HRO Gets Real in 2012

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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Three Forces Shaping HRO for 2012

As 2011 comes to a close, let’s look ahead to 2012 and the three current trends that will continue into the New Year and beyond.

HR SaaS has been around for years. Now that the breadth of cloud coverage is in the HR ERP space it is opening up the middle market for HRO at long last, and is swimming upstream into the large client market. HR mobile applications are proliferating and vendors will be hard-pressed to deal with the rising demand by clients and participants for more on-the-go functionality. What seemed like an innovative differentiator is quickly becoming a competitive requirement.

HRO globalization has long been on the agenda of many HRO vendors, mainly targeted by major multinational companies (MNCs), but there are only so many global MNCs. We are now seeing additional focus on regional service networks for multi-country companies. HRO activity in emerging markets is also picking up for MNCs and for in-country client services. Expect to see HRO acquisitions, partnerships, and new offices for sales and service delivery grow in 2012 as service providers continue to fill-in geographic footprints and service gaps.

The globalization of RPO will continue to be a big story in 2012. RPO vendors are gearing up to meet the demand and two of the largest acquisitions in 2011 included SourceRight (part of SFN Group), which was acquired by Randstad, and The RightThing, which was acquired by ADP.

The growing global RPO demand was illustrated in a big way by Kenexa when it was awarded with a five-year RPO contract by Eli Lilly and Company, which includes recruiting in Asia Pacific, Europe, and the Americas. NelsonHall estimates the deal to be worth more than $50 million, one of the largest RPO contracts to date.

HRO contract awards will continue to increase across Asia Pacific, with some year to year variability due to economic conditions. Three years ago, ~10% of contracts included Australia, with half of those for clients headquartered in Australia. Two years ago, it was ~11%, with about an even split of Australian-based clients. In the past year, the number has jumped to ~16%, with the majority of contracts for clients based in Australia.

China has also emerged as a client base for HRO, including for in-country services. As emerging market companies reach a fast-growth stage and expand their services internationally, the need for HR technology, processes, and delivery capabilities can outstrip the local talent base for HR. For example, Manpower made two acquisitions in China, REACH HR in South China and Xi’ and Fresco in Henan Province.

These are three of the forces shaping the future of HRO. Those HRO vendors that are able to update their portfolio of services and quickly and cost effectively invest in the acquisition or development of new capabilities will gain an advantage in the growing marketplace for HRO.

Interested in reading the latest HRO news from NelsonHall? Subscribe to our newsletter by emailing amy.gurchensky@nelson-hall.com with “HRO Insight” as the subject.