Outsourcing - Full Service HR BPO Has Crossed the Chasm



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Full Service HR BPO Has Crossed the Chasm
By Michel Janssen, Managing Director Everest Research Institute

HR BPO crossed Chasm There is nothing new about using outsourcing in the HR department. Outsourcing payroll processing, benefits administration, staffing, etc. has been going on for many years. Providers such as ADP, Hewitt, Fidelity, etc. lend credence to the value many companies have seen from outsourcing portions of their HR functions.

But in these apparently calm seas, a storm has been slowly building. The concept of "Full Service HR BPO" is starting to become a very real business trend discussed in senior executive suites across North America.

Full Service HR BPO includes all key HR processes with the exception of HR strategy. It includes many transactional services, such as payroll, benefits, staffing etc. The buyer sees the provider as its internal HR provider.

Transactional HR BPO is the outsourcing of component pieces of the overall HR process, such as payroll, benefits, staffing, etc. There may be multiple providers providing HR services to the buyer. However, the internal organization is seen as the integrator of HR functions.

During the past year, we at Everest have been fully immersed in this activity and see clear changes in market trends from both a buyer and provider perspective. In any emerging market, there will be a definite pattern as to how the market adopts new concepts. To help illustrate this point, we utilize Geoffrey Moore's "Technology Adoption Lifecycle" to help explain the current market position. In his book, Crossing the Chasm, he says "the chasm" has been crossed when buyers change from being primarily only technology enthusiasts and visionaries to being a mainstream market. Crossing the chasm is marked by a general dearth of activity as the mainstream market watches to see if the early adopters prove the business case. We believe "Full Service HR BPO" has crossed the chasm.

While HR BPO is not a pure technology play, there are relevant technology-like attributes. The widespread adoption of enterprise resource planning (ERP) systems is creating de facto standards that service providers can leverage across different organizations. The decision to have customized travel and entertainment processes, HRIS reporting systems, training materials, and other services is falling out of favor; at the same time outsourcing is an excellent way to achieve industry best practice.

Finally...Signs of Success

The promise of HR BPO is that outsourced solutions provide leverage (benefits). While it took the early transactions some time to get there, we are starting to see evidence of success. The easiest reference point is to watch the Full Service HR BPO pure play, Exult. Exult made its first profit during the 4th quarter of 2002; Wall Street expects the company to earn 14 cents per share for CY 2003. (See Exult Exults: Start-up Announces First Profit )

The evidence that supports the observation that HR BPO has crossed the chasm comes in two forms:

The number and types of transactions have substantially improved going into 2003.
There is a direct correlation to these transactions in terms of the number and types of suppliers that have entered this market.

Moreover, we anticipate numerous transactions are likely to sign during 2003.

Number and Types of Transactions

Prior to 2002, Exult made headlines with transactions like BP and Bank of America; Accenture (via its ePeopleserve venture) with its BT and Cable and Wireless transactions; and Synhrgy with the United Healthcare transaction. There is no doubt that these were landmark transactions that signaled the beginning of the early adopter phase of Full Service HR BPO. Many of these transactions also included some sort of equity sharing if the new business model proved successful.

The transactions in 2002 started to take on a more traditional flavor -- Mellon with its American Express and BASF transactions; Hewitt with Sony Electronics (US); and Convergys with the State of Florida were transactions that relied on more traditional outsourcing value propositions. The reasons for the transactions being done now include: cost savings on the direct cost of providing HR services, avoidance of large-scale ERP projects, and/or need to upgrade functionality to a self-service model.

Number and Types of Providers

Keeping up with the rapid pace of change in this market has become a real challenge during the past six months. We have seen many new providers announce transactions; some are names that we were not necessarily expecting. We have grouped these providers into five general categories:

Supplier category	Examples	Strategy
Pure play	Exult, Synhrgy, Xchanging	Built their operating leverage around 2-4 clients with a very narrow focus on HR BPO.
Traditional outsourcers	EDS, IBM, ACS	Leveraged their IT experience and their outsourcing experience into providing HR services.
Consulting	Accenture, Deloitte	Utilized their HR consulting expertise and extensive C-Suite relationships.
HR Specialty	ADP, Fidelity, Hewitt	Expanded the scope of their services from transactional outsourcing to full-service capability.
Corporate Services	AON, Convergys, Mellon	Leveraged their relationships to move from existing disciplines into the HR space.

As we examine the categories above, it becomes clear that many different types of providers are sensing opportunity and are all converging in this space. It is also likely that this market will undergo significant change over the coming years as the Darwinian process of capitalism plays out.

Numerous Transactions Are Likely to Sign

Everest has significant visibility into deal signings that are likely to happen during the next six to nine months, and we can report that the amount of activity during the later half of 2002 and going into 2003 has picked up significantly. We can group these potential signing scenarios into two general categories: (1) the mega HR transactions that will be scoped as standalone transactions, and (2) those that will be signed as part of a larger "enterprise" BPO relationship. In the latter, HR may be combined together with finance and accounting and/or procurement, and/or other processes for more dramatic leverage benefits.

While it is hard to forecast a precise number, a safe bet would probably be the 2003 numbers will double over the transactions of all prior years. Given that we believe there currently are 20 to 25 full service HR BPO deals that have been announced, a doubling would represent an additional one to two deals per provider in 2003.

The Other Side of the Chasm

Now that Full Service HR BPO has crossed the chasm, what lies ahead?

Look for numerous transaction signings, especially during the latter half of 2003. Within nine to 12 months, the number of Full Service BPO relationships is likely to more than double.
Expect traditional outsourcing players to further clarify their approach to the market.
Anticipate one to two significant acquisitions later in the year as the market consolidates around "winning" value propositions and key players seek to acquire the necessary capabilities and market position.

Everest expects 2003 to be an exciting year for BPO and looks forward to HR BPO leading the way.

Lessons from the Outsourcing Journal:

Full Service HR BPO has crossed the chasm and is being accepted by the mainstream marketplace.
Many different types of providers are sensing opportunity and are entering this space.
This year, the number of Full Service HR BPO transactions will double.

*Note: Everest is currently conducting a comprehensive analysis of the Full Service HR BPO market. Please contact me at mjanssen@everestgrp.com for more information on this analysis or to get a copy upon its completion at the end of the 1st quarter of 2003.

Publish Date: February 2003

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