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Reducing Costs a Sore Subject at HRO Meeting

May 7, 2007
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Related Topics: HR Services and Administration, The HR Profession, Outsourcing, Latest News
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‘‘Cost savings” seem to have become bad words when it comes to discussing the business drivers of HR outsourcing. That at least appeared to be the case at last month’s HRO World, an industry conference held in New York.

Speaking at an early-morning breakfast session before the conference began, IDC analyst Lisa Rowan shared data that showed cost savings as the top reason for both large and midmarket companies to sign HR business process outsourcing agreements. IDC defines HR business process outsourcing as those agreements that outsource more than one process.

Similarly, both large and midmarket employers said price competitiveness was the top attribute in selecting a provider, according to the IDC report, titled “HRO BPO: Buyer Trends and Outlook for 2007 and Beyond.”

The most disturbing finding for providers, however, was that more than 30 percent of midmarket employers and 28 percent of large-market employers expect cost savings of 20 percent to 30 percent as a result of an HRO deal. Ten percent of large-market buyers expect those savings to be as high as 50 percent, according to IDC.

A more realistic expectation would be 10 percent to 20 percent, Rowan says.

“That’s a scary mismatch between expectations and reality and will require a lot of education of buyers,” she said during her presentation.

The findings were bad news for providers, many of whom are still trying to figure out how to make a profit in HRO. The topic of cost savings was a source of some controversy both at the breakfast and throughout the conference, particularly as many vendors and analysts argued that “business transformation” is replacing cost savings as a reason behind HRO deals.

Providers pushed back against the cost-savings rationale because it wasn’t clear that the data referred to buyers of end-to-end HR business process outsourcing deals, said Patricia Johnson, a spokeswoman for Convergys, in an interview at the conference.

Johnson said Convergys client Whirlpool, for example, only expected to break even following its HRO deal.

Mark Hodges, executive director of corporate development at Equa¬Terra, a Houston-based sourcing advisor, also disagreed with IDC’s findings. In a panel discussion, he told attendees that at least three of EquaTerra’s clients have signed HRO deals where they would be spending more than their current infrastructure costs.

IDC didn’t ask survey participants about whether “business transformation” was a goal of outsourcing, because “it wouldn’t mean anything to them,” Rowan says.

“I think that it’s a given that people are going to say that they enter these agreements to achieve cost savings, but what I had hoped was that people would note the other top reasons that large and midmarket employers sign these deals,” Rowan says.

The reasons include integrating talent management silos, increasing employee productivity and a better deployment of resources to focus on strategic initiatives.

“And all of those things result in business transformation,” she says.

But an employer stating that cost savings primarily drives an HRO deal isn’t necessarily ignoring the goal of making HR more strategic, says Neil McEwen, an analyst at PA Consulting.

“You can’t have cost savings without some business transformation,” he says.

Jessica Marquez

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