With the recent announcement that Starbucks and Convergys have mutually agreed to terminate their HRO engagement after only eight months, serious questions are being muttered about the future direction of enterprise-wide HR outsourcing.
I, for one, have always been a strong advocate of the potential business value of HRO. The opportunity for enterprises to aggregate multiple suppliers of HR services under a single "throat to choke", take advantage of self-service tools and have their retained HR team aligning themselves more closely with driving higher-value HR initiatives, are compelling. However, a number of factors have created serious issues with HRO:
1) Inability to take advantage of low-cost offshore labor. It has proven very difficult for HRO providers to take a great deal of the operational work offshore, which has prevented suppliers offering more sizeable cost reductions for their clients. Having offshore service staff handle direct issues with onshore staff for many HR issues is simply not workable, not to mention the political, data privacy and compliance issues restricting the movement of sensitive employee data offshore;
2) An HRO engagement affects the whole enterprise. It hasn't been possible for any HRO deal to be kept under the public radar. Any HRO deal impacts the whole organization, and is immediately held to public scrutiny. Other outsourcing initiatives, for example finance and accounting, procurement, or some aspects of IT outsourcing, are typically engagements between a service provider and a single company department. It's far easier for enterprises to keep these engagements away from the public radar and give themselves time to get it right;
3) HRO engagements are not given enough time to reach a steady-state. All outsourcing initiatives are painful at first and take at least 2 years to move through transition to a steady state. The Starbucks engagement was only 8 months along... that is not enough time to get near a fully operational state for the firm;
4) HR staff have been largely resistant to HRO. When executives resist outsourcing, it makes it extremely challangeing in may cases to execute effectively through the complex transition. HR trade press have been constantly on the alert throughout the last few years to find the next "HRO tragedy" to dramatize. In reality, there have been close to 200 enteprise-wide HRO engagements, and barely 6 of these went back in-house. That's a 3% failure rate.
5) The costs of benefits management have proven greater than suppliers anticipated, which have eaten into their projected profits;
6) The absence of a common one-to-many HR platform. This has plagued HRO since its inception 10 years' ago. The complexities of HR technology integration have driven up the costs of broadscale HR transformation and have clearly slowed adoption over the last year.
What I see happening, is an industry going back to basics. While the mega-HRO deals have dried up, the amount of less complex and smaller-scope outsourcing engagements in core transactional processes such as payroll and benefits admin are still experiencing healthy growth. Moreover, recruitment services are growing in adoption and interest, and the focus on talent managemt is at an all time high, as we discussed here recently. HR consulting services are booming like never before. Moreover, HRO offerings have the future capability to deliver the value that enterprises unlimately need - we've simply reached a juncture in this market where the current flock of adopters need to be left alone to work this out and deliver their success stories in the future. I predict a quiet year for HRO, but enough enterprises have taken the plunge, and there are some highly capable providers out there (both services and software) quietly working on getting this right.
p.s. a big hat-tip to the Inflexion man for tipping me off on this one....