From Cycle to Cycle

As the pace of hiring begins to quicken, recruitment-process outsourcing may be a viable option for companies that have downsized their internal recruiting functions.

Monday, February 1, 2010
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While the economy struggles throughout the country, the epicenter of the crisis might well be California, where the state is facing unprecedented budget deficits, some of the worst housing markets anywhere and unemployment rates above the national average.

Despite these financial troubles, Mary Steudle, manager of corporate staffing at Southern California Edison, can't seem to get a breather. Once again, her company is expected to hire some 4,000 workers in 2010, a pace that has not let up during the past several years.

Not only has hiring remained brisk at the Rosemead, Calif.-based electric utility, which serves customers in a 50,000-square-mile area south of Santa Barbara, but with the state's unemployment hovering around 12 percent, the volume of resumes Steudle must process has nearly doubled in the past year.

So it's understandable she's anxious to make recruitment services more efficient and take the pressure off the organization. "The pain isn't necessarily just for us but also for the applicant or candidates," she says.

That's why Steudle is taking a close look at recruitment-process outsourcing. For a variety of reasons, RPO is attracting the attention of companies everywhere. Whether the driver is to cut costs, prepare for an eventual rise in hiring or improve process efficiencies, many employers such as Steudle are actively considering this type of outsourced solution.

That's not to say they're abandoning their internal recruiting function; rather, many simply see RPO as an effective supplement to their existing staff.

But is RPO appropriate for everyone? Although many employers have successfully implemented it around the world, there have also been instances when it has gone wrong. And even some of the staunchest cheerleaders concede that some organizations just aren't ready for it.

Why Outsource Now?

Although general hiring has been depressed across the globe, interest in RPO remains buoyant. Deal size has naturally fallen in recent times, and some contracts have even been terminated due to hiring freezes. However, service providers say they continue to field lots of inquiries from companies that have eliminated much of their recruiting staff.

Now, with the economy beginning to show signs of life, these organizations can't wait for business to return to healthy levels before fixing their recruitment services. And with talent acquisition a cornerstone of their talent management strategy, many employers realize they need help with recruiting.

With this in mind, many buyers are turning to RPO, viewing it as a quick and effective solution.

That trend is reflected in the numbers. According to Lead HR Outsourcing Analyst Gary Bragar of Bracknell, U.K.-based NelsonHall, the RPO market grew significantly in the past couple of years, from sales of $1.5 billion in 2006 to $2.1 billion in 2008, an average compound annual growth rate of 20 percent.

This rise came despite the global slowdown in hiring in the second half of 2008. Additionally, the market is witnessing longer contracts (an increase of 15 percent in length since 2007) as it matures, signaling a greater confidence in RPO as a long-term solution in the back office.

"We are continually seeing new deals," Bragar says, adding that companies such as Covance and LSG Sky Chef were among global businesses that recently signed sizable RPO deals. And while most deal sizes have been constrained to just a few hundred hires a year, he says, market consensus is that, by the middle of this year, much bigger contracts should emerge.

These deals will be driven by the likes of companies such as Baker Hughes, a Houston-based provider of oil-field services and associated products. With 35,000 employees in 90 countries -- and another 18,000 workers anticipated should its merger with BJ Services Co. go through -- the company is leaning on its RPO service provider, Zurich-based Adecco, to provide highly scalable recruitment services.

Because of the unpredictable nature of its workforce needs -- demand for talent often fluctuates with the volatile price of energy -- Baker Hughes chose the provider based on its ability to respond quickly to requisitions, according to Aziz Chowdhury, the company's director of global talent acquisition.

"For us at Baker Hughes, it was around being able to meet demand as needed," he says. "Recruiting volume has been down for us recently, and it has gone down significantly."

When oil peaked at $140 a barrel, Baker Hughes couldn't hire fast enough, says Chowdhury. Today, with oil prices at about half that level, hiring volume has declined just as precipitously. Relying solely on internal recruiters would have required Baker Hughes to quickly scale up when hiring managers needed workers; but when gas and oil prices are down, it would have to dismantle those teams just as quickly.

"By our nature, we have little planning time," he says. "It's been particularly onerous" to predict hiring.

The ability to scale, while important, is not the only reason some employers are turning to outsourced recruitment. For many, RPO is one way to help them achieve their financial objectives. For example, companies often realize a reduction in cycle time through RPO, allowing them to fill revenue-producing positions more quickly. Also, they can usually reduce high-cost, third-party agency fees, sometimes by as much as 90 percent.

However, providing lower costs is simply table stakes for RPO vendors. These days, they must deliver a bevy of services to be competitive. These include supporting workforce planning, anticipating clients' needs, measuring and improving quality of hires through follow-up surveys, branding, and managing other talent- acquisition vendors.

Because so many organizations have shed much of their internal recruitment capability, some have turned to RPO for support in these functions.

"Today, you have a lot of maturity in the pure-play RPOs. They have really come up and shown greater capability," says Cindy Cardwell, global RPO practice leader with sourcing advisory firm EquaTerra in Houston. Within the past three years, she says, the market has evolved significantly and brought forth a variety of improvements, including multinational solutions, more robust advisory services, greater automation and partnerships to serve a variety of talent needs.

However, Cardwell adds, each vendor still has its strengths and weaknesses, and buyers should be keenly aware of their needs to match them to the appropriate provider.

"There are varying levels of buys from an RPO," she says. "They don't all have to provide that high touch. The buyer has to understand what he is getting."

Defining an RPO

Indeed, some buyers remain confused about just what constitutes an RPO. It isn't just outsourced recruitment service; agencies and headhunters have been around for decades, while RPO in its truest form has been around for only about 10 years.

Brawls still break out at industry meetings over when the first RPO deal actually took place. While opinions may differ over when the seminal moment occurred, the general consensus today is that RPO is defined as a set of outsourced services that encompass the majority of recruitment administrative functions.

Typically, RPO deals include requisition processing, candidate sourcing, assessment and screening, interview scheduling and presentation of offer letters. In some cases, the vendor also provides orientation and on-boarding services as well as surveys of employees after joining the company. The vendor may also operate, maintain or even supply an applicant-tracking system.

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What separates an RPO from a recruitment agency is that the outsourcer is responsible for the entire process, and not just the presentation of candidates.

Furthermore, an RPO provider typically structures its pricing differently from that of a contingency agency, whose fees are paid only when there is a hire. RPO firms usually charge a base fee in addition to a per-hire fee. Even so, their costs per-hire are usually lower than that of an agency.

Still, most companies don't rely on their RPO vendors to fill all openings, according to Hary Bottka, director of CHRO services at New York-based advisory firm TPI.

"Most companies engaged in RPO are using agencies for executive-level positions," he says. "Or they only use agencies for positions they can't fill with an RPO."

For instance, companies with very specialized skill requirements in areas such as IT or research will continue to turn to boutique agencies for hard-to-fill openings. These employers may have agreements with RPO vendors to use a third party when a suitable candidate can't be found after 45 or 60 days.

In most cases, the service provider fills only a portion of total hires for a client, with some estimates putting the industry average at 40 percent to 50 percent of hires.

So is RPO appropriate for all organizations? Some industry observers are skeptical. Rebecca Callahan, president of Fort Lauderdale, Fla.-based SourceRight Solutions, says the entire industry is witnessing growth again with the economy starting to turn, but cautions that some deal failures are reminders that buyers must be ready for the cultural shifts that will occur when outsourcing.

"In some of the deals that have failed, both the provider and buyer have underestimated the readiness of the organization for change," says Callahan.

For instance, high-touch companies accustomed to having "white glove" internal services may have trouble when some of these functions are shifted to a vendor. If the company fails to ready its stakeholders for these changes, she says, it will have trouble acclimating.

Indeed, one buyer realized that readying hiring managers and executive sponsors was the critical step in winning support for its RPO implementation. Raquel Olsen, the U.S. recruiting manager for Geneva-based Weatherford International, says her organization turned to an RPO provider, Los Angeles-based Futurestep, two years ago to alleviate the burden on hiring managers.

Although the company was satisfied with the outcome, she says, Weatherford worked closely with its provider to ensure stakeholders were prepared for it.

"Change management is key for something like this to work, and having town-hall meetings and weekly and monthly meetings with directors and managers is a must," says Olsen.

To be sure, adopting RPO is a major change for companies with a history of internal recruitment, but industry data show that buyers are growing more confident about an outsourced solution. This is reflected in NelsonHall's May 2009 report on RPO, which found that average contract length has risen from 2.7 years to 3.1 years.

At a time when talent acquisition is again drawing the attention of companies, RPO is once again being viewed as a serious option. With much of their recruitment capabilities downsized, some companies may have no choice but to turn to an outsourced process to find the talent they will need.

Furthermore, as TPI's Bottka notes, now may be the perfect time to embrace RPO because many vendors have lowered their minimum volume requirements and will have time to familiarize themselves with clients as the economy slowly ramps up. However, he advises prospective buyers to ask questions and get educated.

"I would tell them to be cautious," says Bottka, "and get comfortable before going out to market."

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