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2007 HRO Predictions: The Good, the Bad, and the Upbeat

The Good:

1. After a modest 2006, 2007 will see an increase in deal announcements and continued growth in buyer interest in HRO.

This is an indication the HRO market “is sharpening its focus. That means the competition will become even more intense” as industry stalwarts compete with new players, says Ann Vezina, President of the Commercial Solutions Group at Affiliated Computer Services, ACS.

2. There will be additional merger and acquisition activity in 2007.

“We are an industry going through a metamorphosis,” says Kim Davis, President and Co-Founder of TalentTrack. He predicts there will be continued supplier consolidation in 2007 because “there are just too many small providers who won’t be able to sustain themselves over time. And having this many is confusing to buyers,” he says.

Marc Pramuk, VP Research, HRO, Everest Research Institute, predicts much of this activity will be Tier-One suppliers adding needed capabilities. He predicts there will be at least one major event to make the industry “stop and go ‘wow!'”

3. Standardization will supplant the need for uniqueness.

Michael Murphy, Vice President of Strategy and Growth for ExcellerateHRO, agrees. “It’s clear suppliers will have to modify their service delivery models. 2007 will see more scale and standardization in HRO delivery. Suppliers will need to focus on applying process standards across their entire client base.”

Gianni Giacomelli, Head of Global Strategy for BPO at SAP, says there are three ways for HR suppliers to become profitable:

  • Fully use their economies of scale
  • Optimize the process to lower unit costs
  • Utilize labor arbitrage to lower labor costs

He believes standardization, which provides the ability for suppliers to use technology to help all three objectives, “may turn the tide of events and return HR suppliers to profitability.”

He says this year suppliers will have to ask themselves: “How much uniqueness do I want to build into my HR contract?” He adds that Hewitt’s third-quarter earnings reported in August show that uniqueness does not help a supplier’s bottom line. “Suppliers have to realize that their earnings aren’t going anywhere unless they standardize. Wall Street put the brakes on uniqueness,” the SAP executive says.

However, buyers don’t like the cookie-cutter approach. “Suppliers will have to become better at showing how standardization–and a related more thorough use of technology–will get the buyer a lot of goodies like cost reduction, easier governance, and better portability at the end of the contract.” Next year’s successful BPO providers will have to provide only the unique things the buyer truly cares about, he posits.

The result of this change: better supplier returns, according to the SAP exec.

4. The scope of HRO is changing with workforce management growing in importance for the retained HR staff.

“HR organizations are recognizing the need to have a recruitment process outsourcing (RPO) component,” says Davis. “RPO is moving up the ladder of importance.” The retirement of the Baby Boomers is driving this new interest in RPO. “Many young people today don’t have the skills that the aging population does. And this is happening across all verticals. Organizations have to start getting ready today,” he says.

Davis points out learning will become increasingly important this year because of what he calls the impending knowledge gap–when seniors leave, they take with them years of knowledge their young replacements can’t learn from a book.

Pramuk adds a third element–performance management–which rounds out the workforce management piece. “Workforce management will be in scope more frequently in deals going forward,” he predicts.

How will the HRO suppliers handle this? Pramuk says suppliers will provide technology integration and HR reporting tools and analytics to help the retained organization manage their workforces.

5. There will be an expansion of supplier capacity.

Pramuk points out both Hewitt and Convergys approach completion of implementations reflecting their strong win records in 2005.

The Bad:

6. The drags on globalization continue.

Data privacy laws, cross-border security, and the lack of harmonization in laws and rules for process execution “will continue to slow down HRO globalization” in 2007, according to Pramuk. Another drag on globalization: small in-country employee populations that make deploying a common delivery platform cost prohibitive.

7. Supplier profits will continue to be a challenge.

Pramuk says HRO suppliers are getting smarter about profitability. Things they are doing right: smarter pursuits and better scoping and pricing. In addition, they have more clients live, which produces higher operating volumes. And the tough years of experience also help. “Things will be getting better for many providers next year,” he predicts.

According to Murphy, they will need to get better because providers will not continue to invest in negative-return businesses. Both suppliers and buyers will need to migrate to delivery models where both achieve real value and profitability.

However, Pramuk points out “HRO deals are too long term to be fixed quickly.” He says the legacy of past deals “will linger for years to come.”

8. The talent shortage will continue in 2007.

Murphy says the demand for the right talent with domain expertise will be a major hallmark of 2007. “If you looked at the combined open job requisitions at HRO suppliers today, you would see a pretty big number,” he says.

Jim Konieczny, Hewitt’s Global Leader for Multi-Process HR Outsourcing, says capacity constraints will make it tougher for Tier-One suppliers to respond to requests for proposal (RFPs). “This will make them more selective,” he notes. One result: Buyers who can’t get a number of suppliers to respond to their RFPs may have to do sole sourcing to get their work done.

The Hewitt executive adds that the shortage of HR expertise may put a brake on supplier growth. “Will suppliers have enough bench strength to grow?” he asks.

9. Buyers will raise their performance expectations.

Davis believes better-educated HRO buyers will define performance in sharper terms. “Buyers want to shift more financial risk to the suppliers because their results haven’t been satisfactory in many cases. They want to protect themselves by having key performance indicators (KPIs) and service level agreements (SLAs) with teeth,” Davis says.

The Upbeat:

10. 2007 will see some of the largest deals yet in HRO.

While DuPont and Unilever were impressive wins in 2005 and 2006 respectively, Pramuk predicts even bigger deals are on track to be awarded in early 2007.

11. The frequency of global scope for HRO deals will increase.

Today, most HRO buyers have a global workforce. But most contracts thus far cover only a single geographic region. Pramuk says buyers are increasingly asking about global capabilities. “Newer contracts are demonstrating an increasingly global commitment,” he says. This is possible, he adds, because today the suppliers have enhanced their global capabilities.

12. The mid-market presents promising prospects.

Murphy considers this market “untapped.” He says “there are great opportunities in the middle market–there are more chances for leverage and process standardization here.” However, the mid-market has yet to prove it can be profitable, he adds. “Scaling down may be a challenge for some Tier-One providers,” he says.

13. There should be pricing and profitability stabilization.

Konieczny says suppliers now have a much better understanding of their cost of delivery. And buyers have a much clearer idea of their baseline costs. “This will cause additional scrutiny of the business case, which will reshape offerings,” he says. One result: suppliers may begin to unbundle their offerings. At the same time, buyers who have a clearer understanding of their baselines may also unbundle what they are requesting, he adds.

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