Executive Summary: ISG Provider Lens™ Transformational HR Outsourcing Services (HRO) - U.S. 2024
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HRO evolves beyond transaction processing to improve EX and business outcomes
The evolution of HRO has turned into a revolution. Two decades ago, we saw the first transformational HRO deals involving multiple HR processes. These were focused on the consolidation and standardization of transactional HR activities delivered from centralized service centers, using a single HCM application that replaces fragmented islands of HR technology. The primary aims were the modernization of transactional HR systems, compliance assurance, and the reduction of the cost of HR functions through efficiency savings and labor arbitrage. However, back then, HRO solutions only partially achieved improved and insightful workforce management.
HRO has gradually made progress as providers have learned from their experience and their solutions have matured. However, it has lagged behind the scale and pace of finance and accounting outsourcing, where the business case has usually been easier to define and deliver. The outsourcing of individual specialist HR services such as recruitment, benefits administration and learning has prospered as specialist skills and solutions have delivered affordable, focused solutions and outcomes outside the multiprocess environment.
More recently, underlying themes that were present pre-pandemic, such as advances in technology, generational changes in the workforce and geo-political issues, have been unleashed. Organizations need to work differently to survive and thrive in a constantly changing environment with rising employment costs and elevated employee expectations.
HRO providers have invested and continue to invest in solutions to meet these needs, reimagining how HR works and how it can deliver value to the wider organization, transforming HRO. With the increasing pace,
technology plays a prominent role in HR staff and employee interactions. Automation and AI are accelerating and becoming widespread in HR services, augmenting and replacing traditional HR service roles.
Labor arbitrage and the number of service delivery roles are now less relevant to the structure of HRO deals. The human-based HR roles focus less on transactional work and more on strategies or service interactions that require an engaging and empathetic human touch.
New possibilities for HR transformation mean this is the time for clients and providers to reinvent the HR function and reassess the case for the role of HRO.
The reinvention of HR, supported by the latest technologies and best-in-class service provisions, enables a transformation from a back-office support and compliance function to an HR function that delivers value across the enterprise, creating the workforce to drive a profitable, growing and successful organization.
Rather than only executing transactions, operational HR can attract, create, satisfy and retain the right talent and capabilities that add value to the organization. Leading HRO providers bring thought leadership and
experience to guide and collaborate with their clients, creating a vision for reinvented HR that:
• Is designed around the users of HR services, where process design becomes experience design facilitated by HRO providers’ investments in design studios.
• Leverages technology not only to ensure efficiency but also to provide employees with valued, timely and engaging consumer-grade interactions and experiences.
• Empowers HR and business leaders with accessible and actionable data-driven insights.
• Focuses on improving business outcomes for the wider business and not just on operational performance indicators.
• Efficiently and securely processes HR transactions on time, with accuracy and compliance.
Next-generation technology is here and is being used by HRO providers. This goes beyond core HCM platforms such as Oracle, SAP SuccessFactors, Workday and others. Providers have made significant investments in proprietary and curated technologies and platforms that integrate with and/or complement transactional HCM applications.
These solutions are used to:
• Facilitate interaction with employees and HR staff regardless of their location or preferred mode of engagement — whether at office, at home, or on the go; during working hours; or at other times.
• Orchestrate increasingly proactive and personalized experiences based on individual needs.
• Convert self-service into an opportunity to engage, support and delight during moments that matter throughout the employment life cycle – from pre-hire, through work and life events, to leaving employment.
• Automate activities, creating both fully automated and augmented HR process steps.
• Consolidate and report on disparate data to provide HR dashboards, insights and forecasts, facilitating effective decisionmaking and actions.
Automation, ML and AI technologies are not new to HR. Over recent years, they have supported employee contact chatbots, the recruitment process and benefits administration. However, generative AI (GenAI) will have a more noticeable and dramatic impact on HRO. Widespread public awareness and understanding of GenAI have created buyer expectations regarding AI-enabled services. HRO providers have been collaborating with clients and have identified a range of AI use cases across different HR services.
AI-enabled solutions are now being progressively implemented, initially focusing on areas with low variability and few process steps. These include co-piloting the generation of job descriptions, creating offer and onboarding packages, navigating health care options, and answering HR data and policy queries. However,
this is just the start. Leading providers have a clear vision and road map to effectively leverage AI to improve experiences and business outcomes while delivering efficiency savings.
Humans are not going away in this modern technology-led HRO model. There will be fewer people involved in general service provision as automation and AI reduce the need for manual transactional activity. However, people will continue to play a vital role in delivering HRO. In crucial moments for employees, especially in specialized areas involving complexity and variability in outcomes, human involvement and empathetic support from specialists are essential. For example, in health and welfare benefits administration, employees frequently need guidance in choosing the right health coverage from a range of complex options. A well-constructed online onboarding package, automatically delivered ahead of a new employee’s first day at work, is great, but it is even better when backed up by a personal welcome call.
Shifts in the focus of governance for HRO deals make clients and providers focus more on achieving business outcomes. These include operational HR cost savings but extend to wider measures of success, e.g., reduced time to fill vacancies, increased program uptake and ROI, enhanced talent retention, lower absence rates,
improved employee satisfaction, and increased employee productivity.
Traditional SLAs that measure the timeliness and accuracy of operational activities still exist. However, a developing trend toward more subjective experience measurement and an emphasis on business outcomes indicates a shift from a transactional view of HRO to a deeper partnership between the parties. This highly mature relationship will drive greater value from HRO.
HRO pricing is a mix of fixed prices (e.g., for implementation or specified inputs), peremployee fees, and output or transaction fees (e.g., price per hiring requisition). However, outcome pricing is now being considered for some elements of HRO. For example, the provider is rewarded for delivering a measurable
improvement in a business outcome measurement. There is still a way to go before this becomes a common practice, and it requires a new level of pricing sophistication and relationship maturity. The small movestaken so far should be welcomed. They indicate a shift in emphasis from service cost to service value, aligning with the creation of more valuable outsourcing partnerships.
Winning HRO providers lead HR thinking and bring a vision for reinvented HR to clients, collaborating on designing affordable HRO solutions to deliver value and improvements in business outcomes. They offer modern technology-led solutions with a critical human element as part of the service delivery model to provide highly personalized and positive experiences in their interactions with their clients’ employees. To future-proof their services, the providers continually invest in their technologies and services and follow
an improvement road map aligned to key themes in the market. Their approach leads to momentum and success in the market, and significant numbers of clients and employees are served.
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