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Mar 18, 2008

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I think your last paragraph is dead on. I think the future will bring more and more smaller deals in specific areas of HRO. I think RPO will continue to be the fastest growing segment in large part because RPO providers can sell not only cost savings but an increase in quality that is immediately noticeable throughout the organization. That kind of visibility doesn't happen when you outsource payroll, benefits admin, or FMLA admin.

Kraig

Hello Pat,

I have to disagree with you:

1) Definition of "success": if a company went through HRO and didn't go back, then I am deeming it a success. Moving your messy, complex, disjointed processes and technology to a third party is a very challenging experience for any firm. Things can only "go wrong", they can never "go right"... anyone who has actually worked on these engagements will emphathize with me here. Vendors are set up to fail in most cases, and if they can avoid failure - i.e. the client did a U-turn and backsourced - then they succeeded. When I run this analysis again, I will judge success on whether an enterprise renewed their HRO agreement, which will be a similar statistic.

2) Media treatment of HRO: maybe it's the fact you are in the UK, that you think HRO has had an easy ride. It has had a right ol' bashing in the US - and Hewitt (who you mentioned) actually lost out on major deals as a direct result of negative publicity in the press. If you ever attended HR-specific events (you can find lists of some of these in a recent post), the onus was normally to find reasons why HRO should never be adopted. And can you blame HR professionals and HR media being negative about a practice aimed and lowering their overhead?

PF

All very interesting points Phil, and I'd agree with pretty much everything except your definition of success and your criticisms of the press.

I think calling the success rate of HRO 97% because only around 6 companies have cancelled their contracts is very misleading.

Many more have had severe problems with their vendor which has led to renegotiations, or it taking a function back in-house.

Just because a customer hasn't taken the nuclear option of cancelling a contract doesn't make that contract a success.

Also, I think that when you consider what has happened in the market, HRO has had an easy ride in the trade press, and that crying foul on this is a little rich.

For example, Hewitt's failure was never given the press scrutiny it deserved at the time. This may seem a strange thing to say as everyone here probably knows all about it now, but when things first started going wrong, the extent of its problems was, in my opinion, ignored by the wider business press. As a journalist covering it at the time I was amazed at how lightly analysts, advisors and other journos were treating it, to such an extent that I probably ended up going easy on them myself. Hewitt's PR people definitely won't agree with that, but the truth is that HRO has had an easy ride in the press.

Phil's observations are spot on as usual. The question remains whether the HRO industry can be profitable and whether the early-day froth was just irrational exuberance born out of providers' rush to get in from the ground up. The difficulties that all enterprise HRO providers have and still face is their inability to insist on standardized offerings with very little customization. The reality is if buyers truly want to cut costs, they have to accept a more rigid offering. It's looking more and more like mid-market providers will emerge industry winners in that they will roll out true one-to-many platforms with all the bells and whistles their customers need, and without compromising the model.

Phil, all good thoughts, and I'd like to add a couple more. Greed and ignorance. Greed and ignorance on the part of some of this new industry's "founding fathers" who were so caught up in big deal fever that they missed the fundamental differences between high-end, comprehensive HRM BPO and doing ITO, benefits admin or back office A/R for the same target market. Of course it was going to be difficult to impossible for offshore staff to answer arcane questions about never documented HR practices. Of course HR staff, those masters of "why you can't," were going to HATE HRM BPO with its expectation that they now become strategic partners. Of course those ERP implementations that cost tens of millions were going to be lousy platforms for any flavor of leverage across clients. Perhaps now that experienced HR outsourcing execs are in place at more providers, like Pat Goepel at Fidelity and Jay Rising at Hewitt, and the industry has been around long enough for others to have seen what works and what doesn't, we'll see some new approaches to what I continue to believe is a compelling business opportunity. Like you, I think that the potential benefits to end-user senior management and the workforce as well as to successful providers is just too great to ignore. There are definitely some providers who are moving quickly toward sustainable models of comprehensive HRM BPO which have heavy automation via multi-tenant platforms, intelligent self service rather than call centers, process standardization with client-specific business rule configuration, and ancillary revenue sources, like float or transformational consulting, at their core. The middle market (or should I say the non-ERP-constrained) is already seeing a good bit of this, e.g. ADP's GlobalView, and there's a lot more coming.

Phil

To add on to some of the points you have already made

Most global organizations tend to have 'utilities' rather than applications to service their HR processing needs outside of major countries (US, UK et al). Not only there is no existing global system, but also the systems that exist are not up-to-date, given that HR tends to be fairly low on priority for technology upgrade budgets. This seems to preclude a lift, shift & fix approach to HRO unlike FAO. Most organizations seek either a concurrent lift & fix approach or a 'Fix & lift' approach. The former has its challenges & risks resulting in expectation mismatches and the later requires upfront investments which customers expect providers to subsidize.

Given that a simultaneous IT & Process transformation will always have a far longer pay-back period than a mere process transitionl one way to make it more palatable is by addressing the low hanging fruits. This can either be done by taking a phased approach. One way is to do a more or less As-Is 'shifting' operations for certain countries while 'fixing' those at others. The other ways is to shift processes such as Work Force Administration support or Recruitment process support early on, since they can do with somewhat lesser or older technology.

That view is somewhat contradictory to the fact that payroll processing and benefits administration (primarily for US & UK markets) outsourcing has taken a lead and is more or less stable. I believe that this has been driven by upfront technology investments by the providers. This has its own payback related challenges for vendors. The only way for a quick payback in such cases is to scale up fast - winning and delivering a high number of customers. It seems that providers are finding it relatively easier to win customers but difficult to deliver to them - especially from low cost locations. The problem is the lack of availability of knowledgeable associates. The scarcity of resources has meant a huge churn of associates and hence an inability to deliver consistently & effectively.

Vendors thus need innovative models to recover their investments. Speculation abounds that in the case of payroll processing the profitability results are driven more by the cash management rather than by the transaction processing fees.

Furthermore, just like you mention, there is a lack of a single effective integrated platform. There is at least one ERP in the market which allows multi-tenant model and multiple providers are trying to build their platform offering around it. However, while most ERPs no doubt have all relevant functionality, each HR sub-process- whether its performance management, compensation management or resourcing - has its own 'best-of-breed' application. Customers & Vendors quite often complicate issues by trying to build a mash-up application.

All in all - I think HRO would be more successful if it continues to take baby steps for some more time before it attempts giant leaps.

Shyam

Phil - You know that I'm not a proponent of HRO because I believe the core responsibility of a HR team is to manage the quality and cost of a company's human capital. HRO doesn't help with that mission, except to say that HR departments are outsourcing non-core business processes.

With that said, every factor you mentioned drives down the economic value proposition of running an HRO company. In particular, many companies pin the savings on benefit management, and that frankly, if anyone is following last week's warnings from the big insurance payers, this is an area that will only get more expensive...and I think most companies will have a hard time paying more year over year to a vendor without pointing fingers (incorrectly) at the vendor for causing the increases. Medical costs are just out of control.

I would add two more considerations.

First, HR is not a single process. There are recruiting, benefits, compensation, performance management, 401k, stock plans, employee help desk, employee relations, temporary labor management, organizational design, training, regulatory reporting, payroll, leave of absence management, workers compensation, insurance, etc. In most F&A, BPO, or ITO, executives outsource discrete processes. In HRO, they outsource the whole thing...it's just too complex to execute and manage successfully - even if HR managers were the best operations managers OR vendor managers.

Second, I'm not sure all the HRO vendors themselves can deliver on this full set of capabilities, particularly given all the customization requested by clients. Maybe 1 or 2 can, but they are NOT the inexpensive options.

I, too, think there will be a big rise in the demand for singular services or a few closely-related bundled services. Some of these areas have such a history of being provided by 3rd party vendors, I'm not even sure you can frankly differentiate outsourcing from service providers (I know this is a definitional can of worms). Examples: payroll, temp labor management, and compliance reporting.

However, I'm digging the emerging recruiting outsourcing area - I think that can be huge. I think there are also plays around the performance management/job definitions/position families/compensation bundle and leave of absence management. Oh, retiree benefit administration is something to keep an eye on, too.

Tony
http://360vendormanagement.com/

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