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Human resources (HR) is the largest and fastest-growing general and administrative (G&A) outsourcing function with a total size of approximately $30 billion and an annual growth rate of eight percent, according to the Everest Research Institute. Within this market, the full-service outsourcing market (HRO is the fastest-growing market. Currently at about $1.5 billion in revenue, this market is growing at 40 percent a year. The Institute expects the full-service HRO market to be at least 20 percent of the total market in the next five years.

Here are the trends that may affect HR next year:

Human Resources (HR)

1. HR offerings will have to be global.

"As outsourcing buyers become more global, so must suppliers," says Peter Hirano, Senior Vice President and Global Product Manager for Professional Services for Convergys Employee Care. Multinational buyers with employees in North America, Europe, and Asia/Pacific want a supplier "who can deliver one solution that services everyone in their own language," he says.

Jim Konieczny, HR Outsourcing Global Operations Leader for Hewitt, says next year buyers want processes and systems they can leverage around the world. "The more commonality you have, the better off you are," he says of suppliers. He says Hewitt has spoken with some prospects that have six ERP systems around the globe. Now they are searching for a supplier who can provide a single, comprehensive solution. Hewitt has secured two global deals including Sun Microsystems and Pepsi Co.

Suppliers who don't have global capabilities will have to build them this year, Konieczny says.

2. The supplier market will continue its consolidation.

Hirano sees the consolidation on two fronts. First, suppliers will continue to decide to exit the market by selling their HR portfolios, like Mellon did to ACS.

The second way the market will constrict is for the big suppliers to buy niche players to expand their offerings. Likely candidates: compensation experts, recruiting experts, and performance management companies. "HRO suppliers need to expand their offerings to add more impactful areas," he says.

3. Retiring baby boomers will create more HRO opportunities in the US.

Bob Shultz, HP's Vice President and General Manager for BPO, says there is concern that a large part of the skilled work force will begin to retire "any time now, which will lead to a knowledge void." (The oldest baby boomers turned 60 this year.) He says companies are looking at HRO providers to "move up the value chain and add services like succession planning."

4. A worry: Will demand outstrip supply?

The market is by no means mature, but Konieczny suggests that if deal acceleration continues, HR demand could outstrip supply. "The market could absorb that volume, but some suppliers couldn't do the transactions well," he says. Buyers, now experienced and educated, would know.

5. 2006 will be the year of execution.

Vipul Taneja, HR expert with Everest Research Institute reports there were at least 68 HRO deals signed since the start of 2004. Hirano says next year all these deals have to go live. "We will have to watch the capacity of suppliers to execute well on this volume of work," he observes.

6. Suppliers are working on their offerings to integrate self-service technologies on the Web with transactions.

Shultz says this is the next generation of HR transaction engines.

7. The scope of HRO deals will expand next year.

Christian Marchetti, Managing Director of Accenture HR Services, predicts a wider scope. Seasoned HR buyers will expand their outsourcing to include resourcing, advisory services, and exit management, for example. "At this stage buyers know there is a lot more to HRO than just payroll and benefits," Marchetti says.

8. Buyers will combine HR with other BPO processes.

Marchetti sees buyers combining HR with learning, finance and accounting or procurement. "In the case of procurement, organizations are realizing that HR people-related costs represent only 50 percent of the total HR function cost. They now understand there can be significant value by tying in such a process with HR," he says.

Learning

1. Buyers will combine learning with their HR offerings. Hirano says buyers want to expand their HR capabilities, and learning is an obvious choice. "Together they are a holistic solution," he says.

2. Like its other BPO cousins, the focus is going from cost savings to value creation.

Cost reduction will always be at the forefront of an outsourcing deal. But creating value will become the primary driver for learning initiatives, according to Ellen Balaguer, Managing Director, Accenture Learning. She cites a 2004 Accenture study which found the ability to more effectively retool a workforce correlates to achieving higher productivity, revenue, and profit growth. When compared to competitors and industry peers, companies with such ability saw their productivity was 27 percent greater, revenue growth was 40 percent greater, and net income growth was 50 percent greater. When companies get things right in their workforces, it can be a significant contributor to value," she posits.

3. The aging workforce will stimulate learning outsourcing.

Balaguer says with baby boomers getting close to retirement, companies are getting serious about using learning to fill those shoes. "Companies that have traditional engineers will face that issue front and center next year," she says, since the anticipated retirement dates begin by 2010, now just four years away, and continue onward from that date.

The Accenture executive says an Accenture poll found only 10 percent of the executives queried were satisfied with the progress they are making on boosting workforce productivity. "Outsourcing puts the problem in the hands of a highly focused and specialized provider who the buyer can hold responsible on a service level agreement (SLA) basis," she says.

4. The number of learning deals should grow in 2006 after a sparse 2005.

Hirano predicts an up-tick in contract signings next year. He says the landmark deal AT&T did with IBM this year should create more interest in learning outsourcing.

5. Buyers who face renewals next year want more flexibility in their contracts.

Balaguer says buyers need their learning contracts to "be more nimble." She says the issues of "speed and flexibility are at the top of the minds of our buyers." She says buyers need this flexibility to respond to their constantly shifting marketplace as soon as possible.

Publish Date: November 2005

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Copyright © 2005 - Everest Partners, L.P.

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