Happy Holidays – Getting from Here to There in HRO

We had quite a winter storm in the Northeastern U.S. this past weekend, setting snow total records in many areas.

My family was due to drive to North Carolina on Saturday. My area in Pennsylvania only had about six inches of snow and our destination near Charlotte got even less. It was the in-between areas that were blasted with up to 24 inches of snow, causing accidents and stranding travelers far and wide. In the Virginia area we had to travel through, the National Guard was called out to rescue people from their stranded vehicles.

Luckily we were able to wait and travel home on Monday instead, and the roads were dry and clear. Yet we could see evidence of the storm’s aftermath, with many still buried cars and trucks and slashing scars in the snow for those already towed.

Just like many of the areas I drove through last weekend, we are still in the in-between in many HRO areas. For example, I listened to the 1Q10 Accenture earnings call last Thursday and it had evidence of both the in-between and the coming recovery. The actual results for the quarter were stormy, down 11 percent. (See the full earnings analysis in the NelsonHall Tracking Service.) While not hit as hard as consulting and systems integration, which was down 15 percent, outsourcing was still down four percent  reflecting continue pressure to reduce the cost of resources used, lower pricing and volumes. Number of outsourcing contract signings were up, but were generally smaller in size and scope. Overall bookings for the quarter declined five percent, which kept Accenture’s earnings guidance for 2010 to – three percent to + one percent.

When you have been through a record setting blizzard, you take good news where you can, and there were signs of better travel ahead in the Accenture results as well.

Bill Green, Accenture’s CEO, said they were “looking towards the future again,” and Pamela Craig, CFO, said the decline in consulting revenues had likely bottomed out. Why the end of year optimism? It was the pipeline! Bookings are the predictor of near-term revenue; the business is signed and will soon be generating revenue. The path to the longer-term future is the pipeline of potentials and prospects. Accenture’s pipeline is up significantly for the first time since the downturn began, up 20 percent over 1Q09 and the highest in six quarters.

This is consistent with the positive pipeline news we have heard from other HRO providers. My advice is be prepared as the road ahead is not yet dry and clear. Pipelines are like a travel reservation on hold; they are not actual tickets (bookings). And a ticket to ride is no guarantee that the trip will be easy or profitable once underway. But as Martha Stewart would say, it is “a good thing.”  

This holiday season, travel safely and look for and celebrate the good things around you.  See you in the New Year!

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

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