The good will out

By Stephen Dunn, Everest Group Consulting

The multi-process human resources outsourcing market has gone from $0-2 billion in the blink of an eye – and it’s still growing rapidly. Find out what’s going on?

Multi-process human resources outsourcing (HRO) market is now US$2 billion in size and, at 28 percent growth per annum it is growing nearly four times as fast as the general HR services market.

This market crossed a significant threshold in 2005. Close to 40 HRO deals were signed pushing the number of HRO well over the hundred mark. As the market matures, it is developing in size and sophistication and as a result is segmenting. We see changes to the buyer/supplier balance and this has serious impact on the choices offered and decisions an HR manager will make.

But there are serious gains to be had – Everest Group finds that human resources outsourcing can save 15 percent plus off the total direct HR cost base depending on the buyer’s current cost base and willingness to use cost reduction levers such as self service and offshoring.
Furthermore benefits from a supplier’s scale and ability to drive the cost and service improvements require the buyer to adopt supplier/industry standards. In addition, to serve the global market, suppliers must have a global footprint and this takes significant investment.

Research findings, recommendations and advice
Human resources has long been at the sharp-end of outsourcing decisions as the implementer of staff transfer and downsizing programs. Increasingly, HR functions, led by benefits, payroll, employee data management and HR information technology, are themselves the target for outsourcing and are increasingly moving offshore.

While offshoring of transactional HR functions is rapidly becoming standard in new deals, it is currently used in just less than half (44 percent) of the major HRO transactions in force today – representing a major re-negotiation/re-structuring opportunity for buyers. However, this will increase as the significant cost savings and increasing sophistication of supplier offerings are realised. But, despite the growth and maturity that we are seeing, HR still lags behind other areas that companies are offshore outsourcing. This is mainly due to the cautious nature of buyers, who are sceptical of the offshore center’s level of HR expertise and ability to deliver high-touch employee services. However, with the major suppliers now focusing on elevating their offshore HR skills, and with the constant pressure to control costs it will not be long before the HR sector catches up with IT, customer care and other areas in adopting the offshore model.

HRO offerings will have to be global
Buyers want suppliers who can offer them a one-stop solution to cater for all their language, time, legal and cost needs.

Most HRO suppliers already have a moderate to significant offshore presence, with plans to aggressively expand their offshore capabilities. A number of regions around the world provide substantial and sustainable HRO labor arbitrage opportunities for developed nations and are attracting significant investment from the major HRO suppliers.

While India has the greatest number of HRO centers, Eastern Europe is becoming an integral part of the offshore equation due to low costs, language offerings and regulatory restrictions on employee data movement outside the European Union. Central and South American locations are gaining in popularity as near-shore locations for North American clients with processes that require greater contextual knowledge and real-time support.

Buyer objectives, supplier capabilities
As the market matures, it is changing. Buyers are looking beyond cost savings for longer-term value elements such as achieving quality in service delivery and improving business outcomes. Nevertheless, as buyers’ needs evolve and become more sophisticated, suppliers face increasing pressures on profitability and deals can take almost twice as long to stabilise than a typical BPO transaction. This means that suppliers often find themselves having to invest significantly just to keep up with changing requirements. Many suppliers continue to report they are still investing heavily in this market but have yet to produce sustained profits.

Buyers can test the HRO market by outsourcing one function, but cross-functional synergies really come into play when you increase the scope of functions outsourced and outsource multiple HR functions. And it is only in this scenario that buyers can truly leverage a supplier’s pre-existing HRIS platform(s) and its systems implementation experience. The roll-out and maintenance of an HRIS system is one of the greatest capital cost projects, and avoidance of this cost and the associated risk is one of the key growth drivers in HRO today.

This ability to create leverage across buyers has become a strong part of the suppliers’ value proposition, particularly to smaller buyers’ requirement. For this leverage to really take hold, suppliers need to drive process and technology standards across their client base. In our estimation, this increased leverage has accounted for about 20 percent of the 50 percent drop in HRO pricing that has occurred over the last three years in the small customer segment (prices have fallen just under 30 percent in the large customer segment).

So far buyers have been resistant to adopting standards, but this is changing as the economics and supplier capabilities evolve. Smaller companies are also finding suppliers less interested in pursuing deals that don’t meet their operational criteria, i.e. where they do not conform to standards.

Market segmentation
As the market evolves, these suppliers are looking to sharpen their focus on their chosen market segments. As a result, the segmentation between large and mid-market continues to shift. Companies such as Hewitt, Accenture, Convergys, ACS, EDS, IBM, and Fidelity have close to 90 percent share of the larger (>15K employees) segment (in terms of total contract value -TCV) and ADP, Ceridian, AON, Mercer, and Arinso focus more significantly on the mid-market (<15K employees) segment.

Given the smaller size of mid-market transactions, larger market players are cherry-picking special situations in the mid-market segment where transactions typically have a larger scope and price point than those involving mid-market players.

What this means for the HR manager
• The multi-process HRO market has matured considerably over the last three years, and with falling prices is much more attractive than it had been
• Standards, while not yet set, have evolved and allowed suppliers to begin leveraging scale across their customer bases
• Offshoring of HRO transactional services is now a reality and is commonplace in new deals
• Stronger supplier capabilities and a competitive market have driven down pricing by 30-50 percent depending on segments. For those with an existing outsourcing arrangement, there is an attractive opportunity to renegotiate. For new buyers, pricing has improved considerably

For more information regarding HR Outsourcing please contact:
Stephen Dunn, Managing Principal, Europe, Everest Group Consulting Ltd. Tel: +44 20 7664 8920. Web: www.everestgrp.com.