Breakout year for outsourcing predicted

By Michelle Rafter

Feb. 3, 2006

If you thought outsourcing was big, you ain’t seen nothin’ yet.

    That sums up NelsonHall analyst Phil Fersht’s predictions for 2006, which he dubbed “a watershed year” for HR outsourcing in a recently published industry report.

    In 2005, a number of multinationals signed major HR outsourcing contracts, led by DuPont, which closed a record-breaking 13-year, $1.1 billion deal with Convergys late in the year.

    But the bigger story was the deals that weren’t signed, according to Fersht, NelsonHall’s executive vice president for BPO research, and other HR industry observers. As the initial hype wore off and companies realized how complex and time-consuming it is to institute an outsourcing plan, many put the brakes on contract talks, resulting in far fewer deals than prognosticators had anticipated.

    The good news is that plenty of deals in the works last year should close during 2006, Fersht says. That’s one reason he expects a 20 percent uptick in worldwide HR outsourcing spending this year, to $4.3 billion. “It’s going to be the biggest year for HRO yet in that it’s going to become real and workable; it’s no longer a dream,” Fersht says.

    The turning point? Service providers such as Hewitt, Convergys, ACS and others have gone a long way toward standardizing contracts, implementation procedures and technology platforms. They’re also building regional service centers around the world to accommodate multiple clients. All those steps should result in cost savings for both clients and vendors, industry analysts say. For a while, “it was all about selling, selling, selling,” says Michel Janssen, president of supplier solutions for the Everest Group, a Dallas HR industry consultant. “Now suppliers are absorbing the deals they’ve sold and making sound business decisions around them.”

Other 2006 predictions:
4More companies will strike deals that go beyond typically outsourced HR functions like payroll and benefits administration to include activities such as compensation management and e-learning.

4As corporations go global, outsourcing will too. More deals will cover a corporation’s worldwide workforce, not just employees in English-speaking countries. Also, expect more outsourcing deals between corporations and outsourcers based outside the United States—in areas such as Europe and Asia.

4More companies will sign so-called “multitower” deals, handing over responsibility not just for HR but also IT, supply-chain management and finance and accounting to a single outsourcer. IBM and Accenture are primed to handle such mammoth projects, and Convergys made several key acquisitions in the past two years to do likewise.

4More companies will rely on third-party consultants to help craft outsourcing strategies, write RFPs, pick partners and oversee contract governance, leading to a rise in the number of middlemen such as NelsonHall, which merged with EquaTerra last year to improve its standing as an outsourcing matchmaker.

4Analysts expect mergers and acquisitions among outsourcers to continue, albeit more slowly, as rivals position themselves to take advantage of these trends. “Some (acquisitions) will happen, and some won’t because of price or timing or just incompatibility at some level,” says Lisa Rowan, an HR industry analyst at IDC. “But (outsourcers will) never say ‘never’ to any of it.”

Workforce Management, January 30, 2006, p. 24Subscribe Now!

Michelle Rafter is a Workforce contributing editor.

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