Three Forces Shaping HRO for 2012

As 2011 comes to a close, let’s look ahead to 2012 and the three current trends that will continue into the New Year and beyond.

HR SaaS has been around for years. Now that the breadth of cloud coverage is in the HR ERP space it is opening up the middle market for HRO at long last, and is swimming upstream into the large client market. HR mobile applications are proliferating and vendors will be hard-pressed to deal with the rising demand by clients and participants for more on-the-go functionality. What seemed like an innovative differentiator is quickly becoming a competitive requirement.

HRO globalization has long been on the agenda of many HRO vendors, mainly targeted by major multinational companies (MNCs), but there are only so many global MNCs. We are now seeing additional focus on regional service networks for multi-country companies. HRO activity in emerging markets is also picking up for MNCs and for in-country client services. Expect to see HRO acquisitions, partnerships, and new offices for sales and service delivery grow in 2012 as service providers continue to fill-in geographic footprints and service gaps.

The globalization of RPO will continue to be a big story in 2012. RPO vendors are gearing up to meet the demand and two of the largest acquisitions in 2011 included SourceRight (part of SFN Group), which was acquired by Randstad, and The RightThing, which was acquired by ADP.

The growing global RPO demand was illustrated in a big way by Kenexa when it was awarded with a five-year RPO contract by Eli Lilly and Company, which includes recruiting in Asia Pacific, Europe, and the Americas. NelsonHall estimates the deal to be worth more than $50 million, one of the largest RPO contracts to date.

HRO contract awards will continue to increase across Asia Pacific, with some year to year variability due to economic conditions. Three years ago, ~10% of contracts included Australia, with half of those for clients headquartered in Australia. Two years ago, it was ~11%, with about an even split of Australian-based clients. In the past year, the number has jumped to ~16%, with the majority of contracts for clients based in Australia.

China has also emerged as a client base for HRO, including for in-country services. As emerging market companies reach a fast-growth stage and expand their services internationally, the need for HR technology, processes, and delivery capabilities can outstrip the local talent base for HR. For example, Manpower made two acquisitions in China, REACH HR in South China and Xi’ and Fresco in Henan Province.

These are three of the forces shaping the future of HRO. Those HRO vendors that are able to update their portfolio of services and quickly and cost effectively invest in the acquisition or development of new capabilities will gain an advantage in the growing marketplace for HRO.

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A Steady State in HRO for 2Q 2011

After several quarters of new HRO activity, the pace settled down a bit in the second quarter, but was still plenty interesting. Here are several samples from 2Q 2011.

Capita stands out for its volume and breadth of HRO activities. It is the largest MPHRO provider in the U.K. according to the NelsonHall MPHRO 2011 market report. Capita was awarded preferred supplier status by NHS in North Mersey, providing a potential of up to £27m by offering a mix of HR, payroll, and RPO services to 12 Mersey NHS trusts. There were also two awards for occupational health services, which it is expanding into the more holistic well-being services. An acquisition was also in the mix. Team24 was brought in to enhance medical RPO capabilities, further strengthening a market segment in which Capita is rated third in the U.K.

I like to look at the mix of new partnerships, offerings, and mergers and acquisitions to see where vendors are placing their bets on expansion and growth. Global remains hot and deal activity is there to keep hopefuls in the game of capturing new markets.

A leading example is ManpowerGroup’s strategic moves in China. It purchased REACH HR in south China, added Xi’ an Fesco with its 10k associates, and partnered with the city of Kaifeng in the Henan Province to add coverage in the west and north central area of China. To top off this spree, ManpowerGroup aligned itself with China’s Ministry of Industry & Information Technology (MIIT) for a five year plan.  It will develop a talent exchange center, enabling ManpowerGroup’s local partners to provide workforce solutions focused on manufacturing.

Remember that China is not a market you can just jump into and Manpower has been on the ground in mainland China for 17 years. It has the needed relationships and is well-positioned to benefit from the development expansions now moving into inland China.

Other APAC activity included Australia. Mercer was awarded a superannuation pensions administration contract by RBK. Also, Towers Watson is partnering with Link Group to enter the superannuation market in Australia which is not big in numbers, but each group plan can have a large number of members. Finally, Futurestep opened global service management centers in Australia and New Zealand.

Elsewhere in APAC, Genpact was selected for a five year learning content development contract by JobSkills in India; Merce r launched a flex benefits offering in Hong Kong, and is partnering with PayrollServe to offer its HR services in APAC; and ManpowerGroup acquired Web Development Company in India to strengthen IT recruiting.

With plenty of recent HRO deals in implementation and early stabilization, along with perkier volumes and special projects in existing contracts, service providers need to focus on balancing delivery performance with new acquisitions. Compared to some of the things we have experienced in HRO, a steady state is not such a bad thing!

Linda Merritt, Research Analyst, HRO, NelsonHall