RPO & StaffingTalent Acquisition

EDITOR’S NOTE:What I Missed on My Vacation

Evolution isn�t just a concept the religious right disputes; it�s taking place before our very eyes in the world of HRO. Despite the market�s rough going in the past, today�s buyers will get more value.

by Andy Teng

July is the month of vacations. I hope you had a good one. I know I did, having shut down e-mail for a week, let voicemails pile up, and completely erased my mind about outsourcing (OK, maybe I did have to resolve one office crisis in the midst of my respite). Nevertheless, the time away did help recharge the batteries.

So it was no small surprise to learn that the HRO industry that I left behind briefly seemed radically different upon my return. All of the familiar hallmarks of the outsourcing business have suddenly evolved, and the market assumptions I previously held onto so securely were now on shaky ground. Was I away for so long that I missed out on important developments affecting the business? I didn’t think so.

Industries don’t really evolve much in the span of a week, and HRO is no different. What I came back to was in-your-face confirmation of trends that have been slowly unfolding for more than a year now. In two articles in this issue, Managing Editor Peggy Cope (“Keep the Honeymoon Going,” p. 24) and EquaTerra’s Mark Hodges (“Major Market Changes Are Afoot,” p. 66) point out that the HRO industry you’ve grown up with has gone in a new direction. Buyer expectations have changed, and provider business practices have evolved. The result is an interesting, disparate shift in buyer and vendor attitudes.

According to Hodges, the market is currently capacity-constrained. That explains why the number of enterprise HRO deals has fallen from its high in 2005. Two years ago, irrational exuberance dominated the industry as providers rushed to sign new customers to establish a credible portfolio, regardless of profitability. Providers are still dealing with the fallout—part of which is higher pricing these days.

In her reporting of results from a recent Towers Perrin study, Peggy notes that large HRO buyers have been dissatisfied with the results of their engagement, with 2006 being a year of “mild to moderate frustration.” A key finding is that two-thirds of buyers polled say that after implementing HRO, they’ve realized that quality has become an even more important issue than initially, and many say they are spending more time on HRO management than anticipated.

Now, you can look at this information in two ways: higher buyer dissatisfaction and provider pullback spell slow market growth ahead. After all, if you’re not hearing good things about HRO and providers want to start charging more money for their services, why in the world would it make sense to jump into outsourcing?

Or, consider this counter: the buyers who are most unhappy about their engagement signed enterprise deals during the Wild West days of the industry, so they were promised a lot even as providers scrambled to get their act together. In effect, those buyers served as guinea pigs. Today’s providers have worked out their issues, realized the importance of profits to sustain innovation, and have become selective in their engagements. They will most likely pursue only deals they can succeed in—both in profitability and in customer satisfaction. That means today’s buyers will almost get a better deal than their predecessors in delivery quality and value.

How will cautious prospective buyers interpret the data? Are big-bang enterprise HRO deals a thing of the past? Or will buyers muster new courage to go forward with more global engagements? I don’t have a crystal ball, but from conversations with buyers—even those who’ve told me they’ve had a difficult time with implementation—they would not bring HRO services back in-house. Sure, they’ve had problems with providers, but any kind of change—whether moving to outsourcing or to a shared-services environment—will be accompanied by a fair number of headaches. How well your experience goes depends on the effectiveness of your change management and governance model.

So as I stare at the calendar for vacation week No. 2 in August, I’m thinking twice about totally shutting down e-mail. The market’s evolution—even unfolding at its deliberate pace—warrants watching, and I’d hate to miss even an episode.

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