Yankee, Stay Home!
The first seven years of the HRO industry have seen the rise and consolidation of the U.S-based providers with only one notable European exception, Arinso (now owned by Northgate). Over time many have built service centers in India and the Pacific to utilize labor-cost advantages; those that failed to build centers in Asia rapidly found themselves at a pricing disadvantage.

Global Services PREDICTIONS

Payroll-administration services will continue to be amongst the largest HR process to be outsourced; compensation services will see some outsourcing; while performance-management processes will continue to remain largely in-house

While American companies will increasingly outsource to offshore providers in Asia and Latin America, European companies will prefer to nearshore to companies with centers in Eastern Europe.

India-based providers have long furnished services for some U.S. providers, and have helped them develop service centers in India. It was only a matter of time before the Indian companies began providing services directly to European and U.S. companies. The year 2007 saw the first major HRO service contract signed by CalibrePoint, the HR-services division of Hexaware. We believe there will be many more of these agreements, and the relative hegemony of the U.S. providers will come to an end. 

The final globalization of services in HRO will continue to develop, and we believe we will see the services beingprovided from India, China, the Philippines and South Africa. São Paulo will also become a major service cluster for BPO and HRO, as it has for IT services. The U.S. service providers will acquire or forge alliances with these providers, and the U.S. partners will provide marketing, complex systems integration and legal compliance services while the offshore partners will furnish cost-advantaged direct labor, systems and operation centers.

Asian Labor-cost Advantages Will Grow
Current labor-cost advantages in favor of Central Europe and Asia are eroding, but that effect is probably short-term. In 2007, the U.S. dollar fell substantially against major trading currencies such as the Canadian dollar, yen, pound sterling and euro. One effect of these currency rates is to make U.S. labor less costly than it has been in the past. There is little relative advantage today in moving services from the U.S.A. to Central Europe, and the advantage of moving services to Asia is less than it has previously been.

We believe this effect is short-term, and over the span of next two years currency rates will adjust to more normal trading ranges. An offsetting dynamic will be that inflation in wages will be much higher in India, China and the Philippines for HRO service employees, but those inflation rates are applied against a wage rate that is often no more than 20 percent of comparable U.S. wage rates.

The Flight to Quality
As many existing contracts come to an end, employers will begin to accept lower savings in exchange for first quality services. HR executives want to help their chairpersons reduce selling, general and administrative costs, of which HR service-delivery costs are often a substantial component. But since many early deals had very loose service-level undertakings, many HR executives have not gotten the quality of services they expected. Organizations that have signed HRO agreements have captured the biggest percentage savings they will ever see; now, they are increasingly turning to top-notch services for their employees and retirees. 

We see this phenomenon clearly in the refusal of employers in the U.S.A. and Europe to accept call-center services located in Asia. The language barrier for voice services is often judged to be too acute to justify realizing the cost savings to be captured from an Asian call center. While there are exceptions, employers demand that call-center services be maintained in the U.S.A., Canada or Western Europe.

Demand Will Sometimes Exceed Supply
The available supply of visionary HRO people who know how to make payroll consistently, to handle open annual enrollments, to deliver quality training content and other core HRO services is not keeping up with demand, which has been growing by 15 to 18 percent compound annual growth every year for the last three years. This will lead to wage acceleration for providers, margin erosion and raiding other providers (especially of benefits administration and compensation providers) for resources. Ultimately, the dominant provider players will be those companies that can obtain and retain quality delivery people.    

Lowell leads EquaTerra’s HR outsourcing and insourcing practice. He has more than 26 years of international HR outsourcing expertise, including account management, contract management and executive-level HR project management. He has advised companies such as British Petroleum, General Motors, Goodyear, Marriott, Whirlpool and TXU.