Risk Mitigation in Second-Generation RPO and HRO Deals

By Kathleen Goolsby

Iris Goldfein, Vice President, Global Offerings and Centers of Excellence at ExcellerateHRO, points out that the HR outsourcing market incurred a "reasonable amount of press" about many first-generation contracts that did not go as predicted. The industry now faces a new set of risks associated with second-generation Recruitment Process Outsourcing (RPO) and HRO deals. We spoke with two of the major service providers in this area, Adecco and ExcellerateHRO, to learn their advice for mitigating risks in 2008.

Choose the Right Provider

Goldfein says the number-one risk now is picking the right provider--one that can deliver on its commitments and be there for the long term. The buyer needs to understand not only whether a provider is a great match but also whether it has adequate capital and is not already overwhelmed with other clients' work. In addition, she advises buyers need to take the time to understand the differences between the various models and approaches that exist today. "Be sure you understand why it will be a quality solution and exactly what the supplier will deliver and how."

Manage Expectations

Goldfein says that managing expectations has been a big failing--on both sides. "It's very complex and people need a thorough understanding of the solution beyond the sales process." She advises both sides to discuss their deal up front with eyes open so everyone will have a clear view of what the relationship will feel like and what the outcomes will be. "There will be hundreds of millions of transactions, and everyone needs to understand how long the transition will take and what the issues will be."

Recruitment Process Outsourcing Not Successful as Part of Broad-Scope HRO Deal Kim Davis, Senior Vice President, RPO Group, Adecco (and formerly President of Recruitment Process Outsourcing firm, TalentTrack, acquired by Adecco in 2007) also talks about the failures of first-generation deals. He says buyers now express more interest in outsourcing the entire recruitment process for needed skill sets, rather than the ones they experience difficulty in filling.

"Although they are receptive, they have concerns about placing all their eggs in one basket. They believe this would inhibit their ability to have access to third-party search firms and other related recruitment services if the recruitment process outsourcing (RPO) provider were to fail," he explains.

Davis says the root cause for this perception arises from first-generation deals where the providers failed to meet their clients' expectations. For example, some first-generation HRO deals included recruitment in the scope, but the provider lacked recruitment process outsourcing expertise to deliver a quality solution. As a result, some farmed the recruitment process out to a third party. "Others tried their hand at offshoring RPO but quickly discovered this to be very difficult, especially on a complete talent life cycle solution," Davis states.

He says, "The biggest problem with RPO is that there are no barriers of entry. Anyone and everyone can claim to be an RPO provider. In addition, the industry is not well defined."

Many outsourced HR functions are tactical, transaction centric, and a commodity, whereas RPO is a strategic process. So the RPO component in broad-scope HRO deals commonly fails, with buyers taking the work back in house or putting it up for bid to pure-play RPO providers.

RPO's Biggest Risk for 2008

"The biggest risk in RPO for 2008 is pricing," warns Davis. "Providers priced many first-generation deals on incomplete or bad information. Often, they overstated strategic staffing plans." In spite of this, buyers continue to drive price pressures into the RPO negotiation process. Davis postulates that this is partly the result of the industry posturing outsourcing (in general) as a panacea for cost savings, therefore creating unrealistic expectations for buyers. He also points out that buyers are under tremendous pressure today to reduce costs and increase profits.

"But driving down costs can get to the point where a provider cannot deliver," Davis warns. In addition, buyers often mistakenly attempt to get to the best price during the RFP stage without knowing the solution required to meet expectations."

Some providers in the RFP stage bid low in an effort to gain market share. And some HRO providers still incorrectly price RPO functions as a commodity. Davis warns buyers to be sure they "select an RPO provider that truly knows the business, understands the requirements to meet the client's expectations, commits to making the required investments, and has the financial resources to do so."

How can buyers mitigate the risks associated with pricing? Davis advises one strategy is to seek help from a third-party consultant (one with advisory expertise specifically in HR) to help educate on provider capabilities, delivery models, pricing, etc. The buyers should then speak with referenceable accounts demonstrating the provider's capabilities and successes.

He says Adecco, like other providers seeking to mitigate their risks these days, looks at RFPs to see if a third-party consultant is involved, as it indicates a serious buyer looking to make good choices. Further, he warns buyers that engage consultants: "Don't eliminate your consultant from the process before making the final decision."

New Risks in Second-Generation RPO Deals

First-generation RPO deals are now starting to expire. Davis says it is apparent that the buyers are more educated going into negotiation for second-generation deals and have much higher expectations of the delivery model. He points out a significant change: buyers now want the providers to take on all risks associated with their employment/recruitment needs.

Such risks include ensuring scalability and variable staffing rates (the provider incurring all the expense for such assurance), a totally variable pricing model. Davis says some clients now attempt to dictate terms in the bidding process.

These new buyer demands make it very difficult for a smaller RPO player, he comments. "The risk versus required investment may be too great. They simply lack the resources to weather the storm associated with the ever-changing employment requirements. Larger players are better equipped to handle these variables."

But the real element of risk is that "these demands tie the provider's hands," Davis explains. Such constraints will impact the return on investment and success of the outsourcing relationship. How can buyers achieve their demands and yet mitigate all risk associated with these demands?

Davis says that buyers, first of all, need to do a much better job at forecasting their human capital needs. "This includes such components as business plans, marketplace dynamics, demographics, as well as past and future performance. Forecasting also needs to include looking at these areas not just in total but also by skill set."

Davis advises that another way of mitigating the risk is that the deal needs to be an exclusive arrangement. The RPO provider needs to be the sole provider and also needs to ensure the buyers' internal recruitment resources (if they exist) do not compete with the provider by duplicating some functions in the recruitment process. (See a white paper for more information on this pitfall.) This is a common pitfall for RPO point-of-service solutions. The pitfall gets in the way and does not allow the provider to maximize the outcomes of the recruitment process.

As a final RPO risk mitigation strategy, Davis advises the pricing model needs to be flexible. The model needs to provide financial resources if and when hiring requirements increase yet not be fixed when requirements head in the other direction.

Going Global with HRO

Goldfein at ExcellerateHRO says some HRO contracts are just beginning to move beyond North America. As contracts go global, it is important to clearly understand what risks the provider takes on and what risks the client keeps.

She explains, "In HR, it's rare that anything happens exclusively at the provider or the buyer organization. So it's almost impossible for one or the other to take total responsibility." As an example, in a recruitment process, a provider cannot control what a buyer's hiring manager says to a recruit. She says that buyers looking to outsource HR processes on a global basis should expect to engage in "very sophisticated discussions." She adds that "clear documentation will make for a happier relationship."