Midsize Employers in Sweet Spot for End-to-End HR Outsourcing
These staffing levels work because standing right behind this tiny cadre of in-house professionals is Accenture, with its business process outsourcing workforce of 18,000 and deep experience in both HR outsourcing and finance and accounting outsourcing, known as FAO. Catalina’s comprehensive, open-ended HRO/FAO contract with Accenture is now in its fifth year.
"When you wrap business intelligence tools around both functions, you gain insight," says Catalina CEO Samuel Borgese. "And anytime you buy from one vendor instead of two, you save dollars, smooth communications and streamline pro¬cesses. Every business gains from streamlining."
The comprehensive HRO value proposition for midmarket companies like Catalina stems from standardization and economies of scale. The key difference between the midmarket and large comprehensive HRO deals is that midmarket client companies typically move onto the provider's platform, reducing costs for both clients and providers.
"The obvious single greatest advantage for us is that we did not need to invest in huge applications systems and the people to support them," Borgese notes.
The number of deals that cover all or most of a company’s HR functions—a good shorthand definition for comprehensive or end-to-end outsourcing—is still very small. But the midmarket is spawning a new model that may produce a qualitative shift in the HRO value proposition.
This new model, now in place at Catalina, bundles HRO and FAO services in an integrated approach designed to boost business intelligence, eliminate the IT burden and ensure compliance.
Midmarket companies willing to embrace comprehensive outsourcing and standardization can cut costs and offer process improvements. Large-market providers are reaching down to serve the midmarket with a wider range of offerings, while small-market providers are reaching up, but with less success.
The midmarket approach
Catalina, based in Carlsbad, California, is one of the 2,700 firms that make up the heart of the midmarket for comprehensive HRO—companies with 2,500 to 10,000 employees. An additional 5,000 firms occupy the low end of the market, where company size ranges from 1,000 to 2,499 employees. The size of the market is determined from U.S. Census Bureau reports on employers by the size of their workforce.
The large end of the comprehensive HRO market comprises the 900 U.S. companies that employ 10,000 employees or more and are less likely to adopt a vendor’s platform and full standardization.
Like many midmarket firms with comprehensive agreements, Catalina signed its first HRO/FAO contract when, in 2002, it spun off from another company. It has renewed the contract since then and reviews it every year. Accenture handles all HR functions except recruiting and some employee relations tasks.
The driving considerations for Borgese and the Catalina board in the decision to outsource centered on the cost of installing an infrastructure and the ability to shift in-house staff to higher-level work.
"Outsourcing provides significant savings in hard dollars and in the deployment of human capital," says Borgese, who declined to say how much Catalina saves annually with the deal. "It allows us to keep strategic tasks in-house with tactical support from the outsourcing vendor. It’s very difficult for a VP of HR to be a strategic player if he or she is managing the HR infrastructure. If they are freed from this, they can concentrate on workforce deployment and strategic issues."
Another critical midmarket issue, compliance in multiple jurisdictions, also weighed on the company. "Tax authorities are very aggressive enforcement agencies," Borgese says. "You need to have great confidence in your ability to meet requirements. On the F&A side, we must close our books with complete accuracy within five days" of the end of the reporting period.
In its annual review of the contract, Catalina makes cost comparisons against operating the functions in-house and with other vendors. "Some of the major considerations are the level of service provided for employees, which is a real focus for us, and, of course, pricing," Borgese says. "At the conclusion of each of these annual reviews, we have decided to stay with outsourcing."
The vendor’s capabilities in the client company’s industry and its availability and responsiveness are key. "If the vendor is truly responsive, it will be like having the functions in-house," Borgese says.
Bundling for optimal results
Accenture holds more than 50 comprehensive HRO contracts for midmarket companies with 2,000 to 15,000 employees. Ninety percent of these contracts are for comprehensive HRO and FAO services bundled into one contract, with new contracts now typically running five years and some extending to seven years.
Accenture is still increasing its market share for large-company contracts, but with its April 2006 acquisition of Savista, it has now moved into the top position for comprehensive HRO for the midmarket and for bundled HRO/ FAO service offerings.
By any measure, the midmarket comprehensive HRO industry is in its fledgling stage. Consulting firm NelsonHall estimates that revenue for U.S. midmarket multi-process HRO totaled just $600 million in 2005, and predicts that revenue will reach $1.5 billion by 2010.
"Multi-process" refers to contracts that encompass more than one outsourced capability but do not rise to the level of covering most or all HR functions. Most of the contracts in the midmarket, therefore, are not end-to-end HRO deals that would be comparable to the comprehensive contracts in the large-company market.
Everest Research Institute reports that HRO is more developed than FAO and that company spending for HR outsourcing is double that of FAO, but FAO has reached a high level of delivery success. Part of the value of bundling HRO and FAO is that HRO services may benefit from adopting the simplicity and cost advantages of the FAO model.
Everest notes that outsourcing tasks such as payroll and benefits along with FAO processes allows the client and the provider to leverage payroll as the bridging process. In Europe, payroll is increasingly built into FAO deals.
Accenture is now seeing a large influx of midmarket companies requesting comprehensive HRO services. Its existing midmarket contracts are concentrated in the hospitality industry, but Accenture is extending into other sectors, including high tech and financial services.
"Part of our strategy was to hone these services within our historical base and then take them out to the greater market," says Jeff Bizzack, CEO of Accenture BPO Services and former CEO of Savista.
Companies that contract for comprehensive HRO and FAO with one vendor gain a number of efficiencies. The first is clearly economic.
"The cost of bundled services for both the client and the provider will be lower than it would be for two providers," Bizzack says. He did not estimate what that savings would be.
"Secondly, the one-stop-shop solution, with a major partner responsible for both human resources and the financial care of the organization, and using an integrated approach, is hugely effective for any number of issues, including governance," he says.
"Finally, clients benefit from the fact that the bundled approach allows them to look at the issues holistically. Combining the HR and finance perspectives into one viewpoint is a huge advantage."
Bizzack notes the same ad¬vantages that accrue for midmarket companies through this integrated approach also apply to large companies, and there is some movement toward the bundled HRO/FAO approach among the Global 2,000. "The bundled approach for both large and midmarket companies is getting more and more visibility in the C-suite," he says.
"It’s a struggle for HR to obtain the data necessary to deal with issues," he says. "We bring the data, metrics and tools needed, and we provide an interlinking language between HR and finance. Strategically, the customer obtains tools and models to align camps at the higher executive level and to make decisions on the basis of a common set of data."
It’s the platform of the future, Bizzack says. "Once companies see the value proposition in the bundled approach, they will adopt it."
Comprehensive HRO/FAO deals are also emerging at the lower end of the midmarket range. PlatformOne, an HRO technology and services company, now has six comprehensive HRO contracts with client companies employing 750 to 5,000 employees, with two that include full FAO services. All of the contracts began with piecemeal outsourcing that escalated into full-blown HR outsourcing.
One of PlatformOne’s full-service HRO/FAO clients, Business Advantage Inc., used an internal HR staff of nine to manage its 1,000 employees. The business services company outsourced some of its HR tasks on a piecemeal basis, beginning with outsourcing payroll to Paychex, but soon found itself with multiple vendors and no integration.
"Trying to handle some processes ourselves and some through separate outside vendors was like trying to manage a herd of cats," recalls Business Advantage CEO Stanley Joseph.
PlatformOne stepped in to provide a technology solution in April 2006. During the next three months, Joseph modified the arrange¬ment five times to expand Plat¬formOne’s responsibilities and finally concluded with a comprehensive HRO/ FAO contract that he estimates will save the company 30 percent to 40 percent annually compared with the cost of doing it in-house. The participants did not disclose the value of the contract.
Business Advantage now has no HR function. Instead, all HR work is handled by PlatformOne. When strategic HR decisions arise, PlatformOne managers work directly with Business Advantage’s vice president for operations. (The company did not fire all of its HR staff; some were moved to other functions.)
"It was a scary transition because it felt like we were giving up control," Joseph says. "But I believe that the more control you give up, the more powerful you become. The new system offers not only increased functionality but, more importantly, complete system integration between payroll, tax, benefits, HR, reporting and scheduling systems. In short, we reduced six unique systems down to one."
Business Advantage also gained a full set of HR and finance and accounting metrics and a number of quality-control tools. PlatformOne runs the combined functions on a Lawson system hosted at an IBM facility.
Moving to a comprehensive HRO agreement in one step is rare in the midmarket, says Dusty Rhodes, vice president of marketing and business development for PlatformOne. "It took years for us to realize the midmarket companies still make outsourcing decisions on a departmental basis," he says. "The department-based decision-making process at the midmarket companies creates a mess."
"The midmarket companies that go straight to comprehensive HRO are usually facing merger or acquisition activity or a spinoff, and see a full-service deal as the immediate solution that they need," Rhodes says. "In these companies, the CEO, CFO and HR executives all recognize the problem. But the remaining midmarket firms still focus on the piecemeal approach."
PlatformOne has found that the best way to approach the midmarket is to start where there’s pain.
"The pain may be in payroll or IT," Rhodes says. "We introduce the service that we can provide to make that pain go away, and then introduce other services. Then integration issues arise, and it becomes obvious that the piecemeal approach is not optimal. Companies need to integrate the departments within human resources and outsource their tasks on an integrated basis."
Getting to 'yes'
Comprehensive HRO accounts for only 15 percent to 20 percent of all HRO deals, according to research firm Gartner. Growth in the number of deals, however, indicates that companies are increasingly aware of the pitfalls in piecemeal adoption and the difficulties of coordinating multiple vendors for HR services.
Reaping the full potential benefits of HRO—meaningful cost reductions and improved processes—hinges on integrated services and standardization. Integration requires abandoning the piecemeal approach and embracing full-service, end-to-end HRO.
Gartner notes that to achieve these benefits, employers must be willing to use a standardized platform and delivery model, forgo a "soft landing" for HR personnel, bring multiple processes under the contract and accept standard service levels. Midsize employers are often far more suited to meeting these requirements than large firms are.
The staffing reductions that may follow are an obvious issue that companies must confront. One Accenture comprehensive HRO/FAO client, a hospitality company with a centralized HR function and more than 5,000 employees, employed 27 people in HR and finance before it outsourced the functions to Accenture.
Now the client company employs three people in the two functions—the lead HR executive, a controller and a financial analyst. Accenture did not provide estimates of the savings involved. While that structure worked for that company, Bizzack says that the HRO/FAO model varies from client to client in terms of the retained staff.
Catalina Restaurant Group’s Borgese notes, however, that the HR staffing issue should not drive the outsourcing decision.
"It’s a question of whether the HR executive wants control or wants what is best for the organization," Borgese says. "The HR executive has to look at the business intelligence and constant process improvement that can be achieved, and at his or her goals and responsibilities within the executive team."
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Workforce Management, February 12, 2007, p. 23-26 -- Subscribe Now!