Affiliated Computer Services, Inc., (ACS) got a big win when it announced in October that Ford Motor Co. had awarded it a total-benefits-administration contract. The deal—which includes administration of pension and savings plans as well as health and welfare—also typifies today’s new HR contracts that lean toward more-focused outsourcing, rather than mega-deals spanning all HR areas.
“Organizations are focusing on a more limited number of processes, as opposed to a full HR modernization effort,” says Brad Everett, Atlanta-based Executive Director of the HR practice at EquaTerra, an IT and business-process-transformation adviser. “Now, people are focusing on what their real needs are, as opposed to their wishes.”
The number of new HRO deals peaked at 51 in 2006, according to data from Everest Group’s Everest Research Institute, before declining to 47 in 2007 and about 30 in 2008. Annualized contract revenues in the HRO market jumped from $1.4 billion in 2004 to $2 billion in 2005 and $2.5 billion in 2006, before slowing the growth pace to $2.8 billion in 2007 and $2.9 billion in 2008.
“[For 2009,] I am inclined to think that it will be flat or slightly less,” says Katrina Menzigian, Boston-based Vice President of Research at Everest Research Institute, of the number of new deals. “We have certainly not seen a large number of deals come to market this year.”
No More Galactic Deals
Bundled HRO deals have been declining for several years, sources say. “We continue to see a softening in that market,” Menzigian says. “Businesses are less likely to outsource the same scope of services as they did earlier in the decade. The buying process is to be more cautious, and to take a phased or component-based approach.” A phased approach involves a staged rollout, doing one HR area (such as payroll), location, or business unit at a time.
Why the shift? The reasons include an inability or unwillingness to incur the upfront costs associated with a large-scale organizational change, a lingering perception that many early multi-process HRO deals did not succeed, and a lower tolerance for the perceived risk of outsourcing new areas or dealing with a less-proven provider. “There is not that much of an appetite for those modernization efforts,” Everett says.
For example, Everett says, a few years ago, many employers included very robust internal training programs in deals. “Now, there has been a realization: ‘Let’s take a step back and do that which we can defend, in terms of cost-cutting,’” he says. “So those kinds of things are not getting the same attention they got as recently as two years ago.”
“We will see more of a best-in-breed approach, as opposed to bundling them all together and finding an organization that can meet their minimum requirements in all those areas,” says Jeff Croyle, a Nyack, New York-based Partner at sourcing-advisory firm TPI.
Agrees ACS Executive Managing Director Rohail Khan, “There are no more galactic HR deals; those crashed and burned.” Employers want an open-architecture environment, he says. “Clients are asking, ‘Make it easier for me to pick a combination of services, and do not make me have seven portals to do that.’ Not only do they not have time for that, they do not have the [in-house] people or expertise that they historically have had.”