Why HR BPO makes sense in the middle market

By Siew-Joo Tan, Business & IT Services, Yankee Group Human resources business process outsourcing is accelerating in the middle market as companies realize its advantages and more BPO providers target this space.

Human resources (HR) business process outsourcing (BPO), which is the outsourcing of multiple HR processes to a single third-party provider, is the buzz in large organizations and is capturing headlines in the business press. Large deals like the ones forged between Proctor & Gamble and IBM, Rohm Haas and ACS, and Universal/Vivendi and Exult have organizations asking if multiprocess HR BPO is for them.

One thing is certain: the do more with less mandate isn't going away. Companies are seeking ways to reduce HR's operating costs and increase HR's contribution to the business. Organizations are realizing that outsourcing is the way to reduce costs while, at the same time, freeing up HR professionals to focus on more strategic issues in line with the business. Mid-market companies are no different: They need to reduce costs and are finding that multiprocess HR BPO serves their needs best.

Trend Impact

When mid-market companies (those with 1,000 to 10,000 employees) outsource their HR processes, they typically outsource payroll and benefits to separate providers, such as Ceridian for payroll and Fidelity for benefits administration. The publicity about the benefits that can be obtained from multiprocess HR BPO is paving the way for mid-market acceptance. Multiprocess HR BPO will accelerate in the mid-market for the following reasons:

Increased cost savings: By outsourcing many HR processes to a single provider, a mid-market company can increase its savings vis-à­¶is outsourcing individual processes. Outsourcing to a single provider requires less coordination and fewer staff to manage multiple vendors. Bundling many HR processes results in a larger deal, which increases a mid-market company's bargaining power, makes it an attractive client for a provider and saves more for the client. In some instances, mid-market companies will further increase the deal size by bundling in not just HR processes but also IT, finance and accounting (F&A) or procurement processes. Such multibusiness function outsourcing provides more integration of HR and finance information for the mid-market company, reduces the client's need to manage multiple vendors and leverages the BPO provider's infrastructure, such as an ERP system.

Access to greater expertise: The move away from HR specialists toward HR generalists makes it easier for a mid-market company to consider outsourcing. Outsourcers can offer many of the general HR functions at lower cost but more importantly, because HR is the business of the outsourcer, it has greater expertise that mid-market companies cannot afford to possess in-house. As regulations, compliance and HR processes become more complex, having access to the outsourcer's greater expertise is a real plus.

The emergence of a true multiclient model: As opposed to a mess for less model where an outsourcer takes over a legacy system for a client, a multiclient model is imperative to cost-effectively service the mid-market. The rise of a true multiclient HR platform has enabled BPO providers to put multiple mid-market clients on a single (typically ERP) platform, leveraging economies of scale and saving costs and complexity by upgrading all their clients at one time when new versions of the software come out.

Large BPO providers moving into the mid-market: Although the large company market is by no means saturated, it is becoming a very crowded space. Increased competition for large deals, the use of outsourcing consultants, such as TPI, EquaTerra and Everest Group, and the sophistication of buyers have led to margin compression. BPO providers targeting the large company market will start to eye the mid-market as the next arena of growth. With 20.4 million employees in the U.S. mid-market alone, this market will prove too juicy to pass up. Armed with a multiclient platform and preconfigured solutions, large providers will spend their considerable marketing dollars in this market, joining HR BPO providers targeting the mid-market such as Ceridian, Platform One, ADP and Employease. In addition, they'll join professional employer organizations (PEOs) such as TriNet, Gevity and Administaff to drive market growth and acceptance of multiprocess HR BPO in the mid-market.

Vendor Recommendations

Decide if the mid-market is a good fit for your model. Although the mid-market is large collectively, the number of users serviced per contract is much smaller than a large company deal. Outside the United States, the mid-market is even larger, but sales and marketing costs to acquire a customer are also much higher because of the smaller contracts. Servicing the mid-market profitably requires an efficient sales and marketing model in addition to offering preconfigured solutions on a multiclient platform. Mid-market BPO providers should preempt the entry of Tier 1 providers by stressing their commitment and experience in the mid-market, their understanding of mid-market issues as well as competitive pricing.

Build a marquee client reference list in the mid-market. Mid-market clients want references from peer customers. If you're new to the mid-market, incumbent BPO providers will use this disadvantage against you. Understanding how and whether your brand will carry over to the mid-market and in which industry will help target those most receptive. Courting and making the first client happy, then documenting and quantifying the real benefits you have delivered for your clients are keys to building a strong base of client reference.

Articulate the business value you bring to the client organization. Demonstrate the business value to the client organization by quantifying customer goals such as cost savings, service quality or freeing time for strategic HR into measurable metrics. This enables measuring performance versus expectations and ensures you meet outsourcing goals.

Mid-Market Enterprise Recommendations

Investigate the benefits of multiprocess HR BPO. If your annual HR cost per employee is above the average of $1,500 to $2,000 or if your HR systems are in need of an upgrade but the capital outlay makes your CFO gag, then it's time to seriously consider HR BPO. Companies can gain significant cost savings and defer capital outlays by outsourcing a comprehensive set of HR processes to a single provider. In addition, the BPO provider may be able to provide better service levels.

Consider outsourcing multibusiness function to a single third party. Increasing the deal size by bundling HR, F&A and IT makes you an attractive and important client to a BPO provider. Such a deal will also attract the attention and bids from many more BPO providers, including Tier 1 providers such as ACS, Accenture and EDS, which may otherwise consider your company too small to target. Because multibusiness functions outsourcing is a new market, a BPO provider that is positioning itself for such a service will be very interested in capturing such a deal and providing great service to make you a marquee client reference. Bundling your needs in such a way may also increase your savings and improve data integration across your organization.

Be prepared to accept pre-configured solutions and standardized processes in exchange for better prices. This may mean changing HR processes and adopting those of the provider. Expect some resistance from users. However, the savings and productivity increase very often hinge on adopting these pre-configured solutions and standardized processes.