HR Outsourcing – the Challenge of Picking Winners

The potential benefits of Human Resource Outsourcing (HRO), have been well documented but not always delivered. These include reducing cost, avoiding HR technology investment, re-aligning HR towards delivering more strategy and improving HR services. (see Top 5 Benefits of HR Outsourcing). Choosing a vendor that matches your requirements and will work with your culture is difficult enough, but it also important to take a view on who the likely 'winners' will be in the HRO industry.

HR Outsourcing - Picking Winners

At the moment, in supporting our clients as they look at their HR Transformation options, we think one of the biggest challenges is that of 'picking winners'. Whether considering HR Outsourcing for the first time, re-energising an existing contract or simply bringing the whole show back in-house. A wrong decision now could mean you are lumbered with the wrong vendor, solution or the wrong technology platform for the next 7-10 years. This has always been a challenge, yet is more significant now with big changes in the HRO industry. Nothing distracts the vendor's senior management team more than mergers, acquisitions and a major change in direction.

Lessons have been learnt since the first generation HRO contracts of ten years ago, such as BP/Exult (for an interesting account, see The Great Vendor Bender free login required to HRO Today website) which has renewed its contract with Hewitt, following an 'about-turn' of its plans. As David Ulrich, a professor at the University of Michigan's Ross School of Business reflected, 'Often the first pancakes or first batch of cookies do not come out well.'

The giant HRO deal between Accenture and Unilever in 2006 has now been 'digested' following some implementation challenges. Since then, the HRO market has fragmented with some big players moving back to their 'comfort zone', focusing on their core markets and strengths, for example, Hewitt.

Other major changes in the industry include acquisitions such as ACS/Xerox, more 'best-in-breed' deals and the rapid rise of Recruitment Process Outsourcing (RPO), see for example, RPO ends 2009 with a big bang and begins 2010 on a high note. Buyers are now more likely to have a HR Operating Model with multiple HR vendors covering areas such as HRIS, Payroll and RPO. In fact increasingly more and more is up for grabs in HR outsourcing, see the People Management Guide to Outsourcing – Out of the Ordinary, including our thoughts on what should be outsourced and what should be retained.

As we predicted in our attempt to peer into the future of HR in our 'Glass Bead Crystal Ball', Future of HR Operating Models, there is still more consolidation to come in this $6 Billion Global industry. For more info, see HRO provider acquisitions on the rise from HR Outsourcing insights blog.

Hot off the press, Northgate Arinso have acquired the HR Management Services of Convergys. This is a bold bet on the future of the HRO market, and should combine the HR Service Delivery capability of Convergys US and European HR Service Centers, with Northgate Arinsos innovation and technical strengths. See Horses for Sources, the new Analyst firm in the starting stalls, with their take on the deal NorthgateArinso buys its way to top spot in Enterprise HRO and it only cost them $100m.

In picking a vendor, 'financial stability' has always been important in our Glass Bead Consulting weighted evaluation criteria, but now this has a much higher rating than 4 or 5 years ago. The rare AAA credit rating of ADP has a bigger pull than ever before.

Many organisations are attracted to the 'on-demand' HR outsourcing model with a view that there is no need to host the technology yourself with employees accessing services over the internet. This reduces some of the risks of picking the right technology platform, as it's taken out of your hands. See for example, Northgate Arinsos 7 year HRO contract with Astra Zeneca, in 105 countries and 65,000 employees, based on their 'euHReka platform'.

So the HRO market is changing all the time and the benefits and risks of HR Outsourcing will vary for each organisation, its requirements and context.

To minimise your risks in choosing a HRO vendor, consider the following :-

1. Think carefully about your Sourcing Strategy, will you put all your eggs in one basket or go for a best-of-breed approach with HR Processes? Make sure that the different vendors will be able to work with each other culturally and operate with compatible technology.
2. Establish your vendor evaluation criteria up front, work out as an organisation what are the relative weightings and identify any 'deal-breakers'.
3. Work with your legal team to develop flexibility into the contract, including break-clauses and allowing interfaces with other vendors.
4. Consider using an independent HR outsourcing advisor who will know the market well and take you straight through to the Request for Proposal short-listing based on your requirements.
5. In your vendor evaluation, listen carefully to the vendor's answers on their long-term strategy for HR Outsourcing.

Finally, there are great benefits for HRO as part of a broader strategy of transforming HR or to reduce costs, but keep an eye on the marketplace and picking a winner will pay a healthy return.

There are more useful HR Outsourcing resources in the HR Transformation Knowledge Bank

Photo Credit :- Andy Spence – Brighton Races – October 2004

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