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Buyer Behavior Continues To Change the HRO Market

The HRO market is aligning to meet the buyer's needs through alliances and partnerships. Buyers can now define their longer-term vision, and they can pick and choose the order of the building blocks by HR process priority.

Wednesday, October 3, 2012
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We continue to see significant impacts to the HR market, including the economy, robust new technology at lower cost, lessons learned as the HRO market matures and the changing priorities of HR and business leaders. 

What this means for the HR market is that buyers are achieving their future vision through a building blocks approach.

The economy has impacted the HRO market significantly by limiting buyer budgets from year to year. But it is not the only significant influence on buyers as they approach the market. Lessons learned over a decade of HRO, e.g., less ROI than hoped for, lack of realized, but promised, benefits and instances of sub-par service quality, have buyers turning to deeper, specialized expertise rather than to end-to-end HR from one provider. Not everyone can do everything and do it well, and buyers are demonstrating they've learned this through changed behavior when they approach the outsourcing market. 

Another significant impact to this market, access to new technology that is quicker and less costly than ever before is enabling HR leaders to deliver top-notch services to their businesses with a new blended approach of internal and external resources more easily than ever before.

All in, end-to-end, Global HRO deals as defined in the early days of HRO with a single provider doing everything directly will continue to thin as we continue to move into HRO's second decade. Providers and buyers have learned to leverage "best-of-breed" alliances and strategic partners for delivery across HR processes. Tier 1 providers continue to fill the role of primary provider for the foundational element of HR -- workforce administration and the HRIS.

In the past, this was often achieved through the hosting or management of traditional HRIS platforms based on the buyer's infrastructure. When buyers consider new or revised solutions, SaaS HRMS providers now present a game-changing approach, allowing both buyers and Tier 1 providers to embrace delivery on the cloud solution. This speeds implementation and lowers costs to buyers while hitting the mark on intuitive user interfaces that mimic today's commercial apps and social media style.

In addition to game-changing technology modifying the definition and approach to HRO, buyers looking under the hood find the "best-of-breed" expertise, functionality and support they have requested for years is more readily available. "Best-of-Breeds" have improved their integration capabilities to enhance the direct buyer experience, and Tier 1 providers leverage "best-of-breed" providers to strengthen their solution. It's common to find the Payroll solution of Tier 1 providers delivered through alliances with local vendors for global payroll and/or payroll aggregators. Dig deeper into the delivery of recruitment via Tier 1 providers and the buyer will likely find an alliance with best-of-breed solutions. Talent management brings another group of alliances through best-of-breed providers. And again, the technology providers are poised to change the playing field with recent acquisitions.

So what does this mean for buyers? The HRO market is aligning to meet the buyer's needs through a multitude of alliances and partnerships. Buyers can define their longer-term vision, and, based on available budget and governance preference, they can pick and choose the order of the building blocks by HR process priority. They also can judge whether the timing is right for their organizations to upgrade or replace the underlying HRIS, to continue on a legacy foundation and add building blocks such as talent management, or to address an immediate need with the knowledge that integration is available to allow for the closest thing to plug-n-play technology that has been seen in the industry to date.

Full outsourcing continues to see a strong presence in the HR foundation of workforce administration and the HRIS along with core operational and transactional processes (e.g. payroll, benefits, retirement services, learning). Historically, outsourcing was always a partial service balanced with the client's internal retained organization for processes such as compensation or recruitment. The blend and balance of process ownership between external operations and internal client operations historically shifts more heavily to the client in a discussion about talent management (including performance management, employee development and succession planning). While buyers have consistently leveraged outsourced relationships for access to technology in the talent management areas, buyers historically retained the management and touch points to their employee population themselves in these areas. 

Talent Management: A Key Driver for HR and Business Leaders and Technology Answers the Call

SaaS and internal higher touch for talent management is viewed as a competitive edge and critical strategy in today's business market. The job market may be worse than in years past, but that is partially due to a lack of employable resources with the right skills and the expertise. HR is tasked with not only retaining the best and brightest through robust employee development programs to keep resources engaged, but also inventing and reinventing branding at the pace of business to attract the new best and brightest hitting the job market.

Evolving talent management technology now arms HR practitioners with very robust tools via cloud and SaaS, taking the talent game to the next level. Talent profile yearbooks at the touch of a fingertip on an iPad give managers and HR practitioners the most complete picture (literally) of their resources, including skills, achievements, projects, goals, performance, development targets, competencies and anything else an organization might want to attach to each individual. This is the ultimate in self-service for the manager and HR with a social-media feel that promotes use. This is what the HR leaders want: immediate, usable information at their fingertips and solutions that engage their workforce.

Providers of "core HR processes" (e.g. benefits, payroll, retirement, learning) are taking note of the buyer's embrace of new talent management technology. More niche providers continue to develop gaming approaches to enrollments and wellness programs. End-user tools that present critical information without navigation through pages and pages of data are perceived as an immediate win by buyers and their employees.

The Horizon Is Here 

Depending on the day, business leaders continue to see the economy improve and then dip. Until buyers have confidence that the economy has stabilized, their appetite for big-bang change or the budgets to support this approach mostly will be cautious. Once they are ready to invest, long-term strategy development is still critical so that buyers can be sure there is a roadmap to the future model and clear criteria and measures to gauge success along the way. But the approach leading to buy-in for that future vision has changed. 

Five to ten years ago, the philosophy was to contract and sign up for all the pieces that would be needed to achieve the future vision. Today's philosophy is all about agility to change direction immediately and in step with the business. The result is that the HR future vision will likely change at least once or twice before five years have elapsed. Buyers are savvy in the HRO space. Buyers see the flexibility available through process-specific solutions and the advantage to viewing them as building blocks to achieve the longer-term strategy. One might compare it to the car analogy: You may want the ultimate luxury car but prefer the standard sedan's price tag. Now, buyers say they want an engine from Germany, a transmission from Slovakia and a chassis from Japan -- all recognized for their strengths in their respective components. What do you get? A quality vehicle that delivers performance with a middle price range. The combination that's right for you does exist. The point is this: buyers have learned from watching the successes and failures of the delivery relationships and the industry. Buying solutions as building blocks not only fits budgetary parameters more appropriately, it also allows buyers to time the building block additions in a manner aligned with their changing business. This approach also fits well with a company culture that regards staying close to employees as a competitive advantage. The building block approach fits nicely with obtaining leading technology while delivering services internally.

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What approach fits your organization best? The market has evolved to present buyers with many options to achieve their HR delivery objectives:

* Multiple process HRO with a primary provider with fewer governance points of contact on the client side,

* Direct engagement with more than one provider for "best-of-breed" services with more control and involvement by the client, and often more competitive pricing for services, and

* Technology-only arrangements to support the client's preferred internal shared services approach.

Maturity of the market is driving other behaviors impacting the HRO industry. As recently as five years ago, buyers were hesitant to test HR outsourcing arrangements on their own. Almost every transaction between a buyer and provider had an advisory or consultancy involved. The advisor was positioned as a coordination point between the two entities, guiding the buyer on what was available, where providers had strengths, and red-flags along the way. The advisor drove the entire RFP, selection and negotiation process as new contracts were being established and guidance was focused both on the broad strokes of the scope of services as well as contract specifics like service locations and service levels. 

Fast-forward to today -- most buyers of HR services have been exposed to some level of outsourcing, either end-to-end or for core services (e.g. payroll, benefits, etc). HR buyers and their procurement leaders often have experience contracting for services, and advisors now offer high-touch and low-touch services to guide buyers as they need. Today's advisors also bring value to clients through knowledge of the ever-changing multitude of solutions offered, and a new depth of understanding regarding the functionality available and how that translates into competitive edge for the business. 

We're seeing a balance of buyers embracing new functionality and capabilities delivered through technology while retaining administrative activities at varying degrees. More often we see buyers shifting to internal transformation to improve the bottom line and retain control of how services are delivered when looking at HR beyond payroll, benefits, learning and some recruitment services.

So, no matter how far along you are with your sourcing strategy -- whether you're defining renewal strategy or considering a HR transformation of your operating/service/sourcing delivery model -- the options are plentiful, with changing technology at the forefront of developments impacting the HR market. 

At the end of the day, it's all about your competitive edge, and the HR market is presenting exciting new options to help you get there.

Pam Peters is a director for KPMG Shared Services and Outsourcing Advisory.

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