HR Outsourcing trends in Europe - The facts, the complexities and the future

By Andrew Kris, Chairman of the Advisory Board, and Luca Segantini, Director SBPOA.

In 2003 human resources outsourcing (HRO) became one of the most rapidly evolving outsourcing markets worldwide. Even the usually skeptical Europeans have come to recognize that what we are seeing is not just another American management fad. At the SBPOA, we have been observing and commenting on global developments in business process outsourcing and its close relative and pre-cursor shared services for nearly 10 years. Today, it is evident that HRO has arrived in Europe and is here to stay.

Some hard facts

So here are some of the facts and our interpretation of what is really going on in Europe in HRO. In these few lines we also tackle some of the issues brought about by the diversity of Europe, its yet-to-be-harmonized legislation and its seemingly endless cultural differences.

Eighty-five percent of American enterprises are expected to outsource at least one component of their human resources functions by 2005, according to Gartner Dataquest. Across Europe, similar trends prevail, with growth within both the ITO and BPO sectors continuing strongly in Europe in 2003.

At the SBPOA we estimate that Europe trails the US market by two or three years, although it is worth noting that the 'lag' has narrowed in the last couple of years - Europeans are picking up North American trends and are getting quicker at adapting them to European needs.

According to Gartner, revenue growth in both ITO and BPO is catching up with the USA. The strongest growth predicted, however, is in BPO. Gartner expects the European Union (EU) BPO market alone to be valued at $64 billion by 2005.

In a recent report, industry research group IDC stated that the human resource (HR) services market will enjoy strong continued growth in Europe in the period 2003 to 2006, with HR business process outsourcing services in particular forecast to grow at a compound annual growth rate (CAGR) of 27.2% over the next five years. IDC says that the HR services market in Western Europe grew across all service categories in 2003 - against a backdrop of falling ICT stock market values and despite a difficult economy - and will top $34 billion by 2006.

The findings of IDC's research highlighted that despite some well-publicized difficulties experienced by organizations such as BP in the outsourcing of its HR function to Exult, European companies are responding to the toughening economic environment and an increasingly competitive European market by turning their attention to process improvements in back-office functions. HR is getting particular attention as executives focus on unlocking the value trapped in routine administrative and support functions.

According to Mike Friend, Senior Research Analyst at IDC, "The bulk of recent technology investment and related outsourcing activity has been in customer services and customer retention. However, many companies are struggling to define what is an appropriate return on their earlier investments, such as in Customer Relationship Management (CRM). The current economic climate has encouraged organizations across Europe to focus their attention on driving through process efficiencies in their back-office operations. The outsourcing of HR processes or indeed the whole HR function is being increasingly seen as an important business tool in helping to manage inflated cost structures and improve operational capability."

Other key findings by IDC show that HR processing services spend, including payroll processing and benefits administration, is likely to see steady growth of 5.1%. However, the growth of the BPO market is likely to see a greater proportion of processing services revenues captured in broader BPO; hence IDC forecasts a declining share of discrete processing services in the total HR services market.

Similarly, HR consulting services spend, which includes services such as HR strategy, HR best practices, HR process reengineering and process improvement, organizational design, and compensation and benefit design, is forecast to grow 13.6% over the period 2001 to 2006. Consulting services will become the largest HR services segment by 2005.

IDC forecasts that the total European HR services market will grow at a CAGR of 11.4%, with growth anticipated to peak in 2004 at 12.3%. The growth of the HR services market beyond 2004, particularly the growth of the HR outsourcing, will to a large degree be determined by attitudes towards the BPO model in Germany, the largest economy in Europe.

Research from Holway Ovum, a research service specializing in the UK software and IT services marketplace headquartered in London, UK predicts that, "BPO will be the only party in town." It expects the UK BPO market alone to rise from £3.5 billion in 2002 to £10.3 billion by 2005. This represents a growth of 29 percent for BPO against a projected growth of just seven percent for ITO.

Who are the leaders and where do they go for service?

With some notable exceptions such as BP and the broad financial services sector, North American corporations have tended to pioneer the implementation of HRO in Europe by adapting US experience. However, as one CEO put it, "Europe is not the US and Europe is not just the UK". And with the exception of the UK, which has the most vendors capable of meeting the needs of large corporations and public sector organizations, HRO vendors capable of supporting pan-European outsourcing are still few and far between.

The next year will see many large-scale HR outsourcing arrangements as predicted by Gartner and IDC, but most likely leading the way will be the more than 50% or so of the Top 500 European corporations operating or planning HR shared services. For many of these corporations, comprehensive HRO represents an ideal solution to gain even greater economies or simply to eliminate a disruptive step, by moving from functional HR directly to HRO, without creating HR shared services.

Those with the most to gain such as IBM Services, Accenture, EDS and so on, have only recently begun to beef up their capabilities to provide seamless, pan-European services. Others such as Exult, Xchanging, Liberata, Logica CMG and Capita for example remain anchored for the time being to the UK and will need to make substantial investments to expand their operations to continental Europe. North American providers such as Convergys and ACS will leapfrog established UK providers into the continental market and will be effective in competing with others such as ADP, Cap Gemini/Ernst & Young and Hewitt, as they attempt to corral their country affiliates into becoming integrated, Europe-wide HRO providers.

Not just mega-deals

A study conducted by the Institute of Management Accountants (IMA) in mid 1990s, showed that mid-sized companies spent almost twice as much as large companies on their HR function. The study discovered that more than 87% of the expenses mid-sized companies budgeted for finance and HR were going towards routine processing transactions, rather than policy making strategies and analysis that could actually impact the business, enabling it to gain efficiencies, improve productivity and the bottom line. Outsourcing providers at the time showed little interest in these companies, focusing on the larger players, who translated into a better business opportunity.

Today, all organizations, whatever their size, are seeking to outsource their non-core processes in an effort to cut costs and maintain growth. The impact of the global economic downturn has been acutely felt in Europe, especially in so-called mid-market companies that are the foundation for the economies of Germany, France and Italy.

The SBPOA is predicting that for the next two years European HRO growth will be primarily from mid-sized firms, for three reasons. First, European HRO providers are targeting mid-market firms. Informal SBPOA surveys on this topic indicate that this is for quite practical reasons: Small guys (read: mid-size companies) make buying decisions faster than the giants. Second, providers in Europe are more accustomed to pricing for complexity (read: pricing higher) than their American HRO provider brothers and sisters. When we say complexity, we mean legal tangles, local regulatory speed bumps, and issues in administering multi-regional health and pension plans. And finally, smaller scale improves the chances of success for both the client and the provider, given that the parties are still on their way up on the experience curve in HRO.

These trends are encouraging, and the fact that the 2003 average contract value of European outsourcing deals is up EUR 442 million from 2002 is a clear sign that mega-deals aren't so far away along the road  

As TPI, one of the largest of the outsourcing advisory firms active in Europe comments, 'for more than a decade companies have been outsourcing information technology services, however, the outsourcing of other business processes has only recently enjoyed broad based acceptance, with HRO leading this trend over the course of the last several years'. According to TPI, initially, HR outsourcing transactions involved only certain discrete services such as payroll or benefits administration. Today, HR outsourcing typically involves large complex transactions and includes virtually every aspect of HR services including recruitment, compensation, claims administration and learning development.

In Europe as in the US, it is recognized that administering HR services can be an expensive and complex undertaking for any enterprise and, as a result, necessarily diverts resources from other strategic initiatives. At the same time, employees are demanding greater and easier access to employment information and services. Outsourcing HR services to suppliers that specialize in the provision of human resource services reconciles these seemingly conflicting forces and enables organizations to provide the functionality demanded by employees at a cost that is difficult for any one organization to achieve by itself.

With on average approximately 60% of a company's HR time being spent on administration, 30% on consulting, and only 10% on strategy, by outsourcing the day-to-day HR administrative functions, European companies look to freeing up valuable HR resources so they can focus on the more complex strategic planning, directing and monitoring functions associated with best-in-class HR programs.

Changes of this magnitude will also call for re-thinking the role of HR professionals. There will not be room to re-deploy everyone in the outsourcing firm or in a strategic HR role. Already, European HR leaders question whether their colleagues who have focused on managing day-to-day administration, in many cases for large parts of their careers, will be capable of rising to the challenge of becoming HR strategists. In the context of continuing professional development and re-training, European HR associations including the UK's Chartered Institute of Personnel and Development (CIPD), will need to address these issues and soon.

An outsourcer can help making HR more strategic.

The HRO promise is to reverse the ratio of how European HR professionals spend their time, by taking advantage of economies of scale and leveraging the resources of shared service centers across multiple clients, as well as through implantations of best practice and a commitment to service excellence.

The HR outsourcer that has depth, breadth and a scaleable, flexible solution set (including change management, vendor management and functional and technology expertise) that can be deployed Europe-wide, is in the best position to help a client transition quickly to a new system and achieve the fastest path to cost control while improving service quality.

Even though Europe is diverse in so many ways, most basic HR processes are not impacted by regional differences. While some like SAP/ARINSO and Convergys claim that the holy grail of a single system for Europe-wide payroll is close to being achieved and that they can provide it, Europeans need to be careful to avoid building over-complex solutions to problems that do not exist. Just how many regional variations need there to be for training, recruitment, career development and so on?

A pragmatic approach to European HRO is key. If you have 1% of your employees in Estonia, do you want to roll out your entire HRO strategy to serve them? Can you not do it in Excel? And yes, when it comes to a self-service HR solution, large change management expertise is key to transition employees and managers. But it has to be done right. For example, when a large oil company in the UK recently implemented an outsourced self-service HR system, they found that employees continued to request services from the HR team in the traditional manner. As a result the costs of HR administration actually rose significantly and they were forced to suspend the self-service program.

Reasons for outsourcing ? Europe is not different

• Cost effectiveness
• Reduced administrative costs 
• Capitalizing on technological advances/expertise 
• Improved customer service 
• Redirecting HR focus toward strategy/planning 
• Focus on core business
• Reduced corporate overhead
• Provision of "seamless" delivery of services
• Insufficient staff

Continental Europe

Continental Europe reflects a large mix of cultures, languages and legal environments. Some countries are heavily regulated while most have state-run benefits for employees. In Belgium for example, a whole range of payroll-related activities are de-facto outsourced through 'Sociaal Secretariaat' offices that trace their origins back to unions. They can handle every aspect of payroll and have responsibility for collection social security and tax contributions.

Yet, despite these exceptions, there is a great deal of interest in HR outsourcing, particularly in the area of shared services.

HR departments are looking to improve services tactically and strategically. They want to streamline the administration of payroll and expatriate services and find opportunities to maximize information on a global basis. Forward thinkers in HR are also keeping outsourcing in mind as they look ahead to the day when there is a greater need for private or company-based retirement systems. As states reduce their involvement with individual pensions and people take personal responsibility for their retirement, this will inevitably require programs that will need development and administration.

IDC's view that the European HR business process outsourcing (BPO) market is entering a critical phase seems to be justified by some recent announcements. Following contract wins for ACS and IBM, and signals that service providers are gaining increasing exposure in European boardrooms, a third major HR outsourcing announcement came from EDS HRO. It is clear that HRO is moving from what has long been the domain of pure-play Exult and its siblings and is attracting serious interest from the major ICT providers. The combination of their process and technology expertise coupled with the promise of cost and efficiency savings, shows signs of winning over an initially skeptical customer base.

More importantly two of these contracts, as well as the recent deal with Infineon AG, have opened up the market in Germany. The German economy, which has languished for over 10 years, is struggling to overcome the handicap of high wage structures and costly redundancy legislation as well as the growing global competitive pressures faced by its industry.

While generally skeptical and slow to react to developments like HRO, once some of the largest German corporations such as Deutsche Bank and Daimler-Chrysler declare that outsourced HR is a key part of their strategy, and that cannot be too far away given the forward-thinking leadership of these organizations, other major German enterprises will follow as will large sections of the German middle-market.

Further North, Scandinavian corporations and public sector organizations have shown a readiness to consider HRO. Witness the 2003 outsourcing of the City of Copenhagen's HR services to Accenture.

United Kingdom

The UK remains at the forefront in developing BPO domestically with activity dominated by the public sector and financial services. Large sections of the public sector including the National Health Service (NHS), Europe's largest employer, are turning to BPO in an effort to deliver better value for money from bloated bureaucracies.

It is reasonable to assume that of all the HR outsourcing, (with the exception of payroll and benefits), that has taken place to the end of 2003, around 75% of deals have been in the UK. There is evidently a greater readiness to adapt US business strategies in the UK, which is generally the first port-of-call for North American corporations entering the European market.

Offshoring is a persistent feature of the UK market, though strictly speaking any work for UK firms handled outside the UK is by definition 'offshore'. Firms like Exult for example are already providing substantial elements of their services from India. Similar moves to offshore by the large financial institutions have raised the temperature of the employment debate as perceived job losses mount. Nonetheless, the present UK Labour government is taking a sanguine view of these developments.

In a recent speech in Hyderabad, Mike O'Brien, British Minister of State for International Trade and Investment and Foreign and Commonwealth Affairs said that the United Kingdom will not adopt a protectionist view towards business process outsourcing (BPO). He said the British Government was of the opinion that BPO was a "fact of economic life" and the companies had the freedom to decide where to locate their operations." The market for HR outsourcing in the UK is driven by three key factors. One is to free up resources, which will reduce costs and add value to the organization. The second is to maximize the value-add by using management information that results from the delivery of services. The third driver is to improve service levels of the HR function. In particular, there is a lot of activity around adding flexible benefits programs in various organizations in the UK. HR organizations see the benefits of these programs to better attract and retain needed talent.

The UK market has provided tremendous opportunities for outsourcing firms to learn what works and what does not. For example, one leading HR BPO firm learned that gaining cultural acceptance for fully automated processes was too difficult, but partially automated processes encourage early adoption and set the stage for full automation later. If HRO firms can adapt what they have learned in the United Kingdom and apply these with sensitivity to the needs they meet across the Channel, there is every reason to expect a successful Anglo-Saxon invasion. It will be hard for organizations in the private or public sector to resist, and Continental HRO firms will need to do more than claim cultural affinity if they are to be competitive.

It is unlikely that all European Union governments will be as realistic as the United Kingdom in their approach to offshoring, despite the fact that this trend is also benefiting some current and future EU members including Spain, Portugal, Hungary and the Czech Republic. Early signs indicate that the EU will set up a working group to address this issue early 2004. The HRO industry and its clients will need to become more active in the defence of HRO and its benefits to the competitiveness of Europe's organizations and ultimately to its economies, a public discussion in which the SBPOA will play a leading role.

HRO has arrived in Europe

The October 2003 launch of HRO Europe magazine, sister publication to HRO Today in the United States, recognized the coming of age of HR outsourcing in Europe. It is no longer a question of when but how fast HRO spreads across Continental Europe. Behind the surge will be tried and tested providers who cut their HRO teeth in the US and UK markets and who understand the variety of challenges they and their clients face. And they will succeed!

A case in point: British Telecom and Accenture

BT, the UK-based telecoms giant, was one of the first companies in Europe to innovate through a major HR outsourcing deal. Since 2000, all its transactional HR services have been handled by Accenture HR Services, covering everything from recruitment through to pensions. The GBP425 million contract resulted in more than 1,000 of BT's HR team transferring to Accenture to administer HR services. This enabled BT's remaining 600-strong HR workforce to concentrate on the strategic people issues facing an organisation employing more than 100,00 people worldwide, the majority in the UK.

Early experiences

The first three years of the contract ran against a backdrop of significant change for both organisations. Although the HR outsourcing arrangement continued to run relatively smoothly on the surface, it was inevitable that during such a turbulent period, some tensions would emerge. Although the decision to outsource was regarded generally positively within BT, there were still pockets of doubt and, sometimes, suspicion. Some of the processes being delivered by Accenture had been superseded by internal events and were no longer in line with BT's strategic direction. As a result, some line managers felt the HR services they were paying for were counter-productive and not delivering value for money. In other areas, business boundaries had become blurred and BT's HR people were still becoming entangled in transactional work at the expense of strategic input.

Dealing with frustration

The Accenture and BT teams working in partnership reviewed all of the processes and ensured there was total clarity concerning responsibilities in nine key areas. The teams went on to articulate how policies, processes and procedures should link together and assess how to implement best practices.

A creative, pragmatic approach resulted in simple process changes that had significant impact on the later workings of the contract. Results included:

- a significantly reduced number of transactions in both volume & cost across the resourcing process

- faster time to hire through simplifying and automating process steps

- clear visibility of total training spend

- a consistent approach to evaluating impact of training

- improved discipline and control in procurement and vendor management

Today

Accenture has kept to its commitment of savig BT fiver percent per year over the duration of the 5-year contract. In the Spring of 2002, BT decided that it should sell its position in the joint venture to Accenture, turning it into a 100-percent outsourcing relationship. In moving to this position, Accenture HR Services formalised the arrangements for interfacing with BT, such as implementing Service Transition, Service Management, Service Governance and Operational Excellence. The platform created through Accenture HR Services has enabled the firm consolidate its experience and know-how in HR service delivery and positions Accenture as an experienced, validated provider of HRO services.