Human resources outsourcing (HRO) was one of the most rapidly evolving outsourcing markets in 2003. Eighty-five percent of American enterprises will outsource at least one component of their human resources functions by 2005, according to Gartner Dataquest, a Stamford, Connecticut research firm.
Trend 1: HRO Encompasses the Enterprise
One of the biggest developments in HRO last year was the growth of full-service HRO, a solution that encompasses the breadth of the employee lifecycle, including data management, payroll, self-service, and HR call centers. An Everest Group study of the full-service HRO market updated in December 2003 found there have been 49 full-service HRO deals totaling $12.1 billion; 16 were signed from January to November 2003.
Cindy Canevaro, the product marketing manager for Business Process Operations at EDS, a global outsourcing services company based in Plano, Texas, says HR service delivery is going through an evolution – moving from functional, siloed outsourcing such as benefits and payroll, to full-service HRO that covers processes end-to-end. This integrated approach, according to Glenn Davidson, the chief of market strategy and corporate development at Accenture HR Services in New York City, is new.
Bill Matson, general manager, HR Business Transformational Outsourcing for IBM Global Services, based in Armonk, New York, agrees. “The market is shifting from business process outsourcing (BPO) to business transformation outsourcing (BTO). In BPO, you ask us to run your operation as is and we do whatever we can to wring cost out of it. With BTO, we use our experience to build a better mousetrap,” he says.
Matson says that companies who went with BPO found themselves struggling last year. “The service providers are feeling gross profit pressure and the buyers are seeing diminished quality,” he says. The cure is BTO.
What exactly is BTO? BTO means different things to different suppliers, so buyers need to clarify the definitions with their service providers.
Trend 2: Exult Turns Profitable, Proving the Validity of the Concept
Exult, an Irvine, California service provider that was an HRO start-up in 1998, turned profitable last year. Ron Hanscome, a senior program director at META Group, a research firm based in Stamford, Connecticut, says Exult’s financial success was a signal that full-service HRO is a valid market.
In addition, IBM purchased pieces of PricewaterhouseCoopers Consulting (PwC Consulting), acquiring additional BPO assets which it leveraged to win the HRO work at Proctor and Gamble. Exult purchased PwC Consulting’s international BPO operations.
“Buyers like to have multiple suppliers in the marketplace. It raises the comfort level,” says Kevin Campbell, Exult’s President and COO.
Trend 3: Acquisitions Add Capacity
Companies looking to get into the HRO market last year purchased companies to do that, points out Davidson of Accenture. “I would expect one or two more similar deals in 2004,” he adds.
IBM’s purchase of PwC Consulting, though consummated in October 2002, came to fruition last year. “That transaction brought us 3,500 consultants with experience in business transformation. We didn’t have credibility without them,” says Matson.
Convergys, an HRO provider for almost 20 years, broadened its services to offer integrated support by acquiring Avaya Global Employee Services in 2003, explains Peter Hirano, vice president of strategic planning and marketing for Convergys Employee Care, based in Chicago, Illinois. He says the acquisition allows Convergys to build its infrastructure to provide multi-process HR capabilities to global client organizations.
Trend 4: Suppliers Go Global
Hanscome of the META Group argues that the growing use of offshore/best shore resources to deliver HRO services was one of the major developments in 2003.
Campbell of Exult says HRO providers felt “to be a global provider you need a global delivery capability. “Exult opened a captive center in India and an Exult acquisition gave the company centers in Brazil, the Netherlands, and the UK.
Matson of IBM says US buyers expect HRO suppliers to have a global footprint. “They want the suppliers to get the work done in the most cost-effective fashion,” he reports. IBM, for examples, sends the Proctor and Gamble work to San Jose, Costa Rica; Manilla, the Philippines; and Newcastle in the UK.
Canavero of EDS agrees, saying that clients want the best quality at the best price, wherever that is. “Our experience consistently shows that not all clients want or need an offshore solution,” she observes. EDS’ Best Shore product accommodates all levels of client requirements to include onshore, nearshore, and offshore options, she explains.
The analysts predict only the basic transaction-type services will go offshore. “The trend for individual HR components going offshore at the basic level will continue, but not at the sophisticated, deep knowledge level,” predicts Gartner’s Scholl. David Rudini, a principle in the Human Resources Strategies Group for Deloitte’s Human Capital Advisory Unit, based in New York City, agrees that a number of factors will influence the extent to which organizations are willing to accept an offshore model, one of which is security and confidentiality — important when dealing with health plans, labor agreements, and benefits information.
While offshore was a major trend, it took a back seat to finance and accounting outsourcing. Michel Janssen, president, Supplier Solutions for Everest, says “use of offshore resources is more of a driver in finance and accounting outsourcing than in HRO.”
Trend 5: The Use of Transaction Engines
Last year saw the acceptance of transaction engines — investments in rules-based software, process, and facilities — to handle routine and repetitive transactions. Suppliers want to leverage their off-the-shelf solution across multiple buyers. “Transaction engines are similar in promise to the Enterprise Resource Planning (ERP) systems. Buyers don’t have to start at zero, since 80 percent of what they need is already there. They only have to customize 20 percent,” says Eric Simonson, a managing director for Everest. Simonson says transaction engines are a good fit for HRO because some HR functions are fairly standard across industries.
Hirano of Convergys argues there must be a mix and match of technology solutions that are adaptable to client requirements. “Routine processes such as health and welfare administration require configuration tools to support client-specific and participant-specific requirements; the back-end transaction engine, however, can calculate, generate, and even distribute the result,” he explains.
But while Hanscome is cautious about the hype around transaction engines, he says that providing a comprehensive platform for integrated self-service and transaction management is a “ticket to play” for HRO suppliers in 2004.
EDS’s Canevaro concludes that more clients are expecting suppliers will have both transaction engines and labor arbitrage included in their overall solutions.
What’s Ahead in 2004
HRO will continue to go global. Matson of IBM says many multi-nationals are taking a closer look at offshoring. “They worry they’re missing something and now want to get on board,” he says.
At the same time, emerging markets will have a greater opportunity to see new business cropping up. For example, General Motors is opening a manufacturing plant in China. Once the infrastructure needed to make that work is in place, more companies may start sending their outsourcing work to China.
Matson also believes buyers will fall into two distinct camps this year. Companies who have already purchased an enterprise resource planning (ERP) system with an HR component will select a supplier who will run their existing programs (i.e. PeopleSoft, SAP etc). Buyers who haven’t made that investment will accept a supplier offering its own ERP solution, Matson explains. Janssen reports buyers transferred control of their ERP systems in almost 50 percent of the full-service transactions he studied. This was a major difference from finance and accounting outsourcing, where ERP control tends to remain with the buyer.
Predictions for 2004:
- Key enterprise HRO providers becoming financially viable has helped validate this market in order that more cautious mid-market suppliers will enter in 2004.
- As more large companies seek to focus less on administration and more on core activities to grow their businesses, outsourcing HR service delivery and transaction support will increase.
- Though adoption is still minimal, the use of transaction engines across multiple clients will be an important goal for suppliers as they meet the challenge of creating standardized processes in 2004.
- While there is skepticism about what components of HRO can and should be taken offshore, providers of full-service solutions continue to use low-cost offshore labor as part of their business models to meet client requirements.