Success Factors for the Market Segments of MPHRO

Last week, I discussed the four market segments of multi-process HR outsourcing (MPHRO) as defined in my 2011 NelsonHall MPHRO report: multi-country standardization, client-specific shared service transformation, core business focus, and technology-led HR service enhancement.  This week, I’ll examine success factors for service providers within each segment.

In the “multi-country standardization segment,” which is the segment with the highest growth rate for the next five years, it is critical for vendors to be able to support a client’s operations across a wide range of countries including emerging markets. Providers must also be able to rollout standardized HR administration and payroll to create a global system of record. Examples of service providers operating in this segment include ADP, HP, and NorthgateArinso.

To be successful in the “client-specific shared service transformation segment,” the largest of the four, vendors must provide HRO support directly or through a partner for all HR service lines (i.e., payroll, benefits, learning, RPO, and workforce development services) and have a high degree of multi-shore delivery capabilities to support clients in various locations.  Equally important is a service provider’s ability to be able to work with the client’s existing HR technology.  One of the biggest challenges faced by vendors in this group is getting clients to transition more than just back-office functions to its offshore service centers to reduce operating costs.  Service providers operating in this segment include those that have been long-term players in the MPHRO market such as Accenture; IBM; Aon Hewitt; ACS, a Xerox Company; and U.K.-based Capita.

Within the “core business focus” market segment, success is contingent on a provider’s ability to quickly deploy HR services and be accessible when expertise is required.  In terms of HRO offerings, standardized HR administration and payroll are a must and providing support for talent management services is very appealing.  The biggest challenge for vendors operating here is all the competition that exists from some of the following vendors: Genpact, TCS, Talent2, Infosys, HCL, Wipro, and Caliber Point.

Success in the final segment, “technology-led HR service enhancement,” requires vendors to provide their own standard technology for HR administration and payroll that includes talent management functions.  Also, it’s important that this technology be rolled-out relatively quickly.  Providers that fall within this segment mirror the multi-country standardization segment, but also include vendors such as Ceridian.

There’s lots of room in the MPHRO market for all types of buyers, so it’s critical for service providers to decide which segments are of strategic value and to define their sweet spots in their MPHRO portfolios and fill in capability gaps where contracts can be lost to competitors.

Amy Gurchensky, Research Analyst, HRO, NelsonHall

HRO Staffing – A Balancing Act

Fast and flexible scaling is one of the major benefits of HRO. Scaling up is a lot more fun than scaling down, but both are important, take time, and consume resources. One of the toughest challenges in HRO is maintaining staffing and margins at the same time through the ups and downs of client demand and the overall economy.

Recent times required painful and expensive downscaling as HRO client demand and employment levels dropped, reducing volumes and overall spend. Significant expenses were allocated for staff severance and consolidation of real estate. Even in periods of growth, merger and acquisition “savings” targets are based largely on staff downsizing to reduce overlap, followed by real estate consolidation. Whether a service provider is growing organically or via acquisition, or responding to reduced demand, maintaining appropriate staffing capability, capacity, and expense is critical.

HRO is slowly recovering with RPO leading the way while some areas are still waiting for their upturn including learning and MPHRO. New deals are occurring, renewals are going well, and existing clients are once again increasing scale and scope, at least at a modest level. All good and welcome news!

HRO service providers are confident enough to prepare for a return to growth and make select expansions. At the same time, they know they need to add client load with a minimum of new hiring as pricing pressure is still intense. And this is not even mentioning the need for maintaining an experienced and qualified staff to satisfy client employees and other end-users in the ever changing world of HR.

On the upside, clients are growing in sophistication and understanding of HR outsourcing options. While onshore delivery still leads, especially for voice, acceptance of offshoring has reached the expectation that HRO vendors should offer multi-shore delivery options. Nearshore options and the use of non-voice channels like chat allow leveraging more work to selected centers, increasing the need for and the value of a truly global service delivery network.

Recent HRO service provider expansions include:

• TriNet – Added three new U.S. offices
• CPH – Opened a new office in Sydney
• Futurestep – Added a global recruitment operations center in Houston
• NorthgateArinso – Invested in a new global HR delivery center in Hyderabad, India; opened offices in Russia, the Czech Republic, and Istanbul; partnering with ICAP Group in Greece
• Edvantage Group – New e-learning production center in Denmark.

Expanding the coverage of service locations helps avoid the war for talent and damaging attrition rates in the hottest spots as well as providing increased options for clients.

Buyers, do more than look for an SLA on turnover. Ask about the vendor’s current and future plans for managing staffing and service flexible coverage. Does your service provider show that they are at least as, or more, sophisticated as you are in workforce planning and management? They should be.

Linda Merritt, Research Director, HRO, NelsonHall

HRO is Settling in for a Good 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