As Midmarket HR BPO Business Heats Up, Providers Could Be in for Surprises
But Hewitt didn’t offer a payroll solution for midmarket clients. Besides, given its multibillion-dollar payroll, the bank wanted a vendor that specialized in this task, Stuto says. In 2004, Credit Suisse First Boston tapped Automatic Data Processing to handle the payroll processes for its 10,000 U.S. employees.
The investment bank’s piecemeal approach to outsourcing is emblematic of how midsized employers, those with 2,000 to 15,000 employees, are approaching HR outsourcing differently from their larger peers.
Unlike larger companies that are jumping into full-blown HRO deals with a single vendor, the midsized organizations are taking a more cautious approach.
"In the midmarket, they’re just dipping their toes in and outsourcing only one or two processes at a time," says Greg Secord, vice president of marketing and business development for ADP’s National Account Services.
This is partly due to the fact that many midsized companies don’t have the systems in place to mesh with an HRO provider and its service offerings, he says. For example, while a large employer may want to outsource its recruiting and screening process, the midmarket client may not yet have an automated process in place, Secord says. The other reason is that relatively few vendors offer total HR outsourcing services to midsized employers.
But that’s starting to change. Phil Fersht, an analyst at Everest Group, predicts that the $1.2 billion midmarket HRO business will double by 2010.
Providers are offering more standardized solutions to meet the needs and budgets of these clients. While large companies can afford complete customized platforms, 62 percent of midsized organizations said in a recent survey that they are willing to adopt the providers’ standardized process as their own, according to NelsonHall, a Cambridge, Massachusetts-based firm that analyzes the business process outsourcing market.
Deals are starting to be signed in the midsized market, says IDC analyst Lisa Rowan, noting that these companies make up 20 percent of all spending in the HR outsourcing market.
Experts agree that the two leading suppliers in midmarket HR outsourcing today are ADP, which has 43 clients with an average of 9,200 employees each, and Ceridian, with 25 clients that have an average of 4,000 employees each. But the competition is increasing. On one hand, professional employer organizations, which typically target companies with fewer than 500 employees, are moving up-market.
Meanwhile, the larger, more traditional HR outsourcing providers, like Hewitt Associates and Fidelity Investments, are discussing moving down-market. In April, Accenture jumped into the business with its acquisition of Savista, a Wichita, Kansas, outsourcing provider of HR, IT and finance and accounting for midsized companies.
This deal is one of more to come, experts agree. Accenture was one of several bidders for the Savista business, says Kevin Campbell, global managing director of Accenture’s BPO organization. "We are told all of our traditional competitors looked at the deal," he says.
Other expected competitors for midmarket buyers include traditional outsourcing providers in India, which are considering entering the North American market, says Jason Corsello, an HR analyst at Yankee Group.
All of these companies see not only the growth potential of midmarket HR outsourcing, but also the ease of entering the market, Corsello says. Unlike the large-employer market, this segment remains relatively untapped. Also, it’s unusual for companies of this size to have unions, which often are a huge stumbling block for HRO deals in the large-employer market, he says.
Providers are also attracted to this market because midmarket deals tend to be less complex, and the sales cycle is often much quicker—about 12 months, compared with 18 to 24 months for large companies, Rowan says.
"However, as more providers enter this market, there is going to be more choice for buyers, which will result in longer sales cycles," Rowan says.
Midmarket HR outsourcing isn’t necessarily easy, however. The tendency of these buyers to outsource one process at a time brings its own set of challenges.
Often, buyers are too shortsighted with the deals and don’t think about whether the providers they are picking can take on other processes in the future, IDC’s Rowan says.
But Stuto at Credit Suisse First Boston points out that there are advantages to working with multiple providers. The buyer can "play them against each other in terms of pricing," he says.
"Especially when the vendors offer overlapping services, they are always trying to compete for more of your business," he says.
Not everyone is convinced that a one-size-fits-all approach will work for the midsized market. There is much more diversity in this segment than in the large-employer segment, says Guy Patton, president of Fidelity’s HR division. The difference between the needs of a company with 40,000 employees and one with 90,000 employees may not be so different, but in the midmarket, where there are companies as small as 2,000 employees and as big as 10,000, "these are very different companies," Patton says.
That’s why Fidelity, for one, is holding off on targeting this market, Patton says. Once the cost of providing HR outsourcing services drops, it will become more feasible for companies like Fidelity to target midsized companies with customized solutions, he says.
Another unique aspect of the market is that many buyers are spinoffs, and thus need specific services and technology up and running very quickly, says Keith Strodtman, senior vice president and general manager of HR outsourcing at Ceridian.
For example, last year Ceridian won an HRO contract with PHH Corp., a provider of mortgage and vehicle-fleet management services that was spun off from Cendant Corp. in January 2005. These companies rely on their providers to help them through the spinoff process, Strodtman says.
"We try to help these clients by providing them recommendations around what their organizations should look like post-outsourcing," he says. One-third of Ceridian’s clients are spinoffs, he says.
In general, the learning curve for midsized clients is much longer, even if the sales cycle is shorter, experts say. For example, a large employer usually has experience with running a call center, and so will know which questions to ask the provider about how it does that, ADP’s Secord says. But many midsized employers have never had a call center. They rely on the vendor to help them know how to gauge the success of using an outsourcer to run the process.
"A big part of the vendor selection process for midmarket companies is making sure they are comfortable with the provider’s domain expertise," Secord says.
In many instances, this translates to midmarket employers wanting vendors with experience in their industries, Rowan says. "Above price competition, midmarket clients want industry knowledge," she says. "For example, retail buyers want providers with other retail clients."
Midmarket buyers are also looking for support to make sure they comply with various regulations, such as Sarbanes-Oxley. They don’t have the resources that larger employers have to handle these matters.
Having a vendor that not only knows the compliance issues but can also explain them is very helpful, says Peter Brand, regional manager for the HR shared services group at Chevron in the United Kingdom. Last year it tapped London-based Arinso to handle the payroll for its 1,800 employees. In Europe, it’s important to have a vendor that understands the regulations of the different countries, Brand says.
The first step
As midsized companies become more comfortable with outsourcing, experts predict that they will start to tap vendors to handle all of their back-office processes.
"It’s not as hard for a midsized company as it is for a large company to say, ‘Hey, I want to take all these processes and outsource them to this provider,’ " says Michel Janssen, president of supplier solutions at Everest Group.
That is one of the reasons that Accenture bought Savista, Campbell says. On top of offering HR services to midmarket clients, Savista also provides finance and accounting and IT support.
"Even if companies start with outsourcing just one or two processes, they are going to grow and want to outsource more back-office work, Campbell says. "Particularly high-growth companies will see a need to do this," he says.
Credit Suisse First Boston, which is planning to consolidate its HR platforms in the next three years, is considering outsourcing more of its HR processes. But like many midsized companies, it is planning to hire a consultant to help make its decisions.
The company has realized annual savings of $2.5 million from outsourcing its payroll, only half of what it had projected. But Stuto attributes the discrepancy to its own miscalculations and says he hopes that hiring a sourcing advisor will prevent future mistakes.
"We have an idea of what we are looking for," he says, "but we just want someone to confirm our ideas."
Workforce Management, May 22, 2006, pp. 35-36 -- Subscribe Now!