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What The Leader Needs To Know:
Competitive Issues For The HRO Provider
The Opportunity
This article is focused on the challenges faced by
the leaders of Human Resources Outsourcing (HRO) providers.
According to Gartner1, the HRO market should top $51B by the end
of 2004. A compound annual growth rate of 12% is predicted for the
next 3 to 4 years. It’s an attractive market but one with
particular risks.
Our review of HRO identified risks to HRO providers. The list is
not exhaustive and not all will face all these risks. Still it’s
prudent to reflect on them if you’re a leader of an HRO provider.
- Cost Reduction: The Basic Proposition
The clear number one reason for a company to outsource HR is to
reduce costs2. Improved service is a distant second. There are two
major problems with cost-reduction being the core proposition of
HRO.
First, many HRO providers are “stalking elephants”.
The high end of the market is seen as the most desirable. Here are
some problems with this:
- Negotiating power – the telcos learned the hard way that
big business accounts wield their power and crush margins.
- Transfer of infrastructure and employees is a core part of the
deal with big accounts. Your margins rely on greater efficiency.
Efficiency creates excess capacity. What do you do with it when
clients expect you to pick up their resources?
- Low frequency – big deals equal long sales cycles. According
to Business Week (October 4th, 2004) JPMorganChase’s canceling
of their BPO contract with IBM is going to make client’s more
skittish; likely driving even longer sales cycles.
Second, a focus on cost-reduction increases the next two problems.
- Low Cross-Selling
Prior to being acquired by Hewitt, Exult had difficulty selling
additional, higher margin services3. If I brought you in to save
money why are you asking for more?
- Commoditization
Recently of 70 HRO providers only 5 enjoyed consistent name recognition4.
Two of those (including Exult) have been acquired since. There
is no brand leader. Absent strong brands and focusing on cost-reduction
this industry’s margins will erode.
- A Talent Gap
A leading HR authority5 recently found most HR professionals lack
business acumen and skills. If you acquire these people in your
deals – your talent pool may not be adequate to run an efficient
business.
- Poor Execution
The selection, negotiating and transition processes are uniformly
viewed by clients as chaotic and frustrating. clients and experts
consistently recommend the retaining of an HRO consultant to address
this issue6.
How To Leverage It
Here is what you need to successfully build an HRO provider.
- Change The Basic Proposition
Your offer should include the ability to directly
accelerate your client’s business results. That is not just
saving expenses. The focus should be on providing concrete means
to exceed solid financial measures. It’s been proven that
this is possible7. Repositioning your HRO business to deliver “profit
maximization” would address the problems of commoditization
and difficulty in cross-selling higher value services. Clients
are unlikely to spend more to save more – but will spend
more to make more. Imagine if your brand stood for “Using
HR to maximize profit”. A focus on such a hard financial
measure has been suggested as what will make HR a truly strategic
function8.
Short and long-term success in HRO can’t be achieved on the
current playing field with the current play book. In a competitive
market the winner is often the one who changes the rules. Why not
be the winner?
- Consider The Middle Market
Here’s just a few reasons why you might want to focus on a
market that consists of as many as 75 million employees –
just in the US.
- Shorter sales cycles – you are more likely going to
be able to deal directly with the decision-maker and they haven’t
got time to drag this out.
- Outstanding service – your platform and people are
well beyond the scope and quality of what many middle market companies
can or will invest in. There is real opportunity to outperform previous
service levels.
- Utilizing capacity – particularly if you focus on
growth companies in the middle market. They’ll have a genuine
need for the capacity that you’ve acquired from your larger
clients.
- Less competition – your competitors are going after
the “elephants”. Let them fight it out for long-term,
lower margin deals.
- Shorter contracts – a 10-year deal for a service you
haven’t perfected is high risk. An annual contract or a two-year
deal should be much safer, with higher margins and generally more
attractive to both provider and client.
- Partnership – is a more realistic possibility when
your clients are “…not big enough to have teams dedicated
to squeezing vendors or to employ sourcing advisors …”9
- Build Your Talent
If your talent consists predominately of HR professionals you’ve
acquired from your clients why should they expect superior results?
Especially since HRO is a greater challenge than HR. HRO professionals have
to manage client relationships, understand the client’s business,
manage a P&L, market, sell and do it all with greater efficiency
than HR organizations that don’t have these additional responsibilities.
Here are some investments you might consider.
- Senior/Cross-functional Business Development Teams
Consider teams of senior people with breadth and depth in the following
areas: marketing & sales; customer service; relationship management;
finance; operations; IT; and, of course, HR. This is a tall order.
However, only senior, high caliber talent across these areas can
quickly win contracts and efficiently and effectively handle the
transition. Investments here will be well returned in improved close
rates, cycle times and market reputation.
- General Management
The senior executive responsible for HRO engagements on an on-going
basis needs to be a competent, seasoned general manager. They are
responsible for running a business that delivers HR services –
not for running an HR function. A critical distinction in selecting
and developing talent. Many providers put senior consultants or
HR executives into these roles. The competency set is not a fit.
- Core HR Professional Competencies
In addition to HR areas, your HR professionals should be competent
in: understanding and aligning with the client’s business
strategy; influence; organizational change; and consulting.
- Universal Customer Service Learning
There is tremendous value in every member of your organization knowing
what you promise to your clients and how to deliver against expectations
on a consistent, reliable basis. Great damage is done by well meaning
employees not skilled in this area.
- Perfect Transition
Make your company easy to do business with. Right now no one is
perceived as getting transition right. Here’s your opportunity: Be so exceptional at transition that
you provide value from the moment your team introduces themselves
to a prospect. For example, provide prospects with a framework for
establishing the current real costs and real returns on their HR
function. Go further and be able to provide them with hard dollar
costs and returns – not estimates with disclaimers like “…estimates
are based on our experience and the best available information…”
Be so good at it that your team can do it quickly, flawlessly and
for free.
In a situation where the prospect has employed a “sourcing
consultant”, provide outstanding value that surpasses the
expectations of both the consultant and the prospect; “Here’s
the information you requested and three other analyses we thought
would be helpful.”
Be great negotiators. Have 3 – 4 solid frameworks that offer
true win-win solutions. Know what you will and won’t consider
– and why - before you start. Be masters at plain language.
This new industry is replete with stories of transitions being stopped cold because providers
and clients disagree on what was agreed to.
Take lessons from retail when you are actually switching over from
the client’s platform to yours. When Home Depot or Lowe’s
opens a new store it’s done against uncompromising standards,
a hard timeline and with great speed. HRO transfers often feel and
look like they are being made up as they go along. Resentment on
both sides builds as costs and timelines continue to grow.
If you invest in these four areas you can begin building a premium
brand, capturing market share and building margins.
1 (2004) Lawler, Ed. E. III. HR on Top. Strategy+business (35)[Return
to Article]
2 (2004) Gartner.
Outsourcing HR Business Processes: Key Trends and Success Factors.
In: Successful IT Outsourcing: Strategies, Tactics and Management
Approaches. Gartner Executive Report Series.[Return
to Article]
3 (2003) Zimmerman,
E. Exult’s CEO, Now Turning a Profit Transitions to the Next
Stage. Workforce[Return to
Article]
4 (2004) Crespin,
R.J. & Flom, B. The Battle of The Brands. HRO Today Magazine.[Return
to Article]
5 See note 1, above.[Return
to Article]
6 (2004) Dennison,
Timothy. HR Outsourcing: Conference Board Research Report R-1347-04-RR[Return
to Article]
7 (2002) Fields, Gary
S. In There or Up Front? : An Introduction to Bottom-Line Human
Resource Management. Working Paper 02-07, Center for Advanced h\HR
Studies, Cornell University. (1997) Huselid,
M., Jackson, S., Schuler, R. Technical Strategic HR Management Effectiveness
As Determinants Of Firm Performance. Academy of Management Journal
(40:1), pp. 171 – 188. [Return
to Article]
8 See Fields in note 7 above.[Return
to Article]
9 (2004) Mehl, R.
follow The Money: Middle Market HRO. HRO Today Magazine.[Return
to Article]
© 2004 Flanagan Consultants, LLC. Terms and Conditions
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