Phil Fersht’s Predictions for 2006 | Article

fortune cookiePhil Fersht predicts 2006 will be “the year of the global deal.” Fersht, Executive Vice President, BPO Research, NelsonHall, says “the HRO service provider market has never been healthier; 2006 is surely the time to see some competitive bite.”

The HR executive will discuss his December 2005 research paper “2006 Predictions for HRO” at HRO World. Here are six predictions from the paper and what they mean for both HR buyers and suppliers.

Prediction 1: Confidence will rebound.

This year Fersht predicts multi-process HRO will increase by 20 percent to reach $4.3 billion worldwide. He says the HRO market “remains largely untapped” because less than five percent of the Fortune 2000 and one percent of mid-market companies have entered into multi-process HR BPO contracts.

The industry learned from its history lesson. Fersht says the industry moved too quickly during Generation 1, producing “several high-profile failures that held the industry back.” Last year, he says:

  • HRO providers got nervous
  • Buyers realized their ideal end-state was going to be more complex than they had originally anticipated
  • Sourcing advisors were caught in the middle

These developments stalled high-end enterprise deals. That’s why “contracts have taken much longer” to close than both parties expected. Fersht, however, believes this is a good thing. “This painful transition has proved necessary to get us to the next stage–Second Generation HRO–where we are beginning to see HRO delivery balance the operational, process, technology, and HR domain capabilities to succeed,” he says.

Prediction 2: Buyers, Providers, and Consultants Will Get the HRO Balance Right

Fersht believes this year HRO buyers will become better educated, thanks to help from sourcing advisors, suppliers, consultants, and industry analysts. The analyst notes service providers and industry advisors are sharing the realities of HRO with the buyer from the get-go so buyers can determine what measures they need to take to arrive at their end goals.

Armed with knowledge, Fersht believes buyers will find common ground with the supplier community to build pragmatic and cost-effective solutions that work for both sides. He says today’s top tier providers are explaining to buyers they are more likely to enjoy HRO’s business benefits if they look to transform their existing HR processes and infrastructure to the shared services the suppliers offer. “Suppliers and consultants will strive harder to find a common ground between what is realistic and purely Nirvana,” says Fersht. That includes designing services that are financially feasible for both sides.

“Bottom line: the industry will find this middle ground or there will be no industry,” Fersht insists.

Prediction 3: We will see increased global HR outsourcing activity.

The analyst sees the successful service providers acting “braver” and taking on more of a financial burden with global BPO deals to develop the kernel of the utility model they are seeking. The Tier 1 providers, realizing the complexity of the endeavor, understand the need for investment, patience, and acquisition of new skills. They now know they cannot repackage existing resources but need to hire or develop HR practitioners and outsourcing experts for the new paradigm.

The real challenge is the ability to develop a common infrastructure across multiple clients. Fersht says it is clear that the old way doesn’t work; service providers will struggle to take on the existing shared services resources of their clients and expect to leverage them across other clients. This solution doesn’t work because they are too customized and unique, making it costly to try to service other clients from them, he explains.

The new model is to have service providers leverage their own service center facilities. Fersht cites Convergys’s November 2005 contract with DuPont “as a clear example of this move.” IBM, Accenture, Hewitt, ADP, ACS, and ExcellerateHRO are also investing in new global clients “that will enable them to develop a genuine HRO utility model.”

The analyst predicts this year HRO contracts will become more global in nature as buyers notice suppliers have the ability to support their HR operations worldwide.

Prediction 4: Single supplier multi-tower outsourcing contracts will remain slow to emerge. But supplier partnership activity across domains will increase as customers look to bundle more outsourced processes across HR, finance and procurement.

Xchanging, Accenture, IBM, CapGemini, ACS, and EDS/ExcellerateHRO are suppliers who are building multi-tower capability – that is an outsourcing services portfolio across HR, finance and accounting and procurement functions, Fersht reports.

This year Fersht believes buyers still prefer a best-in-breed approach. Many are balking at “putting all their eggs in one basket.” Others worry about achieving competitive pricing when dealing with a single supplier. Finally, some buyers don’t want one supplier dominating all their business processes.

“Expect, in the short term, multi-process contracts within HR to increase considerably as service providers like Accenture, IBM, Convergys, Hewitt, and ExcellerateHRO continue to expand into learning and recruitment services,” explains Fersht.

He explains that customers are already exploring outsourcing multiple processes across their HR, finance, and procurement functions, but the provider market is still relatively immature. “We will still see a greater proportion of individual contracts with separate suppliers, rather than giving HRO, FAO, and procurement to the same provider.”

However, the analyst says he is seeing “some overlap in areas like payroll and temporary staff procurement, where the CFO owns payroll CFO and the HR VP owns the temporary staff procurement.” Accounts payable processes also act as “bridging processes” in many organizations across business functions.

In order to address this need, some suppliers are partnering with dominant players in a particular service line to cater to these expanding requirements. Accenture, for example, has partnered with competitors like Hewitt and ARINSO.

Bundled offerings are becoming one way to go as suppliers pragmatically learn to work together. But is cobbling together a best-of-breed solution a better solution than developing a genuine utility model in key HR domains? Fersht says Tier 1 suppliers are “facing this dichotomy: which areas should they look to partner, make acquisitions, or invest organically to cater to the increasing demand?” says Fersht.

Prediction 5: Some significant mergers, acquisitions, and partnerships will emerge as the Tier 1 providers continue to develop their HRO delivery infrastructure.

Fersht predicts there will be one major acquisition and some new entrants this year. He says the successful HRO company must possess operational process expertise, HR domain skills, BPO transformational expertise and IT implementation know-how. The move towards bundled process offerings (described in Prediction 4) is driving many of these make/buy/invest decisions. The analyst will discuss his opinions of the future moves of each major provider in his presentation.

Prediction 6: Technology will remain a key enabler of successful HRO.

Fersht says most buyers have IT systems optimized “for the four walls of their enterprises.” They are moving to outsourcing to help them make IT an enabler of successful business process redesign. But past failures have made them realize they “can’t simply deploy outsourcing solutions with the vain hope the associated technology morass miraculously untangles itself.”

The analyst reports “the majority of today’s current IT systems have simply not been built for the modern business era and the movement towards engaging third parties to provide managed services of core business processes is highlighting this deficiency more than ever before.” Fersht says buyers “will engage HRO providers who have a strong understanding and track record of deploying a flexible IT model that allows them to manage critical HR data from both inside and outside the organization.”

Fersht concludes that “the tough lessons of 2005 are good news for the future: today’s key service providers are more serious than ever. They have learned where they need to invest, with whom they need to partner (or acquire), and how to educate better both their existing and prospective customers, who have wised up to this industry.”

Lessons from the Outsourcing Journal:

  • Multi-process HRO will increase by 20 percent to reach $4.3 billion worldwide because the HRO market “remains largely untapped.” Less than five percent of the Fortune 2000 and one percent of mid-market companies have entered into multi-process HR BPO contracts.
  • Buyers will find common ground with the supplier community to build pragmatic and cost-effective solutions that work for both sides.
  • Successful service providers will take on more of a financial burden with global BPO deals to develop the kernel of the utility model they are seeking. The real challenge is the ability to develop a common infrastructure across multiple clients.
  • Buyers still prefer a best-in-breed approach. But some are considering multi-process deals as suppliers mature.
  • There will be one major acquisition this year.


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