In the present slow recovery phase, customers are following a strategy of spending less and getting more. This behavioral change is emphatically visible in the Human Resource Outsourcing industry. Shaun Dunphy, Senior Manager, Alsbridge says, “The economic crisis has helped corporate centers to convince more country managers to get on board and support outsourced solutions. However, the general view was that the days of large scale multi-process HRO deals with massive upfront transformation were over. Customers are looking to reduce size, scope and contract duration of deals in order to give them more agility as their business situation changes.”
 
Buyers have reduced contractual durations from 5-7 years to 2-4 years with clear exit/break options  built into the contracts. This lays emphasis on the realization of early benefits and less complex transformation and redesigning at the start. Thus, customers are seeking more rapid implementation timescales of between 6-18 months. At the same time, they are expecting continuous improvement, transformation and innovation to be a standard feature of any contractual agreement at no additional cost.

Dunphy says, “Suppliers report that customers now accept that HR processes are 80% the same. This leads to the growth of multi-tenanted systems based on standardized business processes. However, suppliers are more selective when it comes to bidding for HRO deals. Some suppliers have categorically excluded large multi-process deals as the time to profit is too long, too risky and governance is tricky.”

Recruitment Process Outsourcing (RPO), driven by North American MNCs, and Talent Management in HRO, are regarded as a high growth market. This has led HRO suppliers to acquire or enter into strategic partnerships with niche RPO providers to offer end-to-end services. Learning and Development, integrated with Performance Management and Personal Development offerings, continues to do well in UK and Scandinavia.

Learning management services are requested more in the EMEA and AsiaPac regions than they are in   North America. Suppliers are focusing on “point solutions” for specific markets in order to win new business.

Cloud Computing
 
With the advent of Software as a Service (SaaS), there has been a significant shift in HR technology. Dunphy says, “Year 2010 could be a turning point in how HR services are delivered. For the moment it may be limited to the early pioneers to explore the art of the possible but even when all the hype is removed this looks like a viable alternative to the more traditional licensed, installed and expensively maintained HRM/ERP solutions of yesterday and today.”

“Early deals were expensive due to the inherent nature of the ERP software licensing, often with the insistence that the client would need to continue paying for licenses and annual maintenance. In more recent times with the arrival of generic ERP-based platforms such as those offered by NorthgateArinso (euHRka) and ADP (GlobalView) there has been a move towards subscription-based pricing as an alternative option. SaaS solutions will make this even more enticing provided that software vendors and HRO service providers work together to develop compelling business cases,” he adds.

Suppliers are investing heavily in their own HR Information Systems solutions. While behind the scenes this may be based on SAP, Oracle or Unit4 Agresso engine, there is a focus on supplier branding and improving end-user experience by adopting so called “Web 2.0” interfaces at the presentation layer.

To provide SaaS, suppliers offer their own system(s) and prefer that the customer migrates to their system. In most cases these are built on global instances of SAP or Oracle. However, at the “point solutions” end of the market such as Performance Management and RPO, there is more evidence of the growth of Web 2.0 solutions not based on the major ERPs. “Suppliers who do not offer their own system would work on whichever system the customer prefers. Even though many studies suggest that there is an important trend towards integration rather than functionality, suppliers still say that some customers demand processes such as recruitment and learning to be run on “best of breed systems” sitting under a customer-owned ERP system,” Dunphy says.

Overall, the next generation of HR solutions and services will be less HR-centric and more focused on operational business. “We are likely to see more involvement in the procurement process of COOs and their operational line managers who will want to understand how such solutions will help them run their business, especially in the area of workforce planning and management. This has to be good news for HR since it makes them an essential component of business success,” he says.

Pricing Trends

Taking a cue from the demands of customers, suppliers have also increased their pricing flexibility and are open to customer proposals during negotiations. Customers are interested in output-based pricing like subscription-based services, price per transaction (or service request) and smoother costing models which relate pricing directly to work undertaken rather than notional FTE (or headcount) savings.

Low cost entry models where the supplier effectively funds all or part of the design/implementation phases and then recovers the costs over the course of the contract are on offer but suppliers tend to charge high interest rates on the loan period.

“Gainshare models can be used for regional deals where cost reductions of 15-20% are targeted. Benefits-based pricing is often discussed but proves difficult to implement successfully for shorter term deals. Low cost entry models where the supplier effectively funds all or part of the design/ implementation phases and then recovers the costs over the course of the contract are on offer but suppliers tend to charge high interest rates on the loan period” Dunphy says.

“Furthermore, we expect to see additional mergers and acquisitions among suppliers aimed at increasing breadth of services, entering new geographic regions, or in some cases exiting the HRO marketplace.,” he adds.