Bundled HR Service Solutions vs. Best of Breed Providers

The HR BPO market had forecasted growth from $20.8 billion in 2004 to $31.3 billion in 2009, reflecting an 8.3% compound annual growth rate. The estimated revenue is $28.69 billion in 2009. (Source: Robert H. Brown, “Gartner Research – Sourcing options Grow as the HR BPO Market Matures”, July 26, 2006) One of the primary reasons for this sustained growth is the value that both employers and HR service providers recognize in outsourcing non-core business functions to third parties. In the down economy, the number of employers evaluating HR outsourcing as a cost cutting measure has increased dramatically. This ranges from employers who have never outsourced any function of HR to employers who seek a fully outsourced solution. Financial buyers see outsourcing non-core transactional functions as an opportunity to streamline HR processes to reduce direct and indirect costs. Outsourcing provides employers and employees access to the latest technology and communication tools which align the HR function with the overall business strategy. It provides a platform to consistently achieve better quality around managing human capital in an efficient and cost effective manner. Some employers feel that the benefit of outsourcing is even more effective when it can be managed through a single source HR service provider who offers multiple HR services in a bundled, comprehensive offering while other employers find more value in partnering with specialty providers who focus their services in one main area of HR.

Over the last few years, many HR service providers have expanded their serving offerings beyond their core business to adapt to demands of a growing market. For example, 401(k) providers now offer payroll services or a staffing company may now also offer benefits brokerage services. A PEO offering non co-employment solutions via an ASO arrangement is yet another example. In several instances, strategic alliances are formed as non-competing HR service providers align in order to accommodate the multiple and/or changing needs of their client via a bundled “menu of services” type offering. Other HR service providers have chosen to acquire additional companies instead of partnering to strengthen their offerings. Still, other HR firms choose to build additional offerings through their own internal resources and HR industry expertise.  The question then becomes: Do the benefits of a consolidated offering truly outweigh those of “best of breed” providers?

Perceived Benefits of Consolidated HR Outsourcing Offerings:

1. Integration and streamlined processes. With HR technology being at the core of many HR service offerings, several transactional processes can be automated. This is especially true if all HR processes are managed within a single system or by a common vendor. An example of this would be when an employee is terminated, a COBRA notification is automatically sent because the payroll provider and COBRA vendor are one in the same. Another example may be when an HRIS system has the functionality to initiate an electronic job offer to a candidate and through process workflow an automated alert for instructions to complete a drug/background check is initiated to the screening vendor and the pending candidate. In many instances, employers are able to eliminate headcount or reallocate duties as manual processes become automated and less error prone.
2. Multiple service offerings allow for the most competitive pricing structure. A bundled offering includes the benefit of economies of scale. The more revenue that a vendor earns, the more leverage a company has for negotiating volume discounts. This also holds true for guaranteeing higher service-level agreements or contract terms.
3. Simplified employee experience. Having one point of contact or one system to access for managing multiple requests or transactions creates an efficient employee experience. This heightens employee productivity and increases employee satisfaction.
4. Ease of vendor management. Coordinating with multiple vendors is time consuming and creates risk when dealing with time-sensitive and sometimes compliance-driven processes. A single vendor approach creates efficiencies and reduces errors. An example is a consolidated invoice for services.

Perceived Benefits of “Best of Breed” multi-HR Vendor Approach

1. Quality of service delivery. A specialized vendor that offers one core service tends to offer a higher quality experience because they are not focused in any other area. Many times this allows for custom solutions designed with the client in mind rather than a “boxed” approach. An example would be an HRIS vendor that delivers a function-rich system that is configured to the needs of each customer vs. an out-of-the-box software application.
2. Access to expertise. Specialty vendors seek a competitive advantage by deploying the best possible industry experts to meet the unique needs of their clients. An example of this would be a health and welfare consulting firm that specializes in servicing employers with self-funded benefit plans.
3. Ease of transition to begin or end vendor relationship. Implementation of a multi-faceted service offering can be a very time consuming project which may create comprised success due to deadlines. Focusing one just one functional area creates a higher success probability because a project isn’t dependent on competing projects. Additionally, if a consolidated vendor is performing well in one area and poorly in another, the entire relationship may be compromised. An example would be an employer terminating a benefits consultant relationship due to poor service and being forced to change HRIS systems because of the bundled offering.

If challenged with making a clear distinction as to the best approach for your company, I suggest asking a few key questions:

• What do you value more – quality or simplicity?
• Are you solely interested in saving on hard dollar costs or do you the see a greater opportunity for indirect savings by increased quality relationships and delivery?

If you are leaning towards a consolidated approach, I suggest asking detailed questions around the service integration. Qualify which resources are actually internal or if some are outsourced partnerships. With this, clarify defined responsibilities of the service provider vs. the employer and more importantly who holds the liability. If a specialist approach seems more fitting, ask for specific examples of success stories from their clients who were able to achieve measurable benefits that could not otherwise be realized in a consolidated approach. Contact us today for a free consultation. www.gocentripetal.com.