The intersection between HR strategy and HR technology

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HRO: Profits, or Business Model?

systematicHR Avatar

Jason asks if we can just get past the HRO profit (loss) thing.   I think he’s right.  What’s important in the equation is not if the HRO’s are making money or not (and chances are that none of them are), but how the financials are affecting the shaping of their businesses.  Instead of focusing on profits, Jason asks us to focus on other questions:

Vendor viability should be gaged by many other factors besides profitability.  How is the vendor investing in the business compared to their peers?  What is the vendors current and planned capacity?  How is the vendor viewed in terms of customer satisfaction and responsiveness?  What is their view and track record on service quality and support?  What is the knowledge and stability of the management team? How is the vendor viewed in the market?  What are the vendors change management capabilities?   ((Corsello, Jason.  December 20, 2006.  “Can We Move Beyond ‘HRO Vendors Aren’t Making Money?’”  Retrieved from on December 28, 2006.))

I’d like to add one other question, not from a vendor standpoint, but from an industry view.  If the major players can’t make money, and its probably that other vendors are also in the same boat, what does this mean for the HRO business model?  Here are my set of questions for the industry:

  • What are the contributors to the profit equation that are not working?
  • Do contract costs need to go up?
  • Are pre-sales evaluations of the clients not measuring up to implementation reality?
  • Are standardization efforts working?  Is standardization across clients truly duplicatable?  How much standardization is enough?

The problems with the industry are that the type of clients entering into contracts so far are spending many $Millions and expect some degree of customization.  While they may state that they want the efficiencies that HRO can offer, the implementation reality is not always enforceable.  The other side is that from what I’ve seen, the sales analysis isn’t always diligent enough to reveal what eventually comes out during implementation.  The third main concern I have is to wonder if HRO is actually efficient enough.  Based on what we’ve seen, it seems like they might have a little way to go.  Hopefully the industry will keep growing and clients will stick with their vendors.  The last thing we need is to turn clients from vendor to vendor in a industry where contracts are this large.

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3 responses to “HRO: Profits, or Business Model?”

  1. Synco Jonkeren Avatar
    Synco Jonkeren

    Good points. Even when providers can cross-fertilize from other more profitable business areas, we cannot afford to ignore the impact of the lack of profitability for the longer term. How will it impact services if provider struggle? The good thing is, it will drive innovation. And one of the areas will be standardization: of processes, service delivery and technology. Process optimization, economies of scale and labor arbitrage can only be achieved through standardization, which in turn is driven by standardized technology platforms. ADP’s GlobalView is a case in point. Other providers, Arinso, TCS, are also investing in standardized platforms to realize these benefits and be able to onboard customers quickly. Technology, therefore, should be a critical component of the customer’s provider evaluation. The HRO industry has limited time available to learn from the current status. So, yes, let’s move beyond the the profit/loss thing, but let’s com out wiser.

  2. systematicHR Avatar

    Thanks Synco. You bring a good point regarding technology platforms, the effect on cost and standardization. I’d like to mention that it mystifies me to see so many providers working with SAP and Oracle, yet there are still a few providers trying to develop solutions in-house. When it comes to cost and effectiveness, do these providers actually think they can do it better and cheaper than Oracle and SAP who have been developing the HRMS for ever a decade?

    Another point you make on standardization. I’ve recently been reading “The Toyota Way” in which there is a lovely idea that standardization is confining if one feels forced into it, but standardization can also be incredibly freeing if one views it as a platform from which all future improvements are made.

  3. Maggie Inbamuthiah Avatar
    Maggie Inbamuthiah

    That is a good way of defining Standardization. Agree with Synco that Technology is a critical component for a HRMS vendor.
    Coming to the question on if vendors can build a HRMS better and cheaper than Oracle or SAP, it depends on the size of clients vendors are targeting. There are many vendors who are hosting HRMS for Midmarket clients on a non-ERP, in-house developed platforms.
    Oracle and SAP bring in the cost advantage only when clients are deployed on the platform in a one-to-many model. Another factor is standardization. From what I have seen as a vendor, while we always promise standardization, we end up delivering customization.
    Apart from cheaper and better, the other factor that matters is the speed. Oracle and SAP can deliver faster than most in-house systems.