Mid-Markets to Marathon: The State of HR Outsourcing

By: Amrita T Joshi

Discussion with Michael Sternklar, COO and US Business Leader of Mercer’s Outsourcing business

Michael Sternklar

Michael Sternklar is the Chief Operating Officer and US Business Leader for Mercer’s Outsourcing business. Amrita T Joshi, CEO of Ahilia Inc. recently spoke with him about the current state of the HR and benefits administration outsourcing market as well as some predictions as to how HR outsourcing will change in the next 3-5 years.

ATJ: What do you see as the big growth areas for HR Outsourcing?

MS: I think that there are many potential areas of opportunity for HR outsourcing across the globe that have not been fully developed. Healthcare and benefits are huge areas for any company, but many companies haven’t figured out how to best manage these for their employees.

The healthcare outsourcing market in particular has experienced double digit growth rates and will continue to grow over the next few years.

I also see more attention shifting to the middle market, companies with generally 1,000 employees and more. While most HR outsourcing engagements have previously focused on large companies, the middle market is growing and demanding more services, as many are global. Mercer recently acquired a technology company that focuses on the middle market. We think the middle market will be a key growth area for HR Outsourcing.

ATJ: What do you think the current drivers are for HR Outsourcing? What are buyers looking for when outsourcing HR functions, particularly benefits administration? How do you think this is going to change in the next 3-5 years?

MS: Obviously, the major driver for outsourcing benefits is cost. However, lower cost is just a commodity today. Right now there is a renewed importance placed on risk mitigation. Companies are looking for service providers who are willing to help minimize compliance risk. Second, they are also looking for companies who they can trust and depend on in the long run, as they are entrusting their biggest assets (their employees) to an outsourced provider. The provider increasingly needs to be able to help address client challenges, from technology issues to engaging employees.

ATJ: How do you view the HR service provider landscape today? How do you think it will evolve in the next 3-5 years?

MS: The biggest shift I see in the HR service provider landscape is the evolution of middle market companies and how providers are going to address them. There are a few different types of HR providers who are all trying to address this middle market in some way. The jury is still out on whether or not the large companies will be able to serve the middle market profitably. If you look at the players, they can really be segmented into 3 groups:

Financial services firms that sell products through administration services
Classic HR consultants
Lower-cost providers that compete on price for mid-market and small companies

If you look at the players from a global standpoint, IBM, Accenture, Hewitt, Convergys and of course Mercer, all play in the space with differing degrees of success depending on geographic region.

ATJ: Are deal sizes getting smaller as they are in the IT space? Are companies looking for one provider in HR or are they choosing multiple vendors within HR?

MS: There has certainly been a bias for companies to use only one provider. Deal sizes have also gotten smaller recently, because a company with 7,000 employees doesn’t consider itself a small company. Before, companies were either small or very large. But now, with the middle market sector growth, there is more of a gradation in how and when companies choose to implement HR outsourcing. So even though companies are going with one HR provider, deal sizes are getting smaller because smaller companies are starting to outsource HR functions.

ATJ: What is the impact of recent US healthcare legislation on HR Outsourcing?

MS: The exact implications of healthcare reform legislation in the US remain unclear. However, I think that healthcare reform should be viewed positively from a service provider perspective in terms of adding true value for our clients. Mercer is one of the world’s largest global consulting firms, and we’re trying to help people understand what the new healthcare legislation would mean. Someone has to explain, deliver, and administer these changes. This is great for Mercer because people are looking for someone with a good reputation in the HR area to help them through this transition, and beyond.

ATJ: Given that HR Outsourcing is pretty mature, what do you see as the opportunities for innovation?

MS: I think the biggest opportunity is in helping companies use their data in a meaningful way to drive business decisions. HR Outsourcers are given more information on employees than anyone else. In the past, these huge data files of employee information were just organized without much thought. This data should be used to make smarter decisions about employees. The first company to come up with a formula for how to get large scale trends from individual employee information will be hugely successful in the HR world.

The second opportunity I see is to make employees better consumers. The employees must know how to plan, how to invest, how to save money- beyond the basics of administration. Providers need to implement additional tools to communicate to employees about how to make these decisions. Bad decisions now could affect employees in the long run. For example, employees who have not saved well may not be able to retire.

ATJ: When we spoke about drivers for outsourcing you mentioned that customers need to feel important. Can you elaborate on that?

MS: Customer service is one important trait that companies are looking for from a provider. I think that many customers don’t feel like they are getting the “hug” from customer service. There are definitely opportunities for organizations that understand how to fill that gap.

Fundamentally, I believe that the client should be the center of any provider, or for that matter, any business. As a provider, you need to understand how you appear through the client’s eyes. Let’s face it; keeping clients happy is difficult work when you are dealing with people issues, employee complaints, etc. on a daily basis. But despite these issues if you boil it down, if your service is bad, then the customer will feel unimportant and that is unacceptable. That’s why I think Mercer has succeeded. I can honestly say that at Mercer, every client feels important.

ATJ: Michael, on a personal note, I know you are a big runner. Can you draw any analogies between running and HR outsourcing?

MS: I think that a good analogy for the HR Outsourcing world today would be the Tortoise and the Hare. For the marathon, the long term contracts and dedicated business play a huge role. Clients are looking for excellent work over a long period of time. So slow and steady is important. However, you have to know when to sprint. Healthcare is a sprint that Mercer is on right now, and ignoring its implications is like giving up the race. It’s a tricky balance.

Amrita T Joshi is the CEO at Ahilia. Ahilia is a Marketing Consulting Firm specializing in the IT & BPO markets. She can be reached at amrita@ahilia.com

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Last Updated ( Tuesday, 23 November 2010 )

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