Taking the Pulse of HRO

The prognosis for HRO looks good, though challenges lie ahead, according to a recent survey of HR executives and decision-makers by advisory firm EquaTerra.

Friday, March 16, 2007
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Transforming the human resource function to make it more strategic and cost-effective is a top agenda item for many HR executives and the corporate executives they support. While the value of HR transformation is seemingly self-evident, what is more complicated is how to define, enable and drive HR transformation. 

One approach that HR organizations have been increasingly undertaking is HR outsourcing. The scale and scope of HRO has expanded over the past several years and today frequently includes the bundling of several HR processes and sub-processes across multiple business units and geographies.

The proverbial jury is out, however, as to the true value that HRO has brought to the organizations that have embarked on the journey. 

So is the HRO market going through normal growing pains, or is it a flawed model and concept that buyers should avoid? 

To help answer this question, EquaTerra, an outsourcing advisory firm, launched a unique "HRO Buyers Pulse Survey" in the second half of 2006. The results presented here are based on surveys and interviews with HR executives and decision-makers in more than 50 primarily North American organizations actively involved in HRO efforts. 

The benefits organizations seek from HRO are varied. Cost reduction was the leading benefit sought among Pulse Survey respondents (see Figure 1). Many other benefits tied to enabling transformation also ranked high (e.g., access to externals skills/ knowledge, process improvement, shift resources and focus to more strategic activities). 

Critically, however, HRO buyers have had mixed results in achieving these benefits (see Figure 2). HRO is useful as a transformation tool, but the optimal usage of this tool by buyers and service providers alike remains challenging and in some cases elusive. 

Many different reasons were cited as to why benefits were not being achieved. They included issues with buyer expectations, misalignment between goals and operating models, transition and governance problems, inadequate/poorly performing HRIT, and service provider inflexibility and inadequate capacity and capabilities. 

Overall, respondents did recognize that HRO benefits achieved and problems faced were the responsibility of both the buyer and the service provider (see Figure 3). Credit for success, however, did more often stay at home while blame for problems was placed on the service provider.

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Despite its challenges, the future of HRO for currently engaged buyers remains positive. Nearly one-third plan to renew with their current service providers and another third will continue with HRO efforts but re-bid their contracts. Just 10 percent planned to terminate their outsourcing efforts and bring the work back in-house. Critically, however, nearly one-third of respondents were still assessing their options for going forward -- or not -- with HRO. 

Bottom line, HRO remains a key tool to enable HR transformation. Commentary from survey respondents consistently demonstrated more dissatisfaction with their own current outsourcing models, engagements and services providers than dissatisfaction with the overall HRO concept. 

Much work and rehabilitation is needed, however, to drive the successful achievement of benefits sought from HRO and to reduce the pain experienced in gaining those benefits.

The full results are available by contacting

Stan Lepeak is managing director of research for EquaTerra, an outsourcing advisory firm based in Houston.

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