The real issue is the future of HR, not the future of HRO.
We are hearing a lot of bad news. Polar ice caps and financial markets are melting down, and we find more naysayers to fill the news channels. I heard a lot of comments both from the podium and in the hotel bars during the last round of HRO conferences about the future of HRO.
Discussions included questions on whether HRO is a sustainable business model for providers and a career-ending swan dive for executive buyers. Everyone, and I mean everyone, is confusing two issues. HRO is here to stay. The issues are that HRO does not only refer to multi-process enterprise HRO. In fact, multi-process is a small part of the HRO market, so let’s not mix up the terms. And the future of HRO is more about the evolution of HR.
First, let’s examine the HRO market. The HROA defines multi-process, enterprise HRO as six or more processes in an engagement covering more than 15,000 lives (this number may be adjusted). Clearly, there have been some troubled outcomes and painful implementations in this relatively new sector (inaugurated only since 1999) of the HRO industry. However, the term HRO includes many other aspects of outsourcing in human resources such as benefits administration, learning, payroll, recruiting, relocation, etc. In fact, these other offerings continue to grow, and adoption of many of these solutions is accelerating. The overall HRO market is at least tens of billions of dollars, and some believe the market is in the $40 billion-plus range. The enterprise HRO market is only about $3 billion a year. Single-process HRO is doing well. Overall, single-process HRO is a sustainable, growing business.
So, let us turn to multi-process, enterprise HRO. It is not so fine. Recent earnings reports suggest that HRO engagements are still unprofitable for providers and painful for buyers. Where is this sector of HRO going?
We should think about the future of enterprise HRO for a moment as a business model. If we can learn from the most mature part of the business process outsourcing market—information technology outsourcing—we see an interesting parallel. In the late 1970s, the ITO market arose with major all-inclusive engagements. Some of these were failures, and the market soon changed. Today, the office of the CIO in many companies is a program management office (PMO) that oversees various technology services providers. They may have one firm managing data centers and another managing application development or database administration. The PMO selectively outsources to the best provider for that function. It is essentially the retained organization. Is this a glimpse into the future of HR?
The cost of building internal infrastructure is very high, and outsourcing makes a great deal of business sense. It allows variable headcount in the HR function and different accounting for technology investment, etc. The issue may be what the retained organization will look like. In the future, we may think of multi-process enterprise HRO as simply an engagement where the PMO is outsourced to a provider that can pick its own company for many of the processes or it can subcontract. Future HR departments may be composed of several single-process HRO providers managed by a PMO comprised of the internal HR executives. In short, as evolution inevitably forces us to adapt to an ever-changing world, we must recognize that the future of HR will drive the future of HRO.
