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HRO: Cloudy With a Chance of Consulting

Staying competitive as an HR multiprocess outsourcer means catering to clients and acting less like an administrator and more like a partner.

Talk to human resources outsourcing experts and you hear it over and over again: Like other HR technology, outsourcing is moving to the cloud and becoming more strategic, specialized and global.

As more companies transfer HR functions to cloud-based services, HR outsourcing vendors are switching to cloud-based services, too. In some cases, they’re acting as implementation partners or intermediaries between customers and major vendors of cloud-based HR services such as SAP SE and Workday Inc.

As companies compete for new hires and wrestle with the effects of the Affordable Care Act and other regulations, they want outsourcers to act as their consultants and not just take over back-office processes.

Multiprocess HR outsourcing still exists, though it never got as big as predicted. While some vendors exited the business, new providers have popped up offering cloud-based services from day one. At the same time, more companies are bypassing multiprocess outsourcing to partner with specialists, whether in benefits administration, recruitment process outsourcing or other categories. On the other hand, professional employer organizations remain a popular option for small and midsize businesses looking to offload payroll and other administrative functions associated with having employees.

HR outsourcing vendors that have solidified market share in one geographic area are eyeing expansion into new regions. To do that they’ll have to build out what they offer to cover functions such as payroll and learning in multiple countries and languages.

Cloud-based services and other changes have added to the outsourcing industry’s soup of acronyms, including new buzzwords such as application management services, or AMS, business-process-as-a-service, or BPaaS, and HR-processes-as-a-service, or HRPaaS.

If there’s one unifying theme to the terminology and trends, it’s the service customers expect to get along with the technology. Today, “really good service is what differentiates” outsourcers, said longtime HR tech industry analyst and Eudemonia founder Christa Degnan Manning.

Here’s a deeper look at HR outsourcing trends.

Benefits Administration

The ACA and other federal regulations, growth of benefits products, and pressure to keep a lid on labor costs are pushing more companies to outsource benefits.

In fact, 24 percent of companies now outsource benefits administration, more than any other HR function (aside from payroll), according to the 2015-2016 Sierra-Cedar HR System Survey.

The universe of benefits has expanded so much, NelsonHall HR outsourcing analyst Amy Gurchensky tracks 11 separate service lines, including medical and dental, pensions, 401(k) savings plans, health and wellness, employee assistance programs, risk management and more. According to Gurchensky and other insiders, companies prefer doing business with specialists rather than going with a single provider, and generally work with two or more.

That’s pushed some vendors to zero in on their strengths and sell off other businesses. In September 2015, for example, Mercer sold its 401(k) division to Transamerica Retirement Solutions parent company Aegon to focus on its health care and pension businesses. The company has doubled down on health care by opening a private health care insurance exchange that now serves 306 companies with 703,000 eligible employees or retirees. Earlier in 2015, Ceridian sold its U.S. benefits business to Morneau Shepell and its COBRA division to WageWorks to concentrate on its employee assistance program business.

Offering services is a necessity, as ‘you put the cloud in the mix and their margins are put under pressure.’

—Christa Degnan Manning, analyst

As pressures increase to keep employee benefits costs down, it’s causing industries that traditionally haven’t outsourced benefits to consider it, including health care. Hospitals long believed that as health care providers it would be odd if they didn’t administer their own health care benefits, said Bill Beauchamp, a partner in Mercer’s benefits administration business. Not anymore. “We’re seeing health care really pushing the envelope,” Beauchamp said.

Historically, enterprises with 50,000 or more employees were more apt to outsource benefits. But Beauchamp said he sees that number dropping to companies with 20,000 or fewer.

Gurchensky expects companies to stick with their current medical benefits providers until they know how the ACA will affect their business, but could start looking at other options after 2016.

Recruitment Process Outsourcing

Despite tremors in the economy caused by fluctuating oil prices and a gyrating stock market, hiring has remained steady through the first part of 2016. That’s led businesses of all sizes to continue vying for the best job candidates. The trend plays nicely into the strengths of RPOs, which companies turned to during the recession after cutting internal recruiting teams to save money and have used ever since.

PEOs Are Primed

You could almost hear Maria Black smiling through the phone. The day before, ADP announced second quarter revenue of $733 million for ADP TotalSource, the HR services giant’s professional employer organization, or PEO, business, which Black runs. The number represents an 18 percent jump from the previous year. “It’s an incredibly exciting time and a significant milestone,” Black said.

ADP isn’t the only one having a good year. The PEO industry is expanding as small and midsize companies look for ways to keep up with workplace regulations while trying to lure good candidates from bigger competitors.

PEOs function as co-employers for clients, giving small and midsize businesses the chance to look and act like larger employers by offering them access to benefits and human resources management tools that they might not be able to afford on their own. In the arrangement, clients hire and manage employees. U.S. PEOs employ 2.7 million to 3.4 million employees. PEOs work with between 156,000 and 180,000 companies for a total estimated market value of up to $156 billion, according to the National Association of Professional Employer Organizations.

PEOs have added approximately 100,000 worksite employees a year for the past 30 years, according to the association. Analysts and industry insiders believe that adoption rate will increase because of a law that took effect in 2016 granting federal recognition to PEOs for the first time. That recognition could compound growth coming from small- and midsize employers who began using PEOs to deal with changes brought on by the Affordable Care Act and COBRA.

PEOs such as ADP TotalSource use standardized processes, cloud-based technology platforms and economies of scale to sell smaller employers better recruiting tools and benefits than they could buy on their own. That allows customers to compete with bigger businesses for top job candidates.

Black, who started in HR outsourcing 20 years ago, said, by taking over transactional processes, PEOs also help company owners or HR directors spend more time making HR a “strategy workhorse.”

—Michelle V. Rafter

RPOs are moving beyond mainstays such as sourcing, recruiting and onboarding to provide services such as employer branding and workforce analytics, Gurchensky said. “RPO has been a huge market,” she said.

Some are focusing on specific industries. Last November, health care staffing company Supplemental Health Care spun off its RPO business under its own name, Clinical Magnet, to compete in a blossoming health care RPO market. Clinical Magnet works with small and large health systems to fill the gamut of staff positions from neonatal registered nurses and physical therapists to clinical department desk jobs. Like a lot of RPOs, Clinical Magnet uses technology such as candidate relationship management, mobile apps and text messages to connect with potential candidates months in advance of having openings to fill.

In 2015, the company used those methods to find and hire a clinical staff of nearly 450 people for a health care system in the south central United States that was opening two hospitals. Clinical Magnet President Travis Furlow estimates the team dedicated to the project connected with up to 10 times that number of candidates between April and September, when the facilities opened.

Like many other RPO project teams, most of Clinical Magnet’s recruiters work remotely on what Furlow calls a virtual delivery basis, which is becoming more common in the industry. “There’s a deeper comfort with productivity with virtual workforces” than in previous years, he said. “And not everyone can afford to have that many people sitting on-site.”

As with benefits outsourcing, RPO is mature in some industries but gaining momentum in others, including health care. With nursing shortages predicted to get worse in coming years, that uptick should continue for the foreseeable future. “RPO can do really good things for early adopters, and that’s where I see health care systems now,” Furlow said.

Multiprocess HRO

The multiprocess human resources outsourcing business never made it to the $4.3 billion mark that industry analysts predicted a decade ago, in part because of the difficulties companies encountered turning over multiple processes to a third party. Software as a service also put a damper on multiprocess once companies needing to upgrade legacy on-premise systems chose SaaS over outsourcing. The problems and changing technology led return on investment to fall short of expectations for both companies and vendors. In the past few years, that caused a parade of outsourcers to pare down what they offer or simply exit the business.

As recently as 2013 and 2014, cloud-based services for multiprocess HRO deals were not as big, but companies are starting to embrace it, Gurchensky said. Companies such as Aon Hewitt, IBM Corp., Xerox Corp., and cloud-native newcomers such as OneSource Virtual are moving clients to cloud-based platforms — either their own or systems offered by major vendors such as Oracle Corp., SAP and Workday.

In many cases, customers pick the SaaS platform and pay subscription fees directly. Multiprocess providers help customers implement, operate and maintain it on a consulting basis, and help with strategic planning. Different suppliers market their services under different names, giving rise to aforementioned acronyms like AMS, BPaaS and HRPaaS. A large hospital chain in Las Vegas, for example, hired Aon Hewitt just to implement a new SaaS system. The move took 12 months instead of the 18 months it previously would have taken to get a hosted system up and running, according to Jonathan Schembor, CEO of Aon Hewitt’s HR Services business.

For some vendors, offering services is a necessity, as “you put the cloud in the mix and their margins are put under pressure,” said Degnan Manning, the HR tech analyst and consultant at Eudemonia.

Indian outsourcers are still a factor but because they’re stronger in information technology outsourcing, more often than not they do multitower deals where multiple HR processes are bundled with information technology and other services, Gurchensky said.

Multiprocess outsourcers — Indian and otherwise — still rely on offshoring from the United States to cheaper labor markets, but the practice isn’t as controversial as it once was, Gurchensky and others said. In addition, U.S. outsourcers are more likely to practice “near shoring,” using facilities inside or closer to a customer’s corporate headquarters country to provide support at lower costs.

Gurchensky pegged the multiprocess market at a still-lucrative $3.6 billion in 2015 and looks for the market to maintain the 5 percent annual growth rate it has seen for the past few years. Midsize companies outsourcing HR and payroll bundles are helping push growth, she said. Aon Hewitt’s Schembor agrees that 2014 and 2015 saw companies starting to switch to SaaS, and 2016 and 2017 will see more of them adding services.

Part of that growth will come from vendors such as Workday and SAP that have built a solid business in their home continents and are beginning to expand to other regions, building out payroll, talent management and other offerings for multiple countries.