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Multi-process human resources outsourcing (HRO), where a buyer outsources at least three HR processes to a single supplier, has been around since 1998. The landscape is constantly changing. Here are the top five trends in HRO that have developed in the last six months.

1. Buyers do not want to make any more capital expenditures on their HR systems. This is driving them to consider alternatives including outsourcing.

ERP systems dominate the HRO market today; the Everest Research Institute's Annual HRO Report (March 2005) found they have captured 33 percent of the HR application market. This sizable penetration is the result of the dot com boom times when putting in an ERP system was the chic thing to do. HR executives could easily shake $50-$100 million from their CFOs to install these ERP systems which promised to transform the business process and show business savings to the bottom.

Today things are much different. For some, the ERP system didn't deliver what its vendors promised; in many cases the system went over budget and took longer than promised. So these HR managers have no intention of asking for more money to shore up their ERP systems. For others, they can't justify asking for more money for an incremental change when the system didn't produce the promised business benefits the first time.

HR executives are reluctant to go to their CFOs and ask for money for these reasons. Everybody still has memories of when they first asked for money for a non-strategic function.

Yet they still have the same business needs.

Outsourcing allows buyers to let their suppliers take over their ERP systems. The suppliers are now responsible for all system upgrades, which frees the buyers from making additional capital expenditures. No more humiliating begging at the CFO's door.

Second, buyers learned that the ERP vendor will make any changes they want if they have the budget to pay for it. In these lean times they don't have an unlimited checkbook. Outsourcing solves this problem because the supplier makes a firm commitment on costs in the outsourcing contract.

2. ERP vendors are waking up to this problem.

The vendors are starting to realize a significant amount of their future sales will come from outsourcing suppliers. This is causing the ERP vendors to reexamine their pricing models to look for ways to help the outsourcing suppliers avoid large capital expenditures and create a predictable and moderate operating expense. They are also redeveloping their strategy for this new channel. They can't ignore the fact that companies are worried about the price of their systems and upgrades as well as their standards and service levels.

The vendors are also looking at their feature/functionality options because now they have to make sure their systems provide the necessary measures to support an outsourcing relationship. They have to support service level agreements (SLA), for example. If they are going to do business in the outsourcing world, these vendors now have to become externally focused.

As the importance of the outsourcing channel increases, the ERP vendors are deciding if they should set up multi-users models. This is a change because they currently operate on a one-to-one model.

This development can be positive for the ERP vendors because outsourcing can help them deliver what they promised.

3. Suppliers are developing more concrete HR solutions.

Two years ago suppliers automatically said "yes" when a prospect asked them if they could do something. It didn't matter what the question was; suppliers were so eager to get their first deals they would agree to anything.

The carnival atmosphere is over. Today suppliers are not longer in a hunting mode. Hunting is now balanced by their need to be in an operating mode, too. Suppliers were forced to put together specific offerings and are now executing against those offerings in a more business-like fashion. They understand their specific leverage points and advantages.

Fidelity Investments, for example, specifically states it is building its leverage around a proprietary platform instead of using an ERP system. ExcellerateHRO, the new joint venture between EDS and Towers Perrin, describes how it will handle global HRO. EDS is looking to leverage its global capability.

4. Employers with fewer than 25,000 employees are the fastest-growing segment of HRO.

Buyers with fewer than 25,000 employees (<25K) were responsible for 74 percent of the 65 HRO total full-service transactions completed since 1998. But their contracts only represented 16 percent of the $12.45 billion in total contract value (TCV), according to the Everest report.

The number of <25K companies who are deciding to outsource their HRO may push the broad-based HRO growth rate higher than the current 3540 percent Normal growth in the single-function HRO market is 8-10 percent.

The reason the <25K companies are becoming a force in the market is because suppliers are making their offerings more concrete. These mid-market companies can shop for the solution that best fits their needs. They are good customers for suppliers because they are used to less glamorous, off-the-shelf solutions. They don't expect the world to change because they ask. And they pay a premium for services rendered. The Everest Report says they pay 46 percent more than their larger counterparts: $740 per employee per year compared to $397.

5. Offshoring is not happening here.

Offshoring HR processes is not an attractive option for many companies because HR is such a sensitive function. Companies spend time and money recruiting and retaining top employees. They don't want their employees phoning an Indian call center when they have questions about their retirement benefits. And it's politically incorrect to have them call India to ask about unemployment benefits. That's why companies have been much more conservative in adopting employee-facing offshore strategies in the HR world. Suppliers are also being more thoughtful in their outsourcing approaches in the HR context due to some difficulties they have experienced.

Companies as well as suppliers are offshoring but only behind the scenes. Typically they will offshore their HR application layer as long as it doesn't touch the employees.

These are the five trends shaping HRO today. The drama will continue as outsourcing continues to evolve. Stay tuned for our next installment.

Publish Date: March 2005

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Should You Increase the Scope of Your HR Outsourcing?

Copyright © 2005 - Everest Partners, L.P.

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