‘Generation 3′ HR Outsourcing Deals Have Arrived
Bill Thomas, Executive Director, Europe & Asia Pacific
The start of a new year is always a great time for reflection, and this year it particularly strikes me just how big an evolution the HRO market has been through.
We’re now seeing a wave of ‘generation 3′ HR Outsourcing (HRO) deals hitting the market place. ‘Generation 1′ deals were the blockbuster transfer of functions from clients to provider, sometimes in exchange for stock in a newly formed service provider business. Examples of these transactions are BP & Exult and BT & e-peopleserve. ‘Generation 2′ deals involved the huge build of environments bespoke to a specific client. Organisations which adopted this model include Unilever with Accenture and Johnson & Johnson with Convergys.
Now, ‘generation 3′ deals are becoming the norm, where clients are contracting for pre-configured, hosted, multi-client platforms on which the service provider delivers standardised services. These centre on the provision of core HR technology, payroll, basic HR administration and employee call handling, and recognise that service will vary between a client’s large, core markets and their smaller markets.
Why this evolution in the market place, and why now?
Several converging forces have driven this evolution. Worldwide economic turmoil has brought pragmatism to clients’ business cases and requirements, “what do I need and what can I afford?” have become recognised design constraints.Business outcomes for change programmes have also developed. Typical requirements are now:
- To have command and control over global operations
- Business agility. HR operations need the ability to support the enterprise in periods of rapid growth, retrenchment, acquisitions, integrations, and divestments, often across international borders and into new countries
- Management of talent that delivers a competitive advantage on a global basis
- To source IT for the HR function in such a way that there is a lesser requirement placed on the internal IT function
Furthermore, the service provider landscape has matured. Former single process, regional players who have been investing heavily in their platform based HRO capabilities, are now coming to the fore. Inclusion of scale offshore operations within these providers gives global sourcing advantages to organisations and functions which have previously been ‘sub scale’.
The increasing awareness of these deals is also important. Large scale, global ‘generation 3′ deals are regularly in the press, giving the market the confidence to believe that this model is here to stay. Examples from 2009 include:
- Invensys contracting with NorthgateArinso for euHReka based services
- AstraZeneca contracting with NorthgateArinso for euHReka based services
- Swiss Re contracting with ADP for Globalview based services
We also observed a rise in single process deals where clients are outsourcing a specific requirement (the most common being multinational payroll and RPO) to specialist service providers.
So what are the implications of ‘generation 3′ deals for the HR market in 2010?
For clients, a strong commercial view of contemplated change programmes is an absolute priority. Aligning stakeholders to business needs and to what the business can afford is the key success factor in achieving consensus to go forward. There is also a need to re-orientate understanding of the HRO market place which has shifted dramatically since August 2008. Overarching these factors though, is one of the ability to win support from the executive board. Any change programme remains under intense scrutiny from boards of directors, especially those programmes sponsored by ‘overhead’ functions. Only those change programmes with best in class resources, and on occasion, advisors, will generate required approvals.
For service providers, the HRO market has always been a busy place. Mergers, acquisitions and new entrants are a norm in the industry. However, some tough choices need to be made. Those providers who have invested heavily in their platform-based operations need to scale fast to start recovering their investments. Those providers who have not made these investments are now wrestling to harden their competitive positioning either by going niche or by aggressively working their cost model. Single process, niche or regional players have an opportunity to scale fast if they can mature their sales organizations effectively.
To conclude, the HRO market has shifted. ‘Generation 3′ deals are maturing and becoming the norm and represent an effective response to the world’s embattled economy.
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