Bundled HR Service Solutions vs. Best of Breed Providers
The HR BPO market is forecasted to grow 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. (Robert H. Brown, “Gartner Research – Sourcing options Grow as the HR BPO Market Matures,” July 26, 2006)
One of the primary reasons for this sustainable growth is the value that both employers and HR service providers recognize in outsourcing non-core business functions to third parties. This trend may even see more growth from 2009 to 2010 because of the down economy. Employers are increasingly looking at HR outsourcing as an opportunity to streamline processes, reduce direct and indirect costs, get access to the latest technology and tools, consistently achieve better quality, and align HR with the overall business in the most cost-effective, efficient time possible. Many employers feel that the benefit of outsourcing is even more effective when it is done with a single source provider who offers multiple HR services in a bundled, integrated offering.
Many HR service providers have increased their serving offerings beyond their core business to adapt to demands of the market. For example, a 401(k) provider might now offer payroll services, or a recruiting company is now offering benefits brokerage services. Even further, a PEO starts marketing non-co-employment solutions via an ASO arrangement. In several instances, strategic alliances are formed as non-competing HR service providers align in order to accommodate the multiple 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 firms choose to build additional offerings through their own internal resources and HR industry expertise.
My 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 terminates, a COBRA notification is automatically sent because the payroll provider and COBRA vendor are one in the same. Another example may be that when the HRIS system is told that an offer is being made to a candidate, the process for completing a drug/background check is initiated. 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. These allow for the most competitive pricing structure because a bundled offering produces economies of scale. The more business that is given to a single vendor, the more leverage for negotiation. This also holds true for guaranteeing higher service related agreements.
3. Simplified employee experience. One point of contact or one system to access for multiple requests, creates an efficient employee experience. This heightens employee productivity and increases employee satisfaction. A new hire can enroll for benefits, request time off, and view a paystub in a centralized location.
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. A consolidated invoice for services is an example of this.
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 on 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 a 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. Implementing of a multi-faceted service offering can be a very time consuming project which may create compromised success due to deadlines. Focusing on 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 it is core to the bundled offering.
If you are challenged with making a clear distinction as to the best approach for your company, I would suggest asking a few key questions.
The first being what does your company value more: quality or simplicity. Furthermore, are you to simply save hard dollars costs or do you see a greater opportunity for indirect savings by increased quality relationships?
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.
