In a typical technology adoption cycle, the pioneers are at the front of the curve, the settlers are in the middle, and the sheep show up at the end. Historically, big companies, which have the cash and the critical mass to afford to try something new, are the early adopters.
That’s certainly been the case with full-service human resources outsourcing (HRO). Sometimes called HRO BPO, this type of outsourcing includes back office services like payroll, time and labor, and benefits transactions; front office activities that allow companies to strategize about their HR functions; and self-service engines. Typically buyers have selected one supplier to handle all the HR functions they outsource, which number at least three.
Back in 1998, the big companies–those with more than 25,000 employees (>25K)–were eager to try this new approach, hoping their suppliers could wring out operational inefficiencies through better people, processes, and technology. In the 30-month period from January 2002 through June 2004, the >25k companies accounted for 83 percent of the total contract value (TCV) of $940 million for full-service HRO, according to the March 2005 Annual HRO Report from the Everest Research Institute.
But here’s what’s new: the middle market companies–those with under 25,000 employees (<25k)--accounted for 57 percent of the transactions. And this market is the fastest growing segment of HRO today, according to the report. This explains the Institute's finding that the size of HRO transactions is falling. In 2000 the average transaction size was $437 million. From January 2002-June 2004, total contract value had fallen to $148 million per transaction.
Why now? A host of events have coalesced to make full-service HRO a viable business strategy for the <25k crowd.
1. Broad-based HRO has become a standard business practice.
John Cardella, Executive Vice President, International Human Resources for Ceridian, says HRO’s maturity “has taken a lot of the mystery out of the process.” He credits EDS, Exult, and Hewitt for paving the road as pioneers.
Today “the HRO value proposition has taken hold in the upper end of the market,” says Mike Hogan, Division Vice President of ADP’s Comprehensive Outsourcing Services. The model now has eight years of history, he points out. Many of the early adopters have already demonstrated that HR outsourcing can not only save money as well as improve service levels, which helped confirm the “accepted business practice” title on full-service HRO.
“We can deliver the same value to them that we do for the top end of the market with our “one-to-many” platform and preconfigured solutions,” he says.
2. Suppliers now have defined solutions they can leverage.
Hogan says in the early days of broad-based HRO, suppliers adopted the “lift and shift” policy–they took over and ran the buyer’s proprietary HR or ERP systems. The few suppliers who could handle this type of engagement had little to no scale advantage, so the one-to-one method made sense as a way to deliver a comprehensive HR outsourcing solution. Today, the emergence of a viable multi-client model allows suppliers to deliver lower per-employee costs and increased service levels, while allowing the client to focus their limited resources on areas that provide a competitive advantage.
Fred Lowe, Senior Vice President for Johns Manville, says outsourcing to Ceridian reduced its service-delivery cost by approximately 25 percent per employee. Johns Manville has about 5,500 domestic employees and 8,000 retirees.
Cardella points out the pioneering buyers worked with their suppliers, who built these new HRO systems. He says suppliers today are ready to share their tested solutions with the mid-market; “We don’t have to keep building the technology because it’s already there,” he adds. Suppliers are eager to leverage their technology and transaction engines since they have already made the capital investments.
Lowe adds outsourcing allowed the building materials company to implement self-service for employees and managers. “This technology will improve productivity throughout our organization and provide better information for decision-making,” he says.
However, suppliers have to employ a one-to many model to make outsourcing affordable to this group. Cardella says these models are “a lot more vanilla,” which makes the technology easier to share across 20 customers.
However, that doesn’t mean suppliers won’t personalize the system for the <25k market. "We can deliver a standardized solution that we are able to configure to a specific client's needs." Hogan says the 80/20 rule applies here: more companies are looking for a model where 80 percent of the offering is a standardized service model and 20 percent of the offering has a unique service delivery to the client. He says this utility-based approach is "a leading driver" allowing mid-sized companies to outsource their HR processes to one supplier.
3. Buyers don’t want to invest in HR systems; they don’t have to because the suppliers did.
Buyers want to lower the cost of their HR transactions but don’t want to invest in their HR systems. “The last place the CEO is going to invest a lot of money is to upgrade the HR infrastructure,” says Michael Palmer, Talent Acquisition Practice Leader for Ceridian. Many companies this size can’t afford the sizable investment required. Palmer says HR executives often find themselves “in a no-win situation” since they can’t get the efficiencies they need if they don’t invest in the requisite technology.
Outsourcing, he points out, frees up cash over a seven-ten year period which HR executives can reinvest in more strategic endeavors. “They receive leading-edge technology with no capital investment,” he notes.
4. The cost has come down.
The Everest report found the annual price per employee has fallen significantly from 2003 onwards, making HRO affordable to the mid-market. The report found the <25K companies paid $1,003 per employee annually from 1998-2002 and only $740 from 2003 onwards.
5. The supplier market has matured.
In the early days, there were few suppliers able to handle three transactions in an HR deal. The Everest report tracked 13 major players; nine suppliers in the marketplace have done a global transaction.
6. The <25k market is a big one for suppliers.
Hogan estimates that 25 percent of US companies fall into this category. According to the US Census Bureau statistics in 2004, mid-market companies are the third largest employers in the country. “It’s a big growth area for ADP,” he reports.
Suppliers also charge higher prices to the <$25k companies, according to the Everest report, although this reflects the fact that they also had a higher cost per employee when they did their transactions in-house. From 2003 onward, the Everest report found the average annual price per employee was $740 for the <25k companies and $397 for the >25K companies, a 46 percent premium. Before 2003, their price premium was 33 percent, according to the report.
7. Difficult economic times forced companies to become lean.
Hogan points out most companies had to cut costs during the last few years. They reduced the head count; forcing the folks that stayed to shoulder the additional work. HR outsourcing is now a good choice to gain access to better capabilities while leveraging the HR outsourcing suppliers’ scale and expertise to improve processes and further reduce the administrative costs of delivering HR services.
8. Outsourcing raised performance standards.
Cardella says current service level agreements “raised the bar” on operational excellence. He posits many internal HR departments do not have the resources or the experience to meet or match the performance suppliers have committed to.
HR executives today don’t want to worry about admistrivia,” says Palmer. “They don’t have time to care about changing addresses or insuring the HR system is running. They want to focus on improving the organization.”