Rajesh Ranjan, research director, Everest Group offers insights into HRO
GS:What is the current market scenario and trends?
RR: After dipping sharply in 2008, new deal activity is back in the Multi-process HRO (MPHRO) market. Around 46 new deals were signed in 2010. The global MPHRO market witnessed a growth of 6% in 2010 to reach an ACV of US$3.07 billion. A substantial drop in terminations coupled with a significant number of extensions point to improved buyer satisfaction. However, given the increased adoption of a componentized approach, the average contract size and contract length of MPHRO deals continues to decrease.
GS: Who are the major players and what are their strategies?
RR: Everest classifies 15+ HRO service providers on the Everest Performance| Experience| Ability| Knowledge (PEAK) Matrix into the categories of “Leaders”, “Major Contenders”, and “Emerging Players”. The PEAK Matrix is a framework to assess the absolute market success and overall capability of service providers. We classify ADP, Aon Hewitt, Accenture, IBM, and Northgate Arinso as “Leaders”. “Major Contenders” comprises of ACS, HP, Capita, Ceridian, Capgemini, TCS, Wipro, Infosys, Caliber Point, and Logica. “Emerging Players” include Genpact, HCL, Neeyamo, and Xchanging. Beyond this Everest identified five service providers as the “2010 HRO Market Star Performers” – ADP, Accenture, NorthgateArinso, Aon Hewitt, and Infosys. These five service providers were chosen based on the relative movement on the Everest PEAK Matrix from 2009 to 2010 out of 15+ HRO service providers.
Service providers are adopting multiple strategies to succeed in the marketplace. Some of these are:
Inorganic growth through mergers and acquisitions e.g. Northgate Arinso’s acquisition of Convergys’ HRO business
Adding single-process HRO (SPHRO) service offerings e.g. Accenture and IBM now offer Recruitment Process Outsourcing (RPO) services
Expansion into new markets e.g. Accenture becoming more aggressive in the mid-market space
Strengthening offshore presence
GS What are the key drivers and issues?
RR: Cost reduction remains a top driver of MPHRO. Other important drivers include: managing compliance risk, greater alignment between HR and business strategy, and access to technology
GS: Recent deals and acquisitions in these segments and its impact on the industry?
RR: Some of the major acquisitions in recent times include:
Northgate-Arinso’s acquisition of Convergys’ HRO business
ACS’ acquisition of Excellerate HRO
ADP’s acquisition of Workscape
Aon Consulting’s merger with Hewitt
In terms of impact the merger and acquisition activity in recent times has resulted in a healthier service provider landscape. Quite a few of the acquired providers were struggling in their HRO business and hence were unable to make the necessary investments to enhance service delivery. Buyers of such providers can expect to benefit from the acquisition. Also, with most of the expected M&A behind the market, lesser M&A speculations in the market will also help buyers choose a service provider with more confidence. However, integration, both at the operational and cultural level, will be critical to the success of such mergers.
GS: What types of contracts are happening in the HRO segment currently and is there a difference as compared to the last year?
RR: There is a trend towards smaller deals of shorter duration. In recent years, there is a decrease in the number of processes included in MPHRO deals. One reason behind the decrease is the componentized approach to outsourcing being adopted by buyers where they first outsource only a few processes and then gradually include further processes.
Buyers are typically outsourcing the more transaction-intensive processes such as payroll first and gradually adding the more judgment-intensive ones such as learning and recruitment.
Certain processes such as recruitment and learning are increasingly being outsourced as part of single-process HRO (SPHRO) deals and seeing lesser inclusion in MPHRO deals.
GS: Is the transformation to HRO a challenge for enterprises today?
RR: Outsourcing led HR transformation presents several challenges that enterprises must overcome to achieve desired results. Everest’s research indicates that service provider selection, managing the outsourcing partnership, stakeholder engagement and alignment, cultural integration, overall change management, and transition-related issues are some of the major challenges faced in such undertakings. Service providers and buyers both need to be cognizant of these challenges and take appropriate measures to overcome these.