Is HR Outsourcing “cleaning up” in today’s market?
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.
February 5th, 2007 at 6:58 pm
2006 - as predicted - was a transition year for the HRO industry, as suppliers and buyers invested increased time and resources to understand how to develop workable solutions to run HR function within a global outsourced environment. Whereas 2005 saw dramatic growth of 37% in deals signed, with a total of 39 multi-process HRO contracts, 2006 saw a decline, with 34 deals reaching closure.” (Everest defines multi-process HRO as having 3 specific HR processes bundled within an HR outsourcing deal). Despite this slow down in new deals, annualized contract value in the multi-process HRO market increased a further 18% to reach $2.6bn. The large global deals, for example Unilever and DuPont, have helped drive expenditure higher. The fact that more focus is now on buyers adopting transformational approaches to HRO, as opposed to the classic “lift and shift” model, has slowed-down the HRO market. The change in delivery model has signified a rapid maturing of the HRO industry, which is necessary for workable HRO solutions to exist in the future, and todays’ suppliers to invest in the global resources and infrastructure necessary to delivery HRO in an operationally-successful and economically-feasible fashion.
When we look at the recent wave of deals, it is clearly apparent that these “new” HRO buyers are not going into HRO with the prime incentive of simply making some modest administrative cost savings. Recent deals have included HR transformation costs that, in some cases, are driving more than 100% of exising costs for year 1. To quote a recent buyer who signed an major HRO deal recently: “If you think we did this to make the savings we ended up negotiating, you’re very wrong”.
Net-net, HRO in 2007 will be largely focused on broader business transformation initiatives with the bill footed by cost-arbitrage. Many buyers simply cannot experiment with alternative sourcing options like shared services or captives due to high costs, structural/political issues and poor technology, so outcourcing is they optimum way to drive shock and change into the organization quicxly and effectively.