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The Big HRO Deal Is Back. Thankfully, It Has Grown Up By Marc Pramuk, Vice President, Research, Everest Research Institute
Convergys expects to generate $1.1 billion in revenue over the 13-year agreement. DuPont expects to realize a 20 percent productivity improvement in the first five years and 30 percent thereafter. Why is this contract important? One belief is that it is a harbinger that the HRO mega-deal is back. The human resources outsourcing (HRO) world hasn't seen such a big deal since 2001. Those were the days of turbulent, optimistic growth. Back then HRO suppliers scrambled in a mad land grab. Using a lift and shift model, often suppliers bought staff, data centers, and technology from their buyers as a means to create their own infrastructure quickly. Then they tried to leverage what they had integrated as an offering they could sell to other buyers. In hindsight, there was a lot wrong with this picture. Suppliers oversimplified the complexity of the HR problems they were trying to solve. One company's HR solution was difficult to morph into a universal solution. Too often, suppliers gave in to many of the specific requests of prospective new buyers, creating yet another custom solution. As such, it just didn't scale. Delivering the goods was a lot harder than they envisioned and required a lot more investment capital than they budgeted. More importantly, given the economics of HRO and the significant up-front sales, design and operations costs, suppliers needed a way to shorten time-to-revenue recognition. First, Suppliers RegroupedSuppliers spent the last two years regrouping. Many spent as much as a year eschewing sales pursuits so they could get their strategy and their offerings in order. More frequently they found themselves walking away from deals when it was clear they were uneconomic. They shied away from the big deals, pursuing more manageable deals while they figured out how to make this work. Now HRO suppliers are ready to reemerge and to reshape the HRO industry. And they have learned from the deals of the past. Working with moderate-sized companies has taught them how to do it better, and great strides have been made in optimizing the business models to succeed for both buyers and suppliers. Fortunately, 2006 looks like it will be the year HRO suppliers have grown up. This will be the year of execution, as HRO suppliers demonstrate how to build and manage effective service delivery models that meet both the buyer needs for quality and value as well as the business needs for scalability and profitability. Meanwhile, Buyers Got SmarterBuyers continue to want to outsource HR, but they want to be smart about it. After all, if you are doing a $1 billion deal like DuPont did, you want to make sure you select the right supplier who can deliver what you need. Buyers increasingly are hiring advisors to help guide them. According to our observations, only one-third of HRO buyers to date have used an advisor. As most buyers had never done an HRO deal before, doing it on their own risked being the blind leading the blind. First time buyers don't have access to a rich body of HRO trends and data points to help them to make objective decisions or determine appropriate trade-offs. Today, approximately 75 percent of HRO deals have an advisor supporting the buyer. Advisors are a good idea because they bring a structured due diligence to the selection process. They help buyers make high-risk decisions using a methodology for auditing current operations and determining the potential for value creation through outsourcing, as well as data on supplier strengths and weaknesses to guide supplier selection, and deep experience to mitigate the overall risks associated with outsourcing. On top of this, buyers have become better buyers by focusing more on the value and outcomes and less on the transactional elements within HRO. In the early days buyers were primarily concerned about cost savings and didn't focus on the big picture. On top of this, they tended to focus on what they knew, that is, the details of specific HR processes. There wasn't enough focus on the big picture, zeroing in on the things that really could make a difference in overall HR service delivery. In short, they didn't concentrate enough on the "whats" and "whys" (i.e. What do I want to achieve by outsourcing? Why are you doing this?) and spent too much effort on the "hows" (i.e., Here is how I want you to do things for me). Much of the impact in HRO comes from leveraging the expertise of the supplier to help you determine the best solution to your business needs. TCS Provides a Common LanguageFive years ago, HRO was about the total cost of ownership (TCO). Today the real concern is about the total cost to serve (TCS), which includes all of the people, process and technology costs of service delivery as well as the hidden HR costs, like those buried in the finance or IT departments. Buyers who know their TCS have a good grasp of the true cost of their HR operation and a better basis for understanding and evaluating the service delivery options proposed by potential HRO suppliers. TCS also provides a meaningful way for understanding and considering trade-offs in service delivery design, as it shows the interplay of cost and quality decisions within the delivery architecture. Advisors are helping clients to determine that number, which they are sharing with suppliers to craft wise decisions for all involved. With the increasing maturity of suppliers and buyers in HRO, and the use of fact-based tools for decision-making such as TCS, we predict this year we will see additional HRO mega-deals. There also will be many moderate-sized deals, reflecting the increasing buyer interest in comprehensive HR deals across company segments. Why? Because buyers are better able to see and understand how suppliers can deliver greater value. HRO is growing older and wiser. And the parties involved are having more grown-up conversations. Lessons from the Outsourcing Journal:
Publish Date: March 2006
Copyright © 2006 - Everest Partners, L.P.
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Last November DuPont signed a contract with 
