Contract restructuring will play a significant role over the coming three years as early adopters of human resource outsourcing (HRO) services face impending renewal cycles. These HRO clients will increasingly evaluate how to drive incremental value for their organizations through the End-of-Term process. The areas of restructuring range from modifying the number and type of in-scope processes, to enhancing delivery models through global sourcing, to introducing alternative pricing models, according to a study by global consulting and research firm Everest Group. Traditionally reluctant to take services from offshore locations, both the mid-market and large market HRO buyers are expected to leverage offshoring much more in their second generation deals due to increased cost pressures in recent times. Given the maturity of India as an offshore delivery location and presence of high number of HRO suppliers, more work is going to move to India because of this shift.
About 75-85 percent of engagements will likely be extended while 15-25 percent will be repatriated or transferred to new suppliers, according to the study, Human Resources Outsourcing (HRO): End-of-Term Market in HRO. More than 111 HRO contracts with a combined total contract value of about US $6 billion are nearing their term end in 2010-12. Everest analysts foresee scope reduction with large-market buyers (15,000-plus employees), whereas mid-market (3,000-15,000 employees) buyers will likely expand narrow scopes and leverage expanded supplier offerings that include talent management services.
“While extension is the most preferred option, given the current economic climate and structural changes in the HRO market, recent end-of-term events see intensive renegotiation and contract restructuring,” said Katrina Menzigian, Vice President, Everest Group. “Market factors in the HRO space have changed significantly over the past several years. Consequently, HRO buyers need to understand these changes and how the overall value proposition of their HRO engagement is impacted.”
Examples of changing HRO factors include:
Changing HRO supplier strategies and realignment of focus areas
Shifting buyer approaches away from end-to-end and towards best-of-breed
Market entry of new HRO and specialized HR-process suppliers
Expansion of global sourcing as a key component of delivery models
An analysis of to-date HRO engagements reveals:
82 percent of buyers have extended contracts, 12 percent repatriated and 6 percent transferred to other suppliers as part of end-term decision making
While the majority of buyers extended contracts with the same scope, more than one-third of second generation deals were reduced in scope
Typically, judgement intensive processes are de-scoped for mid- and end-term extensions
Most buyers that repatriated work did so during the early- to mid-phase period
“Several suppliers have recently redefined targets and offering strategies to achieve profitability goals,” said Rajesh Ranjan, Research Director, Everest Group. “They will be challenged to renegotiate with legacy clients contracts that align with their new service delivery models. Opportunities exist for suppliers with broad capabilities to expand scope with first generation buyers. However, in pursuing HRO buyers considering transfer of services the focus should be on offering value, demonstrated success and clear pathway for transition. Lastly, suppliers must continue to focus on cost savings in response to cost pressures by buyers by leveraging strategies such as global sourcing and standardization levers.”
To read an extract of Human Resources Outsourcing (HRO): End-of-Term Market in HRO, purchase the report, or inquire about other research services, please visit www.everestresearchinstitute.com, email info@everestresearchinstitute.com or call +1-214-451-3110.
Other HRO studies providing additional insights into this topic:
Multi-Country Payroll Outsourcing (MCPO)
Global HRO Supplier Landscape
HRO Annual Report
Learning Services Outsourcing (LSO)
