The Outlook for HR Outsourcing1 June 2005
Large-scale HR outsourcing is no longer the preserve of US corporate giants. As multi-process HR outsourcing becomes widely adopted in Europe, John Willmott, managing director at NelsonHall, outlines the options available to European finance directors.
Despite much recent publicity, large-scale HR outsourcing contracts are less common in Europe than in North America. In 2004, the value of multi-process HR outsourcing contracts signed in North America was five times larger than that in Europe.
Indeed, the majority of HR outsourcing deals in Europe are still transaction-focused, single-process engagements, such as localised payroll services, pensions and benefit administration and recruitment.
There are a number of reasons for this. Firstly, traditional multi-process HR outsourcing has in the past depended for its economies of scale on targeting organisations with 20,000 or more employees, and organisations of this size tend to be more commonplace in the US than Europe.
Secondly, there is a lack of service homogeneity in Europe, with many pan-European organisations tailoring their HR services to meet the cultural or regulatory needs of individual European countries. However, these factors are beginning to become less important inhibitors of multi-service HR outsourcing.
Firstly, there is a growing need for pan-European multinationals to standardise their HR processes to improve the visibility of HR information and metrics, and this is leading to a number of large-scale HR outsourcing contracts in Europe.
Recent examples include Accenture's contracts with BT and Sandvik, and ACS's contract with GM Europe. At the same time, pan-European offerings are becoming available, with firms such as Arinso and LogicaCMG now offering pan-European payroll services.
Accordingly, NelsonHall expects the European multi-process HR BPO market to show stronger growth than in the US, growing by 20% per annum and reaching a value of $1.9bn by 2009. In contrast, the wider HR outsourcing will grow more slowly at 8%, reaching $6.8bn by 2009.
The move towards HR outsourcing still tends to be driven by a desire to reduce selling, goods and administrative expenditure. Organisations outsourcing multiple HR processes can expect a reduction in HR operating costs of 20% to 40%.
However, organisations are also typically looking for improvements in their HR service quality, the introduction of e-HR service models, and access to improved management information and performance metrics.
The manufacturing and financial services industries will continue to be key growth areas for HR outsourcing as they look for a mix of cost efficiencies and process improvements, allied to a requirement for complex benefits and pensions services for staff.
In addition, the retail and government sectors present substantial future HR outsourcing opportunities.
Since the multi-process HR outsourcing market is still developing, the vendor landscape remains extremely fragmented. In part this arises from the sheer range of point services available to support HR services and in part from the lack of maturity of the multi-process HR Business Process Outsourcing (BPO) market.
However, the supply-side landscape is evolving rapidly through a merging of vendors that have traditionally specialised in a limited range of point services with the new vendors targeting multi-process HR BPO.
Four vendors in particular are making a strong push to build economies of scale in both multi-process HR BPO and individual point services:
- Hewitt Associates - a benefits administration specialist that has acquired multi-process HR BPO pureplay company Exult
- EDS - which has formed a joint venture, ExcellerateHRO, with Towers Perrin
- ACS - which has announced its intention to acquire the HR consulting and outsourcing businesses of Mellon Financial Corporation
- CSC - which has formed a strategic alliance with Aon Human Resources Outsourcing
These organisations, along with Accenture HR Services, Convergys and IBM Global Services, are arguably the leaders in building multi-process HR outsourcing capability.
However, while these companies have broad HR service delivery capability, they typically still need to build further economies of scale within individual HR services. For example, the mergers undertaken so far by Hewitt, EDS and ACS have given them strong benefits administration capability in addition to broad multi-process HR BPO capability.
It is likely that these vendors will now start to build economies of scale in further HR delivery areas.
Indeed, it is a competitive imperative that they do so. Accordingly, we can expect to see these companies, along with other vendors who wish to carve out a long-term position in HR services, acquiring or forming joint ventures with other HR service specialists, with the prime target being recruitment services specialists.
In addition, these companies will either acquire or partner with specialist technology vendors to provide improved support for areas such as workforce development services and to enable them to switch an increasing proportion of the HR workload to self-service channels.
So what should you take into account when considering the adoption of HR outsourcing?
Firstly, the maturity of your internal HR services delivery and your own motivations are crucial.
If, like many organisations, you have a mature HR shared service centre and wish to reduce costs further but no longer see this as an investment priority, then outsourcing a range of HR services will be easier than if you still have a fragmented internal HR delivery organisation.
In this case, HR outsourcing should be able to assist you in driving a switch to self-service channels.
Accordingly, when negotiating a contract price, you may wish to consider a price per transaction per channel for transactional services rather than an overall price per employee.
It is also important to bear in mind the cost of governance. Even though the vendor may be taking responsibility for a wide range of HR services, it is important that your organisation defines the precise roles and activities to be performed by both the outsourcer and your retained HR organisation at a very detailed level.
This will ensure that there are no gaps in service delivery and that the interfaces with the outsourcing vendor are well defined.
In an outsourcing relationship, the client still retains ultimate responsibility for governance and service delivery.
Near-shore service delivery, typically from Eastern Europe, is becoming a key element within multi-process HR outsourcing, though current HR service delivery is typically based on regional centres and local expertise.
Overall, HR processes lend themselves less to offshore outsourcing than other processes. Approximately 5% of HR FTEs are currently based offshore, though this number is expected to double over the next few years.
In choosing a vendor, the key area of service delivery is arguably the ability to service the employee care function.
However, you should also identify the relative importance of each of the various HR service silos to your organisation and select a vendor that has high capability in those silos of highest importance. Again, this is BPO, so while technology is an important enabler, strong operational management is a more important consideration in vendor selection.
In addition, organisations need to consider the role of the retained organisation both initially and in the longer term.
While the retained organisation may initially concentrate on areas such as workforce development and succession planning, in the longer term the outsourcing vendor will be seeking to expand their role within the client organisation, which could lead to a further reduction in the role of any retained HR delivery organisation.
A MULTI-PROCESS FUTURE
HR outsourcing is already becoming available for organisations of all sizes – not just the largest. In future, service delivery for the larger organisations will start to move away from dedicated, client-specific service delivery to shared utilities based on integrated service delivery, using a combination of local and near-shore personnel.
In addition, the leading vendors will offer both multi-process HR BPO and a wide range of stand-alone HR services, including payroll services, benefits administration, recruitment services, workforce administration services, training administration services and relocation administration services.