- You can’t understate the importance of the 10-year $1bn Johnson & Johnson HR Outsourcing contract to the long-term sustainability of the HRO industry. When discussions began within J&J back in the summer of 2005, the key question bouncing around J&J’s leadership was “can we really do this?”. For a company that has grown largely through acquisition, J&J today boasts a couple of hundred businesses operating under the flagship brand. You can only begin to imagine the challenge of standardizing this global business on a common HR platform, across multiple countries, supported by centralized HR organizations. I recall times it looked doubtful the deal would happen with all the negative publicity surrounding HRO, the contractual issues of some of the earlier engagements, and the financial difficulties experienced by some of the ambitious providers who bit off slightly more than they could initially chew. It became abundantly clear over the last 6 months that J&J would prove to be the bellweather of the HRO industry – its very survival hinging on whether this would actually happen.
- What is transpiring in today’s industry, is that outsourcing (BPO and ITO) is providing the lever for companies to go through major change (hey – I managed to avoid saying “transformation”). And what’s more, HR outsourcing drives business change with the investment footed by labor arbitrage, process automation and self-service technology (contrary to the mega ERP implementations of the ‘90s where the cost was borne by the shareholders). For many global organizations, they simply cannot drive the scale of change necessary through organic process re-engineering – it’s often far too expensive, far too slow, and often far too political. Many companies do not have the required management experience to do it either. Going through outsourcing drives shock into system, forces change quickly and usually reduces administrative costs. Yes, a handful of companies decided it was not for them, for various reasons, but the vast majority would never go back. They want to work with what they have achieved and make it better, through better governance and constant innovation.
So what’s next for the HRO industry? – here are my snapshot predictions:
- Global deals will continue to slow as the major providers reach capacity and absorb what they have already taken on
- The upper middle-market will open up aggressively as firms with 5,000 – 10,000 employees pursue broader outsourcing strategies across SG&A and IT functions. Interest in outsourcing is at an all-time high and companies are vigorously exploring sourcing models that work for them – i.e. captives / hybrid models / full scope outsourcing
- The “Transform first, then outsource” myth is beginning to fade (but slowly). The common plea of “we can’t do this right now until we get our act together internally first” isn’t washing as well as it used to, with more and more companies fixing their internal process and technology requirements while going through outsourcing transition. J&J is a perfect example of that, and a bellweather for many more organizations to follow who desperately need to change.
- HRO will become more accepted as a standard outsourcing practice, like ITO, F&A and Call Center. My post on the Human Capitalist blog in December 2006 lays out the issues the HRO industry has had to contend with, unlike other outsourcing towers: