Recession looms, markets tankâ¦what does it mean for HRO initiatives?
Every morning, some intrepid soul throws the Wall Street Journal on my driveway. Since January 2nd, however, it’s been landing closer to the street, as though hefting the headlines out of the window required extra strength. I’m not surprised.
The worldwide markets have been doing their imitation of Greg Louganis off the high dive, and the other economic indicators are suggesting slowdowns in many of the world’s economies. Welcome to the recession. In economics, you are what you think, and many people believe we are in a recession. Remember, expectational models drive behaviors. So what does this mean for HRO providers and buyers?
For value-driven sectors such as payroll and benefits administration, a recession can be a good thing. Practitioners will look hard at fixed versus variable cost models, and more expensive internal operations that have been maintained because of the sheer force of inertia will come under scrutiny for outsourcing.
The Wall Street analysts predict Armageddon for RPO and SaaS recruitment technology providers, but the meltdown will not happen. Most staffing executives know that while there may be more candidates available in a recession, screening and selection are a big part of the value proposition of these companies. In fact, all employers are chasing the same top 10 percent of the talent pool. Most of these Wall Street talking heads have never worked in the industry and do not understand this. If these analysts are not getting regular calls about other jobs, they are probably in the bottom 90 percent anyway. There is a war for talent, and it will only intensify as the wave of retiring Baby Boomers drives knowledge worker recruitment into high gear.
The recent and identifiable trend of processes being pulled back from low-cost economies will slow down or stop outright. Some providers and some captive service centers have moved work back from India and Eastern Europe, citing cultural or language issues. Value plays will be king again, and labor arbitrage its queen. To maintain economic advantage, the low-cost economies will continue to see growth from outsource service centers. Automation, though, will be the next great frontier of cost savings.
For enterprise service providers, there will be increasing pressure to reduce acquisition costs, which have run away for both buyers and providers. The escalating costs of contracting are far less than the cost of a bad deal, but in a recession deal costs will be under heavy pressure. To get to savings should not cost millions.
One reason for the cost escalation is the proliferation of the sourcing advisors in all deals. Because the advisors shifted their billing models from a percentage of the contract value to hourly billings for transformation consulting, deal closures in HRO have slowed and the pre-deal consulting fees have skyrocketed. One practitioner bitterly complained to me recently about a seven-figure bill for a bid process with a ridiculous number of 14 firms in the RFP after a year of “getting ready.” Honestly, there is no reason for this, and providers and practitioners will tell the consultants to “transform this” in tough economic times. If you are a practitioner with above average intelligence, good procurement and legal departments, and experienced outside counsel, you can go it alone.
We will all weather the storm. We have lived through this before, and we will survive. The key for HR strategy is to have a plan to meet the economic times head-on and configure HR services and budgets to conform to the overall company strategy. HRO is a good alternative as a way to create variable-cost models, to leverage global savings opportunities in shared-services environments, and to gain access to the best technology. The process of HRO evaluation will make you a stronger HR group regardless of the ultimate buying decision.
Welcome to 2008, and enjoy the ride, though it may be a bit bumpy from here.