Let's Make a Deal

Prime outsourcing deals may be available in the current economic climate—depending on the size and needs of your organization.

By Bill Roberts Nov 1, 2008

Human resource managers looking to outsource some or most of their department’s functions may be wanting—or even expecting—the current economic climate to help them land better deals. Some will find them, and others will not.

“It depends on what part of [the outsourcing] market you’re talking about,” says Robert Brown, a research vice president at Gartner Inc., an IT consulting firm based in Stamford, Conn. “The substantial market for payroll or the headline-grabbing comprehensive deals that IBM and Accenture announce?

“The HR outsourcing market is not monolithic. The parts can differ.”

And differ they do.

In the outsourcing market for individual HR processes such as payroll, benefits, recruiting and training, buyers may find they have increased negotiating power over providers, who are thankful for any new business. Analysts, sellers and buyers confirm that competitively priced offerings have become available for individual HR functions, especially for small and medium-sized companies.

The same isn’t true for HR business process outsourcing (BPO), in which one supplier provides end-to-end outsourcing for multiple HR business processes under one contract. Buoyed by a number of mega-deals in recent years, HR BPO providers have stopped taking new business at any cost simply to gain market share. Instead, they’re consolidating, striving for profitable business models and being highly selective in choosing customers. As a result, demand outstrips supply. ›

HR BPO “is definitely not a buyers’ market,” says Jason Geller, a principal in the human capital practice at Deloitte Consulting LLP in New York. “There was a time when every provider would run to your door. Now, it is more of a sellers’ market because the providers are selective about what they bid on.”

HR professionals need to understand the climate and complexities of the outsourcing market before they attempt to secure the best deals.

Where the Deals Are

HR managers interested in outsourcing individual HR functions—such as employee assistance programs, background checking, benefits administration, relocation services, training, payroll or even strategic HR—are finding favorable conditions.

In payroll, for example, outsourcing providers prove, “by and large, very price-competitive. That market is nearing maturity,” Brown says.

And, given the economic climate, the recruiting market “is going to be struggling through next year,” predicts Brown. As a result, companies that are still recruiting and prepared to outsource the function could find bargains.

Similarly, companies still investing in training—many cut those budgets during economic downturns—will likely find good deals for that function, too, says Tom Kelley, SPHR, senior vice president for HR consulting services in the Portland, Ore., office of AmeriBen/IEC Group, with headquarters in Meridian, Idaho. “There’s a lot more negotiating going on now than in the past, and you can get a deal that is really good for both parties,” he says.

Score One for the Little Guy

In general, HR professionals at small companies looking for payroll or benefits outsourcing can find competitive prices, says Beth Longton, SPHR, sole practitioner at H.R. Outcomes LLC in Portage, Mich. As a consultant, she offers general HR services to small companies that don’t want to invest in an HR professional, effectively becoming her clients’ HR staff.

Longton has negotiated on behalf of many clients, whom she declines to name, for outsourcing with ADP, Paychex, PayChoice and other providers. “When I’m helping clients select outsourcers for payroll or benefits, there are a lot to choose from,” she says.

Another plus: The smaller the payroll, the faster the implementation. As a result, companies can realize savings more quickly.

HR managers at large organizations with more complex needs have a tougher time finding competitive pricing. Even large companies whose HR outsourcing efforts fall short of full HR BPO are finding few bargains in the current economic climate.

For example, since it spun off from Hewlett-Packard in 1999, Santa Clara, Calif.-based Agilent Technologies Inc. has outsourced benefits administration, payroll and other processes for its 20,000 employees. Agilent’s outsourcing strategy is different from HR BPO in that the company uses several providers as opposed to just one, says Dominique Grau, vice president of compensation, benefits and HR services.

Several years ago, Agilent negotiated great prices, Grau continues. “Now, most of the vendors want huge increases, like 40 percent. Because so many vendors were losing money, there’s been consolidation and the result is fewer vendors. Vendors have the upper hand in pricing.”

BPO Providers’ Growing Pains

Providers particularly have the upper hand in HR BPO. Monica Barron, vice president of research at Everest Research Institute, the research arm of Dallas-based outsourcing consultancy Everest Global Inc., knows of “numerous examples of very large companies that cannot get suppliers to talk to them because the suppliers don’t offer exactly what the buyer wants or the supplier is swamped with earlier deals.”

That’s a switch from earlier in the decade, when HR BPO contracts began to gain popularity and providers were ravenous for business. The years 2004 and 2005 saw big jumps in the number of multiyear, multimillion-dollar HR BPO contracts signed; at least 300 such deals now exist.

Before HR BPO, most HR departments outsourced individual processes to individual providers, which often meant myriad relationships to manage. A precursor to comprehensive HR BPO was the bundling of related processes, such as all benefits administration, into one contract with a single provider.

In 1995, Shell Oil Co. in Houston, the U.S. subsidiary of Netherlands-based Royal Dutch Shell PLC, was one of the first to adopt the bundling approach when it outsourced retirement, pension, health savings accounts, health administration and related processes for its 22,000 U.S. employees to one provider, according to Ron L. Jeffers, manager of benefits consulting for central HR at Shell. The company never opted for pure HR BPO, keeping its payroll processes and call centers in-house.

In hindsight, many of the early comprehensive HR BPO deals simply lifted and shifted each client’s custom processes, technology, buildings and staff to the provider instead of leveraging standard technology platforms, service delivery locations and staff that could be applied to all clients. As a result, providers did not create the economies of scale they needed to be profitable.

Criteria For Selecting A Provider

In benchmark studies of 38 companies that have adopted HR business process outsourcing, the following characteristics were identified as the top criteria for choosing a provider, in order of importance:

  • Per-employee cost.
  • Technology capability.
  • Ability to help transform HR processes.
  • Flexibility to meet specific demands.
  • Implementation cost.
  • Cultural match.
  • Financial stability of provider.
  • Geographic reach.
  • Risk management.

Source: Towers Perrin’s Staying Ahead of Change: Evolving Realities and Expectations in HR Outsourcing.

“In the early part of the decade, the providers would grab market share any way they could,” says Brown. “It was all about top-line revenue growth for the suppliers. But there were structural difficulties in the contracts; profitability was the problem. Fast-forward to 2008, and the name of the game for suppliers is profitability, and that is the big difference in the marketplace.”

Providers now are more cautious and more focused on establishing the standards-based services that will help them secure the profits they need—and they are less concerned with taking on new customers. As a result, companies that want comprehensive HR BPO are having a tough time finding suppliers willing to take their business. HR BPO providers voice most interest in large companies with thousands of employees and multiple processes to outsource.

“There are still plenty of people looking to buy,” says Cay Gliebe, global accounts executive at NorthgateArinso, a global outsourcing provider based in the United Kingdom that serves mainly companies with 15,000 or more employees in various industries, including its largest customer Cadbury PLC, a confectioner based in Uxbridge, United Kingdom. “We can be fairly selective, and we are screening much more carefully who we will pursue. That is a general market trend. NorthgateArinso makes money off more HR deals than we did in the beginning. It is a sustainable model.” Besides being more selective, the company has been striving toward greater standardization than in the past.

One emerging exception to the HR BPO trend could give buyers another option. Although still proving their HR capabilities, several IT outsourcing companies in India have entered the HR market and are beginning to attract Western-based clients. Among the providers are the three largest Indian outsourcers—Mumbai-based Tata Consulting Services, and WiPro Ltd. and Infosys Technologies Ltd., both based in Bangalore.

These Indian companies “offer the best cost savings,” says Phil Fersht, a research director at AMR Research Inc. in Boston, and he believes it’s a good time to negotiate a deal with them.

Understanding the value

Human resource managers who turn to outsourcing—especially HR BPO outsourcing—solely for cost savings may be disappointed. Here’s why:

A large HR BPO deal can take two years to complete, from vetting providers to negotiating a contract, and another two years to fully implement—so it is nearly impossible to achieve immediate savings.

HR outsourcing reduces costs less than the outsourcing of other domains. The average cost of delivering HR functions typically equals 3 percent of a company’s revenue, according to Brown. In an HR BPO deal, a buyer can, on average, expect a 20 percent to 30 percent cost reduction, typically equaling no more than 1 percent of revenue. By comparison, Brown says, savings from outsourcing financial operations can amount to 5 percent to 10 percent of revenue.

Deals motivated only by money likely will result in bad experiences for the HR staff, the financial executives who promote the deals and the company’s employees. This has always been true, but the bigger the outsourcing project, the more important it is for the company adopting it to understand value in the broadest terms—as an opportunity to offload transaction-based services and concentrate internal staff on talent management and other strategic processes that can make a company more competitive and likely more profitable.

Many providers won’t even talk to a buyer who only wants to shave HR costs. Although would-be customers express more realistic goals than in the past, 10 percent to 15 percent of them still have unrealistic expectations of the cost savings they might reap, says Arthur J. Mazor, senior vice president of Fidelity Human Resources Services, a division of Boston-based Fidelity Investments. The smaller the company, the more likely the expectations are out of whack, he adds.

As with those at other large providers, Fidelity representatives aren’t afraid to turn away business. Mazor says the company chooses not to pursue 30 percent to 40 percent of its outsourcing opportunities. The main reasons Fidelity advisors say “no thanks”: lack of alignment between what the client needs and what Fidelity has to offer, unrealistic expectations for savings or service levels, and the financial fit.

But LeAnne Andersen, senior director for HR at Best Buy Co. in Minneapolis, and chairperson of a special interest group of companies involved in the 50 largest HR BPO deals, says companies are starting to better understand the benefits of outsourcing—and it shows in the deals they are pursuing. “Early outsourcing was about reducing HR costs and less focused on how outsourcing drives top-line revenue. I’m seeing this shift,” she says. Cost management continues to be important, she adds, but many buyers are actually willing to spend more if they can get higher service levels from the outsourcer than they were able to provide internally. “Deals are beginning to change, and it is showing up more in renegotiations.”

The author, technology contributing editor for HR Magazine, is a freelance writer based in Prunedale, Calif.

Job Finder

Find an HR Job Near You
Post a Job


The SHRM Member Discounts program provides member-only access to discounts on products and services you can apply to your life and career, and share with your company.



Find the Right Vendor for Your HR Needs

SHRM’s HR Vendor Directory contains over 10,000 companies

Search & Connect