Surprise, Surprise (not): Cost Reduction Reigns as Top HRO Driver in 2010

Although reduced service delivery costs are not always the key reason companies outsource to third parties, it comes as no surprise (and really, why should it?), that the overriding issue which continues to concern HR departments in 2010 is the ongoing need for HR service cost reduction.

NelsonHall’s just published research report, “HR Issues and Outsourcing Intentions,” found that 78 percent of the 120 buy-side HR executives interviewed – with a nice cross-section of participants from the banking, consumer products, healthcare, high-tech, insurance, media, pharmaceuticals, retail, telecommunications and utilities industries – ranked the corporate requirement for reductions in HR administration costs as their number one issue. Other issues and challenges 2010 HR departments are facing include providing support for organizational restructuring and retraining, of course while reducing HR costs, and standardizing HR processes and providing improved HR information in an environment in which there is little management support for internal investment in HR technology.

This need for cost reduction with minimum investment is having a major impact on the manner in which organizations are approaching HRO. A full 60 percent of our buyer interviewees stated cost decreases (“maintenance of our current services and systems, with only minor changes/additions”) was their main HRO need and expectation over the next 12 to 18 months.

Overall, organizations are seeking average cost reductions of approximately eight percent from their HR services during 2010. However, they will be seeking significantly higher cost reductions from their outsourced HR services. Consequently, they will negotiate with their providers for further cost reductions within existing HRO contracts, and engage in additional HRO deals that focus on both process standardization and cost reduction.

As a result, we’ve seen an increasing number of announcements of new standardized service offerings, particularly in the small and medium enterprise (SME) market. For example, earlier this week Sweden-based Aditro, an outsourcing provider of payroll and HR services to Nordic countries, announced a packaged payroll service for SMEs that includes a standardized payroll service with pre-defined service levels, enabling clients to receive the benefits of outsourcing, but at a lower price.

In an upcoming blog we’ll speak in detail about uptake of SaaS-based vendor hosted applications, another topic we covered in detail in our “HR Issues and Outsourcing Intentions” research report. But, given the extensive nature of the report, (it’s more than 176 pages!), there are many other areas we can also try to cover in future blogs. Interested in hearing more about the key issues HR departments are facing relative to HR service delivery, and initiatives planned in response to these issues? Level of satisfaction with current HR service delivery? Expectations from HRO, including benefits sought and attitudes toward use of hosted HR platforms and offshore service delivery? Let us know!

Gary Bragar, Senior HR Outsourcing Analyst, 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

Tired of Reading the HRO Tea Leaves? Then Let’s Go Back to School

Everywhere we turn the analysts, advisors and outsourcing media are trying to read the tea leaves of the 2Q and 1H09 results on anything and everything. What are the annual contract values of new and renewal HRO deals signed? Who is entering, exiting and partnering? NelsonHall’s July 2009 HRO Confidence Index showed markedly more confidence in the prospects for HR outsourcing for the coming year in Q2 2009 than in Q1 2009. Can we believe – and we all do want to believe! – the uptick in perception survey trends in provider pipelines and anticipated buyer readiness to expand hiring/training/add-your-service here areas? Less bad is good, right?

The “when” of the recovery is, of course, critical to all of us in the HR outsourcing community, as well to all in the larger global economy. The “what” and “how” are also important.

In its July 20 blog, IT services company Levi9 commented, “In striving to cut costs and derive more value from outsourcing contracts companies may forget all the important lessons they have learned rushing into ambiguous arrangements chasing short-term, and sometimes elusive benefits.” While Levi9 was talking IT, its statement is universal and reflective of the first generations of large scale HRO. How will we approach the opportunity for launching third generation HRO?

As it is almost return to school time, we should all be checking what lessons we have learned and what changes we have made. How will the HR outsourcing community be ready for expansion when it occurs? By using the three HRO R’s: Reviewing, Revising and Relaunching!

Reviewing

Every aspect of the HRO value proposition needs to have been vetted, strategically analyzed and selective investment (and divestment?) decisions made to put growth on a flexible, scalable, sustainable footing that is easier and less expense to buy, implement and operate while offering greater differentiated competitive advantage, and, let us not forget, margins.

Revising

I can offer one piece of advice that requires no tea leaves, but does take a lot of homework. Once you have developed your strategy, rigorously conduct your due diligence, run the numbers, map out all elements of your service delivery and technology infrastructure, and stringently assess capabilities, risks and trade-offs. In the SAP white paper, “Strategic Levers to Optimize Your HR Processes,” the recommended HR client assessments could be readily adapted and applied to other portfolios, including HR service providers.

Relaunching

We have recently seen RPO partnerships expand geographic and service footprints for each partner, and changes in direction by Fidelity and Hewitt, away from certain large scale multi-process HRO business. And Spherion’s RPO division, newly branded as SourceRight, is an example of taking something that is working well and leveraging it even more strongly as a single process option. All this indicates that back to school basic analyses are being played out.

How are you doing with the three HRO R’s?

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