Annie Fisher, senior writer for Fortune, recently authored an article entitled “Loyalty isn’t dead; employers have to earn it”.  Annie points to the recent survey results from Fortune’s annual 100 Best Companies to Work For, as compiled by the Great Places to Work Institute, which postulates that loyalty has a direct correlation to employee perks.  Annie adds that:

“…even if you treat people as well as you know how (or as well as you can afford to), they won’t hesitate to jump ship - while still considering themselves loyal to you, at least for as long as you’ve got them.”

A quick look at the Loyalty Research Center provides an interesting definition of Employee Loyalty:

“Employee loyalty can be defined as employees being committed to the success of the organization and believing that working for the organization is their best option.  Further, they do not actively search for alternative employment and are not responsive to offers that are relatively small in difference.”

Which begs the question of why those simple perks (which incur relatively low “switching costs” on behalf of the employer) allegedly cause such drastic shifts in employee behavior and relative loyality?  Not to “dis” the good people at Fortune, but a more fundamental shift - beyond perks - must be driving the roughly 70%+ of individuals that have professed a desire to shape shift employers in the coming year. 

Let’s keep the conversation going.

As if in response to my prior post, Convergys Corporation announced record earnings yesterday morning.  However, upon further examination of the health of their HR Outsourcing business unit - Employee Care - we find a 20% increase in revenues with a correlated 20% increase in operating loss (-$12.0M in fiscal Q4).  Citing a litany of challenges, Employee Care (my former employer) is not alone in the great HRO sweep toward profitability. 

Convergys is not to be vilified for their financial results, as the market has devolved to a state whereby the victor in highly competitive HRO bidding processes is forced to subvert initial profitability in support of highly productive tailing revenues in outlying years.  The premise of success is not on the back of any single client implementation, but instead rests with the hope that economies of scale across multiple HRO clients will render the cost of any particular HR service line significantly lower, thus benefiting all participants. 

In large market HRO (15,000 employees and above), this has proven to be a daunting challenge.  The majority of these clients are complex, global organizations and may demand that the outsourcers retain the unique nuances of their employee-facing solutions.  This, at best, mitigates the net benefit of replicable solutions across multiple clientele and requires “one off” solutions to be supported in a highly volatile HR marketplace.

So will anyone “clean up” in this market?  Are HRO clients provided with proper incentives to modify their HR offerings in support of economies of scale?  Let’s keep the conversation going.

Like millions of other iRobot customers, I believe that my Roomba™ robotic vacuum (now named “Steve”, an honorary member of the household) is truly a wonder. I press a large button, Steve *beeps* to announce that he’s understood my command, and off he goes to clean my floors, bouncing from place to place in a seemingly random set of directions, only to return back to his starting point after finishing his task. Like today’s human resources outsourcing (HRO) market, I know that this nifty little fella has inherent value, performs a needed purpose, and was assembled through intelligent and purposeful design. I also recognize that although Steve’s patterns appear haphazard and chaotic, in fact they are not. Unlike HRO, I don’t need to understand how Steve works to recognize that his job was well done.

So how can one predict the seemingly arbitrary future of the HRO market? Will HR outsourcing end up back where it started, a fledging concept appearing to have more risks than rewards? Or will HRO evolve into another yet undefined industry acronym, going the way of the push-broom in light of innovation and entrepreneurial spirit?In the mid-1800s, Anna and Melville Bissell owned a small crockery shop in Grand Rapids, Michigan. Anna often became frustrated with the sawdust that was embedded in the carpet, as sweeping up the tiny, stubborn particles was becoming a time-consuming nuisance. Anna presented the problem to Melville, her mechanically inclined husband who designed and constructed a carpet sweeper machine that he hoped would solve the problem once and for all. His ingenious design was a success, and word of Melville Bissell’s carpet sweeper spread quickly. People soon began asking where they could purchase a sweeper for themselves.

In December of 1999, Mark Hodges (then VP of Marketing and Strategy for Exult, now Executive Director of Corporate Development for EquaTerra) was interviewed for a piece entitled “Profile of a Startup” for now-competitor Everest Group’s Outsourcing Journal. Like Anna Bissell, Hodges noticed that suppliers of the time were sweeping up tiny bits of the human resources department among small and mid-sized employers. Under the premise that those suppliers were not capable of designing a business which could efficiently absorb the entire HR function for the Global 500, Exult was born. In terms of profitability of such a venture, Hodges stated that, “To do BPO, you don’t think of returns for four to six years.” He added that, “We are either going to be a spectacular success or a spectacular failure – but not in between.”
It has been a little over seven years since that interview was published. No one can deny that Exult built a fantastic monetized asset in a very short period of time, culminating in the acquisition by Hewitt for nearly $700 million in June of 2004. But can today’s HR outsourcing industry ever turn a profit, and has HRO been a “spectacular success or a spectacular failure”?

Share your thoughts and let’s continue the conversation. Meanwhile, Steve has some cleaning to do.

Let me begin by wishing each of you a healthy and happy New Year! 

I would like to be the first to welcome you to Inflexion Point, the new blog offered by Inflexion Advisors.  Over the course of 2007, we will be offering our thoughts and observations across a variety of topics with a goal of providing informative, useful and provocative content to our members. 

As always, we welcome your feedback at any time either directly through this medium or via email at info@inflexionadvisors.com.  Thank you for registering and look for additional content over the next few days.

Warm regards, Mark Stelzner