Where the Action is At in HRO

As a follow-up to my colleague Linda Merritt’s blog last week titled “HRO is Settling in for a Good 2011,” I thought I’d write about where the most action is at thus far. If you were thinking recruitment, good guess, but it is actually benefits administration leading the way in the number of announced contracts in 2011.

In addition to Mercer being awarded a pensions administration contract by Loomis UK Ltd., which Linda also wrote about Mercer in her February 23rd blog, a number of providers have announced important contract awards, including:

Fidelity Investments, after two big five-year contract awards in Q4 2010 by AT&T and Office Depot, in January Fidelity was awarded a five-year contract renewal for total retirement outsourcing (TRO) services by BP America, Inc., a subsidiary of BP. Fidelity will continue to provide administration and recordkeeping for BP America’s 95,000 DB and 48,000 DC and nonqualified deferred compensation plans for U.S. employees. Later in the same month, Fidelity was awarded another five-year contract renewal for TRO services by HP in North America. Under this deal, Fidelity will service all of HP’s retirement plan participants, adding 162,500 participants from EDS who were previously serviced by other providers. In total, Fidelity will serve more than 135,000 DC participants and more than 192,000 DB participants for HP.

Aon Hewitt, in February announced it had gone live with eight new benefits administration clients since the beginning of the year. Across these clients, Aon Hewitt has implemented 12 services including DB, DC, and H&W and has added more than 325,000 participants and retirees to its base of 22 million participants.

Capita, in February was appointed as a preferred supplier for the administration of the Teachers’ Pension Scheme (TPS) by the U.K. Department of Education. This is a seven-year, £80m contract renewal that starts in October 2011 and includes an additional three-year option. A week later, on a smaller scale, Capita won a three-year occupational health services contract by Technip. Capita will provide its Wellness Assessment Surveillance Portal, which gives centralized visibility of health surveillance records to Technip’s 3,000 personnel in Aberdeen and offshore locations.

So will benefits administration continue to be hot this year? I believe it will, though it might be hard-pressed to exceed RPO for the full year in terms of number of contract awards.  As evidenced in the examples above, there are huge volumes of benefit plan participants that are serviced and in today’s economy, clients cannot afford internal resources to manage these programs, nor do they have the expertise and most up-to-date technology. Handling benefits administration is vitally important to employees and retirees, whether it’s the ease of an annual online enrollment or the knowledge of a service center professional in answering DB and DC questions. And it’s not just large companies that need this expertise.  As I wrote in my February 25th blog, mid-market HRO is rapidly growing as well.

A final thought about what will continue to drive contract awards in benefits administration is that buyers are increasingly looking to consolidate their outsourcing services under one provider, as evidenced by Fidelity’s contract with Office Depot. This is a trend I believe will continue and from an employee and retiree perspective is a good thing. I was fortunate enough to leave my long-term employer four years ago with H&W benefits, DB & DC plans, and voluntary benefits, of which all four were provided by four different vendors. Sounds like I should play the number four!

Gary Bragar, Lead HRO Analyst, NelsonHall

Mid-Market HRO is Hitting the Big Time

HR BPO has historically been targeted to and bought by large organizations.  However, the mid-market, defined by NelsonHall as 500 – 15,000 employees, is rapidly gaining traction.  How so?  In NelsonHall’s Targeting RPO Market Analysis, that was published this week, mid-market RPO grew from c. 1/5 of total revenue in 2008 to c. 1/3 in 2010.  The rapid growth is the result of mid-market clients looking to take advantage of the following benefits:

• Reducing the costs of HR services
• Improving service delivery, including standardization of technology and consistency of process across lines of business and geography
• Gaining access to better technology that clients may not be able to invest in themselves
• Taking advantage of expertise and knowledge of best practices.

In fact, many HRO providers have introduced solutions or made acquisitions specifically for the mid-market.  In RPO, SourceRight Solutions launched RPO One for the small to medium-sized (SMB) market in December 2010.  Targeted at organizations with 100 – 5,000 employees, RPO One provides clients with a dedicated account manager and team focused on the SMB market.  It also has a pre-configured Peopleclick ATS (applicant tracking system) bundled with SourceRight’s reporting and analytics platform and Avature’s customer relationship management (CRM) system that includes social recruiting.

In payroll, NorthgateArinso recently launched agoHRa, a payroll solution for companies with up to 500 employees per country.  agoHRa can be used as a standalone local payroll solution or as part of a multi-country solution.  It can also be linked into NorthgateArinso’s euHReka platform.

In benefits, Aon Hewitt’s acquisition of RealLife HR was an early example of a provider expanding its services, particularly health and welfare benefits administration, to employers with fewer than 15,000 employees and/or retirees.  Mercer rolled out its Enterprise Momentum service to help mid-market employers gain an advantage navigating the insurance broker market.  In addition, Mercer acquired Innovative Process Administration in 2010 for its recordkeeping and enrollment technology as part of its growth plan in the health and benefits mid-market outsourcing space.

In learning, IBM is targeting the mid-market with a new offering, Smart Business Learning Services, a cloud-based solution with quick implementation and variable pricing.  Although it’s geared toward the mid-market, it offers all the services and functionality of an LMS for the large market.  IBM has also recently launched Smart Business Learning Content Services for the mid-market, which is delivered on the cloud as well and priced on a per user basis.

NelsonHall continues to see and capture mid-market HRO contract wins in our tracking service, providing evidence of success with this market.  Consequently, expect HRO providers to continue to launch offerings with cloud-age technology, services, and cost points that will finally bring mid-market HRO into the big time.

Gary Bragar, Lead HRO Analyst, NelsonHall

Bang the HRO Drum Slowly

In my blog last week, Don’t Rain on my HRO Parade, it was fun accentuating the positive signs of health returning to the HRO market. This week I’m taking another look at the latest NelsonHall HR Outsourcing Confidence Index, this time with a moderating eye.  

Total contract values are starting to rise as scope slightly increases, but remain far below historic levels. HRO contracts are still smaller in scale and scope, and there are fewer $100,000+ deals. Further, more deals are occurring in the mid-market, and platform HRO is making inroads, both of which will also lower the average total contract value. All these factors look to become part of the new normal, at least for the foreseeable future.

While the grand plan for multinationals may still be to go global, deal patterns indicate organizations are starting with a more regional approach with fewer countries in the initial roll out. Fewer service lines are also now typical, with payroll and basic HR administrative processes remaining strong as the entry point for companies looking to standardize processes across the enterprise.

 This continues to make it look like the era of multi-process HRO is over. And yet, part of what has traditionally buoyed HRO service providers is follow-on contract expansions of scale and scope, including new services. That approach will only grow more important, putting greater emphasis than ever on making sure the initial client experience is as smooth and positive as possible to build the base for attracting more share of the HRO wallet. With buyers demonstrating willingness to go with multiple vendors and multiple stand-alone services, the role and value proposition of a primary vendor needs to be refocused and honed to meet today’s reality.

Frozen decision-making is finally thawing, albeit very slowly. Service providers report that about 20 percent of buy-side organizations remain iced up on sourcing decisions, down only three percent from the previous quarter. Other inhibitors are reducing in impact, but do remember that given continued economic uncertainty, getting senior management’s attention on making a decision for a major change and financial commitment like HRO will still be difficult.

Expect buyers to continue wanting HRO solutions that do not require large upfront investments and provide robust technology at a transparent price. HRO vendors are increasingly emphasizing the business value in their propositions, which is important to build a bridge for the future. At the same time, buyers are increasingly looking for proof points of real business results before they are willing to commit to crossing the bridge with a service provider. 

The news is moderately good for HRO, but bang the heralding drum a bit slowly, as the celebration parade is not here yet.

Linda Merritt, Research Director, HRO, NelsonHall

HRO SaaS Uptake – What, How Much and Where?

As a follow-on to my July 7 blog titled, “SaaS More Than Just Catching On,” let’s today look at what types of HRO SaaS clients are buying, the size of awarded contracts and the industries in which HRO SaaS has had the greatest penetration to date.

The What

By rank order of the most commonly purchased software applications/modules:

• Payroll

• HR administration

• Benefits administration, including benefits planning, health and safety, claims submission, absence management and occupational health

• Employee and manager self-service

• Talent management, including recruiting and learning

• Workforce planning

• Compensation/salary administration

• Employee development for career pathing

• Travel  

The reasons behind the rankings, especially at the top of the list, are pretty self-evident. Payroll leads as it is the most visible and frequently used (and arguably, the most important) service. And HR administration really ties into employee and manager self-service, as one of the primary drivers of SaaS implementation is self-service for cost reduction and employee satisfaction.

The Size

As I noted in my July 7 blog, the mid-market is proving to be the ripest for HRO SaaS. Using Netherlands-based HRO provider Raet as an example – and a good one at that, as it in the past six weeks inked seven new SaaS contracts and one renewal – client company size is ranging from 250 to 12,000 employees. This uptake in the mid-market makes perfect sense, particularly on the lower end, as companies in this space need access to HR technology to enhance their operational efficiency but frequently lack the budget to invest their own capital in purchasing it. In terms of contract sizes, we’re seeing a length range from four to seven years, with an average of five years.

The Industries

In looking across all HRO SaaS contracts awarded thus far in 2010, education is the top industry, followed equally by local government and retail. I don’t necessarily believe there’s any secret sauce as to why these are the top three ranking industries, as organizations in virtually all – including healthcare, media, manufacturing and financial services – may be challenged with a preponderance of multiple divisions and locations, and often have several disparate systems for HR and payroll that do not communicate with each other, causing extra administrative work and duplication of effort, etc. Thus, the driver for most existing and upcoming HRO SaaS contracts is the ability to have one singular system for HR and payroll in order to achieve standardization, data accuracy, cost savings, self-service, timely processing and data, and employee satisfaction.

Due to all the inherent advantages, I believe we will continue to see a growing number of HRO SaaS contracts in the mid-market, across all industries. In addition, but to a lesser extent, I believe we will continue to see combined SaaS and outsourcing contracts such as the one announced on August 10 between MidlandHR and Swan Housing Group. Under this contract, Swan Housing will internally host MidlandHR’s iTrent software – which provides a single platform for HR, payroll, talent management and workforce planning. Swan Housing will simply provide the payroll data via iTrent, and MidlandHR will do everything else, from the structuring of pay and deduction calculations, through to payslip printing and distribution. The advantage of these hybrid-type contracts? Economies of SaaS scale coupled with outsourcing of processes for which internal resources and/or knowledge may be lacking.

Gary Bragar, Senior HR Outsourcing Analyst, NelsonHall

Poll: What Topics Would You Like Us To Cover In HRO Insights?

As I’m on holiday today, it seemed like an ideal time to ask what you’d like to read about in upcoming HRO Insights blog postings. Our goal is to keep HRO buyers, providers and influencers informed, in an ultra-timely manner, on all things HRO. But we want to make certain we cover the topics which address your most compelling needs and areas of interest.

By taking just five minutes out of your busy day to respond to this survey, you’ll provide us with the insights we need to arm you with the drill-down data and intelligence most relevant to you.

We look forward to receiving your input!

Until next time, happy sourcing!

Helen Neale, Senior HRO Analyst and HRO Research Manager, NelsonHall

Standardized Health and Benefits Admin Outsourcing Services Proliferating for the Mid-Market

As my colleague Gary stated in his May 27 blog, standardization is key in making mid-market HRO affordable, efficient and sustainable for both buyers and providers. And given the skyrocketing costs associated with healthcare and delivering health and benefits administration services to employees, it should come as no surprise that Mercer on June 11 introduced an expanded health and benefits administration outsourcing platform to offer a standardized solution for clients with 5,000 to 10,000 employees.

With this new service offering, Mercer joins the ranks of HRO vendors – including Hewitt and ExcellerateHRO (which, as of last week, is now exclusively owned by HP following its purchase of Towers Perrin’s shares in the company) – which have developed and are providing standardized health and welfare offerings to the mid-market. What’s the value proposition of such standardization for mid-market buyers?

Our January 2009 Mid-Market HR Outsourcing Market Analysis found that the top drivers for outsourcing benefits administration services are: 1) Better technology than clients have the capital to invest in themselves; 2) Improved employee experience; 3) Standardized and streamlined processes; and 4) Reduced expenses. And indeed, the standardized health and welfare offerings from today’s HRO providers are helping mid-market companies meet each of these needs. Let’s look quickly at each one.

Better Technology – due to economies of scale, providers have been able to cost-effectively develop or invest in technological platforms which enable rapid implementation – and thus quicker payback – of automated functions and robust self-service capabilities for their clients’ managers and employees.

Improved Employee Experience – whether it’s changing a deductible amount, applying for a Leave of Absence, enrolling in a benefits program or adding or removing a spouse or dependent to an insurance policy, employees feel more in control when they can manage health and benefits-related activities themselves via self-service. And they can do so 24/7, rather than during regular working hours.

Standardized and Streamlined Processes – enterprise-wide consistency regarding activities such as how to enroll in a benefits program, how to determine the impact of healthcare policy changes, who to call for questions and where to go for online portal-based FAQs is advantageous for employees and their companies alike in terms of satisfaction, bandwidth and cost savings.

Reduced Expenses – our above-mentioned Mid-Market Analysis found that mid-market health and benefits administration outsourcing buyers are reducing their costs by an average of 26 percent.

We estimate more than half of the health and welfare outsourcing market is comprised of mid-market organizations. Further, we anticipate growth in overall benefits administration in the mid-market will be 10 percent through 2013, which signals a continuing trend for mid-market organizations to address technology, service delivery and cost issues through outsourcing.  But questions do remain. Which companies will jump on the bandwagon, and which won’t? Will health and welfare outsourcing for the mid-market live up to its promises? This is certainly a space to keep an eye on.

Until next time, happy sourcing!

Helen Neale, Research Director, Human Resources Outsourcing, NelsonHall

Selection and Assessment Tools Help Companies Separate the Jewels from the Trinkets

With near double digit unemployment rates, today’s recruiters and hiring mangers are being inundated with hundreds of applicants for every job opportunity. Yet despite such tight economic times, our recent RPO market analysis found that talent acquisition demand continues to be the top HR issue organizations face. So how can someone tasked with hiring sift through volumes of resumes to select only the most viable candidates?

There is an increasing array of selection and assessment tools – both those developed and utilized by RPO providers on their clients’ behalf as well as SaaS purchases leveraged directly by in-house recruiters – in the marketplace. These tools not only assist in identifying those candidates who meet the skills and experience qualifications of a given job and then assess best fit based on multiple criteria, but also considerably reduce cost-to-hire in terms of recruiters’ and hiring managers’ time expenditure.

Let’s look at several examples.

Aon Consulting’s Screen Machine combines applicant tracking, custom assessment and back-office functions appropriate for entry-level and skilled positions, designed for specific industries. It begins by screening applicants for basic skills and job fit followed up by a custom realistic job preview. Next, the applicant must pass an online assessment which measures their work habits, dependability and retention likelihood. If qualified, the applicant schedules himself or herself for an interview. 

Kenexa Performance Indicators is a web-based suite of pre-employment assessment tools designed to identify prospective employees who have a propensity to be engaged, to work well in a team and to demonstrate excellent customer service orientation. It and other Kenexa offerings help organizations select and retain top performers based on seven key areas that predict individual performance and potential – experience, skills, abilities, personality, motivation, judgment and culture fit.

An offshore services provider uses a Predictive Index tool which measures each candidate across four distinct parameters per a software-based test completed by the candidate. The system-generated scores are used to determine the suitability of each candidate for a specific job.

We believe the use of candidate selection and assessment tools will increase, not only today when there is such a job applicant glut, but also after the current economic crisis subsides. It makes sound business sense to continually develop and leverage new and improved automated tools to reduce the number of potential candidates to only those who meet key specified criteria.

Gary Bragar, Lead HRO Analyst, NelsonHall

What’s Next for TriNet, its Clients and its Prospects?

By now, we’ve all read about what the behemoth created by TriNet’s acquisition of Gevity will bring to existing small business clients and potential HRO buyers:

•  Better service center (East and West Coast U.S.) and onsite personnel coverage

•  100 different healthcare plans from which clients can choose

•  Focus on a wider range of specific industries including blue/gray collar sectors such as retail and hospitality, as well as white collar sectors including professional and financial services

•  Improved risk management services

•  An Oracle/PeopleSoft-powered HRIS platform and HR Passport, a web-based self-service portal for managers and employees

All well and good. So what’s next for TriNet, its clients and its prospects?

Although the mega PEO/HRO provider for small businesses is only a week old, following are my thoughts on relatively near-term happenings:

Expanding reach and offerings to smaller mid-market – read, not just small – companies in its combined target industries: Yes, TriNet has asserted its focus on the small business market. But its one-to-many model – and Gevity’s heritage focus on the mid-market – can easily extrapolate to medium-sized companies of up to 1000+ employees in its target industries. In fact, in its acquisition completion press release, Burton M. Goldfield, President and CEO of TriNet, is quoted as saying, “Our vision is to capitalize on the deep expertise from both companies in order to equip clients with industry-specific services and solutions, breaking with the ‘one size fits all’ approach that companies have typically been forced to endure from HR outsourcing providers.”

More acquisitions – This is TriNet’s sixth acquisition since 2002, mostly of other localized/regionalized PEOs. Given its history, and that one of the driving forces behind its acquisition of Gevity was geography, it’s very reasonable to assume the company will acquire other small PEOs to further expand its service coverage.

Technology enhancements…made in India – There’s little question that TriNet will continue to deliver HR services to its clients from the United States. Offshore delivery won’t play, and doesn’t need to, for its target clients. But that its venture capital backer General Atlantic has in its portfolio a wealth of India-based IT services and BPO firms, we can easily anticipate that future standardized technological enhancements to satisfy the needs of the SMB market will come from non-U.S. sister firms.

What do you think?

Until next time, happy sourcing!

Helen Neale, Research Director, Human Resources Outsourcing, NelsonHall

To Offshore or Not to Offshore…That is the Question for Mid-Market Companies

Is offshoring of non-client facing, back-office HR processes valuable and viable for mid-market companies? Let’s put political rhetoric, protectionism, fears of domestic job losses, etc. aside for a moment and look at the dollars, sense and stats.

Just like their larger brethren, mid-market companies can gain fairly significant cost savings by offshoring back-office processes such as data entry and validation, payroll processing, software applications development, resume mining and job offer generation, file sharing and other administrative and transactional processes. They can also benefit from improved service delivery due to streamlined, standardized processes and technological homogeny, and expedited cycle times due to 24×7, follow the sun capabilities.

On the flip side, the purported cost savings for mid-market companies (of up to 30 percent, a questionable number, in my view) often don’t materialize anywhere near to that extent. This lack of anticipated cost savings is due to a range of initially unforeseen factors including greater than expected training expenses, travel-related costs, inflation and increasing wages in many offshoring locations. And service delivery issues, still maturing delivery models, governance challenges, etc. also have a negative impact on the benefits and perception of mid-market HR offshoring.

Sounds pretty much like large-market and mid-market buyers face the same dilemmas in the whether to offshore or not to offshore decision, yes?

Yes. This all said, the results and our analysis of the findings of our January 2009 research study entitled “Mid-Market HR Outsourcing Market Analysis” found that offshoring of non-client facing back-office HRO processes will continue to increase. This is in large part because offshoring service providers are increasingly recognizing the importance and value of the still largely untapped mid-market, and are making significant investments to support and satisfy it. For example:

•  One mid-market provider we spoke with plans to increase its offshore capacity from 475 to 800 by the end of 2010; 60 percent of the volume increase will be to service newly transitioned processes from existing clients and the balance is expected to come from new clients

•  New or expanded service centers to support mid-market companies are planned for or cropping up in Ukraine, Mauritius, Morocco, the Far East and Philippines, as well as Tier 1 and Tier 2 locations in India

•  Pure play offshoring providers such as Caliber Point and Wipro are partnering with ERP providers to deliver services to the mid-market through offshore locations, signifying a clear change in both the supplier landscape and the services to be provided to mid-market organizations

•  We estimate offshore, mid-market HR FTE numbers will increase by five to 10 percent over the next three years

The investment in offshored mid-market HR processes is clearly being made, and uptake appears to be solid and growing. Time will tell what level of ROI is realized by the provider and buyer communities.

Gary Bragar, Lead HRO Analyst, NelsonHall

The 80/20 Rule in Mid-Market HRO = Major Cost Savings and Much More

The “80/20 rule” most frequently refers to the Pareto principle which states that, for many events, roughly 80 percent of the effects come from 20 percent of the causes. But here, with all due respect to Italian economist Vilfredo Pareto for well-intentioned plagiarism, I’m referring to making mid-market HRO affordable, efficient and sustainable for both buyers and providers.

In mid-market HRO, the 80 percent is standardization, e.g. alignment and relative homogeny of systems, processes, metrics and data across the buyer organization, and a provider model built to operate to scale and at peak efficiency across multiple clients. And the 20 percent is configurability – minor changes to the standardized processes and technology – to meet individual client’s unique needs and requirements.

And the model appears to be working well for the provider and buyer communities alike. It enables providers to realize a profit by offering scalable, repeatable, affordable solutions to mid-market companies, and provides buyers with significant cost savings, single, standard technology platforms for delivered services, increased consistency and accuracy, and employee self-service ease.

•  For example, in payroll, a variety of providers offer multi-country payroll services which are a big boon for multi-lingual, multi-currency companies. And per our January 2009 research report entitled “Mid-Market HR Outsourcing Market Analysis,” the average cost savings for mid-market payroll outsourcing buyers – whether multi-country or not – was 22 percent.

•  In benefits administration, the standardization provides enterprise-wide consistency on how to enroll, how to determine the impact of changes, how to apply for a leave of absence, where to go for company online portal-based FAQs and who to call for more individualized questions, etc. And our above noted report found an average savings of 26 percent for buyers.

•  Standardized RPO processes in the mid-market include creating and submitting job requisitions, screening and testing candidates, extending job offers, processing I-9 forms proving eligibility to work in the U.S., etc. And by outsourcing RPO, buyers can save an average of 26 percent according to our January 2009 mid-market HRO research study.

The downsides of this high level of standardization for the mid-market are that there is a learning curve for both HR staff and employees, and larger mid-market companies may have multiple systems and legacy processes that “work” for particular groups within the organization, and those will have to be given up and the new modus operandi embraced. But effective communications and change management programs can eliminate those challenges.

Finally, according to our January 2009 Mid-Market HR Outsourcing Market Analysis, by 2013 HRO standardization will increase to 90 percent to meet the mid-market’s top three drivers: 1) reduced cost; 2) improved service (including consistency of service delivery); and 3) better technology than clients can afford to implement themselves.

Gary Bragar, Lead HRO Analyst, NelsonHall