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Going Downstream

HR BPO guru Mark Hodges discusses the challenges and opportunities facing mid-market companies currently considering outsourcing, one of several topics he'll be exploring during his 2005 HR Technology Conference® workshop.

Friday, July 1, 2005
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Hewitt Associates signs a 10-year HR BPO agreement with PepsiCo Inc., that extends to 67 countries. Procter & Gamble hooks up with IBM for a 10-year deal valued at $400 million. BT renews its arrangements with Accenture HR Services for another 10 years at $574 million.

We're all familiar with the big HR BPO deals, which regularly grab the headlines. But what about the smaller deals that involve mid-market companies, with 1,000 to 5,000 employees? Does the HR BPO model make sense here? Are these deals happening? And if so, what are the challenges and opportunities?

Few are better positioned to answer these questions than Mark Hodges, chairman of EquaTerra, a business-process outsourcing advisory firm based in Houston. Hodges, who will address the topic as part of his workshop titled Report from the Frontlines: What's Happening Today in HR Outsourcing? at the 2005 HR Technology Conference and Exposition in Chicago®, Oct. 19 through 21 (www.hrtechnologyconference.com), is convinced the benefits of HR BPO are as real in the mid-market as they are for larger organizations. But he's quick to remind those considering this option in the mid-market to tread carefully. Like most major HR initiatives, there's a right and wrong way to go about it.

Hodges is considered a pioneer of the BPO industry. Prior to forming EquaTerra, he established and led the BPO practice at TPI. Before that, he was vice president of strategy and corporate development for Exult, an HR BPO supplier that has since merged with Hewitt Associates. Recently, Human Resource Executive® spoke with him about his take on HR BPO in the mid-market.

What's your outlook going forward in the mid-market?

I think the HRO mid-market will grow at a pretty good rate -- 20 to 30 percent, which is a pretty high adoption rate. I think the investigation rate is even higher than the growth rate.

What are some of the key business drivers within the mid-market?

For mid-market companies, one of the drivers is getting new ERP technology, and getting new technology without a big capital expense. It doesn't have to be SAP or Oracle necessarily, but they certainly want self-service. For example, 5,000 active employees multiplied by a thousand dollars a head multiplied by a three-year implementation. That's about $15 million.

So it's somewhere between $5 million to 15 million of capital for new technology that they would rather have as an operating expense as opposed to a capital outlay. So if you purchase it through an outsourced model, it's an operating expense, not a capital expense.

That's probably the No. 1 driver. No. 2 is dramatic contraction or growth. Look at a mid-market company going through extremely rapid growth versus one that went through a dramatic contraction -- like a Nortel or Lucent. Some of these companies went from 50,000 active employees to less than 10,000 employees.

When you have dramatic business change where you're growing or contracting, outsourcing is a very attractive alternative.

Third, mid-size companies realize they don't have the scale of the Procter & Gambles, Honeywells, JP Morgans and DuPonts of the world, and so outsourcing is more palatable to them, because shared services is usually not palatable.

How does this contrast with larger-scale implementations?

Technology is certainly one of the reasons why larger companies end up outsourcing, but it's not always as important as it is for a mid-size company.

In terms of dramatic growth or contraction, for big companies it's more that they've been cutting, cutting, cutting for three to five years, and there's just not much left to cut. So HR outsourcing is frequently their only option.

Then on the shared services side, they've been doing [that], but they either can't get it right or they do have it right but there's no level of improvement left. Like Procter & Gamble, for instance, or Motorola. Their HR shops were recognized as being world class, yet they outsourced anyway.

Who would you consider to be some of the leading providers serving the mid-market?

You have companies like Employease, SHPS, Synhrgy, Tri-Net and Arinso. In addition, I think companies like ADP and Ceridian are starting to be effective in chasing business. And then some of the larger providers, like Accenture, ACS, Convergys and IBM are looking at this marketplace.

Do you believe that it's a viable market opportunity for the larger players?

I think the challenge for the larger providers will be having a solution for a mid-market company whose HR organization is already very lean ... where most of the cost has been taken out already.

The good news for the larger providers is that a lot of the mid-market companies' HR organizations are fat and inefficient. So a lot of times their average HR cost per employee for a mid-market organization is often much higher than you'd see for a large organization.

I've seen mid-market companies with 2,000 and 9,000 employees with HR annual cost per employee of more than $4,000. Saratoga [Institute] or [the] Hackett [Group] would tell you it should be $1,300 or $1,200.

What steps should mid-market companies take to narrow their list of prospective providers?

It depends on what's important . . . . If benefits is important, and that's a key reason for doing this, your list might include legacy benefit providers like Hewitt, ACS -- which now owns Mellon -- or Excellerate HRO [which combines EDS and Towers Perrin]. If it's technology heavy, you might look at someone like an Arinso.

They need to think about what's driving their decision. What I would not recommend is that they send out an RFP to 15 providers. They should really try to just send an RFP out to two or three.

What other advice would you give to a mid-market organization that's considering HR BPO?

This can be a very tough emotional decision for those that have been around a long time, say 50, 60 or 70 years. If that's the case, don't underestimate the emotional trauma and the change management and communication requirements that are needed. Often a mid-market company is the main employer of the headquarters' town.

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If they're a younger company, in business five, 10, 15 years, I would recommend that they don't try to do it too fast. It takes more than a month. It takes three or four months for a mid-market company to have a really good agreement with the provider.

Young, fast-growing companies are used to doing what they call "deals" all the time. People who do deals typically devalue ongoing operations. They do a deal and then go on to the next deal, and then wonder why HR doesn't work properly.

How do the concerns of larger-size organizations differ from those in the mid-market?

Usually the larger ones care more about what Wall Street thinks and how it will affect HR professionals, of which they have hundreds or thousands of them. They're really worried about how they're going to be impacted.

They also wonder about whether the provider can support their complexity, size and global operations. With the mid-market companies, most times they're in just one country.

Plus they're concerned as to whether employees are going to use self-service, so they care about whether there's going to be enough training and hand-holding to make sure that people use the technology.

Does the scope of a mid-market HR BPO project differ from a large-size project?

Mid-market is more like three to five processes, where the big clients are typically 10 to 15. One difference is a lot of mid-market companies don't have expats. They don't have significant domestic relocation. They also might have training, but not as much, certainly not as big an expenditure, not as many types of courses, not as rich a training allowance.

Then there's labor relations and employee relations -- it's typically not as big an issue to middle-market companies as it is for large companies.

The typical bundle would be payroll, benefits, compensation administration and rewards, HR [information technology] and recruiting.

From the vendor's point of view, is an HR BPO project in the mid-market any more or less profitable than a larger-size project?

It's too soon to tell. The margins for the mid-market aren't necessarily higher or lower, but I can give you my opinion on how I think it might turn out. I think that the profitability for the mid-market, if all of the vendor's business is in the mid-market, should be higher over time because the contracts are less complex and the mid-market is more amenable to a one-to-many model. They don't have the egos of the big corporations.

Mid-market companies haven't been in the Dow Jones Index for 100 years. Less customization is needed. They don't feel that it's at the expense of doing it themselves, whereas a lot of the big guys really do feel that they could do this as well as a provider.

Any final thoughts?

I think one important data point is that HRO does work for mid-market companies. If you think you're too small, I would think again, [especially if] your HR operations are inefficient. If you're spending more than $2,000 a head on HR administration, you should evaluate HRO as an option.

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