Amy L. Gurchensky, HRO Research Analyst, NelsonHall
Last week, I zeroed in on specific market activity within the payroll, learning and RPO service lines. This week, I’ll take a closer look at H1 2013 activity within benefits administration and MPHRO as well as provide some insights on what to expect in H2 2013 based on NelsonHall’s recent HRO Confidence Index.
Benefits Administration
Contract signings aside, there has been a plethora of activity within benefits administration in H1 2013, including:
New offerings:
Mercer launched a private benefits exchange, Mercer Marketplace
Buck Consultants launched an automatic enrollment offering in the U.K.
Secova launched a Coordination of Benefits (COB) audit offering to coordinate benefits with insurance carriers
Acquisitions: Wageworks acquired Crosby Benefit Systems and Benefit Concepts to strengthen its H&W administration offering, including reimbursement account and COBRA administration
Partnerships:
Fidelity partnered with Extend Health, a Towers Watson company, to provide retiree healthcare services
JLT Employee Benefits partnered with Vielife for health and wellbeing services in the U.K.
New technologies:
Xerox launched an account-based benefits portal, BenefitWallet, to assist with managing multiple health accounts on one platform, including HSAs, HRAs, FSAs, HIAs (health/wellness incentive accounts) and other specialized services
Aon Hewitt launched an absence management tool, 360 Absence Solutions, to help clients manage absence-related costs, compliance risks, the administrative burden and lost productivity
Educational resources:
Mercer and ADP both launched websites to provide information on healthcare reform
Ceridian launched an auto-enrollment knowledge center in the U.K.
MPHRO
In recent years, the MPHRO market has been relatively quiet in terms of contract announcements and H1 2013 was no exception. However, my last MPHRO research study, published in February 2013, revealed that the market is very much alive with new wins and contract renewals from all the major vendors, including IBM and Accenture. In fact, IBM recently won a new seven-year, multi-country MPHRO contract, which was bundled with F&A outsourcing services. Other wins include ADP and Marriott Vacations Worldwide for core HR, payroll, time & labor management and talent management covering ~9.2k employees.
Many vendors have been focused on their strategies for expansion, including Aon Hewitt with its acquisition of OmniPoint Workday Services. Although still early, NelsonHall expects ADP to make inroads in LATAM with its MPHRO services since it added RPO capabilities in this region from its acquisition of The RightThing and now expands its payroll footprint from the Payroll S.A. acquisition.
H2 2013
So what does the rest of the year have in store? NelsonHall’s recent HRO Confidence Index survey finds that overall expectations for HRO revenue growth remain at the same level as those reported for the last five quarters; with payroll leading followed by RPO. Top industry sectors for HRO services include healthcare, pharmaceuticals and high-tech. By geography, vendors have reported increased confidence for revenue growth in Central and Eastern Europe and Central and Latin America.
Needless to say, it will be interesting to see how the rest of the year unfolds for HRO.
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Last week the Human Resources Outsourcing Association’s (HROA) Publications & Practices Committee held a webinar on collaborative innovation in HRO with industry experts Lisa Johnson, director of recruiting, North America at Gate Gourmet, Rolf Kleiner, senior vice president and chief innovation officer at Kelly Services, Inc. and Dr. Greg McLaughlin, senior vice president of research & development for Global Targeting, Inc.
Understanding Innovation
Innovation has been a conundrum for years for HRO buyers and suppliers. There are many ways to define the word ‘innovation’ and that makes it hard to be sure each party is speaking the same language. All three experts agreed that open discussions between clients and service providers are needed to develop a mutual understanding of what innovation means in the context of the relationship and contract.
Greg walked us through aspects of innovation range from the conceptual “innovation is an experience”, to the practical “innovation begins with a need and ends with an outcome that creates a competitive advantage.”
Lisa looks for HRO suppliers with the spirit of innovation – backed by experience. Rolf looks for employees who “rise above the white noise” to work on special innovation projects that also support talent management.
Innovation and Continuous Improvement
The HROA Buyers Group’s survey on innovation and continuous improvement showed there is a commonality in basic definition and understanding developing across the community of buyers, service providers, and advisors. From the words of HRO community members:
Continuous improvement is an enhancement of a product, service or process that already exists:
Increased operational efficiency, improved user experience, ongoing, incremental, and step changes
Efficiency and effectiveness gains that “keep pace with the market”
Innovation is something new and different:
Cutting edge, transformational, precedent setting, competitive advantage, disruptive, and dramatic
A significant and often transformational change that, once introduced, “you wonder how you ever lived without it.”
The HRO community is in agreement that continuous improvement and innovation should be a collaborative effort between the HRO service provider and the client:
92% of respondents agree that this collaborative effort is what should be happening between service provider and client, but only 59% see that as true now, with 40% of buyers and only 22% of providers agreeing that collaboration is actually happening in the marketplace right now
77% agreed that innovation should be a collaborative effort among the parties, with agreement from 100% of advisors, 60% of HR practitioners, and 83% of providers.
The Innovation Gaps
Significant gaps – and therefore opportunities – remain:
75% of respondents said that continuous improvement is in the HRO contract
Only 42% agreed that innovation is included in the HRO contract.
In the next blog I will be getting practical about innovation in HRO.
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With more organizations making the decision to use HR business process outsourcing services, even in the face of a still uncertain economic environment, the overall confidence of HR outsourcing suppliers in the market over the next 12-months is at its highest level in six quarters according to the latest NelsonHall HRO Confidence Index (HROCI).The HRO vendor confidence level is up 6% year-over-year reaching 155.5, where 100 represents unchanged confidence and higher scores indicate increased confidence.
Drivers Outweigh Inhibitors
The impact of the wider economy is strengthening the drivers for HR outsourcing which appear to be outweighing its impact on the associated inhibitors such as unrealistic pricing expectations and frozen decision-making. Currently, 89% of HR outsourcing suppliers believe that a net up-turn in HRO decision-making is taking place, with just 7% of suppliers perceiving that a net down-turn in HRO decision-making is taking place.
The top principal drivers for HR outsourcing include:
Increased cost reduction
Greater process consistency across business units and geographies
Organizations looking for an increased transformational emphasis.
New private sector HRO deals typically remain limited in initial size, and significant growth opportunities continue to come from existing clients in the form of added scale or scope. In line with the “increased focus on cost reduction driven by the worsening economic climate,” organizations are finally showing an increased interest in evaluating outsourcing opportunities previously rejected.
Transformation Beyond Cost Arbitrage
The HROCI supports our 2013 trends with “a clear ‘transformation’ agenda” and a focus on value. Clients are looking to vendors to help them:
Deliver a more empowered employee experience and access to learning using technology to administer, deliver, and share learning
Manage business outcomes by driving higher employee engagement including a better end-user experience and continual “future-thinking”
Achieve solid productivity and accelerate time to competency.
2013 Outlook
HRO vendor expectations for 2013 look best for payroll, then MPHRO which looks solid, followed by RPO, benefits administration, and then learning services. Multi-country deals for payroll and RPO will again be common with the average number of included countries around 20. Of little surprise is that expectations for the government sector have slightly worsened, particularly for defense and state & local government.
Have You Listened
Another NelsonHall product of interest is the BPO Index which is supported by a quarterly conference call open to all who register.
According to the January Index, total BPO contract value was down significantly for 2012, especially in North America and Europe. The global economy and the U.S. fiscal cliff added to business growth uncertainty, which drove down industry-specific BPO the most.
At the same time, back-office BPO, which includes HRO, was up 25%, and HRO was up significantly year-over-year.
If you can lower total cost, improve performance, and increase business value, you can get an HRO deal!
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Amy L. Gurchensky, HRO Research Analyst, NelsonHall
For those of you who are not aware, NelsonHall assesses the confidence in the HRO market on a quarterly basis. The report involves surveying HRO suppliers from all disciplines to get a pulse on the market.
From time to time, my colleagues and I will blog about these results. I thought I would take a step back and re-examine HRO supplier confidence levels since the report began.
As the name suggests, the supplier confidence level measures how confident HRO suppliers are in the future market with a level of 100 representing no change in confidence.
Since the report began, the index has constantly shown a healthy level, despite some fluctuations in between. The following chart graphs HRO service provider confidence levels since its inception.
2011 shows a major turning point in HRO vendor optimism, revealing a downward trend line that coincides with the Employment Situation report produced by the Bureau of Labor Statistics.
There is no need to panic though. It appears that supplier expectations are now more accurately aligned to pipeline activity, which showed a slight weakening in Q1 2012. Again, the most important thing to remember is that the indices are still at a healthy level.
Despite the headwinds from the economic recovery, business for HRO has carried on as evidenced in the following contract activity:
ADP: awarded a multi-country payroll contract by HP covering ~130,000 employees in 40 countries across Asia Pacific (excluding India), Europe, and the Americas (excluding the U.S.)
Talent2: awarded a three year RPO contract by Bankwest in Australia providing full RPO services from job requisition through onboarding including employment branding, establishing an innovation program for sourcing, and more
IBM: awarded a learning services contract by a government entity in South Africa including content development and delivery of learning
Aon Hewitt: renews and expands its multi-process HR outsourcing contract with BMO Financial Group for payroll, workforce administration, H&W administration, recruitment services, and compensation administration covering 46,000 employees in the U.S. and Canada for eight years.
There will likely be continued challenges from clients such as stalled decision-making or demands for lower pricing, and some service lines will fare better than others in this slow economy that is decelerating.
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Every quarter, my colleague Amy Gurchensky surveys HRO vendors for the NelsonHall HR Outsourcing Confidence Index (HROCI), which is then available for our clients and the participating service providers. In normal times, the HROCI does not change drastically from quarter to quarter; it more shows changes in trends over time. In uncertain times, however, it is a timely way to see changes in market perceptions even before disruptions occur in contract values, volumes, and revenues.
It is of some comfort that the HROCI is in a steady state of small changes from quarter to quarter. That is not a sign of upcoming exuberant growth, but it is a predictor that we will continue to see solid continuous HRO growth throughout 2012.
The most recent HROCI shows a vendor confidence level of 153, where 100 represents unchanged confidence and higher scores indicate increased confidence. While 153 is down a bit from 164 in 1Q 2011, it is in line with 3Q and 4Q 2011 at 151 and 147 respectively. Vendor confidence is often based on how current business is going, along with the pipeline. In HRO, growth from existing clients is just as important as new business. Ever since deals got smaller in scale and scope, there has been increased focus on retaining and growing existing accounts, and we see positive vendor confidence here as well.
Looking at some of the HR lines of service, payroll is once again in the leading position for growth, followed by RPO, multi-process HRO (MPHRO), benefit administration, and learning. MPHRO is expected to perform well in 2012, primarily driven by the need of organizations to standardize HR services across regions and geographies. Vendors such as ADP and NorthgateArinso that previously offered primarily payroll and employee administration services have been very active in acquiring or partnering to extend capabilities to a wider range of platform-based MPHRO functions. In addition, Logica is becoming increasingly successful in this space in Europe.
There is a slight tempering of growth expectations that can be seen in the data, although pipelines still seem solid. I think this is the same kind of hedge-your-bets thinking that is in the larger economy and what we are seeing from HRO buyers. Everyone still has a healthy sense of caution in case things suddenly go sideways.
Luckily, more and more HRO buyers and clients are willing to move ahead and get on with doing business, even if a bit cautiously. Other buyers still suffer from frozen decision-making and unwillingness to make long-term investments. Buyers with clear direction for what they want to achieve through HRO are the most likely to be deal ready – as along as prices are right and there is not too much upfront investment. The earlier service providers can assess readiness, the faster they will be able to fill pipelines with well-qualified prospects.
Linda Merritt, HRO Research Analyst, NelsonHall
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In the USA Today last week, there was a feature with President Obama giving a talk to the business community, where he gave recognition to them for keeping jobs in the U.S.
The President said the economy has changed, and the transformation has been painful for many American workers who used to work in factories where they thought they would retire from, but those factories relocated overseas where the cost of labor has been cheaper. The President recognized that we live in a global economy and other countries want to develop their companies internationally and will therefore want to employ workers all over the world. But right now, the U.S. is in a unique moment in time where it has the opportunity to bring jobs back as the U.S. has people available and ready to work now. The President wants companies to invest in America, and he is set to introduce a tax proposal that would reward companies who bring jobs back to America and eliminate tax breaks for companies that are moving jobs overseas. The President has set a goal of doubling the export of goods and services by 2014.
So the big question is, will this scheme work and what does it mean to offshoring HRO? As one data point, let’s look at the percentage of HRO contract value by location according to NelsonHall’s latest quarterly HRO Confidence Index released in December 2011:
72% Onshore
16% Nearshore
12% Offshore (the 12% is consistent with April 2010 when tracking of this data point began).
Although some American companies have brought back previously offshored jobs, I believe it will come down to a combination of cost and service. First, pending what the actual tax breaks are that the President will be able to provide, CFOs will evaluate the outsourcing cost savings vs. the tax benefits of bringing jobs back. If HRO service provider jobs are brought back, vendor clients are not going to want to pay more. If the tax breaks don’t cover the labor cost savings, will vendors be willing to eat the extra cost? I don’t think so. Much will also depend on the current level of client satisfaction with outsourced services.
Depending on job type, it is easier said than done. As an example, let’s take moving outsourced call center jobs back to the U.S. Part of the reason call centers are offshored are due to multi-lingual call center support, including for MNCs, that can be provided from HR service centers such as in Manila. Then there is offshoring of non-client facing jobs, often referred to as back-office administration. For example, sourcing of jobs can be done when U.S. offices are closed overnight and candidates can be delivered next morning.
In sum, once the specific tax breaks are known, CFOs will commence cost savings analysis, followed by vendor and client discussions on where and how to best provide HRO services.
Gary Bragar, HRO Research Director, NelsonHall
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HRO is very much at the beneficence and the mercy of the economy. With slow expectations for recovery continuing into 2012, HRO vendors are moderating their expectations. As the threat of a double-dip recession slowly lessens in the U.S., concerns about the next presidential election increases and worries over the European economy remain high. With a mixed bag of economic indicators, the NelsonHall Confidence Index has lowered to 147 from a peak of 170 in Q1 2010, with unchanged expectations representing 100. Although the Confidence Index is slightly down, 147 is still positive for growth. It is the expectations for high growth over the next 12 months that have changed the most, dropping to 33% from 54% of surveyed vendors. Moderate growth expectations increased to 43%, up from 32% in the prior year quarter.
The anticipation of continued growth is based on the experience of 2011 contract growth and expansion in renewals and existing contracts, where service providers have seen the addition of geographies and new processes. At the same time, there has been no change in the perennial barriers of frozen decision making and unrealistic buyer expectations for pricing and savings.
A sign of the times is that payroll services (4.1 out of 5.0) replaced RPO as the strongest individual HR outsourcing service line in Q3 2011. Multi-process HR outsourcing (MPHRO) activity strengthened to 3.9. This is great to see given that some organizations have been scared of adopting large-scale MPHRO services due to fears of the associated timescales and investments. Vendor MPHRO capability is once again maturing beyond employee administration and payroll services. Organizations are being asked to add in greater support for a wider range of HR functions; prompted by the strengthening need to achieve maximum cost savings in G&A functions as the economic situation threatens to worsen.
Expectations for RPO 2012 service line growth dropped to second place with a still very strong 4.0, with payroll remaining in the lead at 4.2. MPHRO comes at 4.0, showing continued strength for the latest generation of standardized processes starting out with initially smaller scale and scope. Look for buyer interest in multi-country and regional standardized and platform services to continue for payroll, RPO and MPHRO. North America and the U.K. will remain the target for modest growth in benefits administration at 3.5. Good news, despite a small drop in pipeline activity for learning (3.4), all service lines are healthy and are showing a reasonable amount of activity.
Will there be continued economic and political uncertainty? Sure. The good news is that HRO deals can and are being done when the basics of demonstrating both proven business value and cost justified efficiency are clear. So let’s get real and get on with the business of life and business – and have a Happy New Year!
Linda Merritt, Research Analyst, HRO, NelsonHall
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According to a survey by KnowledgePool, a U.K.-based managed learning services provider, 70% of internal client learning and development (L&D) organizations are too busy doing daily fire-fighting to focus on strategic talent and learning issues in their company. Out of 104 L&D managers, 69% say their training department does not have enough resources and 42% say that training receives inadequate support from senior managers. Yet 80% of L&D managers said they could improve their organization’s training ROI; 77% think new opportunities for improvement could be identified through rigorous analysis of their training spend and evaluation data; and 75% say improvements could be made by using more informal and on-the-job learning methods.
Sound like an opportunity for outsourcing? You bet! The good news from NelsonHall’s most recent quarterly HR Outsourcing Confidence Index is that learning services, which has been the last of the HR outsourcing service lines to recover, is expected to continue to strengthen as the year progresses. Following several strong quarters of growth within RPO, the need is now shifting toward implementing and optimizing learning programs. Good news in learning since the beginning of Q2 includes:
Genpact winning a content development contract by JobSkills in India
Raytheon Professional Services winning a contract to develop an e-training program for NATO
CIBER’s Federal division winning a 5-year training development contract with a potential value of $30.7m by the Center for Strategic Leadership, an institute of the U.S. Army War College
Accenture winning an e-learning contract with a major bank that may later add classroom ILT
General Physics winning $3m in 5 new contracts from energy companies across Africa, the Middle East, South America, and Asia
Edvantage group winning a safety e-learning contract by Yara International, providing 7 interactive e-learning courses for 3,000 technicians, operators, engineers, and supervisors at 30 plants across 17 countries.
In NelsonHall’s last learning BPO report, top drivers of why companies are outsourcing learning, which support KnowledgePool’s findings, include:
1. Lowering costs (average client savings of 26%)
2. Increasing training effectiveness and ROI
3. Improving the quality of learning for employees
4. Accessing experts in the industry whose core competency is learning
5. Flexible services, aligning learning with the customer’s strategic objectives
6. Focusing on strategic work, not transactional activities.
Look for increased learning outsourcing to continue the remainder of 2011, including by the likes of IBM who continue to see increased demand globally. In 2012, I think learning outsourcing will really soar. Although uncertainty in the economy continues to cause delayed decision-making, there is no doubt in my mind that we will see a boost in learning as companies unanimously agree talent management is more important than ever. To improve and engage talent, you have to invest in your people. There is only so long you can just say the words, eventually you have to walk the talk!
Gary Bragar, HR Outsourcing Research Director, NelsonHall
If you didn’t pay attention to the news and only looked at the recent financial results reported by staffing and RPO providers, you’d think that everything is fine with the global economy. Let’s take a look at a few of the highlights including year-over-year revenue growth in Q2 2011 compared to Q2 2010 and some numbers of contracts awarded:
Talent2 (fiscal year 2011 for period ending June 30) +26%, RPO +57%
Kelly Services +16%, KellyOCG + 22.5%, and RPO ~+50%
Kenexa +59%, RPO + 45%
Manpower + 24%, ManpowerGroup Solutions +21% with 37 RPO deals closed in Q1 and 31 new RPO contracts awarded in Q2
Pinstripe won or extended 15 RPO contracts in H1 (revenue not reported)
SeatonCorp +20%, PeopleScout +95% with 9 new RPO contracts signed.
Why was growth and the number of contracts awarded so high when the sad reality of the news headlines is that there are debt problems, slowdown in GDP growth, and a continually high unemployment rate? Well, that is precisely why! There are several reasons including:
Organizations who have had to downsize are turning to RPO because they don’t want to invest in hiring recruiters and associated staff only to potentially downsize again (i.e., it’s better to outsource recruitment to a vendor that can provide variable pricing and who can scale up or down quicker than the client)
Obtaining better quality of candidates and quality of hire from an outsourcing specialist
Allowing HR to work as a strategic partner and in-conjunction with the RPO vendor to engage employees and retain talent (instead of focusing on hiring)
Wanting to get out of the technology management business, which isn’t usually a client’s core competency
Reducing time to hire, improving hiring manager satisfaction, etc.
In addition to revenue growth from new contracts and renewals, growth comes from existing clients that have increased their hiring volumes. Other sources of growth are from contracts won in prior quarters that take several months before fully ramping up.
RPO does not look like it is going to slow down anytime soon. In NelsonHall’s HR Outsourcing Confidence Index, published in June, pipeline growth reported in the prior quarter was higher for RPO than all of the other HRO services.
At NelsonHall, we’ve seen an increase from buyers wanting to know who we see as the leading RPO providers by country and region. Buyers, are you evaluating outsourcing recruitment, if you haven’t done so already?
Gary Bragar, HR Outsourcing Research Director, NelsonHall
The economic signals for the second half of 2011 remain mixed. Looking at the macro markets combined with global debt situations and unemployment rates, it looks like we are on the edge again. The long struggle to reaching agreement on raising the U.S. debt ceiling rattled nerves around the world.
Alternately, if we look at the NelsonHall HRO Confidence Index for Q2 2011, we see that service provider’s confidence level is 168, near the all time high of 170. Supplier expectations for 2011 for most industry sectors have improved with banking remaining the strongest followed by high-tech and telecoms, with the state and local government sector also up. Expectations are a bit lower for automotive, professional services, and transportation. Geographic growth expectations continue to be positive in emerging markets and have strengthened in the mature markets like the U.S. and some areas of Europe.
HRO vendors see what is happening in the larger economy, they know there is a chance of a double-dip recession or at least several more sideways quarters. At the same time, strength in new sales and expanded scope with existing clients along with still strong pipelines provides them with a more optimistic view. Let’s hope they are right!
ADP echoed this divergent view on its FY 2011 earnings call. It is well aware of the current economic conditions, including a still possible downgrade in the U.S. credit rating. ADP’s FY2012 forecast calls for continued growth based on its strong performance in FY2011, with Employer Services (ES) up 8% to $6.9bn, and a better-than-ever pipeline. It is also benefiting from recent acquisitions and new service innovations that have broadened and refreshed its service lines, especially adding more beyond payroll options in Europe. While payroll continues to be the largest service line for ADP at 66% of ES revenues, 33% is now from beyond payroll services including full HR BPO. In the pipeline, it is now an almost even split: 52% payroll, 48% beyond payroll.
As seen during the recession, HRO can be hit hard and fast in a full-fledged downturn. So, how can a HRO provider like ADP defy the larger economic outlook now? ADP was willing to take a small hit to operating margins to hire and train several hundred sales and service people ahead of the upturn. It was able to affordably acquire added capabilities to round out service lines and invest in new services that have been successful right out of the box, including Workforce Now and Run, which currently has over 120k clients in the small market on its cloud platform using self-service and Smartphone access. At the same time, ADP retains focus on client satisfaction and retention to stabilize recurring revenues.
In a recovery, even a weak one like we are experiencing, a well-prepared HRO vendor can beat the odds. Is your HRO provider one that is beating the odds?
HRO Insights 
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