We’ve had that phrase "transformation" done to death for years now, and suppliers have repeatedly been accused of packaging HR services under a "transformation" wrapper that was really….well… a lot of that lift-n’-shift stuff that didn’t really come up to snuff.
However, recent HRO deals are beginning to show signs of proving this stereotype wrong. Many of the recent deals have major HR transformation components built in that actually negate any really significant cost-savings, and the driver behind HRO is clearly one of driving shock into a company, effecting quick change, and offering companies the chance to actually do things differently. Operating in a globalized environment is necessitating companies to change, look at alternative sourcing models, and – in effect – transform their business. That involves people, process and technology right across the board.
2006 – as predicted – was a transition year for the HRO industry, as suppliers and buyers invested increased time and resources to understand how to develop workable solutions to run HR function within a global outsourced environment. Whereas 2005 saw dramatic growth of 37% in deals signed, with a total of 39 multi-process HRO contracts, 2006 saw a small decline, but still saw an impressive 34 deals reaching closure." Despite this slow-down in new deals, annualized contract value in the multi-process HRO market increased a further 18% to reach $2.6bn. The large global deals, for example Unilever and DuPont, have helped drive expenditure higher, largely as a result of the incremental investment going into the transformation efforts. The fact that more focus is now on buyers adopting transformational approaches to HRO, as opposed to the classic "lift and shift" model, has slowed-down the HRO market. The change in delivery model has signified a rapid maturing of the HRO industry, which is necessary for workable HRO solutions to exist in the future, and todays’ suppliers to invest in the global resources and infrastructure necessary to delivery HRO in an operationally-successful and economically-feasible fashion.
When we look at the recent wave of deals, it is clearly apparent that these "new" HRO buyers are not going into HRO with the prime incentive of simply making some modest administrative cost savings. Recent deals have included HR transformation costs that, in some cases, are driving more than 100% of existing costs for year 1. To quote a recent buyer who signed an major HRO deal recently: "If you think we did this to make the savings we ended up negotiating, you’re very wrong".
Net-net, HRO in 2007 will be largely focused on broader business transformation initiatives with the bill footed by cost-arbitrage. Many buyers simply cannot experiment with alternative sourcing options like shared services or captives due to high costs, structural/political issues and poor technology, so outsourcing is the optimum way to drive shock and change into the organization quickly and effectively.
Phil Fersht is a Vice President of Everest Research Institute
and recognized industry expert in business process outsourcing. He can be reached at pfersht@everestgrp.com.
