HRO Redux: 8/10 buyers don't look back, while the vendors look ahead

Following our recent discussions surrounding the successes and challenges of the HR Outsourcing (HRO) industry, I was sent a recent study from Erik Samdahl at the Institute for Corporate Productivity, which canvassed the opinions of 231 senior HR executives, mainly from large organizations, and has some telling stats on the future direction of HRO, which I wanted to share and interpret with you. There are two key observations from this study that standout in my mind:

1) HRO is massively under-penetrated outside of benefits administration: 

• 72% said their organizations have elected to keep compensation functions in-house
• 58% say their firms do not plan to outsource their payroll function.
• 57% report that their companies do not plan to outsource employee contact centers

If you stick with the philosophy that dictates you should outsource when a 3rd-party can perform the work at significantly lower cost, and at an equal, or better, standard than you do already, then you have to conclude that these statistics point to plenty of future outsourcing opportunities for compensation, payroll and employee contact center solutions, due to the large majority of enterprises which have still yet to outsource these processes. 

These are areas where HRO provision is constantly maturing and providers are working towards more common standards.  As we see more of these "Platform BPO" solutions being delivered into the marketplace (I will be talking more about these in the coming weeks), I expect these three areas to form the centerpiece of future HRO activity.  As the global providers become increasingly proficient at deploying offshore resources to support these processes, they will generate more cost-savings and compelling business cases for their customers. 

• 54% say their organizations do not outsource for recruiting
• 46% of participants say training and development is kept within their organizations

Recruiting and training are processes where many companies need additional help, but the processes are often highly unique and finding cost savings and improved quality from a third-party can often prove challenging, if you cannot find an HRO provider specialized in your particular industry.  This helps explain why many firms which outsource recruiting, often go with specialist providers with specific industry expertise (i.e. retails versus financial services).

• Seventy percent report that their organizations either fully or partially outsource the administration of 401(k) plans, followed by flexible spending account administration (69%), COBRA administration (59%), and the administration of defined benefit plans (58%).

Unsurprisingly, benefits administration is the most widely-adopted of the HRO processes, where many firms have found significant cost savings by using a single outsourcing provider, in addition to high-quality solutions, with self-service hosted applications.    No wonder firms such as Fidelity, Hewitt and Mercer have centered their HRO solutions firmly on their bedrock benefits services, where they can upsell their substantial existing client bases onto their existing technology and delivery resources. 

2) Once outsourced, HR functions are rarely brought back inhouse:

• Less than 2 in 10 companies have brought an outsourced function back into the organization

As we discussed here back in March, most companies which venture into HRO don't go back.  Of the 200 comprehensive end-to-end HRO adopters, only 6 have pulled services back, and not always for operational reasons.  This 8/10 HRO-sustainability ratio, which includes single as well as multi-process solutions, indicates that once firms have moved into an an outsourced end-states for an HR process, the chances are they see little strategic value in internalizing it again, and will only bring work back if it no longer made business sense - normally due to a change in business strategy or volume, or the provider did a poor job satisfying the client.     

Is Platform BPO the answer?

All-in-all, this data tells us that HRO is only really beginning taking shape, and both vendors and clients are learning what works, what doesn't work, and where to center HRO solutions in future. The move towards consolidating BPO solutions under a common platform layer is clearly taking center-stage among the major global outsourcers with transactional HRO functions proving core to these offerings.  The key is finding new avenues for driving out cost, as this is still the major driver behind HRO, and it will be interesting to see how the new offshore-centric entrants, Infosys, TCS and Wipro fare as they push hard with their platform-centric BPO solutions to compete with the incumbent HRO providers.

Comments

[Phil Fersht]

Gianni - good to hear from you. Thanks for the link - a very good article which I suggest anyone here reads. I especially agree with your comment "the provider must leverage economies of scale and process optimization ruthlessly to hit its targets". Your insight on HRO requiring much more discipline than ITO is spot on.

Why I think "Platform BPO" - which hasn't yet been commonly defined - is a starting point, is the fact that some companies are starting to tackle BPO from a standpoint of common IT as the glue to standardize their delivery more effectively.

The Indian vendors (and the Western BPOs with huge offshore resources) have been learning the hard way how to leverage labour arbitrage more effectively, and bring new clients onto more common processes than they had done in earlier engagements. The lessons from F&A BPO are becoming valuable training grounds for these providers - it's those engagements where the vendor took ownership of the ground-up "bread-and-butter" processes, that are proving more successful in the long haul, and they learned to drive (ruthlessly) common operational standards into the engagement; but it often takes the entire duration of a first phase contract to get to a point where the vendor and buyer can work together effectvely. If the provider owns and delivers ground-up processes - i.e. payroll / general ledger accounting, from both the platform and the process perspective, it is much easier for them to develop broader BPO solutions around these hub operations.

What we can learn from ITO is the fact that mature buyers today take far more ownership over their delivery that they used to. They realize their vendor can provide skills, resources, processes and technology, but arbitrage only works when the buyer takes on equal responsibility for delivery.

Where some early HRO deals "failed", was when the blame was commonly heaped on the service provider. However, as outsourcing PMOs get more experienced, they realize that success lies in their own hands, and many more and improving at working with their providers to drive more efficiencies into their relationships. You hear many buyers say today "we need to develop a strategic sourcing strategy" - they are realizing the world has changed and they need to change with it. Outsourcing is just one vehicle for change, and the onus is on them to drive it correctly.

PF.

[gianni giacomelli]

Phil

I agree to what you say and the focus on platform BPO in the coming week is both timely and healthy. But equating platform BPO to a unified-tech-platform game may be missing the point. The economic fundamentals of BPO need to go beyond the mere technology platform per se: the platform IT must be the "embodiment" of a standardized service delivery, without which there is often no reason why the provider can be better and cheaper than the client. See my article on this topic too: http://www.hrotoday.com/Magazine.asp?artID=1661
BPO is an engine about with three pistons: scale, better processes, and labor arbitrage - not just about saving IT money by deploying a unified tech platform. And these "pistons" most often only fire well when the provider can build a replicable engine.

[Phil Fersht]

Gavin,

If you'd have asked me the question of the Indian offshore providers a couple of years' ago, I'd have said they would struggle in HRO. However, they are becoming much more experienced at taking work offshore that is closely tied to the ERP platform, and also dovetailing it with onshore services. They can also offer cost reductions that some of the incumbent HRO provider cannot offer these days, combined with the fact that they are mining their existing ITO clients. One of the major Indian providers, for example, won a major HRO contract last year, which has been transtioning well. I don't foresee a flood of these HRO contracts moving over to the offshore providers, but certainly a handful over the next year that will give them a foothold into this market,

Phil

[Gavin Healy]

Phil,

Thanks for sharing this data - am surprised at the high proportion of firms that haven't outsourced comp, payroll of contact centers. It also appears as if benefits outsourcing is clearly leading the way forward for HRO services in the US (assuming this is a US study).

Do you think the Indian offshore firms have a geniune chance of getting into this market, with all the previous issues firms have had with HRO?

Gavin Healy