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.
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.
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.
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:
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.
“The old are in second childhood” – Aristophanes
Although the benefits outsourcing market (BAO) – one of HRO’s oldest – may seem passé, it’s currently displaying the kind of dynamism typically associated with a younger market. Indeed, in the last year it has continued to innovate and evolve, driven in large part by the U.S. healthcare reform.
More than a year back, President Barrack Obama announced the Patient Protection and Affordable Health Care Act (PPACA). Against the backdrop of the act’s first anniversary, the market still seeks answers to impending questions: Has the market changed? Are buyers still skeptical? Do they now fully understand the implication of these changes? How has service providers responded to the reform?
Everest Group’s just published BAO Annual Report provides a comprehensive view of the BAO market and the impact the reform is having on all parties. So let’s take a quick look.
The study showed that the BAO market grew at a healthy rate in 2011. A closer look at this market reveals that the health and welfare (H&W) market is growing at a much faster rate, albeit on a smaller base, compared to the pension administration market. As the healthcare reform is the main driver behind the growth of H&W outsourcing, this truly indicates the extent to which the healthcare reform is fueling the growth of the overall BAO market.
The healthcare reform surely brought greater access to healthcare for Americans but what for employers? For employers, the reform has created greater compliance requirements, increased administrative burden, and mandates better information delivery to employees. While in 2010, employers were in a wait-and-watch mindset, they have now taken a front seat and begun to analyze the implications and imperatives of the reform. In today’s uncertain economy, many employers are struggling to maintain a balance between new requirements and the soaring healthcare costs, which they believe will increase further due to the PAACA’s auto enrollment provision. Additionally, many employers are realizing they lack the in-house expertise to steer through the reform. All these concerns are spurring them to seek outside assistance to navigate through the complexities of the reform.
On the other hand, the PAACA has created a pool of opportunities for BAO service providers and they are making significant organic and inorganic investments in order to capitalize on them. First, service providers are enhancing their consulting capabilities to help employers align their benefits strategy with reform’s requirements. For example, Mercer acquired Mahoney & Associates and ADP established a strategic advisory services group. Second, service providers are making technology advancements to provide better employee communication, decision support tools, online/self-service tools, and so on. The high rate of M&A activities in 2010-2011 was a result of service provider’s efforts toward strengthening their H&W capabilities, ala ADP’s acquisition of Asparity Decision Solutions. Net-net, service providers are rapidly ramping up their H&W value proposition to appeal to buyers and “make hay when the sun shines.”
Although the market has responded well to the healthcare reform, some organizations believe that the 2012 election will have an impact on the reform, driving a wait and see stance. They will continue with their current benefits strategy until 2012, and focus on tactical ways to reduce healthcare costs, remain competitive, and provide better benefits services to their employees.
The clock is quickly ticking to 2014, the year in which PAACA will be in full swing. And of course we’ll be keeping you informed on how the regulations are affecting change in the BAO market, including whether the buyer will choose “play or pay.”
The BPO industry has long been heralded by McKinsey & Company and NASSCOM as the next growth engine of the global services industry. And for years, McKinsey has pointed to the theoretically huge, unaddressed services space that, in theory, could be open to labor arbitrage. But the reality is that the BPO industry itself is searching for the next big growth driver, as it continues to disappoint investors, providers, and customers as a source of additional value beyond labor arbitrage. This relentless, if misplaced, faith in the segment’s value prospects reminds me of the modern proverb attributed to Yogi Berra, “In theory there is no difference between theory and practice. In practice there is.”
However, the newly built BPaaS homes and those under construction may help spruce up the increasingly shabby BPO neighborhoods. BPaaS is attractive as it has the potential to substantially reduce a client’s TCO when compared to a traditional BPO model. It also promises a reduced capex and a utility-based opex. But perhaps the biggest benefit is the nirvana state of standardization and process harmonization that it can offer.
So, who’s building? And where?
Capgemini made a significant play in the procurement BPaaS space with its acquisition of IBX last year. And its on-demand platform already boasts several big tickets clients including Kraft, Novozymes, and Hilti.
TCS now has a dedicated platform-based BPO business division that offers clients several platforms across F&A, procurement, HR, and analytics. In fact, analytics could emerge as a major area for BPaaS solutions given the current low install base of legacy technologies in the space and organizations’ increasing yearning to utilize data for smarter decision making. And the exponential rise in unstructured data from social media, mobile users, and others is creating a space ripe for a BPaaS play.
BPaaS is also having a major impact on the HR function with platform-based HRO offerings from firms such as ADP. In fact, nearly 70 percent of all multi-process HRO contracts signed in 2010 had a platform-based solution, and propelled the adoption of HRO in the mid-market. BPaaS solutions catering exclusively to the mid-market, such as TCS’ iON, are also starting to emerge in other business areas.
On the other hand, BPaaS is not the be-all, end-all silver-bullet as most organizations are not looking for disruptive changes to their existing technology landscape. There is no big driver to a BPaaS model if the basic functionality already exists and if the installed base of such technologies is high. F&A BPO is one market in which BPaaS has not really taken off. Hence, the technology play in F&A BPO is largely around plugging gaps with point solutions or improving efficiencies with workflows.
Yes, swanky looking new BPaaS homes are being constructed in shabby BPO neighborhoods. But we still have to wait and watch how many people come and buy them.
Is it wrong to plagiarize yourself? In 2008, Everest Group published a report entitled “Understanding the Waking Giant: The Mid-Market and FAO” highlighting how mid-market companies had turned the corner from point solutions in finance and accounting outsourcing (FAO) to adoption of more robust and integrated multi-process FAO solutions. In turning to HR outsourcing (HRO), the mid-market has traditionally been a big consumer of various point solutions including payroll, 401K administration, contingent labor, etc. But today we see clear evidence that mid-market companies have brought the same approach to their HR function, noticeably increasing their adoption of robust and integrated multi-process HR outsourcing (MPHRO) and Benefits Administration Outsourcing (BAO.) In fact, this client segment is quickly becoming the growth platform for many of the market leading HR service providers.
In our ongoing research into both the HRO and BAO spaces, the share of new contracts signed by mid-market companies (3,000-15,000 employees) continues to grow. In fact, mid-market MPHRO deals represented roughly 61 percent of all the deals inked in 2010. We saw the same upward tick in the BAO market, with 71 percent of all BAO deals involving mid-market clients. As a result, service providers are really taking notice and making moves specifically to target this growing opportunity.
What’s driving the mid-market in this direction? Take your pick of factors:
Two important delivery model changes have also increased the appeal of MPHRO and BAO for mid-market companies. In both areas, use of global sourcing has gained traction. First, and not surprisingly, this has come at a time when mid-market companies continue to be under immense pressures to further reduce operating costs while simultaneously optimizing the overall effectiveness of their HR operations. Centralization and integration through offshore delivery centers align with such drivers.
Second, many service providers’ increasing focus around building leveraged and repeatable technology-driven components to their HR offerings, be it SaaS, Cloud, or platforms, is proving to be a justifiable investment. In 2010, about 70 percent of all new MPHRO deals signed involved some type of platform solution, and 71 percent of those involved mid-market buyers.
The strategy to focus on mid-market clients is paying off for some service providers. Three of Everest Group’s five MPHRO 2011 Star Performers – ADP, NorthgateArinso, and Infosys – drive significant portions of their MPHRO business from mid-market clients. Further, each of these providers grew their share of the overall MPHRO market in 2009-2010.
Both ADP and Mercer, major players in the MPHRO and BAO markets respectively, have successfully deployed mid-market strategies, although they are very different in nature. In fact, each firm, as we heard during their recent annual analyst events, continue to invest in sales programs, service offerings, and relationship models specifically targeting this growth opportunity. Mercer leveraged its acquisition of IPA to open doors with mid-market clients, and to align its delivery model with the specific needs of this segment. ADP, which has always had significant payroll offering success in the mid-market, has successfully expanded its footprint with some of these clients into the MPHRO space.
To successfully tap into this segment, HR service providers will need to be on top of the rapidly changing mid-market competitive landscape, delivery requirements, technology solutions, and sales engagement models. With all this going on, dare I say the mid-market will prove to be the “Waking Giant” for the evolving MPHRO and BAO markets?
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.
Watch as Everest Group’s Rajesh Ranjan highlights key findings from our recent RPO Annual Report.
A candidate who recently interviewed with our firm asked me, “How much cross learning takes place in your organization?” After I answered his question and our interview concluded, I began thinking about how much cross learning among various segments of the BPO industry is affecting the way key deal components are being structured today.
Over the last 10 years, the different BPO towers – including HR outsourcing (HRO), Finance and Accounting outsourcing (FAO) and Procurement outsourcing (PO) –have evolved through dissimilar routes and models. But as the BPO market matures, buyers and providers in each of these functions are applying lessons learned from the others to bring more value to their engagements. Following are the four primary areas of learning convergence.
A componentized/phased approach is more practical and valuable. We all find it exciting to read headline news about a big-bang deal that includes end-to-end process scope across multiple geographies. But that excitement fades – except perhaps among competitors – when we read news stories about the failure of the engagement due to factors including implementation delays, buyer dissatisfaction and supplier write offs. We’ve seen, especially in HRO, that the multitude of moving parts in mega-deals make it extremely difficult for both buyers and suppliers to control and manage all the elements of the relationship, and can significantly detract from realization of short-term gains and long-term benefits. Learning from HRO’s missteps, FAO and PO engagements are increasingly leveraging a phased approach that addresses the major pain points in the immediate term and paves the path for more strategic objectives down the road. Seeing the successes of this model, HRO is increasingly following in their phased approach footsteps.
Global sourcing is an integral part of the solution. Global sourcing ensures that the delivered services most optimally meet each buyer’s cost, quality and risk requirements. The FAO market really developed utilizing this “shore-agnostic” concept as a fulcrum, and created substantial value for buyers. While solutions for the HRO and PO markets were originally rooted in an onshore-centric delivery model, they are increasingly embracing the FAO-proven global sourcing value proposition.
Technology is an important enabler of value creation. In addition to providing efficiency and productivity gains, the right set of tools and underlying technology backbone ensure that buyers realize value beyond cost savings. For example, robust forecasting and analytics tools deliver critical information to stakeholders when making R&D investment, marketing mix, employee engagement or customer retention strategy decisions. Providing buyers with access to the best-fit technology platform was an integral part of the HRO value proposition, and more and more tools are being added to the HRO solutions portfolio. PO and FAO buyers and suppliers are taking notice, recognizing the value and increasingly following suit to gain the same types of benefits.
Pricing structure that measures the output of services. An output-based pricing structure closely ties the cost of services to buyer’s business needs. With this model, buyers pay for what they consume, and suppliers are incentivized to improve and innovate in the productivity and efficiency metrics. While there is currently a predominance of input-based pricing structures within the FAO market, we see an increased appetite for and interest among FAO buyers to move to an output-based model, a norm within the HRO market.
Clearly, we have not reached a stage –and probably never will –in which a standard approach applies across all BPO segments because of their inherent distinctiveness. But the important thing is that as each of these segments evolve, they keep on learning from each other to enhance the value of outsourcing.
Back to the beginning. My answer to the candidate? Cross learning is a way of life at Everest Group!