSoft’s outsourcing practice. He can be reached at email@example.com.