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

Show Your RPO Mojo

On drill-down discussions and research, we’ve verified that RPO providers’ pipelines are quite strong right now, in some cases never stronger, but deals are taking longer than ever to close. Why this prolonged decision-making process, when RPO offers such an impressive value proposition – average 43 percent reduced time-to-hire and average 24 percent reduced recruitment costs?

Our just released “Targeting Recruitment Process Outsourcing” research study found that two of the major factors inhibiting buyers from putting pen to paper are: 1) change management issues, e.g., lack of buy-in and commitment from senior management, internal politics, etc.; and 2) lack of baseline data to make the business case for RPO. And of course, let’s not downplay business uncertainty, and consequently workforce uncertainty, and their contribution to RPO contract signing delays.

 Given RPO’s value prop, we recommend:

Buyers put aside fears while gathering the baseline data to evaluate the RPO business case for their unique organization (and providers will help with the baselining), understand that new flexible pricing structures allow for “pay per hire” contract terms to reduce financial output risk, and realize that, once the economy turns around and hiring volumes increase, internal recruiting departments will not be able to ramp up and hire the right people quickly enough…they’ll likely need assistance.

Providers actively adopt a variable cost model, offer prospects support in obtaining baseline data (at minimum on current recruitment costs and time-to-hire), and provide solid evidence of results achieved for other clients. Our research found that the number one selection criteria for an RPO provider is experience, reputation and client references. If you reduced a telecommunications company’s time-to-hire from 90 to 27 days, shout it out. If you beat time-to-hire targets for engineers at a global manufacturer by 30 days, tout it. If you reduced talent sourcing costs by 60 percent for a U.K. financial services company or by 50 percent in just six months for a consumer food product company, highlight it as a case study for prospects. In other words, show your RPO mojo!

Gary Bragar, Lead HRO Analyst, NelsonHall