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Taking the Market's Pulse

Taking the Market's Pulse | Human Resource Executive Online Recent research suggests that the difficult economy is seriously affecting HR outsourcing.

Monday, March 16, 2009
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It undoubtedly comes as no surprise that most human resource departments today are being negatively affected, sometimes seriously, by the slowing global economy. Because it is a support function whose connection to revenue generation and profits is typically viewed as distant and indirect, HR often faces proportionally larger cutbacks than other areas of the organization.

HR groups are also at the unenviable forefront of executing these cost-reduction efforts through processing layoffs, scaling back or stopping hiring, dealing with employee morale issues and facing the brunt of worker discontent.

Research conducted during the fall of 2008 and in January of this year by EquaTerra, a Houston-based outsourcing advisory firm, validates these trends. Figure 1 illustrates how HR organizations are being affected by economic conditions, and things have only gotten worse since this research was gathered.

Most HR organizations don't need more research to tell them things are bad and unlikely to get significantly better anytime soon. The more relevant questions are: How should HR leaders respond to market conditions? And what can they do to help their organizations as a whole weather the current storm?

Clearly, in today's environment, operational efficiency -- or performing required tasks more cheaply -- is paramount. There are many strategic activities HR leaders can do to help their organizations through tough times, but few organizations have the luxury of pursuing them without also addressing operational and cost-cutting issues.

The often-conflicting goals of providing more strategic value while simultaneously cutting costs and ensuring operational efficiency are not new ones for most HR organizations; however, the need to achieve these goals is even more of an imperative during times like these.

There are many tools HR groups use in efforts to become both more strategic and operationally efficient. Traditional change enablers, such as investing in new and more effective HRIT systems or re-engineering core HR processes, are less viable under current market conditions because of their costs and the length of time it takes to implement them. HR groups must find new and more efficient ways to undertake these types of efforts.

Smaller is Better?

HR groups are also increasingly adopting alternative service-delivery models such as shared services, HRIT outsourcing and HR business-process outsourcing as means to improve operations. If successfully executed, these models can help reduce costs, improve operational efficiencies and free up resources and management attention for more strategic work. Here too, the means to deploy the service models must evolve to reflect current market conditions.

"Mega-HRO deals" that bundled several HR processes, including HRIT, into larger, long-term outsourcing efforts were popular over the last several years, but proved much more challenging to both buyers and service providers to undertake successfully.

More recently, smaller one- and two-process HR outsourcing deals have become more popular. So, too, have alternatives to traditional outsourcing models, such as deploying HR Software-as-a-Service solutions.

The question today is: Does it still make sense for HR groups to pursue the deployment and expansion of alternative service-delivery models like outsourcing in these tough economic times? Or are the costs and complexities of undertaking these efforts too much to bear and the potential risk of failure too great?

The experiences of EquaTerra's clients, along with our research efforts, indicate that organizations are slowing and rethinking current and planned HRO efforts. There are many reasons for this, but most do not point to an inherent decline in the desire to do HR outsourcing. Rather, they represent the need to re-evaluate outsourcing needs as well as the best process to use to undertake new efforts.

Figure 2 illustrates the impact of economic conditions on outsourcing demand levels and deal flow. These findings are from EquaTerra's "Pulse" survey of advisers and service providers conducted during the fourth quarter of 2008.

Fifty-four percent of the advisers and service providers indicated that economic conditions are causing buyers to slow or rethink outsourcing. The emphasis here is on slowing, not stopping. Rethinking is occurring in the context of new scope, terms and goals, not whether to eventually go forward or not.

Buyers are more often deferring, not cancelling, their outsourcing initiatives, typically because of other events occurring in the buyer organizations that have influenced the sourcing process.

The economic impact on HRO varies significantly across industries. Efforts to stabilize operations, deal with executive-management changes and contend with other corporate disruptions affect outsourcing-related decision-making at companies.

Outsourcing efforts focused on complex process transformation or requiring large up-front investments are getting delayed or cancelled. However, efforts with short-term ROI models that can deliver quick cost-savings are moving forward, often at an accelerated pace.

The result is sluggishness in the market, creating pent-up buyer demand. Organizations are getting more aggressive in their efforts to reduce head count and costs as well as make fundamental changes across their back-office and support operations. Increasingly, they are using the economic downturn as a time to shed waste and retool with leaner, more scalable business models in preparation for when the economy picks up.

This is all well and good, but organizations still need to determine how they can successfully execute change efforts such as HR outsourcing in today's market conditions. A variety of confluent factors are combining to slow HRO efforts.

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In the majority of cases, HRO buyers will complete the transaction, though often under modified terms and conditions. In some cases, however, buyers may abandon efforts in lieu of pursuing other change initiatives, or because they cannot develop a viable business case in current market conditions.

HRO Challenges

During the fourth quarter of 2008, EquaTerra also surveyed its advisers and outsourcing service providers (in all categories, not just HRO) to identify today's biggest challenges to successful outsourcing deal consummation. Figure 3 illustrates those challenges as they specifically relate to HRO deals, showing that change-management concerns topped the list, cited by close to 70 percent of the advisers.

Change management was also the top challenge cited for all outsourcing deals. Retained-organization and outsourcing-governance challenges, along with costs to do the deal, were the second most-frequently cited challenges. "Loss of faith" in outsourcing scored highly among HRO advisors -- higher than in other functional areas.

This reflects the disillusionment in the market regarding larger, multi-process HRO deals, as those efforts tended to focus on vague transformational promises.

EquaTerra also identified some perennial impediments, including the ability of HRO buyers to "get their arms around" the complexities of a deal (e.g., contract requirements or pricing) and the need for a comprehensive understanding of the solutions being purchased. These barriers are exacerbated in a difficult market environment.

Other events, such as last fall's terrorist strike in Mumbai, India, and a financial scandal that led to the demise of Satyam, an Indian service provider, have also complicated and slowed some buyers' outsourcing efforts.

There are different approaches buyers can take to address the challenges to deal consummation. Economic conditions may dictate that organizations take an accelerated approach to sourcing. This involves limiting the number of service providers considered for a deal or expanding the scope of an existing outsourcing contract, rather than going out to market.

Organizations may also need to scale back on scope and take a more iterative approach to sourcing across geographies and business units. Any accelerated sourcing process must still pay adequate attention to risk identification and management, as well as provider vetting and due diligence -- elements that are more important than ever in this environment.

Ultimately, outsourcing is just one tool that HR organizations have at their disposal to address the challenges of becoming both more strategic and operationally efficient and effective. But it is a tool that is growing in importance.

The more HR groups can rely on third-party service providers to deliver quality HR operational services, the more they can focus on value-added HR activities such as talent management, succession planning, and worker training and education. These are key enablers to organizational success, and they are more important than ever in these challenging economic times.

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

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