HR outsourcing in this recession... why this makes sense for many global firms

By Phil Fersht

While many firms are hunkering down tryng to ride out this turbulent year, we're also seeing an increasing number of multi-national companies use this time to develop business support infrastructures that can scale quickly with the needs of the business.  It's not all about cost-reduction - it's about being nimble, and having a firmer handle on accessing critical data on your staff at a global level. 

As we discussed at the beginning of the market crash, more than 50% of employees in major multinationals now reside outside of the corporate home country (source Mercer / Harvard Business School study, 2008).  The pressure to standardize policies and processes, manage increased workforce mobility and compliance issues is greater than ever, and the current market volatility and uncertaintly is exacerbating the need for corporate leadership to get a tighter grip on managing their global workforce.  For example, many large retailers and consumer goods firms have increasing numbers of employees working in low-cost locations, such as China, Vietnam, Thailand and the Malaysia.  How can corporate management keep a handle on where staff are, how much are they getting paid, and how are they adhering to local regulations in a market where they may need to staff up or down at a moment's notice?

Consequently, many senior HR executives are stepping up into global roles, but are failing to divest of their localized issues.  According to the Mercer / HBS study 45% of HR executives have moved into global roles over the last two-to-three years.  However, while roles are being structured globally, most of the HR executives have been struggling to get away from dealing with local and regional issues.  For those working in global roles today, 9 out of 10 have less than 3 years experience and a failing to move away from their previous localized job roles.  Hence to need for HR administrative support at a global level to help companies develop effective global payroll, benefits administration, workforce data analytics, compliance and recruiting operations has never been as intense with today's market conditions.  So what can we expect to see happening in the coming months with HRO adoption?

As Figure 1 illustrates, the multi-process HRO market grew by 24% in 2007 and is ontrack to maintain  single-digit growth-rate throughout 2008 and into 2009:

Figure 1: Multi-process HR Outsourcing Contracts, 2002 - Present

 

The core question now is centered on whether the deepening global recession is going to impact this market growth. While some engagements will inevitably be put on hold as a result of conflicting corporate priorities, the upward growth trajectory of this market will continue throughout 2009 and into next year as a direct result of the following factors:

* HRO engagements are less complex. As mentioned, the focus of HRO is centered on empowering the HR executive to move from a local into a global role, and manage outsourced HR support functions. Earlier engagements were often geared towards the outsourcer replacing the HR executive role, and this clearly failed. The focus on HRO providing operational efficiency at a global level that leverages lower cost and promotes a global HR operating model, while leaving HR strategy in the hands of the buyer, has helped turn the market round in recent years.

* More efficient deployment of HR technology platforms bundled with HR processes. 90% of HRO engagements have involved enhancements to the HRIS platforms. This has helped clients adopt common HR standards based on HR-XML protocol, but also helped service providers create a utility model that allows them to deliver services across multiple clients – and at lower cost.

* Increased maturity of global outsourcing providers and the rapid deployment of offshore HR delivery models. The entrance of the global service providers into the market has created a much more mature global delivery model that works effectively with global clients. For example, service providers such as Caliber Point, Infosys, TCS and Wipro have brought a new offshore dimension to HRO, that has added competitive bite to challenge the incumbent providers, namely Accenture, Convergys, Hewitt, HP(EDS) and IBM.

* The mid-market has opened up substantially (see Figure 1) as providers, such as ADP and Ceridian, have embraced global payroll-based HRO models that enable mid-size enterprises to move into global HRO models. We are also seeing emerging providers, such as Patersons, and the recently merged NorthgateArinso gaining traction. This sector of the market is going to drive continual growth in the HRO market during these recessionary years.

* Benefits outsourcing services is branching off into best-of-breed solutions, as market leaders Fidelity, Hewitt and Mercer have focused heavily on their core business. It makes more sense in many HRO cases for the lead service provider to keep the benefits services separate from the multi-scope engagement (for example Kraft Food’s recent global engagement with IBM).

* The vast majority of HRO engagements are being centered on global payroll models. The need for companies to have access to their global employee information is now critical, and these maturing HRO models are providing this – usually at lower cost to the client, despite the technology and process transformation requirements in most instances. To put it simply, the business benefits of having global payroll and compensation data is simply too valuable for business decision makers in a tough global market.

With a challenging 2009 ahead for enterprises, the availability of these maturing HRO models is proving to be enticing offerings for firms seeing to reduce overhead and move onto a global HR operating model. Just as people were writing off this market, it has found its feet. Tough times create new models, and global HRO is one of those. The future is challenging, but HRO has become a standard offering for global enterprises in today’s environment. 

AMR Research clients can view our recent market landscape of the global HRO industry here.

Comments

[Paul Ellis]

Phil,

Thanks for sharing these insights - you've really hit the mark with this. HR outsourcing models can really help businesses in volatile markets like today's, where there they need to trim some cost, but also move to a more "pay by the drink" model in these unpredictable times. One thing you didn't mention is the increasing deployment of SaaS (Software as a Service) for Human Capital applications. I am seeing SaaS as a major driver for businesses to move to BPO models, where SaaS applications in areas such as performance management, compensation and workforce administration, can be deployed within an outsourcing context in a pay-as-you-go model. The industry is clearly warming up to these offerings. I'd be interested in your (or anyone else's) thoughts here,

Paul

[Phil Fersht]

Paul - thanks for your question. Yes, SaaS is already showing signs of forming a major utility tool for BPO offerings, and no more so than in HR. It's still challenging with applications such as workforce analytics, which require a certain degree of embedded intelligence, but those which are relatively form-based, for example performance management, onboarding/offboarding and succession-planning, are all being heavily deplyed in SaaS models where the customer is requesting it. The key difference with HRO, is that the HRO vendors are also driving the SaaS deployment options, keen to keep their prices down.

PF.

[Lakshmi Dasaka]

Hi Phil,

This article builds some confidence in the hearts of those like me who are trying to help customers in the mid-market segment embrace the benefits of outsourcing. And I agree with Paul on how SaaS driven models are good options in these recessionary times. I wanted to know if the trends discussed in the article are geography specific. And if yes, are there any specific trends for the North American market?

[Alan Johnson]

This piece really lays down why outsourcing models are making a hell of a lot of business sense in these unpredictable market climes. When service providers can offer the scaleability and flexibility companies need to make quicker global decisions and access global data on their business (in this case HR), it really creates a strong case to externalize processes. Thanks for highlighting and sharing this data,

Alan

[Phil Fersht]

Hi Lakshmi,

Over three-quarters of these engagments have been signed in the US, the rest is predominantly UK and continental Europe,

Phil

[John Fields]

Downturns drive outsourcing, and this one is no exception. The only difference this time is the political climate with anti-offshoring sentiment rife.

Phil: do you see issues with anti-outsourcing impeding growth in markets like HRO?

John Fields

[Phil Fersht]

Hi John,

We may get some issues from TARP-funded financial services firms, but for HRO the motivations are led not-only by efficiences, but also by a dire need to move onto global HR IT platforms:

http://www.livemint.com/2009/03/09235122/8216Buy-US8217-clause-se.html

Obama can't stop outsourcing, he can only reward companies with tax incentives for creating onshore jobs. The transformation costs are a much bigger impediment, right now, for firms looking at upgrading their HR platforms and moving into an HRO model,

PF

[Matthew Shore]

We are a software company [radix-technologies.com] that supplies SaaS soultions for global HR managers. Not wishing to put anyone off, but one issue that is on a few potential clients minds is that of security and data integrity. Personally I think that Saas's time has come, and now that big hitters like Microsoft and Google are embracing it, it should reassure potential buyers. Do you think that these concerns exist still? are people coming around to the idea? and does the idea of saving money overide the security worries an organisation might have?