HRO Focuses on the Future

HRO buyers want service providers that meet today’s needs. Sophisticated buyers also want partners who can help manage changes over time as new service needs and technologies emerge. In a rapidly changing industry, it is not enough to know what customers are buying and what their competitors are currently doing today, each vendor must also invest in the future.

Here are three different ways service providers are focusing on the future:

• Ÿ   Kelly Services recently opened an Office of Innovation and appointed a Senior Vice President and Chief Innovation Officer to define the next generation of workforce solutions for its global customer base. To meet the rapid rate of workplace changes, Kelly intends to accelerate the process of creating and launching new services. Kelly Services was one of the founders of the temporary services market and has evolved into providing a full suite of services including outsourcing and consulting. Given the company’s history of innovation, it makes sense for Kelly Services to see added strategic focus and investment in order to continue as a market-leading innovator of HRO services.
• Ÿ   Infosys opened a new ‘Alternative Delivery Model’ HR-shared service center in a Tier 4 town in India. The company considers this as an important strategic move to differentiate its services and benefit clients by providing additional flexibility and competitiveness. Infosys is partnering with local suppliers, like Desicrew, to set up centers in Tier 3 and Tier 4 communities, creating a more sustainable model to access talent and provide long-term career opportunities in other areas of India. My NelsonHall HRO colleague, Gary Bragar, commented that by opening up a center in a Tier 4 city, Infosys can offer clients a reduced offshore price point, with the added promise of greater staff loyalty and lower attrition rates.
• Ÿ   Lumesse, a provider of integrated talent management applications and services, completed its acquisition of SaaS-based learning provider Edvantage Group last October to add a full suite of learning services including learning management, content development and management, online content delivery, and custom course development. The combined business will have over 1,900 customers in 70 countries worldwide and around 2 million active users of its technology.

Just like buyers and vendors, in following news of the HRO community, we tend to focus more on the current activities and news of the day. Stopping periodically to review HRO business news over a several month period reveals trends and provides clues on service provider strategies for growth and the future.

Lumesse made a big acquisition to quickly add a major new service line. Infosys is adding cost-competitive capabilities for clients and the company should benefit from the reduced operating costs due to lower turnover in the outlying centers. Kelly Services is continuing its heritage of innovation to internally develop and speed to market new capabilities.

There is no single approach to preparing for the future, there are many ways to buy, build, or partner your way forward in HRO.

Linda Merritt, Research Analyst, HRO, NelsonHall

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HRO, Shared Services Centers and the HR COO

Oh the things you can find when you wander the Web. One link leads to another and you can find shiny new ideas that catch your eye. Wandering may be a sign of a short attention span, I prefer to considerate it part of having an open mind searching for relevance. My latest Web find is Deloitte’s Human Capital Trends 2011 study.

HR is challenged to meet a myriad of needs and provide ever more value within constrained resources. Cost remains a top priority and business leaders also want HR to be less tactical and more strategic. The HR tactical work must get done to keep the organization running and HR regulatory compliance issues grow ever more complex, necessitating even more tactical tracking and reporting requirements.

In response, HR shared service centers (HRSSC) have emerged in larger organizations, especially multinationals, driven by the need for cost reduction and the efficiency and compliance benefits of better integrated systems and consistent processes.  Outsourcing some of the shared service processes and/or technology support is also a typical part of HRSSCs.

The HRO community touts the benefits of cost optimization, improved processes, improved compliance and reporting, meeting SLAs, and high user satisfaction. By role and nature, vendors focus on the performance of the areas of their own accountability. Therefore, if only a portion of the HRSSC’s processes are outsourced and multiple vendors are involved, it is a challenge to ensure that overall HR delivery services are effective, efficient, and cost-controlled.

One “revolutionary” trend for HR from the Deloitte study is the need for a HR Chief Operating Officer (COO) to focus on the design, development, implementation, and delivery of HR services. This leader needs to be a great organizational, process, and systems designer and manager. I would also add the HR COO needs to be able to determine from a capability and cost perspective where outsourcing is the most viable option and how to integrate HRO into the overall operation.

It is important to not get lost in the tactical aspects of shared services. The HR COO should be a strategic leader, well-versed in both HR and the business. Adding in the art of building and selling business cases, including capabilities in communications, networking, and even marketing would add value.

Tracking cost and process efficiency are necessary parts of managing an HRSSC. So is collaborating with HR generalists and business leaders to create results and provide data-based information for workforce decision making. Promoting HR and the value of the HRSSC is also important – deliver, create awareness, and buy-in for the next cycle of improvement!

Buyers – the HRSSC leader can be a key partner in both operations and strategic HR transformation, invest and select wisely.

HRO vendors – the state of HRSSC leadership, capabilities, vision, and current operation is a component of the HRO Maturity Continuum.

Linda Merritt, Research Director, HRO, NelsonHall

HRO – Helping HR Move up the Ladder of Business Value

Yesterday I listened to the “Prepare and Predict” webinar hosted annually by Workday and moderated by Bill Kutik, the founder of the HR Technology conferences. R “Ray” Wang from Constellation Research, Jim Holincheck from Gartner and Jason Averbook from Knowledge Infusion each offered three predictions for 2011. All three panelists are heavily savvy in the field of HR technology and while their comments were not necessarily about HRO, the overlap and relevance were significant.

So many things in HR and HRO are considered emerging trends and receiving significant coverage in the media. Sometimes the hype exceeds the reality, and that again seems to be the case with the use of social media in HR and even talent management. Yes, they are growing in both interest and use, but there are few breakthrough examples offered in case studies.

Jim Holincheck sees the use of social media making the most useful and practical progress in recruiting, and to some extent in learning. Many RPO service providers are leading in using social media like LinkedIn to broaden the net for recruiting. Making the applicant process more engaging and “warm” can also help build a pipeline of “warm” candidates.

The panelists agreed that first there needs to be a policy that guides who can do what, and then define the business expectations for any application initiatives. And don’t think you have a lot of time to figure this out. According to Ray Wang, the personal use of smart phones is already driving demand for action-oriented mobile and unified communications in many areas.

The key is not just that various new tools and technologies are present, whether in-house or via HRO, but how they are being used. A growing group will say they are using a talent management application. But the consensus on the panel was that what is really happening is basic automation, putting process elements like appraisals online. Currently, the greatest client-reported benefit of a talent management application is automation, not business results.

It is true that you have to walk before you can run and that the basic “wiring” needs to be in place. That brings me to one of my foundation principles; have an HR strategy that is aligned with business needs, designed to deliver business outcomes and including a design approach for HR technology and service delivery.

HRO buyers – it is only if you have a longer term plan and know where you want to get, and why, that you can select an ERP; otherwise, consider SaaS (as many are), determine how to balance best of breed with the need for integration, and which areas to support internally or outsource as you build a new or change out an old platform of HR systems and services.

HRO providers – show cautious clients looking to meet a few basic needs how your systems and services can enable automation and self and manager services at competitive costs, and is also ready to meet the HR needs of the business as it matures and is ready to move up the ladder of business value through HR as a strategy business partner.

Linda Merritt, Research Director, HRO, NelsonHall

BPO Activity to Increase in 4Q09 and Beyond: Will HRO Follow Suit?

NelsonHall’s 3Q09 BPO Index call, held on October 7, revealed that global BPO contract value was down 46 percent year over year. By region, the U.S. fell 42 percent, Europe declined 31 percent, and Asia-Pacific declined 88 percent (but it’s important to keep in mind that Asia-Pacific has a much smaller base, so even a small decline in contract value would be significant percentage-wise). A pretty dark picture for providers in terms of reduced new revenue streams, and for buyers in terms of missed opportunities to increase service delivery capabilities and improve the total cost of ownership.

The recession’s impact will continue to linger for some time, and not all areas of the global economy will recover at the same rate. For example, as generally predicted, the U.S. unemployment rate is still rising and credit is still tight. On the bright side, as the recession begins to ease, there is cause for optimism as BPO activity has been sequentially rising each quarter to date in 2009, indicating we have passed the bottoming of the recession’s impact on BPO.

In September, NelsonHall completed interviews with 480 BPO buyers in North America, Europe and Asia-Pacific. Only 15 percent were engaged in preparation of new RFPs during the past 12 months, but 48 percent plan to do so in 4Q09 and into 2010. Likewise, during the past 12 months only eight percent awarded new BPO contracts, while 37 percent plan to do so in the fourth quarter of 2009 and in 2010.

So do we have reason for the same type of optimism in the HRO space?

Yes, HRO activity was down year over year at essentially the same rate as BPO, 45 percent. North America was especially impacted with HRO total contract value down by 58 percent, as the hard hit of the recession caused a drastic reduction in major multi-process deals, and there were fewer new contract awards overall.

But when you are looking for a light at the end of a long tunnel, any glimmer is welcomed. European HRO contract value increased 33 percent. While this is on a much smaller starting base than North America, it is good news for the industry. It’s also consistent with our analysis of a rising number of European-based HRO contracts, and with interviews I’ve conducted in Europe thus far for NelsonHall’s Payroll Outsourcing Market analysis. All the providers I’ve spoken with are stating their revenue continues to grow, and that the state of the economy is actually helping to increase demand for payroll outsourcing.

Further, the most recent NelsonHall HRO Confidence Index, published in July, took a real upturn in market activity. For example, on a scale of one to five, expected revenue growth in payroll outsourcing came in at 4.5, benefits administration received a 4.3 rating, RPO a 3.3 rating, and learning services a 3.0 rating.

That confidence is matched by NelsonHall’s current conversations with many HRO providers who are reporting strong pipelines, and that activity is getting much more real deal focused. One provider said it had more RFPs in various stage of response than it has had in six years. Another said buyers are “past the kick the tires” stages and more are in the final stages of getting deals signed.

While the evidence is yet to be seen, I do believe the indicators are there, and when we do the same quarterly analysis and year-on-year comparisons in 2010, we will see HRO activity increase in the U.S. and Asia-Pacific, and continue to increase in Europe.

Gary Bragar, Lead HRO Analyst, NelsonHall

Don’t Ask, Don’t Tell – And Don’t Be a HRO “Bubble” Buyer

Don’t ask for HRO to be done your way.

Using your existing technology, processes, people and vendors – called “lift and shift” – was common in the early years of multi-process HRO. It did lift. It did shift. And it did trap many a buyer and provider.

Providers could not leverage investments across clients when each buyer had its own customizations, sets of licenses, technology cocktails and networks of pre-existing vendors. They also couldn’t protect their own margins and profitability.

Bubble buyers found there was little on-going innovation and improvement other than what they could directly fund. Lift and shift limited overall total cost of ownership management. Whatever initial savings obtained were in many cases eaten away by change orders needed to continually address changes in the customized services platform.

Large enterprise customers do have legitimately complex needs, which may make them think they need significant customization. But even at this level, providers are offering viable ERP wrap-around technology, multi-tenant support services, tools, accelerators and partner vendors that will add value and lower costs for both parties.

Don’t tell providers how to meet your needs by limiting and pre-defining the solutions.

Avoid requesting costly customization that is ultimately unnecessary. For example, large multi-national companies thought they needed one instance of global payroll. It can be done, with enough capital. But even if you can afford it, is that the best use of your limited investment dollars? 

Today, multi-national payroll accuracy, compliance and business intelligence can be delivered through business process outsourcing (BPO) that supplies the required coverage, quality and reporting at less initial cost and with a more flexible total cost of ownership compared to a custom solution built for one.

There is increased buyer acceptance of true multi-tenancy, intelligent shoring, and common provider tools, services and partners. SaaS, SOA and provider proprietary investments in technology, workflow management and service center optimization can provide an integrated front-end with the quality, speed, cost points and analytics needed to satisfy a wide variety of needs. There will be room for unique needs. Vendors that offer standard solutions are set-up to offer 10-20 percent in planned customization.

Does this sound like an unnecessary warning? “We are beyond this”, you say? Take a look at the results of a LinkedIn poll by Vivek Khanna who asked; as head of HR, would you prefer a packaged offering or a customized solution from your service providers?

• 68 percent: “customized to my needs”
• 25 percent: “pre-packaged”
•   8 percent: “I don’t care, I need it cheaper”

While the number of poll respondents was small (25), the pattern of results is interesting. Who wouldn’t prefer customized, all things being equal? But all things are not equal. Customization sounds wonderful, but it is costly on Day One and every day thereafter when you pay the price to maintain, update and upgrade.

There always exceptions and niche players leveraging labor arbitrage, so you can still get it your way, if you really want it. But fewer major providers will take HRO bubble business, and if they do they now know to pass the full costs on to you. So, be careful what you ask for – you just might get it!

As provider capability and configurability is rapidly improving, my advice is to push the envelope internally and with vendors to limit customization to what is absolutely required and worth the price. Do not be a bubble buyer using customization to gain short-term comfort at the cost of long-term value.

Linda Merritt, Research Director, HRO, NelsonHall

HRO: Raining While the Sun Shines

Outside my window it is raining, there are some thunder rumbles and the sun is shining.  How does that average out? Partly rainy, sunny with 100 percent humidity, scattered sun showers?  What will the weather do next?

As I take another look at the latest NelsonHall HR Outsourcing Confidence Index (hey, it’s summer and there is not a lot of new news), it seems much like my local weather conditions. The sun is peeking out, but it is still raining in places.

The overall Index was generally positive with reported increases in growth and pipeline. Confidence in the next 12 months was up at 115 (100 equals no change).  Under the average scores, there are an unusually wide range of responses within each area.  While some are seeing the sun peek through, others are still out in the rain with some thunder, producing an average that does not tell the whole story.

•  Pipeline growth averaged 23 percent, pretty good considering. The swing was from +10% to + 40%

•  Payroll and benefits administration were the relative sunny spots for both current and anticipated growth.  There was pipeline optimism for RPO, but the outlook was still cloudy for multi-process HRO and learning services

•  On average, providers estimate that sourcing decision-making is still frozen in 25 percent of their clients and prospects, though the upper quartile of respondents still estimate that 50 percent or more of their clients and prospects have frozen the sourcing decision-making process

•  Despite the continuation of declining volumes within existing deals and the reluctance of clients to undertake significant up-front investment, the recession is encouraging organizations to view HRO as a mechanism for transforming their cost base, and organizations are increasingly considering platform-based approaches provided these involve minimal investment or fixed cost. Accordingly, there are signs that the level of new deals is beginning to outweigh the impact of the gloomy recession on client volumes and pricing

New client activity and cost-driven deals led contract signings, with some expansion of scope with existing clients. Even with such relatively positive news, providers are still a bit pessimistic in estimating the upturn. There are still concerns about reducing volumes in existing deals and only 1/3 of companies are expecting the upturn to take place in 3Q09. For 55 percent, the future does looks sunnier in 2010.

All this said, business is being done.  And those providers who can leverage client buying triggers, like those outlined in my July 24 “Fast, Flexible and Free” blog, will have the opportunity to grab their patch of the sun while others will still be forced to carry a rain umbrella.

Linda Merritt, Research Director, HRO, NelsonHall

Fast, Flexible and Free HRO – What Customers Want Now

The newest NelsonHall HR Outsourcing Confidence Index indicates that although supplier confidence in the demand for HRO services rose significantly in the second quarter of 2009, they still face largely frozen decision makers.

The signs of hope seem to be more in growing pipelines than in deals done. When a few presenters at this year’s HRO World conference in New York said pipelines were increasingly active and growing, the buzz quickly spread. Rumors, or even rumors of rumors, about the dawn of an upturn in the economy and dreams of unleashing pent-up demand were enough to feed the HRO World attendees’ hunger for good news.

What will help unfreeze the freeze? What are HRO customers most looking for now? Well, they want deals that are fast, flexible and free.

Fast – First Year Savings

The focus is on the short-term. Customers are not interested in long-term returns on investment that may or may not materialize, they want savings now. Our research over the past year shows the nature of deals has changed with organizations typically looking for certainty of cost reduction within the first year of the contract.

Flexible – No Minimums

Scalable services and variable pricing has long been part of the HRO value proposition. Minimum volume guarantees are a part of many contracts as a way to embed suppliers’ recovery of transition and investment costs. Today buyers are looking for infinite variability to be able to quickly add or shed expense directly in line with volumes to the maximum degree possible.

Free – No Upfront Investments

If buyers are shying away from fixed fees, they are even more averse to upfront implementation fees and technology investments.

This risk-averse environment favors smaller scope and scale deals, as opposed to large transformative deals where major technology investments are needed. Right now, buyers are not willing to make major long-term investments and service providers, mindful of their own profitability, are much more cautious about taking on more financial risk.

With HRO pipelines heating up it will be interesting to see what type of deals result. How close will they be to fast, flexible and free?

Linda Merritt, Research Director, HRO, NelsonHall

HRO and the HR Function Study: Troubling Findings

Key findings from the Chartered Institute of Personnel and Development’s (CIPD) June 2009 survey entitled, “HR outsourcing and the HR function: Threat or opportunity?” – for which 315 heads of HR, HR managers, HR experts, learning and development experts and others from CIPD member companies were queried – included:

•  29 percent of respondents’ companies outsource HR, but 43 percent of respondents claim HRO isn’t relieving the pressure HR departments are facing, e.g., need to enhance efficiency, need to enhance quality and an increasing need to innovate

•  80 percent considered their partnership working, change management and business awareness skills to be good or excellent. But only 28 percent considered their vendor management skills as fair or developing, and 13 percent declared no skills at all in this area

•  50 percent think HR is taken seriously within their organization, but most HR professionals are not involved in HRO ventures until the later stages – monitoring, managing vendor relations and provision of end-user feedback

•  36 percent do not consider HRO a strategic enabler for the HR function, while over 50 percent believe it has enabled them to adopt a more strategic role to a limited extent

•  Only 19 percent consider they play a key administrative role in their organization, and only 13 percent consider the HR function to be at the forefront of shaping the organization’s strategic direction

•  48 percent of respondents have occupied a range of business positions prior to their role in HR, while 39 percent have a pure HR background

•  Payroll, pensions, training and aspects of recruitment are among the most outsourced functions, which supports the results of NelsonHall research studies

•  Most respondents report that HRO has been successful in some areas but not others, with a minority reporting no success at all (5 percent), and only 7 percent declaring HRO an all-round success

I am troubled by many of these findings, and HRO buyers and providers should be as well.

First, HR heads must be involved in the HRO decision-making process from the very start – providing input and key advice on vendor selection based on the “on the ground” requirements within HR, cultural fit and the requirements for governance of the contract within the HR department and throughout the buyer organization – as they are the individuals who ultimately will make the outsourcing initiative succeed. Accordingly, without this input from HR executives, many contracts will fail. Thus, the question looms if HR is taken seriously, why isn’t it involved in the HRO deal process? This mismatch suggests that some HR organizations do not have a realistic view of their role within an organization, and perhaps need to take a step back to determine whether lip service is being paid to their actual role in their organization.

Obviously success or failure of an HRO initiative must be shared among the provider, the buyer and the HR department. In regard to the CIPD study findings – as the overall perception of whether HRO has been successful or not didn’t stem from the success of achieving organizational objectives but rather on whether it relieved pressure on the HR department and enabled the HR department to adopt a more strategic role in the organization:

•  Providers should proactively explore with client stakeholders, including HR, whether these challenges are due to incorrect scoping in the contract, unrealistic contract expectations, too-limited client-side governance resources, etc., and develop and implement mitigation plans to address the findings

•  Buyer organizations must recognize and rectify the fact that their HR departments are pressured to change from a transactional to a strategic function without the necessary skills to do so, as well as realize that lack of involvement in the initial contractual discussions results in HR not understanding what’s expected of them in order for the outsourcer to deliver its targets

•  While a very high percentage of those surveyed consider their change management and business awareness skills to be very strong, HR departments must reconsider their view of their own skills. For example, there is clearly room for improvement within change management to enable a more seamless transition from an in-house to outsourced environment. And HR leaders’ admittedly low vendor management skills must be enhanced as these are not only critical to the success of an HRO initiative but also a responsibility with which HR is tasked

Further, to achieve greater HRO success, again in light of the parameters of this CIPD study, buyers must ensure HR personnel have the right tools to enable them to play a more strategic role, e.g., analytics tools to help understand HR’s pain points and their impact on the business. They must also invest training dollars in consultative and problem solving skills to enable HR to act on the resulting data. And providers must encourage buyers to utilize analytics within engagements and provide not just the data but also insights on what that data may mean in the HR and wider business community.

An end note to HR departments: If you want to be more strategic contributor to your company, don’t wait or hope for it to happen, make it so. Provide your C-suite with a solid value proposition outlining how you can more strategically support the company, and present a solid business case regarding the reskilling required to do so.

Until next time, happy sourcing!

Helen Neale, Research Director, Human Resources Outsourcing, NelsonHall