Companies, HR, Outsourcing

Venture capital and HRO

08 Dec 2003 | (Interview)

In this part 1 of an interview, general atlantic partners’ mark dzialga discusses an investor’s perspective on HR Outsourcing. by Joe Vales

This month’s column is the first of two in which we’ll get to hear from Mark Dzialga, a partner at General Atlantic Partners and one of the leading exponents of HR Outsourcing. For a thorough description of his firm ’s activities, see www.gapartners.com.

JV: You’ve made a number of investments in the HR Outsourcing area, including Exult and ProBusiness. What are some of the criteria you use to select investments? .

MD : The core of our strategy is to invest in companies that we believe can be market leaders in their respective disciplines, and to work with these companies to help implement strategy and build management and technology. We do this in an effort to build a company’s sustainable competitive advantage—a desire to see them develop and achieve a leadership position in their respective markets. We try to focus on opportunities that we believe address significant issues or challenges for large corporations, and try to help our companies design an innovative way of solving these problems. In outsourcing, we seek to have our companies provide a creative solution in combining domain expertise, proven process, and technology to help corporations address their HR challenges. Our strategy has led us to both create new companies and invest in existing enterprises. We helped form Exult, which has created a leadership position in the comprehensive outsourcing of the HR function, a market that did not exist four years ago. We also saw a significant opportunity in the outsourcing of payroll for large companies, a function that remained largely in-sourced, which resulted in an investment in ProBusiness. .

JV: You mention “sustainable competitive advantage.” How do you know or sense that aspect when you see a proposal from a company? .

M D : I think the core of competitive advantage is defined by the value proposition the company offers. The value proposition around outsourcing has changed dramatically over the past three years. It used to be sufficient to provide compelling cost savings or a next-generation piece of technology. Potential clients now seek a much more complete, integrated, and proven solution. We focus on understanding in detail how a potential client performs processes and what issues they face that lead them to consider outsourcing, and then evaluate how a company can leverage technology to perform a process for less cost and at a higher level of productivity. We want to know that the company’s solution drives better information, knowledge management, and integrated collaboration. The ability to successfully create and manage change is another key component. Most potential clients seek to outsource because they do not believe they can significantly drive change in an organization. For any respective service area, we want to know that it’s offering a set of capabilities that a major corporation could or would not easily build or sustain on its own. Most of our companies in the HR Outsourcing area are experts at managing change. .

JV: How did you decide on the particular market categories you should be focusing on, and how did you come to focus on HR outsourcing, both in its pure-play form, like RebusHR, and in an integrated back-office offering like Xchanging in the U.K.? .

MD : We started by looking at all of the major functions and disciplines within a large enterprise, and broke them down to include the processes a corporation has to provide. This included areas like human resources, finance and accounting, customer relationship management, logistics, demand management, and procurement. We then tried to identify areas of opportunity by speaking with CEOs, CFOs, and heads of Human Resources to determine the areas they felt they either needed to make a significant investment in or had inadequate process capability. While different companies faced different challenges, There were several common themes that emerged. The support of a large number of technology platforms for any given process was a major challenge, as was the need to provide a more streamlined process methodology. There tended to be a high correlation between the processes identified as most problematic and the dollars required to address these problems. Companies like Exult, Xchanging, ProBusiness, and Rebus are all trying to capitalize on the most difficult challenges that larger companies face in managing a large workforce on a complicated technology platform . .

HR represents an area where the infusion of technology can have a tremendous impact on the way service is delivered to employees. For larger companies, many of the core HR processes tend to be transaction intensive, and the leverage that an outsourcing company can achieve by running a process for many companies on a relatively similar technology platform can produce compelling economics to a client. In addition, HR lends itself well to self-service, and increasingly companies will look to exploit emerging technologies as a way to provide a higher level of service at lower costs. Areas like payroll, training, and benefits enrollment, and health-care claims will all have tremendous self-service potential, and leading edge companies and outsource HRO providers will continue to capitalize on providing these capabilities. .

There exists somewhat of a malaise around HR technologies as a result of the significant investments that many large corporations made in the latter half of the nineties. While some investments have proven out, many others were made in products and processes that were not well conceived and did not scale well within an organization. Recruiting software systems are a good example. Once an area where two or three companies cont rolled the market, by 1999 there were 40 different companies that had some type of product that promoted a Web-based integrated recruiting platform. After making numerous investments in these types of disparate technologies, many companies now face a tougher decision about how best to rationalize their technology. .

Ultimately, what we concluded is that many companies were going to take a very different approach to how to evaluate returns on investments in technology and were going to be much more disciplined about where they were going to deploy their own capital to enable the HR function. This will continue to be one of the driving factors in companies making outsourcing decisions. For the first time in probably seven or eight years, companies are doing zero-based budgeting for capital, and this reprioritization may lead to a very different approach to how companies think about enabling HR technology. Additionally, more executives are pragmatic that technology is only one piece of the solution, and that without a solution that addresses process, people, and the need to influence change, any investment is likely to lead to only marginal returns. At the core of a leading outsource provider is going to be world-class operating talent, and increasingly clients will not only consider cost, but quality of management in their provider in making a decision of buy versus build.

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