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Midmarket HRO Firms Interested but Cautious

March 27, 2009
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The economic downturn has made midsize companies more hesitant to pull the trigger on HR outsourcing deals. But it hasn’t dampened enthusiasm for farming out human resources tasks.

    If anything, the recession seems to have whetted the midmarket’s appetite for HR outsourcing and the cost savings it can bring, says Gary Bragar, research director at analysis firm NelsonHall.

    "There’s more interest in outsourcing today," Bragar says.

    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, according to NelsonHall.

    NelsonHall defines the midmarket as firms having 500 to 15,000 employees, although others in the field use somewhat different parameters. Midmarket companies that outsource payroll alone can expect savings of 15 to 30 percent, according to NelsonHall. Multiprocess HR outsourcing—when more than one task is outsourced—leads to savings of 15 to 40 percent, the research firm says.

    Like the big firms that have led the way with HR outsourcing, smaller businesses are eager to cut costs and take advantage of advanced talent management techniques and tools.

    Media firm E.W. Scripps Co., for example, just began an HR outsourcing relationship with ADP and plans to take advantage of performance management and compensation management tools offered by the vendor, says Lisa Knutson, senior vice president of human resources at Scripps, which has about 6,200 employees.

    For now, ADP is handling duties for Scripps including payroll, benefits administration and recruiting. Knutson says HR outsourcing saves time and money for midsize firms, but requires them to adopt their vendor’s standard approaches to tasks.

    "You as a company have to be willing to be flexible," she says.

    Companies also need to spend time setting up the outsourcing. In Knutson’s case, a request for proposals went out in January 2007. A contract was signed a year later, and Scripps started going live with ADP last November, with the vendor handling benefits open enrollment.

    But many HR departments don’t have the luxury of time right now, says Stan Lepeak, analyst at research firm EquaTerra. Amid the downturn, HR officials frequently find themselves busy handling job cuts or trimming expenses out of their own departments.

    And even though HR outsourcing can reduce costs eventually, companies in clamp-down mode may not have the money available to straighten out jumbled technology systems in preparation for a handoff. They also may not want to take a charge associated with laying off human resources staff.

    It adds up to pent-up demand for HR outsourcing, Lepeak says.

    "The desire is up, but the ability to execute is down," he says.

    The Right Thing, a recruitment process outsourcing vendor, launched a service tailored for the midmarket last year. In the fourth quarter of 2008, five of The Right Thing’s 12
new customer implementations were for midmarket clients, says company president Jamie Minier. But recently, midsize firms have been taking longer to ink deals, partly because of the economy, she says.

    "It’s an interesting time," Minier says.

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