HRO Market Assessment – 2010  

13 April 2010:

Introduction

Towards the close of 2009 Alsbridge conducted a market assessment exercise with key global HRO suppliers and customers to get a better understanding of trends, development areas, deal structures, scopes, future directions and expectations, with specific emphasis on what this will mean for Europe. The method of assessment was by interview rather than numerical data collection therefore the findings represent the viewpoints of key stakeholders and “thought leaders” among suppliers and customers. We looked for evidence of similar views and converging ideas in order to detected trends.

We have captured the key findings under five headings:

  • HR Market Overview
  • Supplier Focus Areas
  • Technology Trends
  • Pricing Trends
  • Using Advisors

HR Market Overview

Changes in the market for HR outsourcing (HRO) are primarily being driven by changes in buyer behaviours. Although they are still looking for economies of scale, globalisation, automated processing and deployment/improvement of self-service, customers are more cautious in committing to deals and are more likely to reduce scope during the procurement process.

The three main outsourcing drivers quoted by customers were:

  • Quality
  • Cost reduction
  • Standardisation

In multi-national companies the recent economic crisis has helped corporate centres to convince more country managers to get on board and support outsourced solutions. However, the general view was that the days of large scale multi-process HRO deals with massive upfront transformation were over. Customers are looking to reduce size, scope and contract duration of deals in order to give them more agility as their business situation changes.

Geography is continuing to challenge both customers and suppliers. Finding an attractive business model that works for both parties when there is a “long tail” of countries with a low number of employees remains an obstacle to the provision of globally consistent HR & payroll outsourced services.

With decreases in scope and simplified transactional requirements there was pressure to reduce the contractual duration from 5-7 years down to 2-4 years with clear exit/break options stated in the contract. This places more emphasis on the realisation of benefits earlier and less complex transformation and redesign at the start. Thus, customers were seeking more rapid implementation timescales of between 6-18 months. However, customers have an expectation that continuous improvement, transformation and innovation will be a standard feature of any contractual agreement at no additional cost.

Therefore HRO is becoming more of a tactical decision comprising a number of alternative paths including single process outsourcing, single function outsourcing, regional outsourcing, outsourcing for a particular market segment within the business, or combining captive shared services with Software as a Service (SaaS) self-service solutions. Balanced against this some suppliers stated that their saw the main business growth coming from successful regional or single process deals.
Recruitment Process Outsourcing (RPO) is regarded as a high growth market, especially driven by North American owned multinationals. HRO suppliers are responding by entering strategic partnerships with, or acquisition of, niche RPO providers.

Learning and Development continues to do well in UK and Scandinavia, especially when integrated with Performance Management and Personal Development offerings.
For medium-sized enterprises in European outsourcing is expected to grow in Germany, Sweden, Switzerland, France, UK over the next few years.

Supplier Focus Areas

During our interviews with HRO suppliers it became clear that Talent Management and RPO are seen as key driving forces for new business. RPO is predicted to be a growth driver especially in the US where more suppliers are entering strategic partnerships to be able to offer an end-to-end process. Learning management services are requested more in the EMEA and AsiaPac regions than they are in North America. Suppliers are focussing on “point solutions” for specific markets where necessary in order to win new business.
There is a definite move to structuring services around Talent Management, in response to the latest wave of HR thinking about talent acquisition, talent development and talent retention.

Standardisation also is on suppliers’ agendas, mainly driven by customer requests for faster implementations and lower costs in the mid market. All suppliers we talked with are investing heavily into their own HR Information Systems solution. While behind the scenes this may be based on SAP, Oracle or Unit4 Agresso engine there is a focus on supplier branding and improving end-user experience by adopting so called “Web 2.0” interfaces at the presentation layer.

Suppliers have recognised the opportunities that the “long tail” of smaller countries represents if they can find the right multi-tenanted service delivery solution. As a result many are starting to offer simplified lower cost solutions. This will be either based on their own platform or via local partner(s), with the main supplier acting as a data aggregator for Management Information (MI) purposes. Although the business case for smaller countries may not be attractive country by country the corporate customer should see benefits from transparency, robustness, quality of service and integrated global HR data.

Many suppliers are seeking to increase their global footprint either by partnering with or acquiring local businesses or competitors. The decision start in a country is typically based on

  • Number of customers with service requirements in that country
  • Total headcount of customers
  • Potential market size and value of new business
  • Fit with suppliers business strategy
  • Availability of knowledge, skills and experience to support service delivery
  • Potential acquisitions or partners

Suppliers will continue to operate using a mix of onshore, near-shore and offshore delivery depending on legislation, complexity, business risk, languages, and degree of interpretation required. This is leading to improved location flexibility as more customers accept offshoring as a viable option.
There is a noticeable trend among suppliers who hare based off-shore, e.g. Indian, where such suppliers are actively seeking to buy “captive” onshore and nearshore Service Centres in Europe to expand their service delivery capability.

Some suppliers we interviewed claimed that the traditional lift and shift with minimal transformation has returned, while other suppliers concentrate on transforming/standardising processes before migrating them to the new location. This seemed the area of least convergence of viewpoints among the supplier community.
Suppliers also report that customers now accept that HR processes are 80% the same. This leads to the growth of multi-tenanted systems based on standardised business processes. However, suppliers are more selective when it comes to bidding for HRO deals. Some suppliers have categorically excluded large multi-process deals as the time to profit is too long, too risky and governance is tricky.

Technology Trends

2009 saw a significant shift in HR technology with the growth of Software as a Service (SaaS). The general view was this would continue with more subscription services based on Cloud Computing as opposed to upfront capital investment in software. Customers will face the dilemma of choosing how best to invest in HR systems and services. In general, we heard customers are questioning the budgetary cost of retaining responsibility for hosting, upgrades and ongoing support of the application landscape.

Many suppliers are meeting this need by offering three models:

  • Subscription-based SaaS (provision of servers, applications and data space)
  • Hosted applications with up-front license purchase
  • Full implementation within the customer’s IT environment

Technical solutions offered tend to be split in two options:

  • Suppliers who offer their own system(s) and prefer (or require) that the customer migrates to their system. In most cases these are built on global instances of SAP or Oracle. However, at the “point solutions” end of the market such as Performance Management and RPO, there is more evidence of the growth of Web 2.0 solutions not based on the major ERPs.
  • Suppliers who do not offer their own system and will work on whichever system the customer prefers. Even though many studies suggest that there is an important trend towards integration rather than functionality, suppliers still say that some customers demand processes such as recruitment and learning to be run on “best of breed systems” sitting under a customer-owned ERP system.
     

Pricing Trends

Most suppliers have increased their pricing flexibility and are open to customer proposals during negotiations. In the medium term this will continue to drive down prices. There is growing interest in understanding price per transaction rather than FTE (headcount-based) costs.

Output-based pricing is attracting more interest from customers. For example, for subscription-based services, price per transaction (or service request) and smoothed costing models relate pricing directly to work undertaken rather than notional FTE (or headcount) savings.

Gainshare models can be used for regional deals where cost reductions of 15-20% are targeted. Benefits-based pricing is often discussed but proves difficult to implement successfully for shorter term deals.

Low cost entry models where the supplier effectively funds all or part of the design/implementation phases and then recovers the costs over the course of the contract are on offer but suppliers tend to charge high interest rates on the loan period.

The Role of Independent Advisors

The interviews indicated that customers tend to use Independent Advisors for larger HR & Payroll deals. Demand is driven by a need for better information on the HR outsourcing market, benchmarking of pricing and contractual terms, the desire to improve the commercial negotiation process, access to programme management skills, and provision of change management and governance expertise.

Generally, there has been less Advisor involvement in niche areas such as RPO, L&D and Performance Management deals. This is the case particularly where the customer often has a specific supplier in mind and is not constrained by public competitive tendering legislation.

Suppliers tend to welcome the fact that customers have involved Advisors to manage the selection process. It provides the following stated advantages:

  • Suppliers expect Advisors to educate and standardise the journey for a customer - the shaping of the deal becomes more rational;
  • Advisors provide the customer with a better perspective of what is possible, and manage customer expectations in areas such as functionality and service levels;
  • Advisors facilitate the deal closure process. An impartial viewpoint benefits both Customer and Supplier during final negotiations.

In some cases Customers are now choosing to continue with the Advisor during the transition/implementation phase to ensure that agreed benefits are achieved.

Conclusions

From a customer perspective it became clear that the days of global multi-process HR deals are over. Customers are seeking to be better informed about what works and doesn’t work in HRO and want to understand the impact on their business strategy. This results in longer preparatory phases and a tendency to reduce the scope, size or geography of deals. By doing more work up front there is a realisation that good governance, change management and programme management can result in faster implementations based on efficient, standardized commoditized HR services.

The converging supplier perspective shows investment in, and growth of, multi-tenanted platforms delivered as Software as a Service (Saas). We believe this trend will continue with the advent of practical Cloud Computing solutions. Suppliers are also becoming more selective about bidding for HRO work and will exclude themselves from large multi-process deals where risk is considered too great.

Furthermore, we expect to see additional mergers and acquisitions among suppliers aimed at increasing breadth of services, entering new geographic regions, or in some cases exiting the HRO marketplace.

About the author

Shaun Dunphy is a Senior Manager with Alsbridge plc, the award winning advisory firm on outsourcing, shared services and offshoring and has a background in the design and operational management of HR services. Shaun can be contacted at shaun.dunphy@alsbridge.eu or call +44(0)20 7242 0666
Copyright © 2010 Alsbridge plc. All rights reserved.

Source: Shaun Dunphy, Alsbridge plc

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