HR experts offer their opinions.
By Russ Banham
In a year marked by increasing economic, social, and political volatility across much of the planet, major trends in HR outsourcing give hope that the industry is maturing while remaining flexible enough to adapt to a changing marketplace.
Key acquisitions and strategic partnerships were made in the HRO vendor universe in 2011, as the industry continues to globalize to present multi-country offerings. Much of this activity has been in recruitment process outsourcing (RPO), creating the ability to service that space in the Asia-Pacific (APAC), Europe, and the Americas. No other deal evidences this trend better than the five-year global RPO contract that pharmaceutical giant Eli Lilly and Company struck with provider Kenexa.
Other trends underway at the moment that auger more of the same in 2012 include the increasing use of predictive and descriptive analytics to glean business insights driving improved performance, higher adoption rates by clients leveraging providers’ cloud-based Software-as-a-Service (SaaS) solutions, and greater use of balanced shoring options—combining off-shoring, on-shoring and near-shoring models.
In talent management, expect growing sophistication in services offered by HRO providers, as opposed to just software packages. And chances are we will continue to see greater acceptance of a la carte HRO services, rather than binges on entire “soup to nuts” menus from single providers.
These are but a few of the predictions for 2012. Josh Bersin, CEO and president of research and advisory services firm Bersin & Associates, is among a spate of optimists. “In many ways,” he says, “this is the golden era of HRO.”
Bersin is far from alone in this perspective. Interviews with several individuals who have spent much of the last decade participating in or observing the evolution of HRO paint a picture of quick gains giving way to true value. “HRO started off as a cost reduction move for some companies,” says Jill Goldstein, HR BPO offering lead at Accenture. “It has expanded well beyond that to become a driving force for creating business value.” She adds, “We expect 2012 to bring even greater emphasis on business outcomes, as companies explore HR BPO as a way to meet business needs and improve business performance.”
True Business Value
A recent survey by Aberdeen Group of 292 HR organizations supports the notion that HRO is providing more of a strategic support for clients, while still providing line leaders with tools to improve day-to-day talent management. This stands in contrast to the older notion of HRO as simply a way to reduce the tactical burden on HR.
The survey, released by the research consultancy in December 2011, indicates that 2 percent of respondents currently outsource all core HR functions. On the other hand, 48 percent of respondents state that their organizations outsource some core HR functions.
“These data points reinforce the idea that HRO will go the way of RPO in 2012—from outsourcing the entire process to more of an a la carte approach,” says Kevin Martin, Aberdeen senior vice president of research operations. “More companies are keeping the core strengths in-house and outsourcing where strength is needed or where the task is very tactical or burdensome.”
The latter point was underscored by the survey, which found that 54 percent of respondents spent half their time on transactional, administrative tasks, as opposed to strategic initiatives. Interestingly, approximately half the respondents selected “automation of HR process/programs” and “consistent HR service levels/programs” as top strategies to improve core HR service delivery. “To me, this suggests that HRO providers should focus more on the services side of their businesses, to enable companies to standardize internal processes,” Martin says.
Measuring HR success will similarly evolve. “Rather than focusing on improving a metric like ‘time-to-fill’ by one week, HRO providers must focus on helping business leaders understand the measurable business impact of the outsourcing endeavor,” Martin explains. “In other words, how will that one-week reduction in ‘time-to-fill’ affect the business in terms of productivity and cost reductions? That’s where HRO providers will truly become leading edge.”
Goldstein agrees that the ability to create business value is fast differentiating the provider marketplace. “As the motivations for outsourcing expand, a new type of buyer is emerging,” she says. “Historically, we’ve seen HR or procurement buyers with a focus on reducing HR operating costs. Moving into 2012 we’re seeing a new type of buyer.”
Goldstein describes this buyer as focused on driving improvements in workforce operations, costs, and results. This, in turn, is blurring the lines between consulting and outsourcing, she maintains.
“Clients are seeking providers that can help them achieve tangible results that include better selection of top performers, improved retention of critical performers and workforces, and accelerated time to competency,” she says. “They want partners who can help create competitive advantage by forecasting and fulfilling talent requirements and aligning talent plans, workforce capabilities, and employee performance with business strategy.”
Backdrop of Uncertainty
Prediction is often more art than science, of course, particularly these days. As Rajesh Ranjan, research director of Everest Group, a research and advisory firm focusing on global services in New Delhi, India, put it: “The biggest joker in the pack is the economic environment. Figuring out where it is going changes by the day, it seems.”
Nevertheless, Ranjan has expectations for 2012 in two areas—multi-process HRO and single-process HRO. “There are some common themes playing out in both areas,” he says. “Buyers, for instance, are approaching HRO with a balanced set of outcomes in mind, as opposed to immediately alleviating cost pressures. Yes, they’re interested in models that address their short-term needs, but more are looking to create a foundation to realize long-term objectives.”
Existing buyers facing deal renewals will evaluate wider options as part of their long-term strategies, although Ranjan doesn’t see them necessarily switching providers. “While the methodologies and approaches being offered up by service providers will lure some clients away from existing providers, the transition costs from moving from one vendor to another will dissuade this,” he says. “That said, many providers are lowering these costs and making the transition easier, more efficient, and faster.”
Consequently, a client with a multi-process HRO platform may shed parts of it to other providers in 2012. This activity will pick up during the year, but Ranjan says it will not be earth shattering.
Jeff Croyle, managing director and partner at global sourcing advisory firm TPI, offers a similar opinion: “We’re seeing a significant level of renewal activity from generation-two and -three buyers, those that have outsourced workforce administration and compensation, and in some cases payroll. As contracts come up for renewal, about 75 percent are renewing with existing providers, assuming market-competitive rates.”
The reason? “Implementation and transition fees can destroy the business case for a new provider,” he says.
Others have a slightly different take. “We will continue to see a consolidation of first- and second-generation client deals moving to providers that have established themselves as the leaders in the industry,” says Mike Wright, outsourcing sales leader at Aon Hewitt. “Second tier providers will struggle and continue to exit the market.”
As for first-time HRO buyers, Croyle criticizes companies for failing to leverage the expertise of advisory firms in holding their hands through the selection process. “These firms are generally less experienced in outsourcing, whether it’s HR or finance and accounting, and in tough economic times they tend to rely more on internal procurement to run the deals,” he explains.
Consequently, these deals take two or three times as long as advisor-led deals for the ink to dry. “The RFP (request for proposal) materials are not market-tested, and there is scant use of the time-tested templates that we and other advisors have used,” Croyle says. “Many first-time buyers currently testing the water will not result in a lot of deals in 2012.”
More Talent in Talent Management
Several interviewees touted the likelihood of talent management playing a greater role in HR BPO. As Linda Merritt, research analyst at London-based BPO analyst firm NelsonHall, says, “It could be a disruptive force, shaking up the HRO field.”
Merritt predicts that vendors will continue to build talent management capabilities, internally as well as through strategic partnerships and acquisitions. A look back at the recent past confirms this trend. Take, for instance, the breakneck speed of deals involving Kenexa. Although the global HRO provider had developed talent management expertise internally, it enhanced it over the past few years via the acquisitions of Salary.com, which strengthened its compensation management capability, and Gantz Wiley research, which beefed up its employee survey research capabilities.
More recently, it acquired The Centre for High Performance Developments in London and New York, which has extensive research on leadership development and training, and Dallas-based Batrus Hollweg (BHI), which offers talent management solutions in the hospitality sector, along with research on talent management best practices. Both deals added to Kenexa’s existing research and content portfolio.
Other shakeups in 2011 likely bode similar actions in 2012:
• Mercer acquiring Censeo Corporation to enhance its talent
management consulting capabilities and online platform of assessment services;
• Kenexa and NGA partnering with SkillSoft for learning content; and
• Talent2 rebranding to simplify its talent management focus, in
addition to becoming a reseller of Cornerstone OnDemand, widely used for its performance management, succession planning, and learning modules, and adding advisory services.
Merritt also points to two acquisitions that will guide increased multi-country contracts such as the aforementioned Kenexa-Eli Lilly deal, which she tabulates as a $50 million contract: Randstad’s purchase of SourceRight and ADP’s acquisition of The RightThing.
“Talent management is becoming a real part of HR BPO,” she says. “It is not just a software package anymore; it’s how you effectively deploy it.”
She makes a good point. Historically, companies turned to a standalone vendor, bought the software suite, and then hooked it up. “Those suites are starting to expand and are not happy to stay in their little space, which is the case with Kenexa,” Merritt says. “More capabilities are a given in future, as RPO vendors become true talent management vendors, like we’re seeing in the Mercer-Censeo deal.”
Among these capabilities is consulting. “Suite providers don’t really do consulting, and HR consultants don’t have that sweet spot in technology,” Merritt notes. “As a result, there will be more acquisitions and partnerships to get this up to speed.”
Bersin agrees that RPO has become an extremely complex environment in the last three years. “What used to be an exercise in sourcing, screening, interviewing, assessing, and hiring is now that plus more—social networking, employment branding, and learning how to use LinkedIn, Twitter, and Facebook,” he explains. “This has led to some significant differentiation among providers insofar as skills.”
While Bersin believes that RPO buyers are likely to adopt a more cautious approach in 2012, given the European debt crisis, soaring national debt in the United States, and political polarization almost everywhere, the firm’s recent Talent Acquisition Factbook survey indicates that forward-thinking companies are shoring up such investments so that they will have the right infrastructure in place to facilitate hiring when the uncertainties settle.
“Many are funding initiatives to enhance recruiter productivity and the quality of their hires,” Bersin explains. “As firms adapt to today’s job market, they are relying more on contractors, and are also embracing new technology and tools that have proven to be worthwhile returns on their investments.”
The survey further indicates that while recruiting is expensive, costing U.S. companies nearly $3,500 per new hire on average, most of these dollars are going to search agencies and job boards. This is changing. “More talent acquisition teams are making investments in new tools, such as professional networks, candidate relationship management systems, and video technology to improve their recruiting efforts,” Bersin says.
Bits and Pieces
What else is likely to be in store in 2012? Accenture’s Goldstein says that her firm predicts significant growth in the use of business analytics, with a focus on discovering insights that inform the way clients manage the business, rather than used solely as an operational scorecard. “Clients will continue to demand more from analytics—it’s no longer just about metrics and dashboards,” she explains. “Companies increasingly understand the value and importance of having an outsourcing partner that can provide true insights to enable improved decision making. They realize there are more meaningful operational insights that can be gained from analytics than a set of metrics.”
Ranjan posits greater use of cloud-based SaaS solutions, “especially among buyers who get to make the choice on both technology and outsourcing,” he says. “More companies will want a service provider-provided technology platform that supports multiple clients—BPO meeting SaaS, or what I call BPaaS, Business-Process-as-a-Service. There are a lot of good options in the marketplace right now.”
The alternative for buyers of earlier versions of enterprise resource planning (ERP) systems is to implement frustrating upgrades that take forever to install and aren’t a meaningful solution at a palatable cost, he says.
Martin from Aberdeen agrees that SaaS and the cloud will enable HRO providers to offer automation quickly and inexpensively. “It also suggests that HRO providers should focus more on the services side of their businesses to enable companies to standardize internal processes,” he adds.
Merritt notes another trend at play—the increasing number of HRO contracts struck in APAC. “Demand in Australia remains strong, including for RPO,” she says, noting Korn/Ferry subsidiary Futurestep Australia’s winning bid with AGL Energy. “The number of announced contracts that included Australia in the past three years has jumped from 10 percent, with half the clients headquartered in that country, to 16 percent, with the majority of clients based in Australia.”
China also is emerging as a client base for HRO, including in-country deals, she adds.
Ranjan believes that the global shoring of services will become more balanced in 2012, with companies adopting different variations of on- and off-shoring models. “Rather than off-shoring, near-shoring, or on-shoring, companies will get rid of the or part in favor of and,” he explains. “Finding the right balance will become key.”
Wright from Aon Hewitt says that the outsourcing of leave administration, disability, and so-called “day one” absences is a trend with legs, while global benefits delivery is an emerging strategy. “Many employers are looking for a common benefits strategy globally that incorporates local approaches and is delivered locally,” he explains.
“Multinationals will continue to look for streamlined, cross-border solutions that enable consolidated reporting and management, support improved risk management, and streamline process and governance.”
Despite these various projections, everyone concurred that the economy and the regulatory issues affecting it remain as Ranjan’s “joker in the pack.” For instance, benefits administration will continue to be a slow growth business until healthcare legislation issues in the U.S. are resolved. Once this occurs, Merritt predicts the unleashing of pent-up demand for consulting and major special projects.
The same could possibly be said for RPO. “With the downturn in the economy and labor markets during the past years, many recruiting departments have been decimated,” says Wright. “At the same time, those service providers committed to the RPO space, and with the financial wherewithal to invest in their businesses, have advanced their capabilities via technology and process innovation and capitalized on trends such as social media.”
As hiring levels begin to increase—they were up in December 2011—buyers will have greater access to state-of-the art technologies, expertise, and scale to acquire top talent in a variable cost model via their RPO partners, Wright contends.
As for what is in store for 2013, no one would even venture a guess. Talk about a joker in the pack.