Rajesh R, Author At Everest Group

The Next Generation | Sherpas in Blue Shirts

January 9, 2013

Talent is clearly the true differentiator in the 21st century. Having the right talent at the right time and in the right place is even more paramount in the current economic situation. However, organizations will need to understand the megatrends impacting the talent market, including the demographic shift, generational differences, globalization, and changing workplace requirements and expectations. Organizations need to align their talent acquisition strategies to remain successful in the long run.

The success of recruitment process outsourcing (RPO) in creating value for buyers is evinced by the rapid growth of this market over the last few years. The RPO market has reached $1.4 billion in annual contract value (ACV) in 2011, and the market is expected to continue on a high-growth trajectory.

RPO has the potential to create value and impact at three levels: cost, business, and strategic. In the early stages of RPO (RPO 1.0), it addressed the cost and the business impact considerations focusing on elements that are low hanging fruits and easy to measure and quantify. The next generation of RPO (RPO 2.0) addresses the cost and business impact on a holistic basis and also starts to create strategic benefits for organizations. It calls for taking a comprehensive approach to talent acquisition—inclusion of internal and external hire management both as well as wide process inclusion—in particular and talent management in general. It requires identifying, impacting, tracking, and measuring more strategic metrics that are business-outcome oriented.

Almost Thumbs Up for Towers Watson’s Acquisition of Extend Health | Sherpas in Blue Shirts

May 25, 2012

Following Towers Watson’s acquisition of Aliquant in early 2011, its May 13, 2012 announcement of its agreement to acquire Extend Health, Inc., which operates one of the largest private Medicare exchange in the United States, is clear confirmation of its belief in the potential growth of the entire U.S. health and welfare (H&W) market.

And there are a number of factors that make Extend Health’s offerings an attractive solution for Towers Watson to have in its arsenal:

Multiple surveys indicate that quite a few organizations are planning to re-evaluate their employer-sponsored plan strategy for the retiree population in the coming years
There is an increasing realization that retiree exchanges are not only more economical for employers but also provide better individual options to participants
This is still a fairly new model, pioneered by Extend Health in 2006 (and there’s inherent value in being first to market)
With hundreds of thousands of baby boomers reaching retirement age in the not-too-distant future, there is significant headroom for growth

It also likely paves Towers Watson’s path into the active employee exchange market, which providers playing in the retiree market see as a natural next step extension of their offerings. For example, both Aon Hewitt and Mercer recently announced active employee exchange solutions. But several words of caution here: 1) the rate of active employee exchange adoption must be closely watched as it is fairly nascent today; 2) while all the Tier 1 providers now have “exchanges” in their offerings arsenals, they are, in a way, disruptive to the traditional benefits administration business model; and 3) it’s unclear how this will dovetail with the state exchanges that will come into play in 2014 if things remain track on with healthcare reform.

What is clear is that Towers Watson really liked what it saw in Extend Health, as what began as an announced partnership in August 2011 became an acquisition less than a year later. And one can understand why: the projected run rate for 2012 and the expected growth rate for 2013 is expected to be 30 percent or more.

There is, however, one aspect of this deal that I don’t like. The US$435 million price paid represents a >7X multiple on current revenues. This kind of multiple is typically available for a pure software company, as opposed to a services-bundled technology offering. However, it seems Towers Watson didn’t want to be a late market entrant, as exchanges represent an increasing barrier of entry for new providers as the existing ones scale up their capabilities and client bases. What do you think? Did it made the right bet?

Pick or Pass on BPaaS? | Gaining Altitude in the Cloud

April 23, 2012

While buyers have typically approached, evaluated, and made third-party business process service delivery sourcing decisions at the operational level, and separated out decisions on the underlying software applications and/or technology infrastructure, they are increasingly realizing the value of looking at IT and BPO in an integrated manner.

Enter Business-Process-as-a-Service (BPaaS), a model in which buyers receive standardized business processes on a pay-as-you-go basis by accessing a shared set of resources – people, application, and infrastructure – from a single provider.

There are many potential upsides of BPaaS…but is it right for your organization? The answer lies in evaluating the model based on a holistic business case that looks at a range of factors including total cost of ownership (TCO), the nature of the process/functional area under consideration, business volume fluctuations, time-to-market, position on the technology curve, and internal culture and adaptability to change.

Let’s take a deeper look at the TCO factor, which must be analyzed in terms of both upfront and ongoing costs for all three layers of service delivery.

For our just released research report, Is BPaaS the Model for You?, we developed and used a holistic evaluation framework that compared TCO for BPaaS and the traditional IT+BPO model across three buyer sizes: small (~US$1 billion revenue/5,000 employees), medium (~US$5 billion revenue/20,000 employees), and large (~US$20 billion/100,000 employees.)

Our findings?

Small Companies

BPaaS brings big benefits. It is independent of deal duration, delivers 35-40 percent savings compared to traditional IT+BPO, enables leverage of the provider’s economies of scale, provides access to otherwise cost-prohibitive technology, and allows entry into BPO relationships that as stand-alone’s lack the necessary scale. Small buyers are also highly amenable to BPaaS’ process and technology standardization requirements.

Medium Organizations

BPaaS is pretty impressive. It delivers 25-30 percent savings over the traditional IT+BPO model, which while less than what small buyers reap is still significant in driving a successful business case. Medium buyers’ increased scale allows them to capture some of the economies of scale benefits even in the traditional IT+BPO model, thereby having a lower differential between the two models.

Large Enterprises

BPaaS is not too shoddy. While it only provides ~10 percent cost savings compared to traditional IT+BPO, the absolute differential in cumulative TCO can still be substantial given the high base. And, in certain buyer-specific situations such as technology enhancements, exploration of new BPO/IT infrastructure relationships, and expiration of legacy technology licenses, BPaaS can be a good model for large buyers to evaluate. But…their tendency to balk at following a tightly defined, standardized approach – unless significant configuration features offset a good portion of customization needs – reduces BPaaS’ appeal for them.

As you see, our evaluation framework shows an inverse relationship between buyer size and cost savings from BPaaS – i.e., the larger the buyer, the lower the percentage savings. In fact, as buyer size increases, the scale benefits of renting versus owning infrastructure and applications can dip into the negative column over ten years. Of course, the assumptions in our BPaaS to IT+BPO model analysis are ideal, and your organization’s individual reality may be quite different.

To learn more about how to evaluate BPaaS’ applicability to your company, select a BPaaS provider and solution, and implement the selected solution, please read our report, Is BPaaS the Model for You?

Video: RPO Annual Report – Raising the Bar to Sustain Momentum | Sherpas in Blue Shirts

March 13, 2012

Everest Group released the Recruitment Process Outsourcing (RPO) Annual Report today. In the video below, Rajesh Ranjan, Vice President – BPO Research, talks about the fast-growing RPO market and the challenges the industry needs to address in order to sustain growth.

A Look Under the Covers of Aon’s Recent Announcements | Sherpas in Blue Shirts

February 13, 2012

Recently, Aon, a leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services, announced its decision to move its corporate headquarters from Chicago to London and released its Q4 2011 results.

Moving Headquarters

Aon has stated two primary reasons for the move – to gain greater access and proximity to emerging markets in the Middle East, Asian Pacific, and to leverage London’s position as a key hub of insurance and risk brokerage business.

However, we believe an additional reason that is clearly at work but not explicitly mentioned by Aon is the tax benefits it will realize. According to the company’s filings, Aon’s global tax rate could fall to 26 percent from an expected 30 percent for 2011 due to the United Kingdom’s favourable territorial tax regime that provides tax exemptions for dividends and gains derived from non-U.K. trading subsidiaries. In addition, the move will grant Aon access to US$300 million in excess cash abroad that will not be subject to U.S. taxes.

There is some buzz in the marketplace that the move will have a negative impact on some of Aon’s U.S.-based clients. We believe that the actual business impact will be negligible. Most of its clients have an increasingly global footprint and unless there is a material change in service provision or leadership attention, a client is not likely to terminate its relationship with Aon. Additionally, only about 20 people at the leadership position will be affected by this move.

Net-net, Aon’s decision to move headquarters is both strategic and financial. Further, the strategic elements seem to focus more on its Risk Solutions business rather than HR solutions business.

Q4 2011 Results

In its February 3 earnings call, Aon’s CEO Gregory Case announced that Aon’s fourth-quarter and full-year results reflect continued progress and positioned the firm for increased growth in 2012.

Focusing specifically on the earnings call’s remarks related to its HR solutions, the business unit Everest Group primarily tracks and analyzes, our takeaways are:

Healthcare exchanges and HR BPO emerging as key growth areas. Aon is likely focusing investments in these areas to further accelerate its recent momentum in these offerings. Our analysis reflects healthcare exchange is an area with significant opportunity and is currently underserved from the supply side. Within the HR BPO business, beyond multi-process HRO (which itself is underserved given limited number of credible players left), we expect Aon to also increase its focus on single process HRO (SPHRO) areas, such as Recruitment Process Outsourcing (RPO), Learning Services Outsourcing (LSO), etc. However, it is going to face stiff competition from incumbents in these fast-growing SPHRO areas.

Challenges in the core benefits administration business. Here, Aon is facing a pricing war from disruptive competitors and has seen some client loses as well. Our analysis in the latest BAO study suggests that while Aon stills leads the overall market, some of its key competitors are growing faster. To be able to maintain its leadership position, Aon has to offer the right balance of cost and quality through innovative solutions. Its strategy to to push for high value-added point solutions, such as dependent eligibility audits and absence management services, is a step in the right direction. However, it can realize greater impact by combining these in its overall benefits administration value proposition and offering to raise the game and address the total cost of benefits question (compared to only operational cost of benefits administration).

Increased focus on mid-market. With pricing pressure and other challenges in the larger end of the benefits administration market, Aon is trying to find its next area of growth in the mid-market. We see Aon addressing this in two primary ways:

Moving health and benefits consulting offering from HR Solutions to Risk Solutions business though only the consulting part moves over, and the benefits administration part remains with HR solutions. The key reason mentioned behind this move is to further facilitate cross-selling health and benefits services within their large base of mid-market clients on the risk solutions side. However, it also raises questions around internal organization ease to offer an advisory-led Health and Welfare administration solution, a key requirement in the mid-market. Expanding and pushing benefits administration services and solutions in the mid-market. This is already in motion for some time with integration of Aon and Hewitt benefits administration offering. With mid-market continuing to see an accelerated growth, Aon’s ability to offer an integrated Total Benefits Outsourcing (TBO) solution can help it capture the opportunity.

Expansion of international footprint. As the workforce becomes more global, Aon is looking to expand its footprint and solution to meet client needs. However, given some of the debacles on the global multi-process HRO front in the past, we believe the company will be much more thoughtful in terms of its approach compared to the past.

Greater leverage of global sourcing. Given the stated objective to realize higher operating margin, we expect the usage of global sourcing to continue to increase in Aon’s outsourcing business

Clearly, things are afoot at Aon. Its ability to execute some of these strategic changes will determine its success.

TCS’s BPO Deal with Friends Life = The $2 Billion+ Gorilla in the Insurance Industry | Sherpas in Blue Shirts

November 16, 2011

On November 9, 2011, TCS announced that its U.K. subsidiary, Diligenta, had inked with U.K.-based Friends Life a $2.2 billion outsourcing agreement, spread over 15 years, for administration of 3.2 million life and pensions insurance policies, as well as its closed books line of business and much of its corporate benefits business.

While the size of the contract itself is indeed eye popping – although that the deal came to fruition isn’t surprising to industry insiders given Friends Life’s heritage – several other factors also make it significant.

This is the largest deal ever in the insurance BPO segment, one of the largest in overall BPO, and the second largest ever awarded to TCS, surpassed only by its 2008 $2.5 billion acquisition of Citibank’s India captive (and its ongoing service agreement with the bank, which was part of the deal)
This engagement also makes TCS the second largest provider in the insurance BPO space, effectively leap-frogging it over EXL, WNS, Genpact, and Accenture. And while the deal will significantly boost TCS’s and Diligenta’s revenues, in the short term, it will likely place a drag on their bottom line
The deal demonstrates that Indian providers are moving away from their previous “start small and grow the business” strategy and are now pursuing and winning mega deals – and there aren’t many such deals to be found in any provider’s new business portfolio these days
The deal sends a clear signal that outsourcing industry-specific functions is becoming increasingly attractive to buy-side organizations
The deal is another example of the convergence of IT and BPO, as TCS/Diligenta will be providing not only BPO services, but also IT and infrastructure services, and moving a significant portion of Friends Life’s policies to its BaNCS technology platform

Of course, the deal also raises questions. Why did this deal come to be signed? What does this mean for the United Kingdom as a market for insurance BPO? How will this deal impact TCS and Diligenta? And finally, given the backdrop of this deal, what are the key developments to watch out for in the insurance BPO industry?

We will continue to update you on these and other issues and developments in the insurance BPO market as they happen.

For more details on the TCS/Friends Life deal, read Everest Group’s Breaking Viewpoint The Two Billion Dollar (and some more) Giant: Implications of TCS’s Insurance BPO deal with Friends Life.

Did ADP Do the Right Thing with its Acquisition of The RightThing? | Sherpas in Blue Shirts

October 12, 2011

Oh, yes it did. In fact, it scored big in three important areas with its October 10 acquisition of The RightThing, a privately held company and a major player in the fast growing Recruitment Process Outsourcing (RPO) market.

Secured a leading spot within the RPO provider community – ADP already had an RPO technology solution in its Virtual Edge Application Tracking System (ATS). With the addition of The RightThing’s business process services, which well complements ATS, ADP will have a comprehensive, rounded out technology plus services RPO solution. It will also be able to offer a fully bundled, holistic RPO offering that includes its existing talent management products.

Ability to tap new mid-market opportunities – Both companies are already strongholds in the mid-market (ADP in HRO, and The RightThing in RPO); ADP will now be able to cross-sell RPO services to its own HRO clients, and offer HRO services to The RightThing clients.

Good culture and service model philosophy fit – Operationally, ADP and The RightThing both utilize a highly centralized and standardized delivery model to drive economies of scale and offer an efficient solution to clients, so no significant alternation in delivery model philosophy will be required.

Of course, while this is a very strong match-up of capabilities and opportunities, acquisitions always have their challenges. First, both ADP and The RightThing have their own recruitment technology solutions (VirtualEdge and RecruitPoint, respectively), and ADP will need to select one and transition clients from the other. Second, ADP will need to quickly and carefully integrate the two companies to ensure retention of top talent, as well as ultimate acquisition success. Third, successfully capitalizing on cross-sell opportunities within the two companies’ client bases will depend on its ability to clearly demonstrate a solid value proposition backed by integrated service delivery and technology. Fourth, and probably most importantly, will be ADP’s ability to adapt and succeed with its first real foray in a non-platform-based play. The RightThing has several clients that utilize their own technology solutions, and ADP’s strategy to serve these non-platform RPO clients, as well its approach for new clients, will be closely watched. Only time will tell how successful it will be in this major move.

For more details on the acquisition, including its impact on the RPO and MPHRO industries, please read Everest Group’s Breaking Viewpoint on the topic.

Moving to the Other Side of BPO – When the Destination Becomes a Source | Sherpas in Blue Shirts

August 5, 2011

Until recently, my discussions with clients about the Asia Pacific region or Latin America countries were, by default, around leveraging them to provide cost-efficient BPO services to the western markets. However, with a growing number of organizations looking to enter or expand in these rapidly growing economies, they are starting to emerge as notable source geographies for BPO services. Hence, it is becoming increasingly important to pre-qualify statements related to these regions to specify the context – i.e., BPO source geography or BPO service delivery geography. With that, let’s take a closer look at these regions from a source geography perspective.

Interestingly, traditional offshore service delivery strongholds such as India, China, and Brazil are also among the most prominent new frontiers of the BPO buyer market. Everest Group’s recent study on the non-voice Indian BPO market clearly shows that the domestic Indian market, although on a smaller base, grew by more than 85 percent in the last two years.

From a functional perspective, the BPO adoption is broad-based in these markets and increasingly includes non-voice transactional services beyond call center work. Some of the key segments that are showing rapid growth include Finance and Accounting Outsourcing (FAO), Procurement Outsourcing (PO), Human Resources Outsourcing (HRO), and industry-specific outsourcing. Also, while buyers primarily outsourced one functional area to start off with, we are now seeing large multi-tower deals as well. The recent multi-tower BPO deal between Brazilian conglomerate Algar and Capgemini illustrates the growing adoption and increasing market maturity.

So, what is driving the adoption in these countries? While cost savings is important, our research shows that the BPO value proposition here is driven more by the need to manage rapid growth and realize operational effectiveness. With the GDP growing by at least 7 percent in recent times in these countries, companies are increasingly evaluating BPO to capitalize on service providers’ existing scale of operations and the resultant flexibility to support growth. Other key consideration include improving operational effectiveness via best practices in business process management and process improvement opportunities through standardization and automation. The fact that buyers in these markets are more aware of the outsourcing concept – due to the vibrant offshoring market – compared to other newer markets is also helping accelerate adoption.

However, serving these markets is not easy. There is a near absence of labor arbitrage, and price points are low compared to the western markets. Hence, service providers need to put in place a different strategy and operational structure. For example:

Different margin expectations. Providers can’t expect to realize the same level of profit margins as with their North American and European businesses because of the reasons cited above. Their margin consideration should reflect the practical realities of these markets.
A long-term consideration. Providers will have to take a long-term view tied to the future growth and the potential of these markets. Providers with short-term profit mind sets will be disappointed here.
A low-cost operating model. Service providers will need to apply multiple levers to achieve a low-cost operating model, including rational investments in infrastructure (lower spend on office infrastructure, facilities, IT, telecommunications, etc.) compared to the infrastructure spend for global client. Further, they will have to expand their delivery network beyond Tier-1 cities to include Tier-2 and -3 cities that offer a much lower operating cost. Additionally, a standardized one-to-many model where people and technology resources can be shared across customers will be important to fully realize the economies of scale benefits.
Innovative pricing structures. Beyond a simple FTE-based pricing structure, providers could get into innovative pricing structures such as gain sharing, e.g., tying their fee to the clients’ business growth (which could very well work with organizations in high-growth industries). There are already some success stories in the more mature IT outsourcing space in these markets such as the Bharti-IBM IT outsourcing deal in India.

Clearly, these new BPO markets represent significant potential. With a focused and differentiated strategy, coupled with robust execution, it is possible to realize the potential.

Takeaways from My RPO World (okay, on the ground U.S.) Tour | Sherpas in Blue Shirts

June 23, 2011

During the past few weeks, I was on the road interacting and engaging with a variety of buyers, service providers, and technology providers in the Recruitment Process Outsourcing (RPO) ecosystem. My travels took me to the HRO/RPO Summit in Las Vegas, Manpower’s analyst day session in Milwaukee, and meetings with numerous buy- and sell-side organizations in multiple cities.

Broad themes I identified during those forums, meetings and some very stimulating conversations include:

Greater pragmatism on global/multi-country RPO. Notwithstanding the continued interest among multinational companies around global/multi-country RPO, there is an increasing realization that a more practical and pragmatic approach is required. For example:

Buyers are realizing it’s exceptionally important to understand the “art-of-the-possible” in heterogeneous markets such as Europe, Asia Pacific, and Latin America, even before floating an RFP.
Quite often, it makes sense to approach and scope multi-country RPO utilizing the Pareto Principle, i.e., focusing on 80 percent of the hiring that takes places in 20 percent of the operating countries.
A phased approach that starts with limited countries in scope and expands into other countries/regions once the relationship stabilized is increasingly preferable.
A hub-and-spoke delivery model is emerging as the most prudent choice.

High interest in “understanding” a total talent acquisition approach. Note my emphasis on “understanding,” as opposed to adopting. Currently, I see buyers making RPO and Managed Service Provider (MSP) decisions for permanent hire and contingent hire management, respectively, independent of each other. While a combined approach to permanent and contingent hiring management through an integrated solution looks compelling, the reality is there are organizational (e.g., misaligned objectives of HR and procurement), operational (e.g., difference pricing structure and service level considerations), and technological (e.g., lack of single technology solution for permanent and contingent hire management) challenges to adoption in the current market. Buyers must have a clear upfront understanding of these challenges and need to identify potential mitigation steps. I have even seen buyers comfortable with their organizational readiness but lacking confidence in providers’ capabilities to offer an integrated solution at this time.

I expect adoption here to be gradual and in a phased fashion, with buyers starting with either RPO or MSP and then looking to expand and integrate the other. From a service provider perspective, creation and execution of total talent acquisition requires expertise in both traditional RPO and MSP models. That expertise, if proven, can create differentiation and significant opportunities, while also creating a natural entry barrier for competitors that focus only on RPO or MSP.

Side note: Everest Group’s forthcoming RPO studies will focus on multi-country RPO as well as blended RPO (RPO + MSP) exclusively highlighting the current state of the market and various dynamics at play.

Providers’ proactive investments to enhance their value proposition and create differentiation. It is clear that some RPO providers understand the importance of creating differentiation in a cluttered marketplace. Those that do are proactively investing in building their differentiation themes and associated capabilities. Examples include Kenexa’s focus on quality of talent theme, Manpower’s investment in helping buyers better plan their workforce requirements, Pinstripe’s development of tools to enhance the efficiency and effectiveness of the recruitment process, and SourceRight Solutions’ total talent acquisition solution.

Broader opportunities in emerging markets. With the demographic and economic changes taking place around the world, emerging markets such as India, China, and Brazil are increasingly viewed as markets with immense potential extending far beyond low cost delivery. Manpower’s recent acquisition of China-based REACH HR is a prominent example.

While my current tour in-person has concluded, I am looking forward to keeping a close eye on the RPO industry’s journey, even if from a near-term virtual view.

Recruitment Process Annual Report Key Findings | Sherpas in Blue Shirts

January 5, 2011

Watch as Everest Group’s Rajesh Ranjan highlights key findings from our recent RPO Annual Report.

Announcing our inaugural conference: Everest Group Engage, The Pragmatic Edge: Designing Your Future. Learn more.

Author: Rajesh R