Companies, Outsourcing, HR

Venture capital and HRO, II

08 Dec 2003 | (Interview)

In this part 2 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 second of two in which we hear from Mark Dzialga, a partner at General Atlantic Partners and one of the leading investors in HR Outsourcing. For a thorough description of his firm ’s activities, see www.gapartners.com.

JV: If we look at Gartner and IDC and other industry analysts, we know they have been very bullish about the HR Outsourcing market. What are the trends you see driving the continuing growth?

MD: A number of trends are driving the growth of the HR Outsourcing market and the willingness of companies to outsource all or parts of the HR function. In today’s environment, improving the productivity and lowering the costs of operations is becoming an important variable for most large companies. There also exists a significant desire to provide greater empowerment to employees and implement self-service applications. As companies evaluate how to implement the next generation of technology and redesign processes, they will be forced to evaluate whether a third party can more effectively manage the transition. Organizations are concluding that they have a large number of disparate systems that need to be consolidated into a single, unified platform—to promote consistency and effectiveness but also to reduce the expense of maintaining numerous processes. As managements evaluate the best uses of capital, some will conclude that the highest and best use of capital resources resides in areas more closely related to revenue-generating capabilities.

Companies are also much more thoughtful in evaluating the risks of implementing new systems and the ongoing costs of maintaining and updating and tying these systems together. HR outsourcing companies offer the potential for significant economies of scale, as they can afford to make investments that can be amortized across a large number of client lives. Also, they fully understand the processes and have implemented such systems. Companies like Exult and ProBusiness can provide effective economics and service levels that, over time, few companies on their own will be able to achieve. It’s not much different from what companies like First Data have been able to do for credit card processing. I believe that there are perhaps 5 to 10 large companies (companies with over 20,000 employees) that will make the decision to outsource their entire HR functions in 2003.

JV: Do you think that a movement toward end-to- end HR Outsourcing is limited to a specific theater, or is it a global movement? Are VC companies saying “we need to bring together three or four shared-service platforms around the world in order to integrate into one seamless process,” or are they thinking country- or theater-wide?

MD: I think the trend to consider HR Outsourcing is a global trend. While the ability to have a global integrated delivery platform will be important for Fortune 500 companies, the supplier market has not yet built out this capability. While the U.S. and the U.K. represent markets where HR Outsourcing is being actively evaluated, the European continent and Asia are still very early in their development. There is a strong interest among multinationals to evaluate the opportunity to outsource their HR requirements outside of their home market. In most cases, these companies lack scale outside their resident market, and the systems and processes required to support their HR needs can vary widely. I do believe you will see an increased number of companies seeking outside providers in these circumstances . The Continent remains a challenge, as there are many fundamental structural issues around outsourcing as a concept, as well as the ability to transfer or displace employees, which make outsourcing as a concept much more challenging.

JV: When you mentioned 5 to 10 significant contracts in 2003, do you think that will be transformational, leading to 10 to 20 contracts the following year? Or is there something else that has to happen before HR Outsourcing will be something a Fortune 100 firm simply must look at? M D : The next 12 months will help define the true potential of the broader HR BPO market. While it is difficult to assess whether the number of contracts granted in 2003 will lead to a more pervasive trend, as the supplier market starts to mature and deliver on its value proposition, most large companies will begin to evaluate outsourcing various processes as an alternative to making the required investments to be successful on their own. Much like the IT Outsourcing market developed, if the early adopters to broad scale HR BPO find that their relationship with their supplier creates value that they would have not achieved on their own, I think that other companies will start to more seriously evaluate outsourcing as a real alternative.

The ultimate litmus test is the demonstration of the value proposition that third paties can provide capabilities that companies cannot achieve on their own in terms of technology, process excellence, and change management. Those BPO suppliers that can demonstrate their value in a very tangible way are extremely well positioned to capitalize on the growth in the market.

JV: Then do you think the lack of qualified vendors has somewhat limited the growth of the market?

MD: The relatively small number of vendors that can deliver on the complete HR BPO value proposition described earlier is an inhibiting factor in the development of the market. However, there are a number of contracts which now have enough longevity where the economics and productivity associated with the relationship can be appropriately quantified. As it relates to the outsourcing of a discrete processes such as payroll, benefits administration, and the management of health and welfare benefits, I believe there are a number of companies well established in the business. The growth of any large outsourcing market is highly dependent on a small group of vendors being able to demonstrate how their approach to people, process, and technology provides a meaningful better outcome for less cost, a greater level of transparency, and a higher level of productivity within the organization. As vendors are able to provide specific examples of where and how they have met these parameters, a greater number of companies will more seriously evaluate outsourcing as a value-added tool.

JV: Do you see a time when companies that specialize in certain HR areas might band together to provide end-to- end services via partnerships and compete against the firms that do it all within one firm?

MD: I do, and I think we’re already seeing that happening. There are many examples of companies who are migrating from the management of one process to the management of a much broader set of capabilities. Examples include benefits-administration companies that have worked to develop a more complete offering in HR process management. I do believe this will drive some level of consolidation, as the ability to have a more credible offering will be an important element in winning new contracts.

JV: If technology is so central to leveraging the efficiencies of the value proposition, then how can start-ups compete when it takes so much investment, so much expertise?

MD: There’s a least-common-denominator problem here. We’re seeing the largest HRrelated IT companies trying to design products that meet the needs of the largest number of companies across very different industries. Theirs is a generic approach, in which they are trying to make one piece of technology solve as many problems as they can. But what you find is that the way in which the products of these larger companies —Oracle, PeopleSoft, SAP, for example — are actually being implemented is very different from company to company. And people know that the in-house implementation, integration, and ongoing maintenance of these highly tailored systems can be very difficult and expensive.

As a result, some start-ups have been successful because they take a very focused approach to not only technology but also to people and process. As the market has matured, it has become increasingly difficult for start-ups to be successful in winning new large contracts, as a result of a greater number of existing vendors having proven capabilities. Newer companies still can be successful in developing unique approaches and technologies for the management of point processes, which is consistent with what has happened in the past.

JV: Let’s move offshore for a moment. I know General Atlantic has made some investment in offshore companies, and you’re bullish about India. How do you see offshore developing, and especially for HR Outsourcing?

MD: I think the offshore opportunity is very significant for large companies. Most people think of it as a cost-saving opportunity, but for those who have studied it closely, I think they’ll find that it’s a fundamental issue of quality. The opportunity to perform customer operations and call-center outsourcing is becoming well understood, through the emergence of companies like Daksh. There are a large number of vendors that are trying to expand and provide other process capabilities, and depending on the process, many vendors will be successful. The real opportunity will be in the ability of vendors to develop global integrated delivery systems, of which India will be a part. The success that many large corporates have had with outsourcing the development and maintenance of applications will pave the way for companies to evaluate the offshoring of other process needs.

JV: Do you see BPO firms establishing centers in India that they own and run, or continuing to contract with Indian firms?

MD: I do believe that BPO firms are going to need to own their own capability in India. As most vendors are obligated to provide capabilities against a defined service level, the need to directly control the process, technology, and quality of operations will lead most to develop their own capability. For large corporates, some will choose to build captive operations (GE, American Express) while others will elect to work with the existing vendors in India who have already built out a proven capability. Doing business in India carries many complexities, and as a result, many companies may find the existing vendor base to be an attractive alternative to quickly moving process capability to India.

Related Content: