During the global financial crisis there was no shortage of people eager to write an obituary for the investment banking sector. Many predicted the demise of all traditional investment banks. However, quite to the contrary, many of those that survived the tsunami are now healthier than ever before, such as Goldman Sachs. A similar fate was expected of HR outsourcing (HRO) players during the difficult days of 2008; however, those that survived look set to emulate the performance of the banks.
After dipping sharply in 2008, new deal activity is back in the multi-process HRO (MPHRO) market. As cited in Everest Group’s recently concluded HRO Annual Report, 46 new MPHRO deals were inked in 2010, and buyer satisfaction is improving, as evidenced by the fewer number of terminations and healthy number of extensions. At the same time, the mood in the market is that of cautious optimism. And rightly so, given that in the past misplaced euphoria in this market has been rapidly replaced by gloom and doom.
Buyers too are wiser and tending to tread a more cautious path. This is underlined by the fact that an increasing number of buyers are taking the componentized route wherein they incrementally adopt MPHRO to minimize risks. Today, it’s typical for transaction-intensive processes to be outsourced first and judgment-oriented processes later on, perhaps to a different service provider, if at all. This is a major shift from the days when HRO involved either as-is lift-and-shift of existing processes or big-bang end-to-end transformation. With buyers today opting for the middle path somewhere in between these two extremes, even in cases where elements of the more traditional lift-and-shift model are in play, we see a limited amount of transformation either up-front or post transition. To distinguish this new, thoughtful lift-and-shift approach from its predecessor, we’ve coined the term “fix-lift-&-shift / lift-shift-&-fix.”
Additionally, certain processes such as recruitment and learning are increasingly being outsourced as part of single-process HRO (SPHRO) arrangements, rather than as components of MPHRO deals. The rapid growth of the standalone recruitment process outsourcing (RPO) market is testimony to this trend. Buyers recognize the need not only to have service providers with specialized knowledge to deliver certain processes but also to reduce complexity in their HRO deals.
Although the componentized approach and the increasing popularity of single-process HRO is resulting in a gradual decline in average contract size and contract length of MPHRO deals, there is an increase in the geographic scope of MPHRO deals. This is largely driven by buyers’ need to standardize specific processes across the globe from the outset.
Given these developments, it seems service providers and buyers have both moved on wizened by past follies. Now is the time for service providers to dispel the negativity associated with MPHRO, by highlighting the many recent win-win relationships.
Yes, there are risks to adopting MPHRO, but the value proposition remains strong. What is required is that both buyers and service providers do rigorous due diligence to act smartly and make well-informed decisions, and avoid repeating past mistakes or making new ones.
It’s time to raise a toast to those that weathered the storm and came out wiser and stronger.