The Turning Point: A promising outlook for the Indian HR industry
The HR industry in India can potentially leapfrog into a groundbreaking innovation market as the country has access to advanced technology skills
The industry of HR services in India has been around for more than three decades. In the pre-liberalization era, the industry was an insignificant part of the national gross domestic product (GDP). Post 1991, the service sector in India grew in eminence and has steadily emerged as the biggest pie of the national GDP. Mostly driven by IT/ITeS services, the overall industry has steadily matured both in the global as well as the India-to-India market. The HR services sector, however, driven by brick and mortar businesses and traditional delivery models has fallen behind as compared with other highly mature service sectors and the global market.
Over the last few years, the HR industry has witnessed some radical evolutionary leaps led primarily by technology and the growth of domestic homegrown multinationals. While there are some variable opinions on the exact size of the industry (owing specifically to the variance in opinion on temp staffing and education), the industry is estimated to be over Rs. 30,000 crores. Out of this, the segment of recruitment accounts for a majority of the industry (over 70%). Some of the other services that command a big market share include L&D, outsourcing, technology, and consulting and advisory services.
Compared to other mature HR service economies in the West, most experts believe that there are sizeable opportunities in India yet to be explored. Ironically, with the exception of Info Edge, there are no public companies in this space. Varun Talwar, CEO of The HR Fund, highlights that the recruitment space presents huge opportunities for companies to go public because recruitment remains the top challenge for CHROs. The need for specialization at an industry, skill, and local level will drive consolidation and pave the way for large homegrown public companies. The emergence of large public companies will depend on how effectively companies are able to attract finance and create plans for scaling up.The technology space presents immense opportunities for growth and innovation driven mostly by cloud, social media, and consumer technologies. While in all other geographies, the evolution of services has followed a common path, there is a large opportunity in India to leapfrog if companies can efficiently utilize technology. The future of the industry will be largely driven by a combination of social, cloud, and mobile technologies, commonly referred as SOCOMO.
John Sumser, Principal Analyst at HRxAnalysts and Founder & Editor-in-Chief of HR Examiner, highlights that HR services across the world matured at three levels. The first level involves the execution of the administrative layer of HR activities, such as payroll and benefits. At the next level of maturity, service companies manage talent management processes, involving the use of data to deploy talent, identify training and development opportunities, and track performance. The highest level of maturity is about development and evolution of the human capital, that overlays administrative and talent management processes, for operating the company.
It is interesting to note that there are instances where Indian organizations have successfully utilized technology to develop highly advanced service functions as compared to other developed markets. Owing to the maturity of the technology market in India, it is possible that the HR service sector in India will skip the traditional maturity path and evolve in an atypical manner. China Gorman, CEO at CMG Group, mentions that another key development that will affect the industry globally is the changing demographic composition of the workforce. The constitution of the workforce has changed radically and digital natives will comprise a majority of the workforce in a few years. This is an indication that innovation will have a significant impact on the industry in the coming years.
The recent spurt in large-scale acquisitions is changing the landscape of HR services and will affect how investors will look at this space. Emerging organizations and emerging technologies in human capital management will become the prime focus for venture capital investments. Niche services fueled by technology are making their way into this space and attracting investments in the West. These services are more plug-and-play solutions that address specific needs in organizations. An example is background and reference checking solutions that use social technology to connect with a candidate’s former employer or a former colleague to verify credibility of claims made in a candidate’s resume or an interview. There are a number of solutions emerging in performance management. Niche solutions that use social technology and business software, to help provide on-going feedback against critical KPIs and connect individual and organizational goals are cropping up. Market experts believe that similar trends will reflect in India in the coming months.
There are several opportunities for the sector and the outlook for the coming months will continue to remain positive. In line with the global outlook for the industry, consolidation is expected across most of the segments. However, consolidation is expected to be more prominent in some of the segments, including technology, outsourcing, and recruitment. The coming few months will see more industry associations being formed, owing to the need to build a unified voice and share best practices. The Indian Staffing Federation (ISF) that came into existence in 2011 is one such example. Industry consortiums, such as CII will likely play a crucial role in this.
The demand side challenges and increasing pressure on HR organizations in India will compel the creation of new services. The imminent skills shortage, changing nature of the workforce composition and the growing influence of social media will likely drive the introduction of new services such as employer brand consulting, and online and computer-based skilling services. As the demand landscape intensifies, service providers will likely introduce new and innovative products in the areas of talent and performance management, engagement, and retention. Most experts are unanimous in their opinion that innovation will be the key propeller of growth in the industry.
The demand for HR services will move away from pure cost efficiencies toward value conversations. As seen globally, the coming times may likely see larger, integrated, multi-year, multi-service deals in India. There is expected to be an increase in organizations looking for managed services, a type of service where a single provider manages the end-to-end service of a particular program. An example would be a managed recruiting service that includes vendor management, assessments, and candidate selection. The RPO space will also likely see fervent activity.
The industry, however, will continue to be affected by the low maturity of the HR function in India. HR professionals continue to find it difficult to make and drive a strong business case on the value of employing HR services to their CEOs. Experts also believe that HR service companies are not doing enough to educate the buyer. In the absence of use-case scenarios and a weak business case, the opportunity for the buyer to move up the HR service value chain becomes difficult.
The introduction of large global players will likely constitute a threat to homegrown companies. Homegrown companies face two key challenges - the inability to scale and the inability to attract funds. A typical example is the segment of HR consulting where global companies rule the roost. These large corporations are acquiring smaller organizations that find it difficult to compete with the scale and presence of the global players. In the age of talent competition, entrepreneurs in India need to open up to the idea of hiring specialist talent, such as CMOs and CTOs.
The path to growth for the HR industry lies in the diversification of the service portfolio to cover a broader spectrum of services. Service companies have a huge role to play in educating the market on value-based conversations that rise above mere cost conversations. As an industry, providers have to continue their focus on hiring skilled talentand innovation as part of their long-term strategic plan.
THE HR BUYER
Walking the path to maturity
HR in India, starting from independence until the mid 70s was purely transactional and focused on industrial relations. From the 70s, the focus shifted to personnel management and this continued until the early 90s. HR, as a function, evolved post liberalization era when global business standards were introduced and the competition for talent intensified. The HR buyer began to look keenly into recruitment services to gain access to a larger pool of quality talent.
As business complexity grew, management of the employee lifecycle became more challenging and HR functions started feeling the pressure to manage the scale and complexity of a larger and more diverse workforce. While recruitment is still the predominant preference, the last 10 years have seen organizations open up to a broad spectrum of HR services. There are three markets of HR buyers in India― multinational corporations with access to global markets, homegrown owner-promoted companies, and SME and small companies.
The multinational corporations are the largest consumers of HR services in India, and homegrown Indian companies are far behind the curve in terms of adoption maturity. Large multi-national corporations who have significant service budgets, however, typically address their need for value-added HR services at an international scale and Indian players have to compete with global players in a more mature market. Education and awareness about HR services among homegrown owner-promoted and small scale companies is low and hence, the bulk of the business for service companies comes from the lower spectrum of the value chain, such as compensation benchmarking, transactional activities, and administrative services. The HR buyer in India is yet to mature enough to consume high-value services such as leadership development and succession management.
Another problem in the buyer community is that HR professionals in India are not skilled to build a solid business case for investment in services. As K. Ramkumar, Executive Director, at ICICI illustrates, “the role of the HR professional while explaining the value of services to the CEO is like that of a doctor or an engineer diagnosing a problem to a client. Excessive use of technical jargon dissolves the value and leads to a weak business case. HR professionals in India lack the maturity to drive the business case.”
Few services will likely see a spurt in demand in the coming months. According to Prince Augustin, EVP-Human Capital & Leadership Development at Mahindra & Mahindra, skilling and education are two sectors where buyers and service providers will collaborate. Sudeep Banerjee, Head-Organizational Capability at Bharti Airtel, forecasts that the HR buyer will be keen to employ integrated HR services to manage the complete horizon of a particular function, such as talent management.
The outlook for 2013 will be of stable investments, but the real growth of investments will come across the next 10 years.
Broad spectrum of available services
Richer high value-added services expected in the future
Large opportunity in L&D technology to scale-up skilling programs
Inability to drive the business case
Lack of substantial successful implementation case examples
Low maturity of the market
Working towards incremental growth & sustainability
The recruitment industry is probably one of the oldest among the service industries in the world and it is still the largest segment of the HR industry with an annual turnover of over $400 billion globally. It started post World War II, predominantly in war affected countries, where there was a large influx of employable people returning to jobs, giving rise to the temporary staffing industry. In India, recruitment services started about 20 years back when the economy got liberalized and there was a sudden spike in the demand for talent.
More than 99% of the 20,000 players in the industry comprise niche or boutique firms, which operate either in one city, one industry, or with one client. The last 5 years has seen the emergence of large homegrown players along with most of the renowned global players establishing a sizeable presence.
The recruitment market, globally and in India, is dominated by staffing that comprises around 75% of the market. Staffing is a large volume business with thousands of people employed in this segment. Temporary staffing in India, however, is a relatively new phenomenon and has been around only in the last 12-13 years. The staffing industry is valued at an estimated Rs. 16,000 crores and the permanent recruitment business is valued at approximately Rs. 4,000 crores in India. The permanent recruitment segment includes recruiting, contingency and executive search and comprises about 15% of the market. 10% of the market is comprised of recruitment consultancy services, including assessments, salary benchmarking services, and satisfaction surveys. Technology companies, including portals constitute the remaining 5% of the recruitment market in India.
Kamal Karanth, CEO at Kelly Services India highlights that staffing presents huge opportunities for the industry. In India there are 13 lakh temp workers presently in the organized sector and estimates by the Indian Staffing Federation (ISF) project that the demand will swell to 90 lakh, across the next 10 years. Managed services, or services where a single provider manages the overall staffing span of a company, is another key area where large recruitment companies will be looking to diversify. For homegrown companies, two challenges will likely be key areas for concern, scaling up, and the ability to find the right people. E. Balaji, MD and CEO at Randstad India, highlights that for global companies, understanding the dynamics and characteristics of the Indian market will be a core challenge. Another core challenge for most recruiting companies across 2013 will be low operating margins. Ashok Reddy, CEO at Teamlease, highlights that it will be essential to look at how to scale the business and make the business independent of one or two core people.
While the outlook for 2013 is expected to remain fairly static, the recruiting industry will likely witness changes in terms of consolidation, new delivery models, and a greater reliance on technology.
Sizeable growth opportunities in staffing
Specialized talent search in STEM, pharma, and IT
Recruitment process outsourcing (RPO)
Longer recruiting cycles
Stagnant growth outlook
Question on ability to scale
Availability of talent pool
LEARNING & DEVELOPMENT
From grassroots to global leadership
The second largest service segment of the industry, learning and development services is witnessing tectonic shifts, driven primarily by demand for more skilled manpower in the corporate sector. The learning segment in India comprises learning at all levels, from school education to corporate training. As such, it is difficult to arrive at an accurate estimate of the size of the industry. From information gathered from global studies and interviews with industry experts, People Matters estimates the size of the industry to be worth approximately Rs. 7,000 crores in India.
The demographic composition of the workforce is dramatically changing, with more personnel from the rural sector and tier II cities entering the organized sector. While it is widely recognized that a very small percentage of academic courses in India churn out professionals who are fit to join the corporate workforce, the last 5 years have seen a large number of corporations hiring professionals at the grassroots level and grooming them per their requirements.
The influence of technology has changed attitudes and outlook toward learning and development both among organizations and among talent. In the coming times, the emphasis on leadership and management development, technology, and specialized training at the grassroots level will shape the direction of learning and development services in the country.
Substantial opportunities exist in government partnerships and many service providers will be looking to reposition their business model to tap the huge potential market. Sanjeev Duggal, CEO at Centum Learning, highlights that in the five year plan, the government has allotted Rs. 35,000 crores, for learning and skilling. With the penetration of end-user devices and social media growing at an unprecedented pace, spending in learning and development technology will see significant increase. Vinay Kumar, Director and Principal Consultant at C2C Consulting, highlights that with increasing globalization and M&A activity, organizations are likely to increase spending in leadership learning, technical training, and cross-cultural development to meet their demand for global and technical leadership. Sureish Nathan, Vice President & Managing Director (Asia Pacific) at Center for Creative Leadership, believes that the APAC market presents significant expansion opportunities as the market is more mature and there are opportunities for cost arbitrage.
The service industry lacks qualified trainers and the talent shortage is one of the most significant challenges that CEOs of L&D companies face. Vinay Kumar highlights that there are only 10 Certified Global Facilitators in India, out of which 6 work internally in companies. The lack of certified professional trainers in India can potentially hinder the growth and maturity of the market.
Some industry experts believe that the slowdown has in fact, affected the industry positively because this has given organizations the opportunity to rationalize their workforce spend and invest in L&D. With the government policy fuelling changes, the L&D industry in India has a positive growth outlook in the coming months.
Government and academic partnerships
New technology space, particularly in social media and consumer technologies
Low maturity of the buyer
Longer sales cycles
Lack of qualified trainers
Moving buyers from commodity to value
OUTSOURCING AND NICHE SERVICES
Global playing field, local advantage
HR outsourcing and niche service providers constitute the third largest revenue segment in the industry. From a construct perspective, this segment has two predominant types of service arrangements― project based or single contract deals and large scale multi-year arrangements. These services typically cover the complete breadth of the employment lifecycle and include services such as candidate assessments, payroll and benefits, RPO, training process outsourcing (TPO), engagement, performance management, and exit and outplacement services. The market comprises global players that are apt in multi-functional process outsourcing services, pure play global HR process experts, and domestic homegrown players.
Post liberalization, Indian corporations have steadily witnessed more global players entering the market equipped with best-of-breed business practices. These disruptive developments exposed Indian corporations to competitive threats unprecedented in the erstwhile closed economy times. In response, Indian corporations adapted through expansion into global geographies, diversifying product and service lines, and introducing global best practices. Human capital management thus evolved as a crucial component of organizational strategy. With the HR function shifting to a strategic focus, the need for process-level partnerships is increasingly gaining importance.
2012 reflected the impact of the economic slowdown on the job market. Attraction and retention of high quality talent has become a critical ingredient of organizational success. With lesser jobs, the competition for quality talent has intensified. While the trend is expected to continue across the next few months, value-based services such as assessments and RPO have seen a consequent rise in demand. According to SmithaAffinwalla, Head of Consulting at DDI, as the HR market in India is maturing, the need for depth of value increases. There is an increasing need for service providers in this space to understand the need of the market. Rajesh Ranjan, Vice President at Everest Group, highlights that there is a huge opportunity for homegrown Indian corporations in this space as they have a deeper understanding of the market and have the means and resources to respond in indigenous ways. At the same time, global organizations are trying to scale up operations in the Indian market and the space will likely see consolidation in the coming years.
Technology will play a pivotal role in driving the next generation of opportunities in this space. According to PankajBansal, CEO of PeopleStrong HR Services, there are significant opportunities in the payroll and benefits space with the Indian market likely to witness the emergence of large homegrown players co-existing alongside global corporations.
Players in India will continue to leverage the labor arbitrage advantage
Emergence of large homegrown players
Large opportunities in the SME sector
Sales conversations are typically difficult in less mature markets, such as India
Talent and skills shortage
Increase in competition
Exploring new frontiers of value delivery
The consulting space in India is crowded with all the major global players having a significant presence. Consulting, by definition is a service that helps a client address a specific business challenge. Consulting services in India comprise strategy consultants, niche boutique consultants, recruitment consultants, business consultants, IP or knowledge consultants, leadership consultants, and system integrators.
There are various market categories in the consulting space with varying size and maturities. There are four categories of HR consulting organizations in India― MNCs that have been in India for a long time, MNCs that are new entrants or are looking to enter the Indian market, large Indian corporates, and SMEs and smaller corporations. Each of these markets have different levels of maturity and demands.
The consulting space in India has seen some changes in the last couple of years. Economic conditions and cost pressures have shrunk consulting budgets in organizations, thereby making it difficult for small players to sustain. As a result, consolidation has taken place, and there exists fewer players in India but on a larger scale. Consulting organizations in India unanimously agree that the Indian market has a lot of untapped opportunity. Nischae Suri, Managing Director at Mercer Human Capital, highlights that the PSU sector, in particular, is gradually looking to adopt global practices and improve transparency. Additionally, Indian multinational corporations looking to enter outside markets are largely underserved and it presents significant greenfield opportunities.
Sankar Ramamurthy, Executive Director at PricewaterhouseCoopers, is optimistic that the outlook for consulting service will be positive in 2013. He highlights that some services like compensation, evaluation, and recruitment will be evergreen. People- based services and analytics will likely come up in a big way. There will likely be high demand for value-based services including learning solutions, social media services for recruiting and branding, and performance management.
At the same time, the market is witnessing pressures on margins and costs, both from the supply as well as the demand side. Consulting organizations in India are also worried about the dearth of skilled talent. To differentiate their market stature, consulting organizations will be looking to broaden their portfolio of services, hire quality talent, and increase focus on value-based service positioning.
Compared to the West, consulting services in India are still in the early stages of maturity. PSUs and homegrown companies, looking seriously at HR service delivery optimization, will introduce more maturity in the consulting space in terms of pricing structures and service expectations.
PSUs and homegrown companies
SMEs and Indian multinationals
Consolidation in the market
Analytics and people-based services
Relative low maturity compared to other markets
Dearth of quality talent
Demand side cost pressures
Building the base for future growth
HR technology was the late entrant in the technology space in India. While other enterprise technology platforms have seen a great deal of evolution, the HR technology space is far behind other technology sectors in terms of maturity. HR technology developed in the West in three phases or layers. The first layer comprised automation of administrative tasks, such as payroll and benefit. The next layer comprised management of the talent lifecycle within the organization, starting from recruitment to training and deployment. The highest level of technology maturity was seen in the form of integrated solutions that manage the entire human capital of the organization. Global experts, however, believe that development of the HR technology space in India has been unlike the West, and technology providers are pioneering disruptive products that could potentially affect the global HR technology industry.
The HR technology market is a highly fragmented space with a number of niche players offering off-the-shelf standardized solutions to large global players providing comprehensive human capital management solutions. Essentially, three types of players comprise the HR technology market in India― niche core HR off-the-shelf providers (including standard payroll and administration solutions), solutions that cater to optimization and efficiency of HR management (such as analytics, performance, engagement, workforce solutions) and comprehensive enterprise solutions providers. The market is mostly made up of small and large Indian corporations, though the last 5 years has seen the introduction of many global players.
A number of trends are affecting the HR technology space, including the evolution of cloud-based services, increasing penetration of mobile computing, and the changing demographic distribution of the workforce. Owing these developments organizations are gradually realizing the need for anytime information availability, new ways to manage performance and efficiency, and develop new ways to engage talent and customers.
Various sectoral opportunities will likely drive market growth in this sector. With FDI opening up, there will be more requirements for retail companies to manage talent and performance. The hospitality industry too will likely see an increased influx of talent and a greater need for technology to manage the workforce. Among the other sectors, PSUs and manufacturing organizations will be looking to optimize efficiency and optimize organizational performance.
Disruptive technologies, pioneered in India, will likely shape the global direction of the HR technology market. With the workforce becoming diverse and more distributed, the HR technology industry will likely see a surge in demand for analytics and big data. More global companies with analytics capabilities will likely seek entry into the Indian market and existing players will be looking to ramp up their product capabilities.
While the outlook for 2013 for HR technology will not be of exponential growth, the space will see companies trying to establish presence and build a base for the future.
Sectoral opportunities in retail, hospitality, retail, and PSUs
Emergence of disruptive technologies, such as gamification
Larger HR technology budgets from the demand side
Cloud-based and analytics services
Low maturity on the demand side
Market skepticism from failed implementations
Lack of use-case scenarios to drive business expansion