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Recession Fears May Mean Good News for HRO Providers

February 6, 2008
The recent gloom and doom headlines about an impending recession may actually mean good news for HR outsourcing providers.

As companies are discussing how they will cut costs in the face of an economic downturn, many will look at outsourcing some of their HR processes to cut costs.

On Tuesday, February 5, the Institute for Supply Management said its index of non-manufacturing business activity showed the sharpest decline last month that it had seen in 10 years—possibly indicating that services industries, like hotels and retailers, are shrinking. The Dow Jones industrial average plummeted 370 points in the wake of the report.

But bad news for the markets could mean good news for outsourcers, analysts say.

“Our view is that an economic slowdown may actually benefit outsourcing,” says Lisa Rowan, program director for HR and talent management services at IDC, a Framingham, Massachusetts-based consultant.

“We aren’t seeing a lot of employers doing due diligence on the providers yet, but if things really start to deteriorate we expect we will.”

HRO providers with offshore operations in particular may see a boon in the wake of an economic downturn as employers who have historically shied away from offshoring may now become more receptive to the idea, says Naomi Bloom, managing partner at Bloom & Wallace, a consulting firm in Fort Myers, Florida.

“If the provider says, ‘I can give you another 20 percent off by offshoring,’ many companies would be interested,” she says.

That doesn’t mean, however, that there will be a rash of major HRO deals in coming months, analysts say.

For one thing, sales cycles take much longer in a market downturn, Bloom says.

And those deals that do happen will more likely involve midmarket employers outsourcing one or two HR processes, says Stan LePeak, managing director of research with Houston-based EquaTerra, a global management consulting firm specializing in outsourcing and business process change.

“I think you are going to see more selective deals around outsourcing single processes like payroll or benefits, rather than big multi-process deals,” he says.

To win business, however, HRO providers are really going to have to play up the cost savings potential of outsourcing, rather than just talking about the “strategic value,” which many of them have been focusing on in their sales pitches, LePeak says.

“They can’t just talk about ‘innovation’ and ‘transforming processes,’ ” LePeak says. “Companies want to hear about cost reductions or about the possibility of shifting workforces to make the costs more variable.”

If the country is headed for a long-term recession, however, even HRO providers will feel the pain, Bloom says.

Most of these providers get paid based on the number of employees they serve, but if those numbers get cut, so do the providers’ profit margins.

“If we see massive layoffs, it could reduce the revenues providers are making from current customers as soon as those new volumes are used to reset customer fees,” Bloom says.

—Jessica Marquez