Posted tagged ‘HRO Confidence Index’

HRO Confidence Remains Steady for 2012

May 10, 2012

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

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.

President Obama to Reward Companies That Invest in the U.S.

January 18, 2012

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

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.

HRO Gets Real in 2012

January 3, 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

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.

Fast or Slow for HRO?

August 5, 2011

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?

Linda Merritt, Research Analyst, HRO, NelsonHall

HRO Confidence Continues to Soar!

July 21, 2011

Our recently published Q2 2011 HRO Confidence Index indicates that 50% of HRO suppliers, which includes payroll, RPO, learning, benefits, and MPHRO vendors, are much more confident in the HR Outsourcing business over the next twelve months compared to the previous twelve month period.  Thirty-five percent are slightly more confident and 15% are as confident.  The driving factors are two-fold.  The top reason is new contract activity, first reported as the main reason in Q3 2010, and the other reason is increased scope of existing contracts.

In the past, my colleague Linda Merritt and I have written about new contract awards. For this blog, I wanted to focus on the importance of contract renewals, including increases in scope expansions as they are closely following new contract activity as the reason for this high confidence in HRO!

A few examples of recent contract renewals and scope expansions include the following:

  • Last week, Genpact was awarded a 7 year MPHRO contact by Nissan to include payroll, recruiting, training, and benefits administration.  Genpact had been providing HR services to Nissan group companies and affiliates.  It has also been providing services outside of HR that included F&A, procurement, collections, customer service, and analytics.  As part of the contract, Genpact acquired Nissan’s HR shared service center in Yokohama, Japan, which handles HR functions for 54,000+ employees globally. The center, renamed Genpact Japan Service Co., Ltd., will serve Nissan, its affiliates, and other Genpact clients.
  • In June, NorthgateArinso was awarded a 7 year MPHRO renewal and scope expansion by Fifth Third Bank that I wrote about in my blog on the 23rd.
  • In June, Pinstripe was awarded two RPO contract extensions and scope expansions by Johns Manville and Rayonier. For Rayonier, the scope was expanded  from professional hires for one division to include all professional and hourly hiring for all divisions.
    • In April, Aon Hewitt was awarded a flexible benefits contract by Emap, a business-to-business media group in the U.K.  Aon’s Risk Solutions business had already been providng services to Emap.
    • In addition to winning a total retirement outsourcing (TRO) renewal earlier this year with BP America, Fidelity Investments also won a  5 year contract renewal for TRO in North America by HP, adding 162,500 participants from EDS who were previously serviced by other providers.

I believe we will of course continue to see contract renwals, but within the next one to three years, we will see an even larger increase in scope expansions.  Why?  Although buyers are increasing their propensity to outsource, since the recession began in 2008 we’ve seen new HRO buyers treading more lightly to test the waters before diving more deeply.  A common example I see is in recruiting, where a new contract may start out for a particular business unit or geography, but then expand based on client satisfaction and increased benefits to enterprise-wide RPO, similar to the Pinstripe example above. When these contracts come up for renewal and the clients are happy, having  obtained the benefits they signed up for and maybe even had their expectations exceeded, then there’s a good chance these clients will be looking to increase whatever scope they can.

We’ll come back to additional findings and trends in our HRO Confidence Index in a future blog, but in the meantime , NelsonHall clients can view the full report at the NelsonHall website.

Gary Bragar,  HR Outsourcing Research Director, NelsonHall

HRO is Settling in for a Good 2011

March 2, 2011

HRO is back in the swing of things as evidenced by the NelsonHall Q1 2011 HRO Confidence Index, which is based on a questionnaire completed by HRO service providers. While the full report is for clients and survey participants, we like to share tidbits for our HRO Insight blog readers.

The HRO Confidence Index hit a low of 115 in Q2 of 2009 as the full impact of the recession hit home. On the rise since, it peaked at 170 in Q4 2010. The Q1 2011 HRO confidence level is 164. Some of the ratings slightly declined since the last quarter but remain at very positive levels, indicating a settling in of vendor confidence with a dash of realism.

Renewals and increases in scale and scope are going very well with existing clients. New deals are being signed and there is some increase in total contract values as geographic coverage continues to expand.  Multi-country coverage is in ~30% of contract activity and the average number of countries included is 11. Growth is even expected to increase for multi-process HRO and there are hints that multi-tower deals may return as buyer confidence increases.

Revenue growth expectations are still positive, although with moderation from perhaps a bit too much holiday cheer in Q4 2010. On a scale of 1-5, with 5 being a strong increase, overall HRO expectations for revenue growth slipped from 4.3 to 3.6. RPO which had shown the greatest return to revenue growth throughout 2010, dipped to 3.7 from its high of 4.2 last quarter. A slight decline was also experienced by geography. The U.S. and Asia Pacific are still seen as the greatest opportunities along with Canada and the U.K. as traditional hot spots. Not surprisingly, given the current turmoil, the largest scaling back for growth was in the Middle East which dropped from 3.7 to 3.1.

The HRO outlook is quite positive and yet hurdles will always present themselves and awards will often be hard won. Getting the final commitment made and dotted line signed is still an issue. Clients continue to push hard for low prices and cost reductions. Across all BPO, including HRO, expectations for immediate and overall cost savings can be unrealistic. HRO is challenged to refocus on the overall value to the business in addition to operational cost to support its pricing.

Clients are growing in sophistication and understanding of outsourcing options. Fewer buyers are trying for lift and shift deals and are starting to wean themselves off of wanting heavily customized technology set-ups. They are also cautious about vendors with only a single offshore delivery center. This should ease the way for HRO vendors with growing multi-shore delivery options and expect business to continue to increase for hybrid and platform HR technology systems.

It is time to settle in and get down to the business of business and ensure a good year for HRO.

Linda Merritt, Research Director, HRO, NelsonHall

HRO Confidence Jumps 13 Percentage Points, Per NelsonHall’s 4Q10 Index

December 14, 2010

What a difference a quarter, or two, or three, can make! NelsonHall’s just-released 4Q10 HR Outsourcing Confidence Index found that 54 percent of respondents are much more confident about the health and growth of the HR outsourcing industry over the next 12 months as compared to the previous 12 months. And this number is up from 41 percent in 3Q10, 33 percent in the second quarter of 2010, and 27 percent in 1Q10. 

The primary drivers for this boosted confidence are increases in both new contract awards and in providers’ pipelines. The strongest pipeline is in RPO, followed by outsourced payroll (especially in the SMB market, as providers are offering better technology and services targeted specifically to this segment) and then outsourced learning services.

In terms of revenue growth, based on financial results for the period ending 3Q10, RPO led the pack, followed by payroll, learning, benefits administration and multi-process HRO (MPHRO) taking the next four rankings. It should come as no surprise that RPO took the top spot as contracts continue to be awarded weekly. As I’ve written about before and consistently hear during discussions with RPO providers, growth in this space is about scalability to meet demand while lowering fixed costs of dedicated internal resources when volumes are low, while, of course, simultaneously improving quality of hire.

At the opposite end of the spectrum, MPHRO is facing significant challenges due to a range of factors – especially risk aversion, which in turn is driving more point solution deals – but it is by no means dead. If I were an MPHRO provider, I would continue to hold steady as MPHRO contracts are being awarded, albeit smaller in scope than in the boom years of mega deals.

As for expected HRO growth by geography in 2011, on our 1 to 5 scale, with 1 being lowest and 5 being highest, we see:

  • U.S.: 4.6
  • Asia Pacific (overall): 4.3
  • U.K.: 4.1
  • Europe: (overall) 4.0
  • Central and Latin America (overall): 3.9

I believe all these indicators point to a move out of the mucky waters HRO has been slogging through for the past eight quarters. Further, I believe the U.S. and other regions will continue their outsourcing trend as companies try and continue to grow their strategic businesses, while offsetting costs associated with non-core areas (and companies’ views of what IS core are changing quite substantially.) Finally, I believe we will continue to see more multi-country and multi-continent point solution HRO deals as companies look to standardize those processes and implement best practices provided by a single, best-of-breed vendor.

Gary Bragar, Lead HRO Analyst, NelsonHall