Many people are asking me what the big sourcing
stories of 2006 were. Rather than discuss the obvious – like huge profits for
service providers in India – I enjoy talking about the less-prominent developments, which may well become the big stories of 2007.
Here’s one such development: The slowdown in
companies opting to send their human-resource operations offshore was caused by
a host of factors, and the problems plaguing so-called HR outsourcing (HRO) may
not get better anytime soon. In fact, they could get worse, and the wholesale
outsourcing of HR departments could be on hold for the near term.
The culprits behind the HRO slowdown include
management changes at Hewitt (the market leader); the well-publicized earnings
problems of a few notable providers and the failure of several providers to
provide good service on large deals they’ve done in the past.
Management changes are a matter of course for any
business, and Hewitt handled its management changes well. They wouldn’t even be
noteworthy except they seemed to contribute to taking the company off its
torrid pace from the prior year, 2005, when Hewitt won almost 30 percent of the
HR contracts awarded globally. Some clients seemed concerned about the HR outsourcing
business model when Hewitt’s new leadership acknowledged having some hard
choices ahead.
Elsewhere, another provider, ACS, has admitted to
“growing pains” and has also taken accounting charges on two of its HR
contracts. And Convergys is still struggling to achieve the scale required to
leverage its solution. While it is difficult to assess just how EDS
(ExcellerateHRO), Accenture and IBM have performed financially, we can make a
rough estimate of how much business they’ve won. The answer is: probably less
than they’d hoped.
Some of the challenges the HR business faces today
are the result of an immature market: providers that over-commit and clients
that under-weigh the changes required for substantial benefits through
outsourcing. Some are also attributed to poorly designed deals. Some are
just related to poor execution.
Are the HRO industry’s issues really going to be
solved by greater volume? We don’t think so.
Instead, the market is already showing a bit of
retrenchment, with clients opting to contract for discrete parts of their HR
functions, such as recruiting, payroll, or training. The market appetite for
wholesale HRO relationships seems to have waned a bit, opting to wait out the
service delivery issues that are affecting several of the leading providers.
This situation may be the proverbial
self-fulfilling prophesy: If the providers require scale to grow out of their
problems, and clients are unwilling to sign up until the problems are settled,
we’re in a deadly embrace.
The industry’s biggest deal of 2006, Unilever’s
award to Accenture, may be the critical relationship to watch. If Accenture can
show that the demanding needs of a company like Unilever can be met, perhaps
there’s a way forward for others through large-scale HRO. In the mean time,
look for greater use of function-specific sourcing within the HR domain.
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