A few years ago the predictions were lofty. According to the Yankee
Group five years ago, the human resource outsourcing market (HRO)
would be $80 billion globally by now, with half of that being the
Several years ago Decision Point wrote that by 2008 HR outsourcing
would be considered the fastest growing segment of the projected
U.S. business process outsourcing market, and that HR outsourcing
would generate savings of more than 30 to 40 percent for customers.
Two years ago a study by Hewitt predicted that companies would
expand HR outsourcing across the board, with significant increases
in the outsourcing of leave management, learning and development,
recruiting, health and welfare, defined benefit plans, global
mobility, and payroll by 2008.
Today, 10 years after its birth, most people I talk with in the
industry think the HRO market is stuck in neutral, or even reverse.
This sentiment surely comes on the heels of several U.S. companies
- including some notable companies such as Starbucks, Wachovia,
Conseco, Dell, Capital One, Lehman Brothers and UBS - who have
recently terminated or significantly altered their existing HR
outsourcing contracts. Others, such as Schneider Electric North
America, simply opted against outsourcing human resources. At the
end of October, HR outsourcing provider Convergys announced a
thirdquarter operating loss in its HR management business of $280
million on revenue of $59.4 million.
So what happened? There is no one finite answer, but clearly a big
reason for the slowdown stems from an inability of vendors to meet
clients' expectations. It turns out that in terms of outsourcing HR
functions, one-stop shopping may not be all it's cracked up to be.
Big market with big growing pains
Despite its issues, HR outsourcing is still a big industry -
estimated to be anywhere from $25 to $35 billion today - with
growth expected by most financial and industry analysts in the
future. Kennedy Information predicts the HRO market should reach
$50 billion in 2010, with a compound annual growth rate of 12
percent. It is also dominated by an elite group of vendors.
The Everest Group notes that five vendors control 76 percent of the
large company market and the top 10 have 92 percent market share.
This shouldn't be surprising. Outsourcing an HR function is a
pretty common practice - almost every company in the United States
outsources something. In a study my organization, the Institute for
Corporate Productivity (i4cp), conducted a few months ago, 95
percent of the companies surveyed reported that they at least
partially outsource one or more HR functions. Yet the exponential
growth spurts experienced during HRO's infancy have given way to
some serious growing pains.
In the case of Indiana-based energy company NiSource Inc., IBM's
inability to help the company achieve projected cost savings was
cited as a factor that led to the amendment of a 10-year,
$1.6-billion contract after just two and a half years.
Wachovia went through a similar scenario with its provider, Hewitt
Associates. Three years into a seven-year deal, the financial
services company took many HR functions back in-house or sent them
out to other vendors. In news reports about this decision, cost
wasn't cited as a reason for the move, but rather a desire to move
away from an end-to-end solution to a more blended approach.
These are just two corporate examples of a change to original HRO
Death of the Mega-Deal
It wasn't too long ago that announcements of singlesource, billion
dollar deals were a common practice in the HRO market.
However, with the many reported changes and cancellations to HRO
contracts, it begs the question: Is the current climate a harbinger
of the death of the HRO mega-deal?
Perhaps. Companies now seem to be more skeptical of vendors'
"one-stop-shop" claims, and are more willing to split contracts. An
example of this is American Airlines, which attempted to find one
single vendor to handle HR administration for the company's entire
workforce of 86,000.
"We wanted to work with one vendor, but no single supplier showed
any interest in what we wanted to do," Jeffrey Brundage, executive
vice president for human resources at the airline told an industry
publication. Instead, in the end American opted to sign deals with
both IBM and Mercer to handle different parts of its HR function.
Granted, each of these deals on its own may be considered sizeable,
but the fact remains that no single vendor was apparently able to
adequately meet the company's needs.
The list of reasons why companies shift direction with HRO
contracts isn't a surprise. Cost overruns, disappointing results,
and changing strategies are all reasons that have caused companies
to bring HR processes back in-house. But sometimes it's just plain
old poor quality that drives this decision. For example, catering
giant Sodexho decided not to renew its recruiting contract with
provider Berkeley Scott Group after concluding it could deliver
better results internally.
And that's ultimately the biggest threat for HR Outsourcing
companies - a feeling that "we can do this just as well or better
by bringing it back in-house." What does it take to bring an HR
process back into the organization? Time and money - and lots of
both. When NiSource amended its contract with IBM, it paid the
provider $44 million up front to acquire technology assets, and it
expected the transition to cost another $10 million, according to
Fear of this sort of financial pain makes companies reticent to
bring a previously outsourced process back in house. And most
companies are pretty inexperienced in doing so. In i4cp's
outsourcing survey, only 18 percent of companies reported that they
had ever taken an outsourced HR function back in-house, with poor
quality being the most-cited reason for doing so.
Yet some companies feel it can actually be cheaper in the long run
to just end the relationship. The United Kingdom's Automobile
Association (AA) - similar to AAA in the United States - terminated
a seven-year data center contract with IBM after a little more than
two years, saying it could run IT more cost effectively internally.
All of this pain points to the need to approach outsourcing
deliberately, diligently, and with a well-thought-out and detailed
plan. The most important decision is not how to outsource, but
whether to outsource at all. Jumping the gun on an outsourcing
decision often seems to lead to buyer's remorse.
One thing many experts agree on is the need to include backsourcing
as part of any outsourcing plan. Backsourcing? When developing a
strategy for outsourcing a process, companies should be cognizant
of the reality that this process may need to come back in-house at
some point. Some internal knowledge and expertise should remain, as
well as a plan for bringing the process back should the need arise.
The contract itself should include terms that lay out events that
would trigger backsourcing.
Future Catalyst for Outsourcing?
There are potential catalysts to get the outsourcing market going
again. Many believe that a down economy will actually help the HRO
space as companies look to shed expenses. An i4cp survey on cutting
costs found that 63 percent of the responding companies plan to use
outsourcing as a way to cut costs through 2009. Sales cycles,
however, are typically lengthened in a recession.
But the emergence of integrated talent management may be the bigger
excuse for senior management to make the tough decision. Today, in
simplistic terms, the pitch by HRO vendors is pretty
straightforward. Convince the CEO or CFO of a company that you can
not only manage HR more cost effectively, but you can also make it
The promise of integrated talent management has certainly captured
the attention of the "C-level," but its implementation also carries
a lot of political baggage. Trying to harmoniously unite various HR
silos has kept more than one CEO up at night. This is where HRO
companies, playing up their expertise in this integration -
particularly the technology aspect - will prove awfully tempting
for several companies. Look for many more "talent management
outsourcing" deals in the future.