Articles>HR BPO deals get bigger

Human Resource BPO deals are getting bigger
By Emily Leinfuss

Human Resources Business Process Outsourcing (HR BPO) may have existed since the 1970s, when companies farmed out a single, transactional task like payroll or benefits.

However, 1999 marked the launch of what experts call “full spectrum outsourcing,” which is the transfer of transactional elements of five or more major HR processes to an outsourcer at one time. That means a company will give the outsourcer control of any combination of HR functions, including benefits, health and welfare, performance, measurements and rewards, retirement, technology and so on.

But the deal is not the only thing. HR BPO is about creating a better service arena at the company level. It is about radically transforming how HR services are delivered. HR BPO’s main advantage lets an organization shed all the transactional, repetitive, important, but low value-added parts of HR and concentrate on the five essentials: sourcing, hiring, training, rewarding and developing human capital.

Today, about 10% of Fortune 500 companies have some kind of HR BPO deal that covers full spectrum outsourcing, estimates Naomi Lee Bloom, a Managing Partner of Bloom & Wallace and a recognized consultant and expert in the HR systems and HR BPO industry. “Between 50 and 60, depending on the exact criteria, multi-year, multi-process (e.g. core HRM recordkeeping, payroll and benefits administration plus HRMS with self service and call center) comprehensive HRM BPO deals have been signed to date,” says Bloom.

There is also a vast middle market of deals that don’t have that level of complexity. “Those (users) are signing up in droves,” she says, adding that through the end of 2004 there have been somewhere between 50 and 100 comprehensive middle market deals. “I define the "vast middle market" more in terms of their complexity factors than by their revenue or headcount. The bulk of the comprehensive HRM BPO deals being done in this market in the US are with Ceridian, ADP, and a host of lesser players,” adds Bloom.

In fact, consultant Bill Kutik, of Kutik Communications, asserts that HR BPO is the fastest growing segment of the overall Business Process Outsourcing (BPO) market. “It has become enormously competitive because vendors of all stripes have looked at the 10-figure, five- to seven-year deals that Exult was signing and said, “I want some of that.’”

As is generally the case with a hot industry where there is a lot of money to be made, the HR outsourcing business has attracted a large number of vendors in recent years. As a result, it is headed for a shakeout, leading to consolidation.

For example, last year Hewitt Associates, an HR BPO and consulting firm bought Exult, an HR BPO big-deal pioneer. Hewitt also purchased HR software vendor Cyborg Systems in 2003, creating a combined entity that has the capability to provide more of the full spectrum of HR functions in one outsourcing swoop.

“One of the reasons why Exult was willing to be bought by Hewitt is that they realized they needed a lot more domain expertise and relationships,” says Bloom. “This is a very tough business in which to make money. It’s very tough to get it right.”

Meanwhile, it only takes looking at recent news — namely EDS’ joint venture with Towers Perrin — to see how companies are joining forces to provide more full spectrum services. In January, EDS paid $420 million for part of Towers Perrin’s outsourcing business in benefits.

Another growing trend is offshoring on the part of the outsourcer. Many outsourcers are moving activities to lower cost locations. “India is already offshoring to China,” says Bloom. “The fact is you won’t know where anything is going, and you shouldn’t care, as long as there are the right security and privacy controls in place.”

With all this emphasis on creating the one-stop-shop for HR BPO, Kutik warns that user companies still may not get everything they need from a single entity. “The big lie in HR BPO is that you are handing over your HR department to a single vendor who will do everything themselves,” says Kutik. “That is not true. You are handing it over to a general contractor who is going to be managing many of the same vendors you used yourself. Yes, they will manage them better, but no, it is not a single vendor doing all your work.”

There are a number of advantages to HR BPO. Recent statistics show that HR BPO can lower the total cost of HR service delivery by 20% to 30% for the part of the service that is outsourced. It also gives companies access to new technology they can’t afford themselves such as employee self-service. In addition, with HR BPO, companies get better or at least equal service at lower costs.”

Of course, there will be some inevitable bad “train wrecks, says Bloom. “Big loud noises, deals going bad, customers jumping ship, lawsuits – the same thing we saw in the software industry,” she says.

“When you sign up with a comprehensive BPO provider, it’s a marriage,” she reminds buyers. “You need to make sure they are in a good position to succeed long-term.”