HRO & HCS Marketplace Landscape
An Introduction to HRO (human resources outsourcing)
Almost every organization outsources part(s) of HR (human resources). Most businesses use 3rd parties to perform payroll, job recruiting through job boards like Monster or social media sites such as LinkedIn, background checking, assessments, and benefits administration.
An outsourced provider uses a combination of technology, certified personnel, and streamlined processes to more effectively perform a transaction for the buying organization than can be efficiently done inhouse.
For HR, HCS (Human Capital Services) and related workforce management solutions (WFM), technology has outpaced user adoption. Today, the demand from consumers to have the same technology experiences at work as they do at home, along with the changing workforce dynamics, is driving the future of HR software and human capital services (HCS).
Technology has the capability to automate basic transactions and functions, and to support employees so that they can self-manage much of HR that was previously done by admins and HR staff. The result is that enabled organizations can focus on their core. And for employers, today’s solutions can deliver reduced cost structures such as:
- The deployment of self-service gives employees and managers direct access to a wealth of information and tools. Through employee self-service systems via intranets, employees can access the information and support to manage their own health benefits, 401(k) programs and day-to-day HR transactions.
- Providers handle processes that are not core to operations such as: benefits administration, payroll, assessments, workforce analytics, and recruitment-process outsourcing.
- Shared-services model for back-office functions: Every non-strategic HR function -- administrative support, research, document centers, benefits, billing and payroll, among others -- is taken out of the hands of internal employees and managers. This centralization reduces costs and allows front-line people to focus on higher-impact work.
Essentially, anything that is a transaction can be automated, standardized, and streamlined. With all of this electronic, self-service, outsourced and integrated HR, one might think that the human resources department is being marginalized, but actually, HR is becoming more critical, and more strategic as its professionals are freed to focus time and resources on critical business outcomes: a) workforce management, b) talent supply chain management, c) or workforce analytics specific to the business such as labor matching (job costing meets real-time scheduling and workforce planning).
HR Software Technology, HCS, & HRO History
The market for workforce technology and HRO solution providers (otherwise referred to as HR technology, HRIS, HRMS, HCM, talent management and a host of other clever names and acronyms) has come a long way over the years with the constant being evolution. Another constant has been that the technology capabilities have outpaced the adoption and use.
The utilization failure is in part due to overhyped promises an the part of providers and poor business processes by the buyers. In fact, the majority of implementations deployed have failed to fully utilize the entire suite of possibilities for HR technology.
The history of HR technology has evolved as the focus of the human resource function has changed. And the scope and strategy and technology will continue to change over time as it always does: from human resources being called “Personnel” before the 80’s to “HR” in the 80’s and 90s to “HCM” in the 2000’s to something else before we get to 2015 in the opinion of most experts believe.
The market for HR technology: According to multiple analysts and industry sources, the total potential market of large American enterprises seeking is between 25k North American organizations excluding government with greater than 10k employees. The mid-market for HR technology is approximately 100k companies with 1,000 to 10,000 full-time employees.
The current HR technology priorities include “workforce management utility features” and being able to offer a suite of “HCM” for the complete “lifecycle” and other buzzword bingo phrases. The priorities for the providers center around the need for technology to be “Easy of Use Out of the Box” without extensive coding and implementation. This means that the user interfaces have to be straightforward, features have to be pre-configured and support services beyond implementation are available (“Solution not Software”).
The future of workforce technology players will consolidate into the following camps: solution providers, system of record providers that include a suite of processes, and app providers.
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Payroll Staffing Market Landscape
The marketplace for workforce management software and related BPO including content, software, services, and outsourcing solutions consists of thousands of firms worldwide. However, by function and by industry leaders exist.
The goal of HR software is to automate key elements, coordinate the human aspects, and measure and analyze it all. To satisfy customer demand, payroll providers must move beyond payroll services to offer HRMS technology as well as both HR services and FAO services (primarily time tracking and expense management). In summary, a shift has occurred from historically only managing “employee transactions” to greater ROI.
While the payroll market for small businesses with less than 50 employees is highly competitive (“red ocean”) between several different vendor types; there are approximately 50 players with significant, meaningful revenues ($10M - $100M in annual recurring non “pass-through / non-reseller revenues) in the United States. For multinationals and global organizations there are a dozen global payroll service providers.
The middle market of small and medium organizations with 50 to 5,000 employees representing greater than a million USA businesses is wide open as no dominant nationwide leader exists. Regional and industry specific payroll and beyond service providers do exist as highlighted in the table below. Download our Payroll Mid-Market Landscape Report.
In addition to local accounting firms and banks, which are increasingly choosing to be referral sources and turn to private-label partners for payroll services, the landscape can be categorized into the following primary buckets of competitive players:
- The big four “umbrella” brands – ADP and Paychex together control a significant share of the target market and continue to grow based on their sheer brand recognition and referral base. ADP primarily focuses on the mid-market and Paychex targets the lower end. Ceridian focuses up market and Intuit’s focus is with very small businesses. ADP and Paychex are the big targets and are showing vulnerabilities to the up and comers based on technology, service, and price.
- Licensees – there are ~300 active service bureaus ranging from $1M to 5M in annual recurring revenues that are delivering their service based on licensed technology from a handful of software vendors in the market who in turn receive an average of 3 to 9% of the service bureaus’ revenue. These licensees are primarily small businesses that are operated on a lifestyle basis and were initially started based on local relationships.
- There are approximately ~50 smaller payroll providers and a “handful” of larger players whom are operating older proprietary systems ("Home-grown" or legacy providers) that do traditional payroll processing but lack a differentiated technology strategy including WFM capabilities.
- Software only providers – Intuit and Sage provide software only solutions for the very smallest of businesses (< 50 ees) with simple needs. These do-it-yourself solutions come with tax table updates for an annual fee, but do not guarantee compliance and keep the burden of processing payroll on the small business itself.
The future of workforce technology players will consolidate into the following camps: BPO solution providers, system of record providers that include a suite of processes, and single application ("killer app") providers.
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The Human Resources Outsourcing (HRO) Marketplace
The outsourcing marketplace is a highly competitive and fragmented industry that is poised for enormous growth in the next decade as companies fight to maintain their competitiveness and profitability. Ephor Group’s continued focus on the outsourcing industry is driven by several key trends including:
- The need for all small businesses and emerging enterprises to outsource multiple business processes and functions to remain cost competitive and to gain access to capabilities/expertise/resources/tools otherwise unaffordable;
- Evolving market dynamics such as the increased need for mobility, risk management and governance requirements;
- Highly fragmented market;
- Economically efficient model driven by recurring revenues (long-term contracts, valuations, high switching costs);
- Operational performance driven by people performance, scalable customer acquisition and cost models;
- Increased dissatisfaction with service levels from Fortune 500 vendors presents small business and mid-market opportunities
The outsourcing marketplace is a multi-hundred billion dollar industry encompassing tens of thousands of providers selling hundreds of different products and services. When you consider that virtually every business outsources some business process, you can appreciate the total size of this unique marketplace. If you are an outsourcing provider, aggressively targeting small business and the mid-market enterprises, it is critical to secure your position of this marketplace.
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Outsourcing Market Opportunity
In the early days, the term "Outsourcing" typically meant that a single process, such as payroll or benefits, was handled by a 3rd party. Today, the small business and mid-market outsourcing market encompasses almost all business functions and processes; essentially anything not deemed to be core or a competitive advantage can (and perhaps should) be outsourced.
Currently, outsourcing takes many forms as some organizations contract outsourcing service providers to handle distinct business processes, such as benefits management or marketing. And many organizations outsource entire functions. In fact, the majority of businesses outsource to three or more business processes ranging from very common (payroll, benefits, staffing and information technology outsourcing - ITO) to entire functions: financial and administration (F&A) processes, human resources (HR) functions, call center and customer service activities, procurement (supply chain) and logistics.
Aggregate Sizing of the Market Opportunity
Mid-tier companies struggle to remain competitive in a global marketplace. Although these firms had considered outsourcing in the past, appropriate solutions were generally lacking, or the price was too high because of the dearth of competition. Today, huge market opportunities exists.
The following outsourcing statistics are from 2009 unless otherwise indicated
- Outsourcing spending in all business activities has continued to climb at 10 to 20% for the last decade – in good economic times and bad (Nelson Hall).
- The majority of businesses with more than 40 employees outsource at least two of the following functions: payroll, benefits, IT, recruiting, or accounting, Small and mid-market businesses are adopting at a faster rate than larger corporations (the mid-market and large market have comparable revenue potential and the mid-market has higher margins). (Ephor Group Research).
- TPI reports that the Total Contract Value (TCV) of the global outsourcing industry in 2008 was $93 billion, IDC forecasts nearly 50% growth over the next few years.
More than 150,000 professionals are involved in the $6 trillion global outsourcing industry.
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- Midmarket spending on HR outsourcing should climb from $20.9 billion last year to $22.1 billion this year and $29.6 billion in 2013 (NelsonHall).
- Human Resources Outsourcing (HRO) has grown to be the second most commonly outsourced business function for companies of all sizes. Nearly 42% of mid-sized companies expect to increase the amount of HR functions that are outsourced to third parties in the next 2-3 years. Additionally, 52 percent already outsource payroll, while 45 percent outsource benefits administration and still another 40 percent outsource retirement services. Moreover, 90 percent of mid-sized and small organizations that offer health insurance benefits to their employees utilize a benefits broker or consultant to help obtain coverage (Everest Research Group).
- The global RPO market projected to reach $1 billion level this year and grow to $3.2 billion by 2013 (Nelson Hall).
- The North American benefits administration market is nearly $12 billion currently and will grow by an average 10 percent annually over the next few years, to reach $18 billion by 2011. In particular, the growth in the market is driven by health and welfare and leave of absence administration services, which are expected to increase from a 47 percent share of the market in 2006 to 62 percent in 2011 (Nelson Hall).
- Nearly 40% of small business mangers subscribe to online software (Jupiter Research).
- HR software and technology is growing within the mid-market at more than 20% per year. The fastest growing segments center around performance management with special emphasis on creating a “High Performance Workforce” (HPW).
- The FAO market is roughly $2 billion (FAO Today)
- 73% of mid-tier firms indicated they outsource some piece of their enterprise business processes In addition, 25% of middle market firms say they use BPO services, such as financial and accounting services. And there is still much room to grow. For example, just 14% use outsourced demand management processes, like customer call centers; and only 13% use supply management services, such as logistics outsourcing with a shipping firm. (Gartner Group survey)
- Over 75 percent of the finance executives plan to expand their outsourcing programs in 2010 (EquaTerra)
- Over 85 percent of the finance executives are satisfied with the benefits from FAO (EquaTerra)
- IBM will spend $130 million on marketing and demand-generation programs this year (2009) to help channel partners expand their midmarket sales efforts.
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Most Common Outsourced Functions and Processes
Why did outsourcing take so long to catch on among mid-sized companies?
One key reason is the lack of stable, sizable outsourcing partners focused on the middle market. Big consulting firms and outsourcing providers have not developed efficient customer acquisition and operating models to service the small business mid-market with their high set-up expenses and the shorter contract lengths on which many smaller firms insist.
While there exists a plethora of smaller, thinly capitalized operations – often offshoots of CPA or bigger company consulting firms that cover just one city or region, the market opportunity to solve the outsourcing needs for small business is prevalent.
Business segments typically outsourced include information technology, human resources, facilities and real estate management, and accounting. Many companies also outsource customer support and call center functions like telemarketing, customer service, market research, and web development.
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Outsourcing Types & Descriptions
- Business Process Outsourcing (BPO) is the contracting of the operations and responsibilities of a specific business functions (or processes) to a third-party service provider. BPO is typically categorized into back office outsourcing - which includes internal business functions such as human resources or finance and accounting, and front office outsourcing - which includes customer-related services such as contact center services.
- Financial Accounting Outsourcing (FAO): Finance & Accounting Outsourcing (FAO) is a maturing market, driven by the need to improve finance and accounting performance, flexibility, controls, and cost. Some analysts see analytical services superseding the FAO market over the next decade as organizations have data overload yet are short on analytical talent, and ripe with business challenges requiring decision-making information. FAO analytical services can provide:
- Process work to focus on decision-support and solving business problems using financial domain expertise, analytical tools, data simulations, and modeling.
- Leading organizations are looking at their entire life-cycle of financial management from sourcing (paying vendors) to customers (sales and collections).
- In this view, analytical services (e.g., revenue leakage, pricing elasticity, cash flow modeling, and market-mix/churn simulation) can be used to generate benefits beyond labor arbitrage and process standardization to improved cash flow, spending, sales, and market share. Analytical services are rapidly being seen as an extension of FAO and generating benefits outside the walls of the CFO’s organization. While the majority of work priced in contracts is full-time equivalent (FTE) or transaction-based, clients are looking for their FAO partner to take greater accountability for improved business results, such as days payable outstanding, days sales outstanding, and closing days. This holds especially true for companies that are looking to their FAO partner to assume responsibility for end-to-end process, supporting systems, and/or need more performance accountability than standard service levels provide. Depending on the FAO scope, another variation is gain-sharing, in which multiple companies invest to provide a capability or solve a problem and then split the benefits based on some predetermined formula. FAO agreements with these types of structures need a level of transparency, integration with the client, and partnership governance model to work effectively. It is becoming prevalent that more existing FAO relationships will evolve to incorporate outcome-based pricing, and captive-shared services centers will be pressured to contract internally at these leveraged market levels.
- Procurement Outsourcing: Procurement outsourcing is the transfer of specified key procurement activities relating to sourcing and supplier management to a third party — perhaps to reduce overall costs or maybe to tighten the company's focus on its core competencies. Vendor management of indirect materials and services are typically the most popular outsourced activity. Procurement outsourcing solution that addresses the total procurement value chain for maximized results, including sourcing, savings implementation, and transaction management.
- Human Resources Outsourcing (HRO): Multi-process refers to contracts that encompass more than one outsourced capability but do not rise to the level of covering most or all HR functions. Most of the contracts in the midmarket, therefore, are not end-to-end HRO deals that would be comparable to the comprehensive contracts in the large-company market.
- Recruitment Process Outsourcing (RPO): Encompassing recruitment and staffing this includes searching for and hiring new employees and a wide variety of services from job boards to staffing and relocation firms, testing and assessment technologies, applicant tacking technologies, executive search/placement firms, background checking services, etc. For the most part, this category ends when the employee is hired.
- Employee Benefits Outsourcing: This category encompasses a wide variety of employee benefit and related services from traditional health and welfare benefits to worksite/voluntary products, pharmacy benefit programs, benefits administration and communication software, third-party administrators, retirement plan services, and workers' compensation/disability insurance services.
- Talent Management: This category includes all the human resources services related to managing the individual once they are hired as an employee -- appraisal, evaluation, recognition, promotion, retention, and succession planning services.
- Training and Development: This category includes the many products and services related to training and developing employees from instructor-based training to eLearning solutions.
- Payroll Outsourcing: This includes everything from payroll processing companies to companies specializing in specific payroll and compensation services, compensation design, and salary statistics services.
- Compliance Outsourcing: This category includes all the services related to complying with and managing the various aspects of labor laws, labor relations, legislation, litigation, alternative dispute services, OSHA, HIPPA, etc.
- Knowledge Process Outsourcing (KPO) is a form of outsourcing, in which knowledge-related and information-related work is carried out by workers in a different company or by a subsidiary of the same organization, which may be in the same country or in an offshore location to save cost. Unlike the outsourcing of manufacturing, this typically involves high-value work carried out by highly skilled staff. KPO firms, in addition to providing expertise in the processes themselves, often make many low level business decisions—typically those that are easily undone if they conflict with higher-level business plans.
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Selling Outsourcing to the Small Business Buyer
Economic conditions require employers to operate more efficiently and achieve more with fewer resources. But today's strategic partnerships are also about achieving ongoing efficiencies, innovation and improvement to the mutual profit of both partners. Outsourcing deployed effectively can reduce costs, increase agility, improve service levels.
Beyond startups, there is always a group or committee responsible for evaluating and purchasing outsourcing solutions. The sales challenge as a provider is identifying these committee members, their roles, and creating buying and sponsorship from all influencers.
Outsourcing Decision Drivers: The Two-Headed Monster
- Cost/Value aka Price-to-Value
- Relationship or Emotional Motivation of the Buyer
Both decision drivers are required to get a deal done.
What to look for in an outsourcing provider?
- Solution Fit
Services Delivery Model: Technology Augmentation versus Platform Providers
Flexibility and/or customization requirements
Success Stories for our industry and company size
- Implementation fees
- Customization fees
- Training costs
- License versus Subscription versus Pay-per-Transaction
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Employers are looking at outsourcing to better control costs and remain flexible costs structures. Technology is also a major consideration as most companies do not want to manage multiple providers and point solutions nor do they want to re-invest in upgrades or replacements.
Prevalent Outsourcing Trends:
- An opportunity for mid-market niche providers to emerge as major consolidation among the larger providers continues.
- Buyer adoption will continue to prefer a “Phased” over a “Big-Bang” approach.
- The demand for analytics will continue to increase.
- Industry specialization will continue especially from services-oriented and labor-demanding industries.
- Mid-market adoption will continue and more demand from manufacturing, healthcare, and services sectors.
- SaaS adoption.
- Shift towards more strategic projects.
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Outsourcing Key Performance Indicators
What Are the Keys to Creating a Branded Company in the Outsourcing Sector?
- Vertical Practices and Solutions;
- Perform Culture that continually innovates and improves account management, shared services, quality, and productivity;
- Communication systems, vehicles and formalization; and
- Engagement synchronization regarding the performance against targets/expectations:
- Advanced coordinated metrics,
- Shared accountability.
Outsourcing Key Performance Indicators:
"It's difficult for mid-tier companies to find a partner with the right organizational fit and scalability, particularly if they need services on site in a number of locations; however, forward-thinking organizations have adopted online services delivery models are realizing results." – Garry Meier.
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