Diligent selection of deal scope, sustainable business models for providers, and other market developments help put the industry on a growth path, new study concludes.
In an era when less is more, HRO engagements are becoming less complicated, centered on repeatable, transactional, and established processes, sometimes built on global service delivery models, and are often bundled with technology, according to a new study released by AMR Research. Phil Fersht, research director, global business services & outsourcing at the firm, said because of these developments, the multi-process HRO market was expected to grow by around 10 percent in 2008.
According to Fersht, growth will be largely based on transactional deals such as payroll administration and in which immediate cost savings can be achieved from offshore labor arbitrage. Services most often included in scope are payroll processing (around 90 percent of the deals), employee contact centers, workforce data management, and HRIT system management. Surprisingly, benefits administration, once a core process often found in early-generation multi-process contracts, is increasingly being peeled away from these deals. According to AMR, one reason why end-to-end service providers are not pushing to include benefits administration is that costs to offer the service have been high and provider profit margins have suffered as a result. Buyers then are turning to best-of-breed vendors to help them manage benefits administration, which can be complex and overwhelming for internal staff.
In AMR’s research, it shows how HRO engagements are further changing and evolving from earlier models of comprehensive outsourcing. In first-generation HRO deals, buyers looked to consolidate as many of their HR services as possible to one provider; today, they have grown much more selective, often times choosing only a few services that they struggle to deliver with internal resources.
One thing that hasn’t changed is that buyers are looking to HRO as a way to access technology. AMR reported that 84 percent of current engagements involve a new HRIS being implemented just prior to or concurrently with the outsourcing contract. And in almost all of the contracts (92 percent), providers maintain and support the HRO system.
Whereas large-market buyers are more clear about how HRO will transform their businesses, mid-market organizations say they need support in determining an efficient, steady state for their HR group. The study pointed to the fact that mid-market companies often also include in their deals support for organizational design and risk/compliance function because they lack the internal resources and expertise. This is not surprising considering that many mid-market buyers are still new to the HRO market, which itself has not developed many mature comprehensive outsourcing solutions customized specifically for organizations with 3,000 to 15,000 employees.
An exception may be ADP, which AMR said now has a 66-percent market share of this segment. Not surprisingly, Ceridian, another larger payroll provider, is also a significant player in this segment.
In the large market, vendors such as Hewitt, IBM, Convergys, Accenture, NorthgateArinso, ACS, ADP, and ExcellerateHRO continue to account for the majority of HRO engagements around the world. They face competition from some upstarts, however, in the form of offshore competition. AMR said India-based Wipro now has a six-percent share of the enterprise market, while Infosys and TCS are also establishing a presence. These IT BPO companies are slowly entering the U.S. market, leveraging their existing client base on the IT services sides. Because the offshore providers have a global footprint, they are also attracting the attention of global clients.
Fersht said these developments are clearly helping to settle the HRO industry, which has experienced some rocky moments during recent years. However, with delivery models and pricing now more sustainable for suppliers, and buyers more judicious about deal scope, it appears the market has matured markedly.
“The HRO industry has clearly found its feet after suffering from all the hype, negative publicity of failed deployments, and poorly structured contracts of its early years. The industry has gone back to basics to provide primarily payroll-centered services that are tried and tested in addition to being less complex,” Fersht added.