Ephor Group is a Management Advisory firm that invests resources in our clients to create wealth producing enterprises.

Human Capital Services (HCS) Introduction


 

HCS broadly includes: Human Resources, also commonly referred to as HR, HCM (Human Capital Management) Workforce Management, Personnel & Employee Management and also includes both tactical day-to-day employee and employer responsibilities as well as strategic human capital management.

 

Today, the vast majority of employers outsource some components of their HR responsibilities. The most commonly outsourced business functions include: compliance, employee administration, staffing/recruiting, and HR technology.

 

Accordingly, HR providers has grown beyond providing benefits and payroll services, to multi-process, multi-functional HRO and HCS solutions being delivered via a cloud or SaaS platform that makes companies more efficient. Solution providers have the ability to streamline administration, improve employee performance, and provide long-term strategic support services to the business.

 

HCS History and Future State


The market for HR services and HR technology is as big as business itself. Most small businesses start by outsourcing payroll, staffing/recruiting and HR technology.

 

As organizations grow in size and complexity, they turn to outsourced HRO solution providers including HRO, PEO, ASO, RPO, fractional HR providers, and project oriented HR consultants t of it their specific needs.

 

While still evolving, HR technology platforms have been consolidated to a few major players per organization type, size, and industry paving the way for global, national and regional service providers to approach the SMB and mid-market. The future HR technology players will consolidate into the following camps: all encompassing solution providers, system of record providers that include a suite of processes, and app providers. Enterprise HR technology adoption and SMBs are adopting HR technology from one of the major players or opting for "best-in-class" SaaS app providers to fir their specific, exact needs.

The future HRO (human resources outsourcing) players will provide unbundled functional processes and outsourced solutions to not only enterprises, but mid-market and SMBs as well.  

 

The Human Capital Services Marketplace


The players with the most market share in the United States among the mid-market include Peoplesoft, Oracle, SAGE, ADP, Ceridian, Paychex, Infor, Workday, NetSuite, Kronos, Taleo, Epicor, and Microsoft. However, there are numerous "best-in-class" solutions as well as players that thrive in specific industries.  

 

While the HR technology marketplace, has consolidated in recent years, the market for HR solution provider is highly fragmented with more than a hundred multi-process mid-market HRO enterprise solution providers.

 

The outsourcing marketplace is a multi-hundred billion dollar industry encompassing hundreds of providers selling hundreds of different products and services. When you consider that virtually every business outsources some HR processes, you can appreciate the total size of this unique marketplace. If you are an outsourcing provider, aggressively targeting small business and the mid-market enterprises, it is critical to secure your position of this marketplace.

 

Human Capital Services Trends


In the early days, the term "Outsourcing" typically meant that a single process, such as payroll or benefits, was handled by a 3rd party. Today, the small business and mid-market outsourcing market encompasses almost all functions and processes; essentially anything not deemed to be core competitive advantage can be outsourced.


Currently, HR outsourcing takes many forms as organizations contract outsourcing service providers to handle distinct business processes, such as recruiting or personnel administration.


Where is HR outsourcing headed?

 

First, almost all of the transactional processing can be done by technology that did not exist 10 years ago. Companies will spend less time processing and more time on the core business.This means anything currently being processed manually will be automated, and/or outsourced.

 

Second, the business world is simply more complex. Rising complexities due to macro forces: globalization, social media, contingent workers make up a third of the workforce, etc... This means, that having "Go-To" on-demand partners and experts to support on strategic items such as Compensation Structures, Compliance, Workforce Planning, Leadership Development, etc., is a must.

 

 

 

 

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HR Software Market Landscape


The marketplace for workforce management software and related HR software technology consists of thousands of firms worldwide. However, by function and by industry leaders do exist.

 

As the HR software industry evolves, there are emerging the following software categories:

  • System of Record (PEOs and Payroll for SMB, For enterprises = ADP, Ultimate, Workday, Oracle-Taleo, SAP-SuccessFactors)

  • eRecruiting (For enterprises you have software [Taleo, others] and services [Staffing, RPO])

  • System of Engagement (SalesForce.com, Microsoft-Yammer, Bullseye) Read more about Systems of Engagement

  • Killer BIC Apps – (Gamificaiton, bid data and business analytics are big now)

 

 

 

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HR Outsourcing Market

 

Factors Driving Outsourcing - Source: AMR Research / Global Services Media, May 2009; Sample: 127 Mid-large Enterprises

With the advancements in technology platforms, HRO outsourcing is becoming more prevalent among SMBs and middle market enterprises.


 

Human Resources Outsourcing (HRO): Multi-process refers to contracts that encompass more than one outsourced capability but do not rise to the level of covering most or all HR functions. Most of the contracts in the midmarket, therefore, are not end-to-end HRO deals that would be comparable to the comprehensive contracts in the large-company market.


  • Recruitment Process Outsourcing (RPO): Encompassing recruitment and staffing this includes searching for and hiring new employees and a wide variety of services from job boards to staffing and relocation firms, testing and assessment technologies, applicant tacking technologies, executive search/placement firms, background checking services, etc. For the most part, this category ends when the employee is hired.

  • Employee Benefits Outsourcing: This category encompasses a wide variety of employee benefit and related services from traditional health and welfare benefits to worksite/voluntary products, pharmacy benefit programs, benefits administration and communication software, third-party administrators, retirement plan services, and workers' compensation/disability insurance services.

  • Talent Management: This category includes all the human resources services related to managing the individual once they are hired as an employee -- appraisal, evaluation, recognition, promotion, retention, and succession planning services.

  • Training and Development: This category includes the many products and services related to training and developing employees from instructor-based training to eLearning solutions.

  • Payroll Outsourcing: This includes everything from payroll processing companies to companies specializing in specific payroll and compensation services, compensation design, and salary statistics services.

  • Compliance Outsourcing: This category includes all the services related to complying with and managing the various aspects of labor laws, labor relations, legislation, litigation, alternative dispute services, OSHA, HIPPA, etc.

  • Knowledge Process Outsourcing (KPO) is a form of outsourcing, in which knowledge-related and information-related work is carried out by workers in a different company or by a subsidiary of the same organization, which may be in the same country or in an offshore location to save cost. Unlike the outsourcing of manufacturing, this typically involves high-value work carried out by highly skilled staff. KPO firms, in addition to providing expertise in the processes themselves, often make many low level business decisions—typically those that are easily undone if they conflict with higher-level business plans.

The Human Resources Outsourcing (HRO) Marketplace


The outsourcing marketplace is a highly competitive and fragmented industry that is poised for enormous growth in the next decade as companies fight to maintain their competitiveness and profitability. Ephor Group’s continued focus on the outsourcing industry is driven by several key trends including:

  1. The need for all small businesses and emerging enterprises to outsource multiple business processes and functions to remain cost competitive and to gain access to capabilities/expertise/resources/tools otherwise unaffordable;
  2. Evolving market dynamics such as the increased need for mobility, risk management and governance requirements;
  3. Highly fragmented market;
  4. Economically efficient model driven by recurring revenues (long-term contracts, valuations, high switching costs);
  5. Operational performance driven by people performance, scalable customer acquisition and cost models;
  6. Increased dissatisfaction with service levels from Fortune 500 vendors presents small business and mid-market opportunities

The outsourcing marketplace is a multi-hundred billion dollar industry encompassing tens of thousands of providers selling hundreds of different products and services. When you consider that virtually every business outsources some business process, you can appreciate the total size of this unique marketplace. If you are an outsourcing provider, aggressively targeting small business and the mid-market enterprises, it is critical to secure your position of this marketplace.

 

HRO Technology


Almost every organization outsources part(s) of HR (human resources).  Most businesses use 3rd parties to perform payroll, job recruiting through job boards like Monster or social media sites such as LinkedIn, background checking, assessments, and benefits administration.

An outsourced provider uses a combination of technology, certified personnel, and streamlined processes to more effectively perform a transaction for the buying organization than can be efficiently done inhouse.

 

For HR, HCS (Human Capital Services) and related workforce management solutions (WFM), technology has outpaced user adoption.  Today, the demand from consumers to have the same technology experiences at work as they do at home, along with the changing workforce dynamics, is driving the future of HR software and human capital services (HCS).

Technology has the capability to automate basic transactions and functions, and to support employees so that they can self-manage much of HR that was previously done by admins and HR staff.  The result is that enabled organizations can focus on their core. And for employers, today’s solutions can deliver reduced cost structures such as:

    • The deployment of self-service gives employees and managers direct access to a wealth of information and tools.  Through employee self-service systems via intranets, employees can access the information and support to manage their own health benefits, 401(k) programs and day-to-day HR transactions.
    • Providers handle processes that are not core to operations such as: benefits administration, payroll, assessments, workforce analytics, and recruitment-process outsourcing.
    • Shared-services model for back-office functions: Every non-strategic HR function -- administrative support, research, document centers, benefits, billing and payroll, among others -- is taken out of the hands of internal employees and managers.  This centralization reduces costs and allows front-line people to focus on higher-impact work.

Essentially, anything that is a transaction can be automated, standardized,  and streamlined. With all of this electronic, self-service, outsourced and integrated HR, one might think that the human resources department is being marginalized, but actually, HR is becoming more critical, and more strategic as its professionals are freed to focus time and resources on critical business outcomes: a) workforce management, b) talent supply chain management, c) or workforce analytics specific to the business such as labor matching (job costing meets real-time scheduling and workforce planning).

 

HR Software Technology, HCS, & HRO History


The market for workforce technology and HRO solution providers (otherwise referred to as HR technology, HRIS, HRMS, HCM, talent management and a host of other clever names and acronyms) has come a long way over the years with the constant being evolution.  Another constant has been that the technology capabilities have outpaced the adoption and use. 

The utilization failure is in part due to overhyped promises an the part of providers and poor business processes by the buyers.  In fact, the majority of implementations deployed have failed to fully utilize the entire suite of possibilities for HR technology.

The history of HR technology has evolved as the focus of the human resource function has changed.  And the scope and strategy and technology will continue to change over time as it always does: from human resources being called “Personnel” before the 80’s to “HR” in the 80’s and 90s to “HCM” in the 2000’s to something else before we get to 2015 in the opinion of most experts believe.

The market for HR technology:  According to multiple analysts and industry sources, the total potential market of large American enterprises seeking is between 25k North American organizations excluding government with greater than 10k employees.  The mid-market for HR technology is approximately 100k companies with 1,000 to 10,000 full-time employees.

The current HR technology priorities include “workforce management utility features” and being able to offer a suite of “HCM” for the complete “lifecycle” and other buzzword bingo phrases.  The priorities for the providers center around the need for technology to be “Easy of Use Out of the Box” without extensive coding and implementation.  This means that the user interfaces have to be straightforward, features have to be pre-configured and support services beyond implementation are available (“Solution not Software”).

The future of workforce technology players will consolidate into the following camps: solution providers, system of record providers that include a suite of processes, and app providers. 

 

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RPO Introduction: Recruitment Process Outsourcing


For organizations on the grow, leveraging an outsourced partner is critical to ensuring KPIs such as Cost-per-Hire, Time-Per-Hire, are successfully managed.

 


What to look for in an RPO outsourcing provider?

  1. Pricing including pay-for-performance, success fees, Implementation Fees, Training costs, SLAs
  2. Recruitment Services Delivery Model
  3. Holistic versus Point oriented providers
  4. Flexibility and/or customization requirements
  5. Success Stories by company type, size, industry

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Beyond Payroll Services and Payroll Outsourcing Trends


Employers are looking at payroll providers to incorporate Time and Attendance, Labor Management (Scheduling, Tracking, etc..), Human Resources Software such as Employee Self-Service and other Talent Management HRMS features, Spend and Expense Management.


Prevalent Payroll Outsourcing Trends:

 

  1. An opportunity for niche providers to emerge for those that adopt to buyers demand for "Beyond Payroll Technology and Services."
  2. Buyer adoption will continue to prefer a “Phased” over a “Big-Bang” approach.
  3. The demand for workforce analytics will continue to increase.
  4. Industry specialization will continue especially from services-oriented and labor-demanding industries.
  5. SaaS adoption.
  6. Shift towards more add-on, integrated products and services.

Payroll Staffing Market Landscape

The marketplace for workforce management software and related BPO including content, software, services, and outsourcing solutions consists of thousands of firms worldwide. However, by function and by industry leaders exist.

 

The goal of HR software is to automate key elements, coordinate the human aspects, and measure and analyze it all.  To satisfy customer demand, payroll providers must move beyond payroll services to offer HRMS technology as well as both HR services and FAO services (primarily time tracking and expense management). In summary, a shift has occurred from historically only managing “employee transactions” to greater ROI.


While the payroll market for small businesses with less than 50 employees is highly competitive (“red ocean”) between several different vendor types; there are approximately 50 players with significant, meaningful revenues ($10M - $100M in annual recurring non “pass-through / non-reseller revenues) in the United States. For multinationals and global organizations there are a dozen global payroll service providers.

The middle market of small and medium organizations with 50 to 5,000 employees representing greater than a million USA businesses is wide open as no dominant nationwide leader exists. Regional and industry specific payroll and beyond service providers do exist as highlighted in the table below. Download our Payroll Mid-Market Landscape Report.

 

In addition to local accounting firms and banks, which are increasingly choosing to be referral sources and turn to private-label partners for payroll services, the landscape can be categorized into the following primary buckets of competitive players:

  • The big four “umbrella” brands – ADP and Paychex together control a significant share of the target market and continue to grow based on their sheer brand recognition and referral base. ADP primarily focuses on the mid-market and Paychex targets the lower end. Ceridian focuses up market and Intuit’s focus is with very small businesses. ADP and Paychex are the big targets and are showing vulnerabilities to the up and comers based on technology, service, and price.
  • Licensees – there are ~300 active service bureaus ranging from $1M to 5M in annual recurring revenues that are delivering their service based on licensed technology from a handful of software vendors in the market who in turn receive an average of 3 to 9% of the service bureaus’ revenue.  These licensees are primarily small businesses that are operated on a lifestyle basis and were initially started based on local relationships.
  • There are approximately ~50 smaller payroll providers and a “handful” of larger players whom are operating older proprietary systems ("Home-grown" or legacy providers) that do traditional payroll processing but lack a differentiated technology strategy including WFM capabilities.
  • Software only providers – Intuit and Sage provide software only solutions for the very smallest of businesses (< 50 ees) with simple needs. These do-it-yourself solutions come with tax table updates for an annual fee, but do not guarantee compliance and keep the burden of processing payroll on the small business itself.



The future of workforce technology players will consolidate into the following camps: BPO solution providers, system of record providers that include a suite of processes, and single application ("killer app") providers. 

 

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Professional Staffing Trends


The staffing market segment focused on professionals (IT, HR, Finance) and scientific and engineering personnel (programmers, geoscientists, etc.), is highly fragmented, characterized by numerous sub-scale single point solution providers particularly prevalent in the secondary and tertiary markets.

 

The large national providers generally do not enter the secondary and tertiary markets due to the general lack of large accounts.  Additionally, their internal “G&A allocation” prohibits them from being price competitive in the small to medium size enterprise market.


The following staffing segments are fundamentally very attractive:

  • Scientific and Engineering (includes IT Staffing among others)
  • Workforce Management (WFM) and human resource outsourcing (HRO) sectors
  • F&A (Financial &Administration)

Professional Staffing and Scientific Staffing market drivers include:

  • Percentage of the workforce that is now contingent
  • Slow growth economy
  • Healthcare reform, Obamacare economics
  • Skill Demand versus Skill Supply Imbalance in SME (small and medium enterprise) businesses

For staffing companies, valuations are to be largely suppressed in the near-term. However, the demand for staffing is high, especially in niche arenas and under served markets.

 

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PEO and ASO Trends


PEOs (Professional Employer Organizations), also commonly referred to as "Employee LEasing" or "Staff Leasing" provide HR services to small businesses. The major trends include: a) healthcare reform and its impact including state funded exchanges, b) rising complexities and regulations of doing business, and c) adoption of SaaS version 2.0 HR SaaS software platforms.

 

For ASOs (Administrative Services Organizations), also commonly referred to as "unbundled PEOs", or HROs, their exists a major growth opportunity for mid-market niche providers to emerge as major consolidation among the larger providers continues.

 

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HRMS Trends


Primary challenges (priorities) for HR technology providers today to overcome include:

  • HR’s ability to impact/solve/support the business. As HR continues to move from “HR centric” to a “worker centric model tied to business outcomes”; the demands placed upon professionals and systems evolve. The admin and strategic functions of HR are intrinsically intertwined and cannot be separated and have to be performed durably well. Essentially, HR’s job is to create jobs. If sweepers are viewed as unimportant then they can be outsourced, but if HR finds sweepers that are customer service oriented, sweepers become an integral part of operations in the above pictorial example.
  • Vendor Definition. The current fragmented landscape continues to evolve as the major players consolidate and race to keep pace with the advancements in technology and the demands of consumers. First and foremost, providers have to decide whether they are Business Management Platform (ERP) or an HR Platform (Talent Management suite + core HRIS-HRMS) or simply an application that integrates into the aforementioned platforms? Today, the HR solutions landscape is littered with hundreds of providers that have meaningful client bases, but there are only a few players that have the majority of the market share by segment and region.
    Suites exasperate the vendor definition problem as companies need to deploy processes and not modules (illustrative list of processes here).
    Data Management Sludge. According to Naomi Bloom, data management is a big problem not only in HR but is actually preventing the US economy from tHRiving because the ability to effectively and efficiently manage requires usable, actionable, secure data.
  • Customers are moving towards demanding Solutions and not software (i.e. the demand for SaaS + solutions). The emergence of HROs servicing a broader scope as well as the mid-market continues to grow. These outsourced human resource providers are filling a needed role of performing transactions for companies, providing back-office shared services, and providing expertise across the HR and human capital management spectrum. But also, software providers have to change their thinking and approach to fit consumers’ demands. Software providers must think of user adoption and measurement of outputs as the end goal versus “go-live.” Software systems have for too long rewarded the wrong goals. Adopting enterprises and organizations have exasperated the problem as well by implementing technology to solve the business problem when technology is only a tool. Organizations are best served by starting with strategy and desired business outcomes and then defining their requirements for architecture and their users (defining wow user experiences before deployment).

Did you know?

  • 1 in 5 enterprises are seeking to replace HRMS in 2011 up from 9% over the previous two years.
  • 25% of firms looking to upgrade their HRMS.
  • The top 3 initiatives regarding HR tech spending in 2011 include: Business process improvement/innovation (approximately 2/3), Implement/automate talent management processes (more than half), and third is a tie between Implement self-service and Support Business Strategy from HR by nearly half the responses

The overall state of technology continues to evolve as consumer technology evolves. Today, SaaS deployments are taking over, as evidenced by Workday’s market share growth, and the shift towards truly integrated platforms has become the adopted standard (although it will take years to filter to everyone).

 

 

The future workforce is notably already different than the current workforce including:

  • Large global and virtual “outside the firewall” workforce along with a mobile workforce. Do you have integrated language translation services embedded in your systems? Providers need to embed global into everything from data standards to analytics to systems blueprints to processes.
  • Contingent workforces will represent a significant portion of the workforce.
    Younger generations are driven by “meaningful work” not money and other changes in work.
  • Matrix and team organizations will be more prevalent.
  • Total Compensation prevalent based on the new workforce demographics and attributes.
  • Consumerization requires re-thinking about Usability, Usefulness and Utility.
    Users expect the same experiences at home as they do at work. Software systems will need to be so easy that anyone can start using right away (No more form driven, tabbed, menu driven solutions that require manuals).
  • “Gamificaiton” = Engagement. The fastest growing application is games. Games have already been adopted by numerous Global 2000 companies as well as non-profits for training and development with outstanding ROI.

Historically, the majority of HR technology systems were implemented for either “payroll+” reasons or to solve a specific human resource pain. Coupled with advancements in technology, and demand from consumers, many organizations are facing re-implementation. Lots of roadmaps exist (email us for a list of options). Beyond defining your multi-generational tech savvy requirements (SaaS architecture for the future), processes (KSAOCs), and creating your organization’s YBR ("the “Yellow Brick Road”), having the right game-plan & mantra is key.

 

 

As the buyer of HR technology has shifted towards the end-user; the future of HR technology will certainly be work centric, workforce driven, and people performance-oriented.

 

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SaaS EPM


The market size for Performance Management software applications is greater than $1B annually according to Gartner. Historically, Performance Management was licensed software, but today, is largely being replaced by SaaS (software as a service).


Performance Management is a segment of software within the Human Resources or HCM (Human Capital Management) software market, also commonly referred to as “Talent Management.”

 

SaaS Performance Management includes:
• The web-based tool includes: Performance Management, Goals Management, Training & Learning modules, CRM features and other add-on apps such as surveys, compensation, succession.
• Pre-configured industry solutions for regulated organizations such as Education, Government, Healthcare, and multinational corporations.


Most licensed software providers have inhibited the routine use of these systems. These non SaaS systems have additionally required mass customization and coding to fit workflow processes and end-user adoption has been limited due to expense.

 

Today, there exists a significant number of organizations that, due to performance mandates and/or regulations, are now required to document performance.

 

Along with cloud and SaaS adoption, software normally marketed to human resources personnel is now being consumed directly by employees and managers/executives. Read more about the Social Performance Management market.

 

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Fractional HR Services - Outsourced HR Services


Fractional HR service providers, similar to interim CFO and contracted outsourced bookkeeping, run the gamut from strategic to tactical. The market is highly fragmented with no national players.

 

Buyers of fractional HR services include:

  1. Entrepreneurs: The alternative to doing HR themselves/bootstrap

  2. Growing businesses: Outgrowing their current HR capabilities

  3. PEO refugees: Companies looking for added value services (non transactional services) to traditional PEO / ASO offerings

  4. Limited internal expertise: Companies without a current HR department

  5. Transitional: Companies bridging to an internal staff

 

 

 

Download HCS Industry Reports, Best Practices and More...

 

Outsourcing Market Opportunity


In the early days, the term outsourcing meant that a single process, such as payroll or benefits, was handled by a 3rd party. Today, the outsourcing market encompasses almost all business functions and processes; essentially anything not deemed to be core or a competitive advantage can (and perhaps should) be outsourced.


Currently, outsourcing takes many forms as some organizations contract outsourcing service providers to handle distinct business processes, such as benefits management or marketing. And many organizations outsource entire functions. In fact, the majority of businesses outsource to three or more business processes ranging from very common (payroll, benefits, staffing and information technology outsourcing - ITO) to entire functions: financial and administration (F&A) processes, human resources (HR) functions, call center and customer service activities, procurement (supply chain) and logistics.


Aggregate Sizing of the Market Opportunity



Mid-tier companies struggle to remain competitive in a global marketplace. Although these firms had considered outsourcing in the past, appropriate solutions were generally lacking, or the price was too high because of the dearth of competition. Today, huge market opportunities exists.

The following outsourcing statistics are from 2009 unless otherwise indicated

  • Outsourcing spending in all business activities has continued to climb at 10 to 20% for the last decade – in good economic times and bad (Nelson Hall).

  • The majority of businesses with more than 40 employees outsource at least two of the following functions: payroll, benefits, IT, recruiting, or accounting, Small and mid-market businesses are adopting at a faster rate than larger corporations (the mid-market and large market have comparable revenue potential and the mid-market has higher margins). (Ephor Group Research).

  • TPI reports that the Total Contract Value (TCV) of the global outsourcing industry in 2008 was $93 billion, IDC forecasts nearly 50% growth over the next few years.

More than 150,000 professionals are involved in the $6 trillion global outsourcing industry.

  • Midmarket spending on HR outsourcing should climb from $20.9 billion last year to $22.1 billion this year and $29.6 billion in 2013 (NelsonHall).

  • Human Resources Outsourcing (HRO) has grown to be the second most commonly outsourced business function for companies of all sizes. Nearly 42% of mid-sized companies expect to increase the amount of HR functions that are outsourced to third parties in the next 2-3 years. Additionally, 52 percent already outsource payroll, while 45 percent outsource benefits administration and still another 40 percent outsource retirement services. Moreover, 90 percent of mid-sized and small organizations that offer health insurance benefits to their employees utilize a benefits broker or consultant to help obtain coverage (Everest Research Group).

  • The global RPO market projected to reach $1 billion level this year and grow to $3.2 billion by 2013 (Nelson Hall).

  • The North American benefits administration market is nearly $12 billion currently and will grow by an average 10 percent annually over the next few years, to reach $18 billion by 2011. In particular, the growth in the market is driven by health and welfare and leave of absence administration services, which are expected to increase from a 47 percent share of the market in 2006 to 62 percent in 2011 (Nelson Hall).

  • Nearly 40% of small business mangers subscribe to online software (Jupiter Research).

    • HR software and technology is growing within the mid-market at more than 20% per year. The fastest growing segments center around performance management with special emphasis on creating a “High Performance Workforce” (HPW).

  • The FAO market is roughly $2 billion (FAO Today)

  • 73% of mid-tier firms indicated they outsource some piece of their enterprise business processes In addition, 25% of middle market firms say they use BPO services, such as financial and accounting services. And there is still much room to grow. For example, just 14% use outsourced demand management processes, like customer call centers; and only 13% use supply management services, such as logistics outsourcing with a shipping firm. (Gartner Group survey)

  • Over 75 percent of the finance executives plan to expand their outsourcing programs in 2010 (EquaTerra)

  • Over 85 percent of the finance executives are satisfied with the benefits from FAO (EquaTerra)

  • IBM will spend $130 million on marketing and demand-generation programs this year (2009) to help channel partners expand their midmarket sales efforts.
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Outsourcing Adoption

Factors Driving Outsourcing - Source: AMR Research / Global Services Media, May 2009; Sample: 127 Mid-large Enterprises

One key reason is the lack of stable, sizable outsourcing partners focused on the middle market. Big consulting firms and outsourcing providers have not developed efficient customer acquisition and operating models to service the small business mid-market with their high set-up expenses and the shorter contract lengths on which many smaller firms insist.


While there exists a plethora of smaller, thinly capitalized operations – often offshoots of CPA or bigger company consulting firms that cover just one city or region, the market opportunity to solve the outsourcing needs for small business is prevalent.


Business segments typically outsourced include information technology, human resources, facilities and real estate management, and accounting. Many companies also outsource customer support and call center functions like telemarketing, customer service, market research, and web development.


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Outsourcing Types & Descriptions



  • Business Process Outsourcing (BPO) is the contracting of the operations and responsibilities of a specific business functions (or processes) to a third-party service provider. BPO is typically categorized into back office outsourcing - which includes internal business functions such as human resources or finance and accounting, and front office outsourcing - which includes customer-related services such as contact center services.

  • Financial Accounting Outsourcing (FAO): Finance & Accounting Outsourcing (FAO) is a maturing market, driven by the need to improve finance and accounting performance, flexibility, controls, and cost. Some analysts see analytical services superseding the FAO market over the next decade as organizations have data overload yet are short on analytical talent, and ripe with business challenges requiring decision-making information. FAO analytical services can provide:

    • Process work to focus on decision-support and solving business problems using financial domain expertise, analytical tools, data simulations, and modeling.
    • Leading organizations are looking at their entire life-cycle of financial management from sourcing (paying vendors) to customers (sales and collections).
    • In this view, analytical services (e.g., revenue leakage, pricing elasticity, cash flow modeling, and market-mix/churn simulation) can be used to generate benefits beyond labor arbitrage and process standardization to improved cash flow, spending, sales, and market share. Analytical services are rapidly being seen as an extension of FAO and generating benefits outside the walls of the CFO’s organization. While the majority of work priced in contracts is full-time equivalent (FTE) or transaction-based, clients are looking for their FAO partner to take greater accountability for improved business results, such as days payable outstanding, days sales outstanding, and closing days. This holds especially true for companies that are looking to their FAO partner to assume responsibility for end-to-end process, supporting systems, and/or need more performance accountability than standard service levels provide. Depending on the FAO scope, another variation is gain-sharing, in which multiple companies invest to provide a capability or solve a problem and then split the benefits based on some predetermined formula. FAO agreements with these types of structures need a level of transparency, integration with the client, and partnership governance model to work effectively. It is becoming prevalent that more existing FAO relationships will evolve to incorporate outcome-based pricing, and captive-shared services centers will be pressured to contract internally at these leveraged market levels.

  • Procurement Outsourcing: Procurement outsourcing is the transfer of specified key procurement activities relating to sourcing and supplier management to a third party — perhaps to reduce overall costs or maybe to tighten the company's focus on its core competencies. Vendor management of indirect materials and services are typically the most popular outsourced activity. Procurement outsourcing solution that addresses the total procurement value chain for maximized results, including sourcing, savings implementation, and transaction management.

  • Human Resources Outsourcing (HRO): Multi-process refers to contracts that encompass more than one outsourced capability but do not rise to the level of covering most or all HR functions. Most of the contracts in the midmarket, therefore, are not end-to-end HRO deals that would be comparable to the comprehensive contracts in the large-company market.

    • Recruitment Process Outsourcing (RPO): Encompassing recruitment and staffing this includes searching for and hiring new employees and a wide variety of services from job boards to staffing and relocation firms, testing and assessment technologies, applicant tacking technologies, executive search/placement firms, background checking services, etc. For the most part, this category ends when the employee is hired.
    • Employee Benefits Outsourcing: This category encompasses a wide variety of employee benefit and related services from traditional health and welfare benefits to worksite/voluntary products, pharmacy benefit programs, benefits administration and communication software, third-party administrators, retirement plan services, and workers' compensation/disability insurance services.
    • Talent Management: This category includes all the human resources services related to managing the individual once they are hired as an employee -- appraisal, evaluation, recognition, promotion, retention, and succession planning services.
    • Training and Development: This category includes the many products and services related to training and developing employees from instructor-based training to eLearning solutions.

  • Payroll Outsourcing: This includes everything from payroll processing companies to companies specializing in specific payroll and compensation services, compensation design, and salary statistics services.

  • Compliance Outsourcing: This category includes all the services related to complying with and managing the various aspects of labor laws, labor relations, legislation, litigation, alternative dispute services, OSHA, HIPPA, etc.

  • Knowledge Process Outsourcing (KPO) is a form of outsourcing, in which knowledge-related and information-related work is carried out by workers in a different company or by a subsidiary of the same organization, which may be in the same country or in an offshore location to save cost. Unlike the outsourcing of manufacturing, this typically involves high-value work carried out by highly skilled staff. KPO firms, in addition to providing expertise in the processes themselves, often make many low level business decisions—typically those that are easily undone if they conflict with higher-level business plans.

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Employers are looking at outsourcing to better control costs and remain flexible costs structures. Technology is also a major consideration as most companies do not want to manage multiple providers and point solutions nor do they want to re-invest in upgrades or replacements.


Contact us for any of the following industry sector briefs:

  1. eRecruiting Software Leaders
  2. HRO Mid-Market Leaders
  3. HR Software for Small Business
  4. HR Software for Mid-Market Enterprises
  5. HR Content Leaders
  6. Payroll Staffing
  7. PEO Regional Leaders
  8. SaaS Leaders

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HR Software HCM Technology HCS M&A Transactions


The future of HR is bright as 2012 acquisitions by industry giants SalesForce.com Oracle, SAP, Microsoft, IBM will expand the scope of the market for years to come. Download the YTD 2012 HR M&A Transactions by clicking on the image below.

    HR Software M&ATransactions HRTech

    Have a question about M&A comparables, valuation for your company, or market landscape? Contact Charles Bedard at ephor[at]ephorgroup.com

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