HR outsourcing contract renewals to include more offshoring, significant restructuring | Press Release

Posted On September 30, 2009

DALLAS ─ Although early adopters of human resources outsourcing (HRO) services will make significant changes when restructuring end-of-term contracts over the next three years, 75-85 percent of buyers will retain current suppliers, according to the Everest Research Institute. As HRO clients evaluate how to drive incremental value for their organizations through the end-of-term process, areas of restructuring will range from modifying the number and type of in-scope processes, to enhancing delivery models through global sourcing, to introducing alternative pricing models. Everest will discuss end-of-term strategy development during a one-hour Webinar on Oct. 6, 10 a.m. CDT.

While most end-of-term engagements will likely be extended, 15-25 percent will be repatriated or transferred to new suppliers, according to the Institute study, Human Resources Outsourcing (HRO): End-of-Term Market in HRO. More than 111 HRO contracts with a combined total contract value of about US$6 billion are nearing their term end in 2010-12. Institute analysts foresee scope reduction with large-market buyers (15,000-plus employees), whereas mid-market (3,000-15,000 employees) buyers will likely expand narrow scopes and leverage expanded supplier offerings that include talent management services.

“While extension is the most preferred option, given the current economic climate and structural changes in the HRO market, recent end-of-term events see intensive renegotiation and contract restructuring,” said Katrina Menzigian, Vice President, Everest Research Institute. “Market factors in the HRO space have changed significantly over the past several years. Consequently, HRO buyers need to understand these changes and how the overall value proposition of their engagement is impacted.”

Examples of changing HRO factors include:

  • Changing HRO supplier strategies and realignment of focus areas
  • Shifting buyer approaches away from end-to-end and towards best-of-breed
  • Market entry of new HRO and specialized HR-process suppliers
  • Expansion of global sourcing as a key component of delivery models

An analysis of to-date HRO engagements reveals:

  • 82 percent of buyers have extended contracts, 12 percent repatriated and 6 percent transferred to other suppliers as part of end-term decision making
  • While the majority of buyers extended contracts with the same scope, more than one-third of second generation deals were reduced in scope
  • Typically, judgement intensive processes are de-scoped for mid- and end-term extensions
  • Most buyers that repatriated work did so during the early- to mid-phase period

“Several suppliers have recently redefined targets and strategies to achieve profitability goals,” said Rajesh Ranjan, Research Director. “They will be challenged to renegotiate with legacy clients contracts that align with their new service delivery models. Opportunities exist for suppliers with broad capabilities to expand scope with first generation buyers. However, in pursuing HRO buyers considering transfer of services, their focus should be on offering value, demonstrated success, and a clear pathway for transition. Lastly, suppliers must continue to focus on cost savings in response to cost pressures by buyers by leveraging strategies such as global sourcing and standardization levers.”

The Webinar will be held Oct. 6 at 10 a.m. CDT; 11 a.m. EDT; 4 p.m. GMT Summer Time. To register, please visit: research.everestgrp.com/Events/Webinars.

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