Human Challenges

The german weekly “Computerwoche” published an article last week entitled: “Is there a european market for HR Outsourcing?”. They refer to a european conference on HR Outsourcing (HRO) held in Brussels beginning of this month (HRO World Europe 2006 - Future-Proof HR Transformation). The provokative intro statement from Euan Davis, Senior Analyst at Forrester was:” There is no market for HR-Outsourcing.”

But how can it be possible then that companies like Hewitt make $1.5 billion in revenue with HRO, 20% done in Europe? Hewitt had become one of the biggest providers for HRO solutions after the acquisition of Exult and was able to close a large number of deals as a consequence. Still in 2005 13 contracts were signed. In another article from “Computerwoche” in August this year Hewitt's former CEO and Chairman Dale Gifford was cited saying that Hewitt took on too many contracts in a short period of time and underestimated the complexity and cost associated with delivering on those contracts. In February this year Hewitt openly stated that the operating margin of the whole company would be impacted by the HRO contracts signed in 2005.

On November 10 Hewitt published the results for the last quarter. Donald Glade takes this up in his blog “ Hewitt's Financial Results, What do they mean?” to analyze the state of the industry. Hewitt's outsourcing business still experiences declining revenue, income and profitability although the overall market of BPO (Business Process Outsourcing) still grows although behind expectations.

In fact many potential buyers evaluate HRO but do not commit themselves over concerns about delivery. Donald refers to an interesting article in “ HRO Today” about this phenomenon. And also the “Computerwoche” article from last week is citing statements of big companies like the german chemical giant Bayer or the British Royal Mail that moving to full outsourcing would be too complex in one step. Streamlining processes internally and then establishing Shared Services Centers could be interim steps to move to a full HR BPO model.

It looks like full HR BPO may not be the most favorite outsourcing alternative companies pursue. Does the overall BPO market growth come more from other directions? Phil Fersht in his guest entry at Jason Corsello's blog writes about “The Great Outsourcing Divide: Where HRO Has Been Challenged, FAO is Blossoming”. He makes the point that HRO is more complex and sensitive as FAO (Finance and Accounting Outsourcing). A company wide HRO initiative impacts the lives of all employees and managers across an entire organization. He furthermore states that “ HRO can negatively impact an entire organization if the relationships between the service provider and the buyer’s governance team are not well defined. This can particularly be the case during the early transition phases post-transaction. Areas of impact, for example the introduction of self service tools and high-touch offshore employee care representatives, need to be managed and communicated extremely diligently.”

Unilever, one of the world's biggest consumer goods businesses outsourced HR to Accenture. At HRO World Europe they were stating that it was difficult to find a provider who could offer global services. “Computerwoche” cites Christian Marchetti, Accenture's Managing Director for the HR Services business stating that it is a competitive advantage to have the willingness, the skills and the experience to adapt to the European diversity that is inherent to big HRO deals. Only few providers could actually prove that they are up to deal with this diversity. As Hewitt, ACS and Convergys some of them admitted to have underestimated the complexity of big outsourcing deals.

Although there is reluctancy to enter into big HR BPO deals according to IDC the HR BPO services business grows at 16% in the US. RPO (Recruitment Process Outsourcing) may be partially the reason for this. A new trend in the US that starts swamping over to Europe. At this stage though most projects in RPO are about simple services around elements of the hiring process. It looks like there are no examples yet of outsourcing of the complete end to end process.