Article: Enabling HR to be strategic

Strategic HR

Enabling HR to be strategic

According to an Everest Global Study, the Asia Pacific HR Outsourcing market holds total potential worth $28 billion
Enabling HR to be strategic
 

The evolution of HR from a transactional to a strategic concept has taken place much faster in the Asia Pacific region than in the West

 

HRO enables buyers to scale up quickly in response to increased business demands and also to scale down rapidly when appropriate

 

 As the global HR Outsourcing (HRO) market moves towards maturity in the developed economies of the West, the Asia Pacific market—especially the ones in India, China and Indonesia—have showed stellar performance. While the overall Asia Pacific market is expected to grow at 12 per cent, the emerging countries within the region are expected to grow at a much faster pace of 25 per cent. This is significantly higher compared to 5 per cent growth rate expected for the mature markets of North America and Europe.

With such a rapid growth rate that is expected to be buoyed by a vast and still untapped potential, Asia Pacific has emerged as the HRO story to talk about. With the current market size of $2 billion, the Asia Pacific HRO market holds total potential worth $28 billion. The penetration rates for the APAC region continues to remain in the single-digit range, thereby indicating that the current HRO market in Asia Pacific, especially the emerging market segment, is just the tip of the iceberg.

Over the last few years, the HRO market in Asia Pacific, especially the emerging markets, has shown signs of moving up the maturity curve led by high demand from growing domestic corporates as well as increasing maturity of the local players who have started offering solutions of global standing and bringing in affordable technology, both contextualized for the local market. It is what is driving business both in Multi-Process HR Outsourcing and Single-Process HR Outsourcing (MPHRO and SPHRO), especially Recruitment Process Outsourcing (RPO).

Interestingly, the global major players are lagging behind or facing tough competition from locally entrenched players. In the initial days, when the Asia Pacific market was yet to show its potential and pace, it naturally did not feature on the radar of the global major players. With the market now showing tremendous potential, these international players are facing a tough challenge from the local players who have established ground in the market with their innovative, well-packaged offering and solution models suitable to the unique needs of the Asia Pacific region. These tend to differ significantly from the solution that the leading players dish out in the more mature Western markets, which are not finding success in Asia Pacific given the lack of proper contextualization.

This has led to an interesting situation where the biggest names in the game are missing out on the biggest opportunity – a situation that will soon be corrected as global majors prepare to aggressively target Asia Pacific. The face-off between the Davids and the Goliaths of the HR outsourcing space will be an exciting watch for the buyers as they reap the benefits of this epic battle!

Key growth drivers

A number of factors are driving organizations based in the Asia Pacific region to take the HRO route:

Growth of a holistic concept of HR: Traditionally, most companies in Asia Pacific viewed HR as an operational burden – payroll services, employee data management and recruitment were a “necessity”. But this perspective is undergoing a sea change. Organizations increasingly see talent as a critical differentiator and consequently want to dovetail HR to business outcomes. Outsourcing is seen a contributing step in that direction as it helps the organization to free management bandwidth and focus on strategic HR initiatives. The evolution of HR from a transactional to a strategic concept has taken place much faster in the Asia Pacific region than in the West. In fact, unique market conditions in the region have forced HR in Asia Pacific to leapfrog the West in some ways. The rapid rise of the middle class in Asia Pacific, rise of the aspirational millennials and the proliferation of mobile, internet and social media have made talent a dynamically evolving entity that organizations need to manage as well as capitalize on. While salary inflation and high attrition are characteristics typical to Asia Pacific, they need to be managed by capitalizing on the ability to source or hire niche / business critical skill sets, which can act as a competitive differentiator. All of this requires point-in-time visibility and insights into the business metrics to make the right decisions as seen in the increasing CEO involvement in HR decisions. HR outsourcing in Asia Pacific is quickly evolving to enable organizational leaders make informed decisions.

Economic growth: Most of the countries in Asia Pacific have experienced rapid economic growth in recent times. While the West (United States, Canada, and European Union) struggled with GDP growth rates of 0-3 per cent in the last five years, most of the Asia Pacific region witnessed GDP growth rates upwards of 5 per cent. Consequently, companies operating here have also grown at a rapid pace. This has led to the supporting capabilities in terms of people, process and technology being unable to keep pace with growth and increased scale. Hence, there is an increasing need to reexamine the way business can be supported in a more sustainable manner. Rapid hiring that keeps pace with the company’s growth trajectory is, thereby, becoming critical. Finding niche skills on time is a challenge; hiring large volumes, on time, beyond the Tier I and II cities, without investing in expensive brick-and- mortar offices is also a challenge.

Access technology without capital expense: With a preference to use capital to drive core business growth in the Asia Pacific region, getting access to technology without capital expenditure, especially in a pay-per-use mode, as part of the HRO value proposition, makes it a compelling option and distinctive from the West.

Building a variable HR cost structure / scalability: In today’s dynamic economic environment, organizations need to be agile to quickly scale up or down as the situation warrants, in order to keep pace with the rapid upheavals in the global economy. HRO enables buyers to scale up quickly in response to increased business demands and also to scale down rapidly when appropriate. It also helps establish a variable cost structure that is aligned with changing business requirements. This is especially relevant for RPO as hiring requirements are inevitably volatile across years.

Greater focus on harmonization/standardization and compliance: One of the fallouts of rapid growth in recent years is that many organizations have not really focused on process harmonization and standardization. Increased Merger and Acquisition (M&A) activity has added further complexity to managing basic internal processes. These scaled-up organizations are now looking to drive greater standardization across their business units and operations to capture the next level of growth while at the same time remaining compliant. Many buyers also want most of the manual HR processes within their organization to get automated in order to drive efficiency and speed. Companies also want a standard set of processes across the organization that provides a consistent and enhanced employee / hire experience.

Quality of hire: This has become an increasingly important driver for RPO in the Asia Pacific region. While countries such as China, Singapore and Australia are facing an overall talent shortage, even countries such as India and Indonesia, which have an overall talent surplus, are feeling the pinch for niche and highly-skilled roles. The quality can be measured in terms of hires’ longevity and performance, or hiring manager’s satisfaction. This is especially important for hard-to-find or niche and business-critical skills.

Asia Pacific Challenges--The key challenges

On the flip side, in spite of high growth and heightened buyer interest, the Asia Pacific HRO market faces a number of challenges:

Creation of a business case beyond cost: Traditionally, the key driver for HRO, especially in the West, has been cost reduction. Since labor arbitrage as a lever for reducing cost is not feasible in most of the Asia Pacific region, there is need to create a business case beyond the low hanging fruits of cost reduction. While the drivers mentioned above contribute to building a robust business case, many organizations in Asia Pacific continue to view HR through the “transactional necessity” prism, which makes selling the concept of HR outsourcing more challenging.

Perception of loss of control: While there is a broad familiarity with the outsourcing concept, there is still significant reluctance to HR outsourcing due to a perceived loss of control.

Internal shared services approach: Many large organizations continue to take the internal shared services approach to HR, it gives a greater sense of control vis-à-vis outsourcing. While it is now becoming common to have a hybrid shared service plus outsourcing approach for HR, the internal shared services concept will continue to be a challenge to the HRO market.

Geographic complexity: Asia Pacific is a heterogeneous region with varying cultures, languages, mindsets, and economic situations across the countries of the region. This makes it difficult for an HRO provider to build broad, region-wide capabilities that can serve multinational corporations or take advantage of the entire pie instead of just once slice or country.

A few unsuccessful cases: Some of the earliest examples of MPHRO in emerging markets of Asia Pacific were modeled on the “Western model” by the global leading HRO providers, and they were not very successful. For example, one of the manufacturing companies in India could not get the desired value from HRO because of two reasons. One, the solution was significantly customized which prevented benefits that can come through standardization (a key requirement in absence of labor arbitrage). Second, there was limited technology leverage that also reduced the potential benefits coming through automation and self-service. While the market has moved on from there, there is still some lingering apprehension among a section of potential buyers.

Secret sauce to succeed in the Asia Pacific HRO market

To achieve success in the Asia Pacific HRO market, service providers need to put in place a different set of solution elements than what is generally prevalent in the West.

Technology model: Most buyers in the region (especially outside Australia) tend not to have tools of their own and expect their service provider to bring in technology along with their services. For MPHRO, they expect an HR Information System (HRIS) and for RPO an Applicant Tracking System (ATS). The expectation of a bundled solution is highest for mid-sized organizations (5,000-15,000 employees). Since the high cost of globally popular ERPs or ATSs often makes them non-viable in the region (especially in low-cost countries such as India, Malaysia, and Indonesia), it is imperative for service providers to bring in affordable technology. The technology needs to be configured for the local market, especially for countries such as Japan and also India. This can be achieved either through local technology partnerships or best through proprietary systems.

Analytics: Analytics usage is emerging as a key demand from buyers in the Asia Pacific region, especially in the fastest growing economies, where managing attrition and salary inflation is important. Buyers want an easily configurable dashboard with a unified view of their entire workforce and various HR processes that helps them to understand the linkages between various HR parameters such as engagement, attrition, compensation, and performance management. More advanced analytics (predictive and prescriptive analytics) is in demand, especially in the areas of recruitment, attrition, performance management, and productivity.

Engagement and pricing model: Engagement and pricing models in the Asia Pacific region, especially in the emerging economies, increasingly need to be tailored to suit the unique buyer situation and demands, instead of a blanket application of a cookie-cutter approach. Multiple pricing models are used within MPHRO: (1) Some providers use an input-based or FTE- based model (2) There is increasing adoption of output or variable pricing in terms of per-employee-per-month (PEPM). This may further vary in terms of one PEPM price point for the entire arrangement or multiple PEPM price points for technology and various processes. RPO arrangements generally have a base-fee plus variable pricing model based on number of hires, though input or FTE-based model is used in a few cases. The base-fee is a more significant component of the total price rather than the variable component, especially in those RPO arrangements where focus is more on process execution than sourcing.

Delivery model: Barring a few high-cost countries such as Australia or Singapore gaining labor arbitrage through an efficient delivery model is very difficult. Hence, it is imperative for service providers to make internal processes very efficient and highly automated and leverage tier-II and tier-III locations.

What’s ahead for this Industry?

The single most important dynamic that is going to play out in the emerging economies of APAC over the next few years is the inherent incongruence between the two opposing nuggets of truth: On the one hand, Asia Pacific is the fastest growing HRO market with huge untapped opportunity in the future, and on the other hand, the leading global service providers are currently playing second fiddle to their local counterparts.

This raises multiple interesting questions: Will these global players make a move on Asia Pacific? Will it be organic or inorganic? What will be their value proposition and what type of solution will they bring in? What will be their strategy to counter the entrenched local providers? Whatever be the answers to these, as long as the answer to the first question is “Yes”, it will be a boon for buyers as they get offered more choices, more innovation, and ultimately greater value.

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Topics: Strategic HR, Outsourcing, #HRInsights

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