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2006 Nugget – HRO Market Concerns

By on January 10, 2007 in Uncategorized

Many people are asking me what the big sourcing
stories of 2006 were. Rather than discuss the obvious – like huge profits for
service providers in India – I enjoy talking about the less-prominent developments, which may well become the big stories of 2007.

Here’s one such development: The slowdown in
companies opting to send their human-resource operations offshore was caused by
a host of factors, and the problems plaguing so-called HR outsourcing (HRO) may
not get better anytime soon. In fact, they could get worse, and the wholesale
outsourcing of HR departments could be on hold for the near term.

The culprits behind the HRO slowdown include
management changes at Hewitt (the market leader); the well-publicized earnings
problems of a few notable providers and the failure of several providers to
provide good service on large deals they’ve done in the past.

Management changes are a matter of course for any
business, and Hewitt handled its management changes well. They wouldn’t even be
noteworthy except they seemed to contribute to taking the company off its
torrid pace from the prior year, 2005, when Hewitt won almost 30 percent of the
HR contracts awarded globally. Some clients seemed concerned about the HR outsourcing
business model when Hewitt’s new leadership acknowledged having some hard
choices ahead.

Elsewhere, another provider, ACS, has admitted to
“growing pains” and has also taken accounting charges on two of its HR
contracts. And Convergys is still struggling to achieve the scale required to
leverage its solution. While it is difficult to assess just how EDS
(ExcellerateHRO), Accenture and IBM have performed financially, we can make a
rough estimate of how much business they’ve won. The answer is: probably less
than they’d hoped.

Some of the challenges the HR business faces today
are the result of an immature market: providers that over-commit and clients
that under-weigh the changes required for substantial benefits through
outsourcing. Some are also attributed to poorly designed deals.  Some are
just related to poor execution.

Are the HRO industry’s issues really going to be
solved by greater volume? We don’t think so.

Instead, the market is already showing a bit of
retrenchment, with clients opting to contract for discrete parts of their HR
functions, such as recruiting, payroll, or training. The market appetite for
wholesale HRO relationships seems to have waned a bit, opting to wait out the
service delivery issues that are affecting several of the leading providers.

This situation may be the proverbial
self-fulfilling prophesy: If the providers require scale to grow out of their
problems, and clients are unwilling to sign up until the problems are settled,
we’re in a deadly embrace.

The industry’s biggest deal of 2006, Unilever’s
award to Accenture, may be the critical relationship to watch. If Accenture can
show that the demanding needs of a company like Unilever can be met, perhaps
there’s a way forward for others through large-scale HRO. In the mean time,
look for greater use of function-specific sourcing within the HR domain.

About isg

Analyst at ISG.
View all posts by isg →
  • http://www.humancapitalist.com Jason Corsello

    Hi Peter- Great post but didn’t we all say last year that Convergys-DuPont was the deal to watch?
    Here en lies the problem. The HRO clients are driving into the body shops of the providers saying, “See my car over there…the fender is falling off, the clutch is going out, its got lots of dents in it. But your friend, whom I just paid a bunch of money to assess the situation, said you can fix it up and, after you are done, have it looking and running like when I bought it.”
    Subsequently, the HRO providers says, “No problem, give me the keys and I’ll fix it right up and have it in running in tip-top shape in no time!”
    Unknowingly, the provider takes the keys, pulls the car into his shop to realize the frame is bent, underneath the paint sits a bunch of rust, and the entire electrical system is shot.
    Yes…both parties are to blame for unrealistic expectations but, what has been missing to date has been true due diligence and disclosure.

  • http://www.tpi.net Peter Allen

    Jason;
    Good to hear from you!
    Boy, do you have that right! We’re in the midst of way too many remediations of first-generation HRO deals that have gone sour. This is just NOT GOOD for our industry.
    Our clients tell us that the “irrational exhuberance” of outsourcing proponents got in the way of prudence.
    Our experience shows that avoiding a bad deal is so much more important than putting a notch in the gun for another deal completed.
    There are essential factors that need to be addressed in order to get to win-win in outsourcing. The providers, seeking market share, have been eager to commit, too. It’s not a pretty situation.
    Peter

  • Phil Fersht

    Good analogy Jason…
    The problems facing HRO have been caused by poor timing, negativity from resistant HR managers and poor (and often decentralized) HR processes underpinned by legacy technology that perform even worse when they are turned over to a third party, which is hurriedly trying to develop the capabilities to deliver. As soon as Exult, ePeopleserve and co came up with the concept in the late ‘90s companies were too quick to jump on the bandwagon and massacre their HR departments under the guise of “strategic HR initiatives”. The 2001 terrorist attacks exacerbated the problem: the costs saving from remediation were immediate and gave financially-distressed firms some respite from a very nasty recession. Unfortunately, it takes years for suppliers to build a true global infrastructure to deliver a function as complex as HR. Moreover, the less mature a function’s processes and technology, the harder the transition and pain as it moves over to a third party. For example, companies with centralized, efficient finance organizations tend to enjoy a much smoother transition into an outsourced endstate than those who are going for a “big bang” approach where they are literally offloading their existing mess for less. HR people have also vehemently resisted HRO, which has really not helped. The success of the recent global deals – namely DuPont and Unilever – will be based on Convergys’ and Accenture’s developing maturing as global HRO suppliers, and will surely provide a bellweather for the success of the HRO industry in the coming months
    Do we hear CIOs constantly complain about their ITO provider and demand they do everything inhouse? Do CMOs complain that their customer care service provider is costing them business? Do we hear CFOs complain openly that their F&A provider us messing up the accounts? Sales, IT, finance – and many other functions – are also crucial business functions, but their leaders realize the realities of operating in a cut-throat globalized economy.
    So far, we have seen HR managers blame everyone but themselves for the “failures” of HRO. Firstly, we have only seen two companies out of 150 full-scope HRO buyers take their HR back inhouse – one because they downsized so considerably that HRO was not economically-viable, and the other for reasons other than poor service provider performance. Secondly, we hear some HR managers point the finger at the service providers and consultants for “over-selling HRO”. What they are really saying is “we don’t like being held accountable” because that is what their peers in sales/marketing/finance and IT have been doing for years.