HRO Will Drive Ahead in 2013

Linda Merritt, HRO Research Analyst, NelsonHall

With more organizations making the decision to use HR business process outsourcing services, even in the face of a still uncertain economic environment, the overall confidence of HR outsourcing suppliers in the market over the next 12-months is at its highest level in six quarters according to the latest NelsonHall HRO Confidence Index (HROCI).The HRO vendor confidence level is up 6% year-over-year reaching 155.5, where 100 represents unchanged confidence and higher scores indicate increased confidence.

Drivers Outweigh Inhibitors

The impact of the wider economy is strengthening the drivers for HR outsourcing which appear to be outweighing its impact on the associated inhibitors such as unrealistic pricing expectations and frozen decision-making. Currently, 89% of HR outsourcing suppliers believe that a net up-turn in HRO decision-making is taking place, with just 7% of suppliers perceiving that a net down-turn in HRO decision-making is taking place.

The top principal drivers for HR outsourcing include:

• Increased cost reduction
• Greater process consistency across business units and geographies
• Organizations looking for an increased transformational emphasis.

New private sector HRO deals typically remain limited in initial size, and significant growth opportunities continue to come from existing clients in the form of added scale or scope. In line with the “increased focus on cost reduction driven by the worsening economic climate,” organizations are finally showing an increased interest in evaluating outsourcing opportunities previously rejected.

Transformation Beyond Cost Arbitrage

The HROCI supports our 2013 trends with “a clear ‘transformation’ agenda” and a focus on value. Clients are looking to vendors to help them:

• Deliver a more empowered employee experience and access to learning using technology to administer, deliver, and share learning
• Manage business outcomes by driving higher employee engagement including a better end-user experience and continual “future-thinking”
• Achieve solid productivity and accelerate time to competency.

2013 Outlook

HRO vendor expectations for 2013 look best for payroll, then MPHRO which looks solid, followed by RPO, benefits administration, and then learning services. Multi-country deals for payroll and RPO will again be common with the average number of included countries around 20.  Of little surprise is that expectations for the government sector have slightly worsened, particularly for defense and state & local government.

Have You Listened

Another NelsonHall product of interest is the BPO Index which is supported by a quarterly conference call open to all who register.

According to the January Index, total BPO contract value was down significantly for 2012, especially in North America and Europe. The global economy and the U.S. fiscal cliff added to business growth uncertainty, which drove down industry-specific BPO the most.

At the same time, back-office BPO, which includes HRO, was up 25%, and HRO was up significantly year-over-year.

If you can lower total cost, improve performance, and increase business value, you can get an HRO deal!

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Trending Now in Payroll Outsourcing

Yesterday, NelsonHall published its “Targeting Payroll Outsourcing” report for our clients, so I thought it would be appropriate to briefly touch on some of the findings.  The global payroll outsourcing market was estimated to be $12bn in 2010.  Currently, the mid-market (50%) combined with the national segment makes up ~90%, while large multi-nationals make up the remainder. 

While the mid-market segment is quite large, majority of growth is expected from the large multi-national market because of the increase in demand for multi-country payroll across all regions.  In fact, the desire for multi-country standardization has been reflected in NelsonHall’s HR Outsourcing Confidence Index (HROCI) for some time now.  We are seeing a shift from multi-country standardization on a global level to more of a regional level. 

The drivers for payroll outsourcing have remained the same overall, but the rankings have changed.  The number one reason for outsourcing payroll continues to be cost reduction with ~85% of all buyers citing this objective.  Moving up one notch is the desire to have a multi-country platform managed by a single vendor to obtain global visibility of cost and aggregated reporting of data.  Finally, the third most important driver cited for outsourcing payroll is to ensure compliance and manage risk due to continual changes in tax laws including Sarbanes-Oxley in the U.S., and labor contracts.   

Another interesting change worth noting is the shift that has occurred with who is leading the discussion to outsource payroll.  In 2009, HR spent the largest proportion of time discussing the decision at 83%, with the CFO / finance department allocating ~70% to it.  This year, the CFO / finance department is spending the biggest proportion of time on discussions at 86%, while HR is spending ~80%.  Two main reasons explain why the CFO is spending the most time leading discussions.  First, payroll often falls under finance departments in Europe, and second, the CFO is involved when cost is the primary driver. 

One final thing I’d like to point out now is the 3% global increase since 2009 in self-service and electronic statements that are resulting in less time, money, and paper consumed, along with the increasing popularity of paycards as an alternative to paper payroll checks.  Paycards save employers >50% of the cost of issuing a check.  An estimated 2.5% of employees in the U.S. are paid via paycards with HRO providers such as ADP and Ceridian offering paycards on a standalone basis.

The payroll report goes into greater depth on these topics and others including market size and growth estimates, technology platforms utilized, and estimated vendor revenues and market shares to name a few. 

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

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