HR outsourcing went through a shake-out over the past two years due to the continual issues around scope and other challenges that buyers and service providers encountered over the past decade. The dust has settled from the revamping efforts, but there are new challenges on the horizon. Here's what your company needs to know for decisions in HR outsourcing through the next five years.
Drivers for change
Several current trends as to service demands from buyers of outsourcing services will change service providers' offerings and required expertise. Those demands will also necessitate a change in buyers' approach to services decisions. ADP cites the following drivers for these demands:
- Government-directed/mandated controls across the North American and EMEA markets in the areas of finance and data privacy
- Government healthcare mandates, especially the U.S. Patient Protection and Affordable Care Act (PPACA)
- Changes in workplace employment laws
- Services that consolidate and standardize systems and processes across geographic boundaries (thus requiring that service providers have a core competence in managing regulatory requirements in and across markets from which they operate)
- Changing workforce demographics and user expectations (for instance, a growing reliance on new technologies such as mobile applications/devices, social networking/collaboration, and 24/7 access increasing an anytime-anyplace approach to performing work)
One of those drivers stands taller than the others. "We believe that the industry's ability to effectively respond to the changing global regulatory environment will be the most important change that service providers will need to respond to in the next five years," says John A. Haslinger, Vice President, Product Marketing at ADP.
There will be consequences with these five market forces, whether from buyers' demands or regulatory changes. Terrence McCrossan, Division Vice President, Marketing & Strategy at ADP, believes consequences will include:
- Increased emphasis on cost control, reporting/analytics, process efficiency, and flexibility
- Increased demand for improved decision-support tools to assist employees, managers, and executives in making informed choices regarding workforce management, employee development, employee engagement, cost management, and total cost of ownership
- Necessity (especially for large organizations) for thinking globally and solving productivity issues globally rather than taking region-specific approaches
Regarding the globalization demands in recruitment process outsourcing (RPO), Angela Hills, Executive Vice President at Pinstripe, says enterprise clients want a partner that can scale with them globally "even if they begin a partnership exclusively in one theatre of the world."
She predicts the five market forces described above (especially changing workforce demographics), combined with economic uncertainty and slow recovery, will propel growth in RPO. Recruitment outsourcing also meets buyers' demands for solutions that switch fixed costs to a variable-costs model.
The need to ramp up recruitment after the recession, combined with the tremendous unpredictability in workforce demand and need, will also drive growth in RPO.
Katrina Menzigian, Vice President, Research Relations at Everest Group, an advisory firm on global services, says service providers increasingly will face the need to drive true business value for clients. "In HR (and in other areas of outsourcing such as finance and accounting, IT, and procurement), providers already established their ability to successfully deliver operationally compelling solutions," she says. "The source of competitive differentiation going forward will be linking outsourcing outcomes with a client's overall business objectives. HR clients from first-generation deals continue pushing for more value, increased savings benefits, and outcome-based pricing models."
Impact on HR outsourcing from U.S. healthcare reform mandates
ADP expects an increase in HR outsourcing, especially over the next two years, due to the U.S. healthcare legislation and the significant complexity and reporting requirements it creates. McCrossan predicts the increase will occur especially in payroll, HRMS, health and welfare benefit administration, time and attendance administration, and leave administration. The increase will come from companies of all sizes that are already outsourcing some HR functions as well as those that have not yet outsourced.
He adds that the effort to conform to the PPACA requirements will lead to employers standardizing HR policies, plans, and processes related to employee benefits and workforce management in order to facilitate reporting and compliance.
On the provider side, Haslinger says the market forces will cause a shift to pay-as-you-go as the predominant service model as providers seek to standardize services onto Software-as-a-Service (SaaS) platforms.
Six decision-making risks
What risks will buyers of outsourced HR services face in their decision-making over the next two years? Pinstripe and ADP cite the following risks:
- Choosing the most effective model (standardization, customization, local or global, and single or multi-process scope)
- Finding the domain expertise needed to manage change and drive consistency globally across an organization
- Ending up with a payroll service provider with limited scale or expertise in a particular market or region
- Being motivated to sign an RPO contract that places a higher premium on flexibility rather than on aligning the proper resources; focusing on flexibility can lead to ending up with a provider that has challenges in scaling to meet a buyer's growing needs
- Taking a "procurement" approach to an RPO decision; Hills warns this can lead to "devaluing the more subjective and 'soft' factors in decision making"
- Missing the opportunity to create real process improvement when implementing the outsourced solution because of not giving enough attention to change management
Navigating the changing HR service provider landscape
Menzigian points out HR providers are entering and exiting the market due to increased demand on core competencies, broader sets of capabilities, and differentiation.
Hills expects that new leaders will emerge in the RPO space "as buyers' growing sophistication causes buyers to shift which criteria they most value." She also anticipates a lot of mergers, acquisitions, and exits in the space. Provider consolidation can cause declines in operational effectiveness when integrating acquisitions, she warns. To ensure effective service delivery, she says buyers should prepare for this possibility and maintain open communication and clear management of expectations.
Buyers need skills in understanding the factors that go into building outsourced solutions, or they will need to use consulting/advisory firms. "Solutions range in complexity, and understanding the factors is key for trying to make a multi-year buying decision," says Hills. "Due to the large volume of firms that will enter the RPO space, we will see fragmentation in outsourcing solutions, making services more like traditional staffing augmentation than outsourcing."
Key factors that buyers should include in their HR and RPO provider-selection criteria over the next five years include the following:
- Provider's financial stability – is it enough to allow the provider to invest, grow, and compete?
- Global regulatory compliance expertise
- Domain expertise in the outsourced HR function enabling the provider to improve efficiency and quality, thereby lowering costs over the long term
- Proven long-term commitment to the HR space (consider the degree to which HR outsourcing is the core business of the provider)
- Organic growth as a cornerstone of an RPO provider's growth strategy (this may provide the most dependable services to buyers as the provider landscape shifts)
- Integrated and consistent service delivery worldwide
- History of successfully delivering high-quality scalable solutions
Hills adds an insight unique to RPO provider-selection criteria. "Buyers should recognize what will truly drive success of a partnership and also what is unique and quirky about their organization and needs. Therefore, they should seek a partner that will be the best fit for that uniqueness and where the buyer wants to go. Sometimes the safest choice is not actually safe at all as the safe provider may not help the buyer stretch as an organization to fully achieve its potential."
McCrossan at ADP advises buyers they should solicit the input of industry advisors and analysts that "have an informed view" of the HR outsourcing space. Buyers should also ensure an appropriate amount of time for discovery during the RFP process.