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HRO Providers Slow Their Pursuit of New Clients

November 15, 2006
Related Topics: Outsourcing, Latest News
Outsourcing providers, including those in HRO, are seeing a slowdown in the number of deals they anticipate closing in coming months. But this pause in the market isn’t due to lack of demand from buyers.

Instead, it’s the providers who are putting the brakes on the number of clients they plan to bring on board in coming months, according to recent survey conducted by EquaTerra, a Houston-based sourcing advisor.

EquaTerra surveyed its own advisors and 59 percent say demand for outsourcing is on the rise. But less than 50 percent of service providers surveyed—almost 20 percent less than last quarter—agree, the study says.

While demand is up, many providers are taking time to absorb the deals they already have rather than continue to aggressively pursue new clients, experts say.

A number of providers, particularly in HRO, are struggling with capacity issues, says Stan Lepeak, managing director of research at EquaTerra and the author of the study. Specifically, these companies are finding it harder to identify people with the experience and skills necessary to manage these contracts, he says.

It’s particularly difficult to find top-level talent because HR outsourcing grew so quickly, he says. There just aren’t that many people who have experience with these contracts, Lepeak says.

"A lot of providers just weren’t clear on what skill sets they needed," he says. "And they are finding it’s harder to grow those skills than they anticipated."

It’s even been an issue in terms of training and finding the people to actually do the outsourced work, he says. "A lot of the rank and file at the service providers have come from their clients," Lepeak says. "But a lot of these employees are finding it hard to perform in this new environment."

As a result, many HRO providers are raiding their competitors for staff and are doing more internal training, he says.

Some HRO providers are dealing with the talent shortage through acquisitions, IDC analyst Lisa Rowan says. In April, Accenture acquired Pecaso, a Heidelberg, Germany-based SAP consulting firm. "That helped Accenture acquire very deep domain knowledge of SAP," Rowan says, adding that she anticipates similar deals as companies seek expertise in certain areas.

"This market is so new, providers haven’t had time to grow talent," she says.

Despite a small hiccup in the market, Lepeak and other analysts expect the HRO market to continue to grow in the long term.

However, there may be a return to deals where providers are just looking to outsource single processes, like recruiting and learning, Lepeak says.

The EquaTerra study cites recruitment process outsourcing as a "hot area" as more buyers look to sign deals with RPO specialists.

Buyers are driven to outsource recruiting because they are starting to feel the talent shortage, but they are also finding that the major HRO providers don’t have the capabilities to provide what they need, says Jason Corsello, an analyst at Yankee Group.

"The big topic du jour is talent management," he says. "Many buyers are not necessarily thinking that their service providers are going to be able to do that for them, so they are looking for specialists."

Jessica Marquez

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