hro: so old, yet so new

www.globalservicesmedia.com

Human Resources Transformation Pg 28

Small, Shorter Term Deals in HRO Pg 20

Sourcing Strategies, Trends, and Observations Pg 32

The gateway to the global sourcing of IT and BPO services

Spec

ial

Rep

ort

July 2011

So Old,Yet So NewH

RO

Demonstration City of ChinasourcingHangzhou

Software Paradise, 后Hangzhou SourcingTo Combine the Global Resources and Facilitate the

Integration & Upgrade of the Global Service Capability

Hangzhou was defined as the “China Service Outsourcing Demonstration City” in February 2009. Hangzhou is also the

one of eleven software industry base cities in mainland China. It has currently formed the several industries including

telecommunication, software, integrated circuit, digital TV, animation games and E-commerce.

The revenue of software business in Hangzhou was achieved at 47 billion RMB in 2009, the software export revenue reached at

460million USD. There were total 112 enterprises passed CMMCMI, ISO27001 certification. There were 20 IT software enterprises

have list on public market, two companies ranked at Top 10 of self-brand software products, total 15 enterprises have list at the

key software enterprises name list of the national strategic planning.

In order to accelerate the development of outsourcing industry, Hangzhou Municipal Government set up the leading team

to draw up the development plan, issue the supporting policy to make the rapid development of outsourcing industry in

Hangzhou. The total delivered amount of offshore outsourcing business reached at 919mllion US Dollars, risen to 352%

compared to the same period of last year (2008).

Hangzhou government has put more focus on the financial service outsourcing that is considered as the medium and high end

outsourcing industry, Hangzhou now is creating to become the financial delivery center.

Sponsors:

Ministry of Commerce of the People’s Republic of China

Ministry of Industry and Information Technology of the People’s Republic of China

Ministry of Education of the People’s Republic of China

Host City :

Hangzhou People’s Government

Official Promotion:

Hangzhou Municipal Foreign Trade & Economic Cooperation Bureau

October Trip in HangzhouChina Sourcing Summit & Delegation to China

International Financial Outsourcing Center International Financial Outsourcing Center

Promotion & Undertaker: Great-Idea International Outsourcing Consulting Center Contact: Tel-8610 85863613 Fax-8610 59081093 [email protected]

Please Attention

Hangzhou, ChinaA City of Financial Delivery Center

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The fortnightly digital magazine features research reports, articles and experts’ views. Available on www.globalservicesmedia.com

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Global Services’ web-based seminars aim to impart useful information related to outsourcing indus-try in the form of presentations and discussions by industry specialists.

reSearch

We deliver indepth analysis and research reports on sourcing subjects.

MicroSiteS

Online resource center designed to provide focused content on special subjects to the out-sourcing community.

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April 2011

features

28HuMAN RESOuRCES TRANSFORMATION – IS OuTSOuRC-ING A SOLuTION?

by Kumar Parakala, KPMG

32THE FRENCH BANkING SECTOR: SOuRCING STRATEGIES, TRENDS, AND OBSERVATIONS

By Nigel Hughes, Global Services Director, Compass Management Consulting

xperts

Next Issue:

software develoPment

GlObal SeRvIceS DIGITal MaGazINe

[SPECIAL REPORT]

8DESTINATION EuROPE – NEARSHORING CONTINuES TO DRIVE DEMAND

by Smita VasudevanEmerging markets within Europe will be seeing significant nearshore activities this year, with niche IT capabilities and multilingual skills offering new opportunities.

[COVER STORy]

16HRO: SO OLD, yET SO NEW

by Prerna TandonOutsourcing and offshoring of HR presents many opportunities and challenges, what is needed is for more HR professionals to have outsourcing business skills (namely process, operations, project man-agement) and for more outsourcing professionals to have a greater understanding of HR issues and its impacts.

[HRO]

20SMALL, SHORTER TERM DEALS SETTING NEW TRENDS IN HRO

by Smita VasudevanHRO providers are not seeing too many opportunities for multi process deals, but there lies a clear opportunity in transforming small, short-term deals into longer strategic outsourcing relationships.

Editor’s NotE

Ed NairEditor

[email protected]

Arevivalwillsurelybemarkedby

disruptionandthenareinventionwould

happen.

Ticking Again

this year is seeing a resurgence of interest in BPO, based on the level

of contract activity and contract values. The BPO market had a

sluggish trend through the entire period of recession and the time there-

after. In the GS100 survey we found that there was a y-o-y growth of 8.3

% in terms of number of BPO customers signed on during 2010 despite

a fall in total contract value (TCV). This clearly points at a fall in contract

sizes for BPO contracts, accompanied by fall in contract periods also.

HRO seemed to be sunset segment in BPO. Large end-to-end deals in comprehensive HR BPO services have slowed for the past 12 to 18 months. A revival will surely be marked by disruption and then a reinvention would happen.

The good news is that HRO is regaining its lost momentum. Demand for global expertise in HR, integrated HR services, and technology innova-tions in HR service delivery are the drivers. There has been a rise in single service HRO contracts. A recent IDC report states that HR BPO market would grow at a CAGR of 4.4% through 2015. Specific segments like RPO, employee data management, talent management, and learning have robust demand profiles. HR technology itself is on the rise and with the availability of subscription-based models for software the adoption is going to increase. Increasingly, many of these sub-segments in HR would be driven and delivered using technology.

The cover story this month encapsulates these trends very well.

The other main story focuses on Europe as an outsourcing destination, despite all the economic woes faced by the region. In fact, the services industry can be an instrument for overall economic development for a lot of countries in Europe.

Enjoy the summer !!! GS

YOUR STRATEGICTECHNOLOGY PARTNERBuilding solutions for Finance, Telecom, IT, Automotive and Energy sectors 4500+ best in class engineers 18 offi ces in 11 countries Track record of building highly complex solutions Expertise in business and technology domains Focus on innovation and R&D Best-in-class processes

MICHAEL MINKEVICHVP Technology Services

E-mail: [email protected]: +7 (495) 967-8030 x4427

Mobile: +7 (495) 364-9137

CONTACT US:ROMAN TRAKHTENBERG

Managing Director, Luxoft USAE-mail: [email protected]

Tel: +1 (212) 964 9900x 240Mobile: +1 (917) 930-205www.luxoft.com

8 Globalservices www.globalservicesmedia.com July 2011

Special Report

Emerging markets within Europe will be seeing significant nearshore activities this year, with niche it capabilities and multilingual skills offering new opportunities.

In the post recession phase, when low cost countries like India, China and Philippines remain the most attractive destinations on the global outsourcing map, Europe, at the other end of the spectrum, is

also capturing good amount of attention. Although cost-lier, numerous other factors are driving demand to Europe. Experts are of the opinion that nearshoring activities in both IT and BPO space will have a significant impact on the market this year. Ian Marriott, Research Vice President, Gartner Research, says, “We see lots of oppor-tunities in Europe for services to move within the region and much of the work is going nearshore from uk or uS.”

An increasing number of companies are choosing to keep work closer to home and nearshoring is thus being seen as

SmitaVasudevan

the biggest trend for Europe in 2011. With a huge IT tal-ent pool, multiple language skills and favorable time zones, Eastern European markets can be seen as the destination of choice for nearby countries and for the uS. Alexander Semenov, Head of Sales Department, Reksoft, says, “Europe still retains its strong position for outsourcing high-end solu-tions development.” Lots of new IT trends and developments are reshaping the European ITO space. Cloud is influencing the market in a big way. According to Forrester Report “Market Overview: European IT infrastructure Outsourcing (2011)”, cloud services remain the most discussed service in the infrastructure outsourcing market. Resistance to the cloud will change as enterprises realize the flexibilities that cloud offers.

destination Europe – Nearshoring Continues to drive demand

Destinations compendium brings together the

myriad dynamics of the outsourcing locations. It

covers research report on top 100 outsourcing

cities, countries-in-focus, regional dynamics, city

profiles,expertsopiniononlocationassessment.

http://microsites.globalservicesmedia.com/destinations

aonestopresourceonoutsourcingdestinations

destinations compendium

Don'tmissthisopportunity!Bookyourspacenow!ContactNiketaatniketac@cybermedia.co.in

2011


Special Report

BPO activities, especially voice operations continue to see significant momentum. This is fairly justified, as there is hardly any other location currently that can support six to eight lan-guages within a single city. Emerging markets like Serbia and fairly established ones like Poland and ukraine are offering huge potential for growth due to the availability of multilin-gual skills and good quality resources.

What Makes Europe Attractive?Shortage of resources in one region can drive demand to

other regions where resources are available in plenty. This is where Eastern Europe scores big. As per studies and surveys conducted by ‘IT Sourcing Europe’ there is a huge gap in IT talent and resources in the Western Europe. Interestingly, Eastern Europe has seen a significant surge in its IT resources over the last couple of years, which justifies the large number

of Western European enterprises queuing up to this region. Dmitry Loschinin, President & CEO, Luxoft, says, “Eastern European countries have shown a signifi-cant rise in educated and qualified IT talent. Romania, for exam-ple, has seen more than a 12 percent growth in the number of experienced IT professionals employed at companies providing IT outsourcing services. In addi-tion, ukraine is another Eastern

European country that has witnessed similar growth, a nearly 10 percent increase since 2008.”

Nearshoring to Europe is thus on a high and will be driv-ing demand significantly in the future. Marriott points out, “Offshoring looks at a balance of low cost and low risk. When enterprises try to drive down costs, the risks tend to go up.” Offshoring to countries like India, China and Philippines can be a low cost alternative to nearshoring, but there are other factors that balance out or overshadow the cost benefits. When companies start outsourcing, they prefer keeping it closer to home and work with companies that speak the same language and have a cultural compatibility. “This is reason why more percentage of work is going nearshore than offshore” adds Marriot. This holds true especially in case of mid-market com-panies that are new to outsourcing.

Another factor adding to its global appeal is a mature legal framework.“Benefits from privacy legislation and align-ment with legal systems offer high confidence to enterprises outsourcing to countries within the European union” says Marriot. These regions come out as safer alternatives, especially when data protection and security laws may not be that strong in other parts of the world.

The Opportunities WithinPoland, ukraine, Czech Republic and Romania are some

of the leading countries in the European outsourcing space. Emerging ones like Bulgaria, Serbia, Slovakia etc are also capturing lots of attention. Semenov says, “Customer inter-est and the providers’ development centers continue to move eastwards. This interest is closely connected with the level of technical education and resources availability in these coun-tries.” There are many new locations coming to the fore. ‘The Central & Eastern Europe IT Outsourcing Review 2010’

Dmitry Loschinin, President & CEO, Luxoft

33 GS Destinations Compendium 2010 www.globalservicesmedia.com

regional Dynamics

countries becoming members are: •Politicalstabilityandgreaterintegration •Increasedtrade •Increasedinwardinvestment •Socialpoliciesandsubsidies Eastern Europe has attracted a lot of investments from service providers and cli-

ents (captive operations) in the last 3-5 years making it a strong “offshore cluster” and a “skills cluster”

Global Clientèle With 63 percentage of all developed countries in Western Europe, it is the largest

cluster of buyers across the world. This attracts large business firms from across the world to have centers in the region to cater to the domestic markets in these developed economies.

Eastern Europe hence caters to the global clientele indirectly, this has successfully built a strong brand for “Nearshore to Eastern Europe”, offering cost differential of 15-20 percentage compared to Western Europe.

Clients say productivity per employee higher in Eastern Europe than offshore loca-tions like India, Philippines and China.

High skill sets available for processes like Product Development (Turkey, Ukraine, Russia), Regional Multilingual Skills (top 5–6 locations of previous list), and R&D (Russia and across the region).Europe: Centers of Excellence

Belfast

Dublin

Kraków

• High value processes in Financial Analytics, R&D and Applications Development Management

• Specializes in R&D, Infrastructure Services and Custom Development Application

• Business Analytics, Finance and Accounting Outsourcing, multilingual

Weste

rn E

uro

pe

Ireland

U.K.

Poland

SAP, Quest Software, IBM, Microsoft, Accenture, Marino Software, PMI Software, Infosys, Deloitte, Amazon

Barclays, Accenture, InfoTech, HCL, Capgemini, HP-EDS, KPMG, Xerox, ECOM, First Data

Region/ Country/ City Core Specialization Companies Established

Google, IBM, Motorola, Fujitsu, HCL, Capgemini, ACS, Hewitt, Quantum,

Kraków

Prague

Budapest

St. Petersburg

Accounting Outsourcing, multilingual Contact Support, HR Outsourcing

• Focused on HR Outsourcing, R&D processes and emerging destination for Engineering design services

• Focused on HR Outsourcing, R&D in Software Development and TestingE

aste

rn E

uro

pe

Poland

Czech Republic

Hungary

Russia• Specializes in Engineering Design and

R&D services.

Capgemini, ACS, Hewitt, Quantum, Sabre

Sun Microsystems, Accenture, GE, SAP, Google, Intel, Capgemini, Mahindra Satyam, IBM

SAP, Microsoft, Sun Microsystems, TCS, Genpact, Cognizant, Canon, Mahindra Satyam, SCA

Intel, Motorola, Sun Microsystems, Boeing, HP, Auriga, Google, Luxoft, EPAM, Arcadia

Figure 1 Europe: Centers of Excellence.

Source: Global Shore 2010 webinar ‘Europe: Showcasing the Challenges and Opportunities’

PRIMARY VALUE PROPOSITIONIt is a viable nearshore destination for Western European clients for several reasons: Western Europeans prefer outsourcing to Eastern Europe than to traditional

offshore destinations like India or Philippines due to the unique service delivery profile of Eastern Europe.

Factors such as cultural affinity, skills expertise, labor pool availability which includes engineers and scientists who are not abundantly found in offshore loca-tions, contribute to this appeal.


Destination Europe

“we are predicting that more and more

enterprises will consider eastern europe as a

strategic outsourcing destination.”

identified Croatia, Moldova, Latvia, Slovenia and Albania as the newly established markets.

Marriot points out, “If we take a broad look at locations within Europe, there are application services, remote infra-structure and business processes being outsourced. MNC service providers are moving to Poland and Czech Republic for infrastructure services and there are also significant BPO centers being set up in Poland.”

Numerous service providers are rushing into the scene to capture the untapped opportunities and to expand their footprint within Europe. Sitel has extended its European operations with its new call center location in Serbia. The company sees lots of opportunities in the region and considers it as a major step in its strategy to double opera-tions in Eastern Europe in the next three years. But why Serbia ? Tim Schuh, General Manager, North EMEA, Sitel, says, “We have always tried to be early adopters in the mar-ket. Sitel has significantly expanded its operations in Nicaragua and Poland. We wanted to be the first global outsourcer in the Serbia market.” Its deci-sion to expand into Serbia was based on lots of fac-tors like language abilities, good quality labor, work

ethics, infrastructure and so on. Hungary, Romania and Slovakia are the leading locations for voice operations. Poland is the popular location for Non-voice BPO work like FAO and transaction processing.

Indian service providers are also waking up to the realization that having a nearshore presence in Europe is increasingly important, both in the ITO and in BPO space. Mphasis is the recent one to join the bandwagon. Gopinathan Padmanabhan, Head Global delivery unit, Mphasis, commented in one of its recent press releases, “Poland offers ability to service clients in most conti-nental European languages and is well connected with other Western European business centers. The availabil-

32 GS Destinations Compendium 2010 www.globalservicesmedia.com

regional Dynamics

United kingdom Spain France Italy Sweden

Denmark Finland Germany Norway

Western Europe has done a significant amount of nearshoring to Eastern Europe.Over the years, the gap in GDP between Western Europe and Eastern Europe has

widened instead of declining, which has helped in attracting clients from the former to the latter. This has helped in making nearshoring to Eastern Europe an attractive opportunity.

It has been a destination of choice for Western Europe for more than a decade and this attractiveness has become stronger over the years.

CHALLENGES Clients face dilemma- No single country can take care of all languages. But

Estonia can take care of the 5 major languages. Most smaller countries do not offer scale

ADVANTAGES Europeans are conservative businessmen compared to their American counterparts

and are more comfortable keeping work closer to home. Thus nearshoring is a favored option.

Considering a cut off population of 10 million, only Russia, Ukraine, Poland, Romania, Belarus, Czech Republic, and Hungary have the advantage of a sizable talent pool

Multiple factors enable to be perfect nearshore options for Western Europe like: 1. Financial Attractiveness 3. Trade laws (European Union) 2. Cultural compatibility 4. Excellent Education

Major clients nations in the region are:

Europe: Showcasing the Challenges and OpportunitiesThe Emerging Nearshore

Prominent nearshore options: Eastern Europe

poland: 6 kraków, Warsaw, Gdansk, Wroclaw Czech Republic: 6 Prague, Brnohungary: 6 Budapest Russia: 6 St. Petersburg, Moscow, Nizhniy Novgorod, Rostov-on-Don, Novosibirsk Romania: 6 Bucharest, Cluj-Napoca Ukraine: 6 kyiv, Lviv Belarus: 6 Minskslovakia: 6 Bratislava

Bulgaria: Sofia

slovenia: 6 Ljubljanaserbia: 6 Belgradeestonia: 6 Tallinn Croatia: 6 ZagrebLatvia: 6 RigaLithuania: 6 VilniusMalta: 6 Valletta

Source: Global Shore 2010 webinar ‘Europe: Showcasing the Challenges and Opportunities’ REGIONAL DYNAMICS

European Union member countries in Eastern Europe have significant advantages, providing them the edge to become “nearshore locations of choice”

A recent trend is of clients preferring to send work onshore or to nearshore loca-tions. This is true for US itself. This is not necessarily because of a language pref-erence. This is being preferred even at a higher cost than offshore locations. This trend is favoring Eastern Europe.

Being a part of the EU makes the smaller countries offering cost arbitrage very attractive nearshore destinations, some other benefits for Eastern European

Source: Global Shore 2010 webinar ‘europe: Showcasing the challenges and Opportunities’

COUNTRY-IN-FOCUSEnsuring Global VisibilityA special feature for countries to showcase their uniqueness

There are numerous outsourcing destinations that exist as great alternatives to India and China.

Inviting Countries to showcase capabilities that accentuate their uniqueness.

For more information write to [email protected]

Examples of Country-in-focus featureEgypt Philippines Jordan

JORDAN


Destination Europe

ity of talent, language skills and an established business infrastructure in Poland made it a natural choice for us.”

What benefits do these locations offer to service provid-ers? Luxoft that has operations in the Eastern European countries like Romania and ukraine believes that there are many advantages. Loschinin says, “Because Luxoft maintains operations in both countries, we are able to tap into the abundance of IT talent available, and as a result, our Eastern European business is booming. For our global customers, the deep expertise of our engineers and software developers results in higher-quality products and services, and an overall competitive advantage.”

Will it be a Future Destination of Choice?When it comes to low cost alternatives, Europe has a long

way to go, but it will surely be a major contender in selec-tive areas that require better language skills and good qual-ity. Salil Dani, Research Director, Global Sourcing, Everest Group, sums up “In the next couple of years demand is likely to increase with countries coming out of debt crisis. Easter Europe will continue to see demand for high order IT skills and niche capabilities, though the overall scale of operations would be lower than that in India and Philippines.”

For service providers, scaling up can also be an issue in the long run. General Manager, Andrei Pronin, Auriga, com-ments, “The providers tend to be of a smaller scale, and can put together large teams slower than competitors from other locations. However, for traditional R&D projects that’s not a problem, as big teams are rarely needed.”

Service providers would invest more in the near future, especially in the Tier 2 cities. Different regions will have their own specific requirements and service providers will have to adopt a combination of strategies to make use of the opportunities.

Pointing to future prospects, Schuh says, “It is little bit of a mixed bag. The countries are in different phases in terms of their recovery from the recession. There is very positive momentum in the Eastern Europe. But it’s a little tougher in countries like France and Spain.”

Although experts have mixed reactions about the potential that Europe holds, service providers seem to be very positive. Loschinin reveals, “We are predicting that more and more enterprises will consider Eastern Europe as a strategic outsourcing destination and we are expect-ing significant business growth for our operations within Eastern Europe.” GS

So Old,Yet So New

HRO

Prerna has been one of the pioneers in the HRO space in India. She led the HRO practice in Infosys BPO as VP and SBU Head for over two years growing the business profitably. Later, she joined ANZ Bank as the Global Head of Payroll & HR Operations, responsible for global strategy and execution in this area.

Prerna Tandon


Cover Story

outsourcing and offshoring of Hr presents many opportunities and challenges, what is needed is for more Hr professionals to have out-sourcing business skills (namely process, operations, project man-agement) and for more outsourcing professionals to have a greater understanding of Hr issues and its impacts.

Hro: so old, Yet so New

Human Resource Outsourcing (HRO) or Human Resource Services (HRS) is one of the oldest areas to have been outsourced in varied and different models, in bits and parts,

especially areas such as recruitment, payroll and benefits and learning/training. This has resulted in large and very successful specialized and localized outsourcing firms in the HRO space. The advent of offshoring has lent a differ-ent flavor and new opportunities, but there are numerous challenges that buyers and providers are still struggling with.

The Sum of the PartsMost are still searching for the magic formula of suc-

cess. In fact, to club all Hire to Retire (H2R) or Search to Separation (S2S) processes under one roof is a mistake in

itself because each of the hire to retire processes is unique and has a unique set of characteristics that need a different strategy both from a buyer/providers viewpoint. Some of the differentiating characteristics are:

Recruitment: There are sourcing and search functions within recruitment, especially at junior and middle levels that lend themselves to being operated out of a shared services environment which is location agnostic. Needless to say that technology enablement is a critical factor for this to be successful. This has only been possible in the recent past, with internet becoming an important medium for job seekers. However, there are still aspects of recruit-ment that are better performed on shore, especially that require face to face interaction and allow really experienced recruiters to add value based on their experience of the sec-tor and the geography (including networks and contacts).

PrernaTandon


HRO: So Old, Yet So New

Payroll/benefits: These func-tions, especially transactional aspects are most easily done in an outsourced and offshore environ-ment. Once again a robust and country compliant technology is the key enabler. However, there is a very thin layer of knowledge that is required which best resides with on shore staff. This mostly per-tains to regal regulatory filings and compliance related activities. The question about does this fall into the finance or HR function is still being discussed. I have seen sev-eral organizations where payroll is part of finance function and equal number where it is part of the HR function. Wherever this might lie, but what is certain is that its important to recognize the finance and HR components of this sub function and address them appropriately with the right owners.

International mobility: This HR function impacts a very few number of employees of any organization, but most of these employees are prized high profile talent, hence most firms endeavor for this service to be best pro-vided by specialist organizations, for instance immigration services firms, moving companies etc. However, internal staff provide coordination and administrative type services, which, though small in numbers are suited for offshoring.

learning: Training and Development as this function was previously called, now has signification components that can be outsourced and can be better performed by specialist firms (offshore or on shore), especially if online learning or e learning is a significant part of a company’s strategy. Learning, again is being increasingly used as a dif-ferentiator by companies. Administrative tasks, e learning related components such as content design, development, instructional design, project management, conversion, administration, testing and tracking are activities that are increasingly being outsourced and even offshored.

Employee Data Management and Queries: These functions are mostly the ones that can be completely out-sourced and are location agnostic. Employee Self Service and Manager Self Service, ESS or MSS enablement, very widely being adopted, restrict the scale at which these functions need to be performed. However, query handling, again mostly pertaining to compensation and benefits still remains a significant proportion of activities that can be outsourced/offshored.

talent & Performance Management: These activities are very niche, mostly periodic in nature, usually centralized

with the HR function, closely linked with Learning and Recruitment and other than administrative tasks do not have high scale.

Importance & Complexity of HR ProcessesHR processes and activities in any firm, though frag-

mented and small as far as number of staff performing a single process is concerned, are mostly the most sensitive processes and have the opportunity to impact each and every employee of the company at some point of time during the hire to retire lifecycle, as compared to any of the other shared services or functional areas. Additionally, experience with HR processes is crucial to maintain employee engagement and morale and one bad experi-ence has the ability of becoming the topic of coffee corner conversation and experience sharing, thus disrupting the agenda of HR managers. Often, I have found that toler-ance for errors in HR processes is extremely low.

Additionally, from a providers standpoint, HR Processes have a degree of unparalleled complexity, primarily because of zero tolerance from buyers end, the relative importance as described above, coupled with diversity of processes in a limited scale that require varied levels of skills and knowl-edge ie both voice and transactions, simple data entry to judgment based, local/geography specific knowledge as well as knowledge of company specific rules and policies.

The Organization’s Viewpoint: Enablers for Offshoring

The three tiered model, implemented well and consist-ently, is the key for designing the HR function in a cost efficient manner that not only enables a global organiza-tion to grow and operate in different countries, but also


ensures that through transition to shared services (global, cost effective and scalable), provides consistent employee experience.

Briefly, the three tiered model consists of HR Strategy, policy and design components at the top, business partner HR as HR support to business and conduits for change management and implementation of HR strategy in the business and shared services at the base, almost as the strong foundation on which the HR function resides. This model is being increasingly adopted as HR functions transform themselves in an effort to support increasing demands and complexities of businesses in a cost efficient manner.

HR technology is the next fundamental pillar which enables the creation of HR shared services which can then be outsourced/offshored, with adequate change manage-ment and knowledge transfer routines.

Mostly, in the case of HRO, buyers are HR managers and not sourcing departments. Often, I have found that this translates into greater importance on factors such as competence and experience in HR, home grown HR tech-nology and its functionalities and lower consideration on

factors such as competence in delivery, offshore capability, knowledge management, SLAs etc.

Also, most buyer organizations and HR managers, when asked would normally state that they intend buying superior service, and not lowest cost. Service performance even if it’s at a wee bit higher cost is more important in the buying decision.

Service Providers- Key Success FactorsBundled HR technology in the solution set is the

single largest enabler for success in not just delivery but also in winning more and new business. Cost and time involved in an in house HR ERP implementation can act as deterrent and can work hugely in favor of the provider who can provide a BPaaS (Business Process as a service) model. Most large outsourcing providers who have added HRO in their basket of services have now realized this and have partnered large ERP like Peoplesoft/SAP and provide HRO service using the underlying technology platform. Traditional HRO firms have their own home grown, highly customized technology platforms that has resulted in client stickiness.

Cover Story


Change management, the discipline that HR profes-sionals are entrusted with for all major transformation projects in any business is just as important for HR Outsourcing projects. This area, since it happens in HR functions’ own backyard, is also, most easily ignored and overlooked. But due to the nature of HR Outsourcing as it has the potential of impacting every employee several times during their employment with the company needs to be adequately addressed through various change management techniques and communication.

Emerging Trends & New ModelAnyone who has viewed and been a part of this indus-

try has witnessed trends where HRO has moved from processwise specialist in country outsourced mode to complete function deal based list and shift to now general-ist offshored. Newer trends in this space (both technology ie Workday and process) are now looking at closer inte-gration of all shared services functions that creates scale, which was the drawback with HR shared services alone. Creation of scale then enables investment justification both at providers and buyers end. If one has to adopt the customer centric view then this trend makes eminent sense to have all internal shared services processes that impact employee lifecycle (not just HR, but even finance, ie employee reimbursements, travel and expenses etc) all reside under a single shared services umbrella. From an operations and delivery standpoint, these processes can then be classified by skills required to perform them i.e. voice, numeric ability, end user service etc. While from a purist standpoint, this makes a good model that addresses the strains that exist in the current model and combines ease of delivery and greater end user satisfaction, the chal-lenge that this poses is that of functional territory and operational control within the structure of any organiza-tion.GS

Prerna has been one of the pioneers in the HRO space in India. She led the HRO practice in Infosys BPO as VP and SBU Head for over two years growing the business profitably. Later, she joined ANZ Bank as the Global Head of Payroll & HR Operations, responsible for global strategy and execution in this area.]

Provider organizations have to realize that business process management techniques and disciplines, if used well can enable them to be successful in this space. A recognition of how HRO comprises several smallish processes, and treating each one, however small in scale it might be, as a process that requires strict process discipline of mapping (SIPOC), training process staff, escalation matrix, ‘what if ’ scenarios, knowledge transfer/manage-ment are all very critical.

Competent and skilled staff, like in most other areas is just as important. Service attitude, higher skilled staff capa-ble of performing multiple processes are more important in the HRO space.

For complete end to end outsourcing, mix of onsite and offshore in the solution mix can be a differentiator and important. Specific geography compliance. legal/regulatory knowledge can be additional advantage in the overall delivery capability.

Enablers for both Buyers and ProvidersJust as in any outsourcing, both buyer and provider

need to invest in setting the foundation of this relationship that can enable the future delivery of superior service to the employees of the business.

One key area is to invest in process standardization along with policy streamlining. A complete analysis of process and policy anomalies and standardizing them prior to outsourcing can assist a seamless transition and on going delivery. It is broken processes, too many exceptions in smallish scale of operations, backed by several policy variations that pose delivery and knowledge management constraints from a providers standpoint. Also, process and policy variations that may have crept in over time, are also in the interest of HR organizations as they attempt to build scalable, consistent employee policies and practices. Hence addressing this aspect is of mutual interest.

Often, this aspect is over looked, and technology is awarded greater importance. However, the point to note is that policy, process standardization can enable cleaner smoother technology implementation with fewer customi-zations that can be a boon for any technology/application implementation and maintenance professionals.

HRO: So Old, Yet So New


Hro providers are not seeing too many opportunities for multi process deals, but there lies a clear opportunity in trans-forming small, short-term deals into longer strategic outsourc-ing relationships.

A s the economy is reviving, the HRO market is regaining its lost momentum. The number of deals has gone up over the last few quarters and adoption rates are improving. According

to krishna Baidya, Industry Manager, Frost & Sullivan, “The HRO market has received a great boost as increased number of multi-process outsourcing deals, involving HR services such payroll, recruitment, training and develop-ment etc have started pouring in.”

A major chunk of the demand is coming from public sectors across regions, as pressures to cut costs are mounting. Sectors like financial services, pharmaceutical and man-ufacturing are some areas that are currently high on HRO adoption.

Everest Group’s ‘Human Resources Outsourcing Annual Report 2011’ points out few notice-able trends for this year. Demand for global expertise by buyers, integrated HR services, technology innovations and preference for sin-gle service contracts will be major factors driving the HRO market in 2011. Increased buyer prefer-ence for offshore service providers as a low cost HRO partner will most likely be an important trend

SmitaVasudevan

to look forward this year. GIA’s ‘Human Resource Outsourcing: A Global Strategic Business Report (2011)’ expects united States and Europe to continue dominating the global HRO market.

Going Strong“In 2010, the Multi Process HRO (MPHRO) mar-

ket grew by six per cent to reach an ACV of $ 3.07

HRO

Copyright © 2011, Everest Global, Inc.ERI-2011-X-X-XXXX

2

Exhibit 2: After dipping sharply in 2008, new-deal

activity is back in the MPHRO market

Growth curve of MPHRO new-deal activityNumber of deals

Number of new deals signed

Number of employeesadded each year

New deals Number of deals

Number of employees added each yearNumber of employees (‘000)

Sample size: 285 deals signed between 2005 and November 2010Source: Everest Research Institute (2011)

0

20

40

60

80

2005 2006 2007 2008 2009 2010

46

28

6157

50

43

0

10

20

30

40

50

60

70

2005 2006 2007 2008 2009 20100

250

500

750

1,000

1,250

1,500

1,750

2,000

After dipping sharply in 2008, new-deal activity is back in the MPHRO market

small, shorter term deals setting New trends in Hro

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B. More than 40 new deals were signed during this time and there were also significant number of extensions to the existing ones,” says Rajesh Ranjan, Research Director, Everest Group. This coupled with reduction in the number of contract terminations indicate improved buyer satis-faction. As enterprises are becoming more careful in their outsourcing strategies and are reevaluating partner-ships, there are some notable changes in the types of HRO contracts being signed. The visible trend is that the size of contracts is reducing and the contract period is going down. Enterprises are also includ-ing lesser number of proc-esses in the MPHRO deals. Commenting on this, Michael Custers, VP Marketing, Northgate Arinso, says,“We are seeing fewer ‘big bang’ out-sourcing contracts combining finance, HR, and procurement outsourcing, in favor of a more controlled and smarter approach focused on a select number of HR processes and rapid financial and quality returns.” The idea behind this is to start slowly and later move to bigger deals if the deal appears to be paying off. “Such change in customers’ mentality is keeping vendors on their toes in the increasingly com-petitive market. Through such outsourcing, buyers are seeking to scale up quickly or gain access to contingent workforce with the required skills, gain cost advantage at various geographical presences they may have and deliver consistent experience,” says Baidya.

Payroll has traditionally been the most outsourced function in HRO, considering its complexity and spe-cialized knowledge required in the domain. Typically, enterprises are initially starting with outsourcing trans-action intensive functions like payroll and over time, they move to other areas like learning and recruitment. The opportunity service providers have here is to trans-form short term agreements into long-term strategic relationships by offering competitive services combined with innovative technologies that suit specific enter-prise needs.

The influence of software-as-a-service (SaaS) will be fairly visible on the

global HRO industry. The rise of SaaS is likely to popularize Hybrid HR models. According

to Custers “Hybrid HR allows enterprises to leverage their in-house infrastructure for workforce administration, seamlessly integrate it with an outsourced multi-country payroll solution (HRO), and deploy your talent manage-ment processes in a SaaS/OnDemand model.”

RPO is Hot Recruitment Process

Outsourcing (RPO) is relatively new as compared to most other areas in HRO, but it has matured fast. The segment is growing, though certain areas are still not developed fully. In terms of global RPO, there hasn’t been much of development as there are not many service provid-ers capable of delivering a

comprehensive global offering. This apparently is the reason why buyers have been depend-ing on multiple service providers for their global RPO needs. Employment branding is an RPO area that is increasingly gaining focus. Enterprises are looking for service providers for their employment marketing and communication initiatives as they find it cost effec-tive to outsource these rather than doing it in house. Technology for recruitment processes are evolving and enterprises are looking for providers who are able to offer sophisticated technology solutions. These tech-nologies include mobile platforms, and employment marketing and recruitment CRMs. Integrated tech-nology offerings is most likely to be one of the major service provider innovations to be witnessed in 2011. In terms of the geographical demand, North America accounts for more than 50 per cent of the global RPO deals.

Service Provider Strategies The Everest Report had classified ADP, Aon Hewitt,

Northgate Arinso (Convergys), IBM and Accenture as the leaders, while Genpact, Xchanging and Neeyamo are categorized as the emerging players.

HRO


Service provider strategies are also changing in line with the chang-ing demands of the industry. Many providers are trying to strengthen their offshore presence and add sin-gle process offerings to their line of services. Growth is most likely to be achieved by way of inorganic routes like mergers and acquisitions. The recent spate of M&A deals amongst HRO service providers clearly high-lights this. One prominent one is the aqcuistion of Convergys’ HRO business by Northgate Arinso. Commenting on how this has con-tributed to their business, custers says, “NGA and Convergys’ HRM business have been fully integrated now. We have invested a lot in build-ing strong ties with our customers and exceeding quality standards. We believe that both our customers and our employees have benefited signifi-cantly from this transaction.” NGA believes that the need for higher employee engagement, continuing globalization, openness to process standardization, automation of transactions, and focus on core strategy to be the most important elements of a successful HRO strategy.

Emerging Models Typically, the pricing models are based on head-

count utilization by enterprises. This is usually the same for both single-process and multi-process HRO. But as cloud-based and SaaS offerings are becom-ing more popular, utility based pricing models are likely to be seen more. Mid-market enterprises will be more open to such kind of a model as it offers them access to technology applications without having to pay a high initial cost for deployment. Pointing to the growing demand for smaller deals, Ann Vezina, Executive Vice President and Group President of HR Services,

ACS, says, “As the first wave of “mega-deals” come up for renewal, we expect organizations to look for a best of breed solution, rather than a comprehensive solution.”

The Power of the Mid Market

The mid market segment is expanding the growth opportunities for global HRO service providers. Today a large chunk of the business is coming from these enterprises and providers are developing special-ized strategies to tap this explod-ing potential. A research paper by katrina Menzigian, VP, Research Relations, Everest Institute ‘How Mid-market HRO is Emerging as a True Growth Platform, 2011’ states that the mid-market companies have increased their adoption of inte-grated MPHRO and this segment is becoming the growth platform for many of the leading HRO service providers. Of all the MPHRO deals signed in 2010, 61 per cent came

from the mid market. Cost saving objectives, access to advanced HR technology and improvements in overall business efficiency are the major factors driving these companies towards outsourcing.

Commenting on their mid-market strategies, Vezina says, “Services need to be scalable for any size employer with the ability to grow as mid-market organizations grow and their needs expand. We are prepared to meet their needs in all service lines and grow with them as the economy recovers.”

Drivers“Cost reduction remains a top driver of MPHRO.

Other important drivers include managing compli-ance risk, greater alignment between HR and business strategy and access to better technology,” says Ranjan. Enterprises are depending a lot on service providers in areas other than cost saving and are looking for partnerships that bring a little extra in the form of innovation and guidance. Experts believe that providers have a big opportunity here. They may not be seeing too many opportunities for multi process deals but there lies a clear opportunity in transforming small, short-term deals into longer strategic outsourcing rela-tionships. A multiple location strategy can play a vital

Small, Shorter Term Deals Setting New Trends

Ann Vezina, Executive Vice President and Group President

of HR Services, ACS

“Services need to be scalable for any size employer with the ability to grow

as mid-market organizations grow

and their needs expand. we are

prepared to meet their needs in all service lines and grow with them as the economy

recovers.”


role for service providers. Custers says, “Multi-country process is a great entry point into multi-process HRO, and we consider it a major driver for growth in the overall HRO industry.” Enterprises are targeting improvements in different strategic business areas, and providers that are able to offer this will have a visible advantage in the long run.

Custers says, “we believe that together with multi-country payroll and learning, recruitment represents an important area of expansion for HRO. However, we strongly believe in process integration for HR.RPO can be deployed as a stand-alone process, to deal more efficiently with the transactional part of recruitment.”

Small, Shorter Term Deals Setting New Trends

What Lies Ahead?“Outsourcing led HR transformation presents

several challenges that enterprises must overcome to achieve desired results. Everest’s research indi-cates that service provider selection, managing the outsourcing partnership, stakeholder engage-ment and alignment, cultural integration, overall

change management, and transition-related issues are some of the major challenges faced in such undertakings. Service providers and buyers both need to be cognizant of these challenges and take appropriate measures to overcome these.” says Ranjan GS

Copyright © 2011, Everest Global, Inc.ERI-2011-X-X-XXXX

3

Exhibit 3: New deals continue to be smaller in size

and duration

TCV of deals over timeAverage TCV (US$ million)

Average TCV = US$66 million

Term of deal over timeAverage number of years

Average term = 6.1 years

Note: Analysis does not include contracts that have a TCV of more than US$1 billionSample size: 381 deals signed between 2005 and November 2010

Source: Everest Research Institute (2011)

64

2714

5259

101

Upto 2005 2006 2007 2008 2009 Nov-10

3

4

56

7

8

Upto 2007 2008 2009 2010

New deals continue to be smaller in size and duration

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IntroductionThe concept of human resources

(HR) transformation or the exten-sive restructuring of corporate human resources departments (HRD) took hold in the last decade or so. Prior to that HRD staff was seen as adminis-trators managing the mundane and not involved or responsible for stra-tegic decisions. However, as compe-tition increased so did the demand for human assets and a need for attracting, retaining and growing the best talent. This required a change in the mindset of the HRD and tak-ing on more strategic role bearing in mind the larger business goals and objec-tives. Soon organizations began to relook their HR departments and its func-tions. HR transformation took root and HRDs started getting influenced by ideas on modern HR practices of HR specialists and gurus of the time like Dave ulrich. Shared services center (SSC) for HR, outsourcing HR, and HR business partners/leaders and other similar concepts and models started getting implemented. The key idea of HR transforma-tion was to set HRD free from the administrative tasks and focus on the strategic.

by kumar Parakala, kPMg

Human resources transformation – is outsourcing a solution?NassCoM estimates the global BPo industry spend to grow at a CaGr of 6.1 percent between 2009 to 2014

xperts

The current scenarioToday, as the global economy con-

tinues to gain further stability, a large number of organizations worldwide are expecting HR transformation by reducing their total cost of ownership (TCO) for human resources. With a focus on achieving this, strategic HR seems to have taken a back seat. Several HR surveys done so far have indicated that ‘Cost’ remains a top priority that an enterprise seeks to reduce in case of HR “too”. This could be achieved either through in-house cost reduction initiatives or setting-up

a shared services center or outsourcing to a third-party service provider or a combination of these models. Most of the organizations trying to trans-form HR have chosen outsourcing as a major portion of their Human Resource transformation strategy.

Organizations will continue to invest heavily in HR Outsourcing (HRO)

NASSCOM estimates the global BPO industry spend to grow at a CAGR of 6.1 percent between 2009 to 2014, while the HRO spend which

Figure 1: Worldwide HRO and Total BPO spend

P = ProjectedNote: HRO spend includes spend on routine HR services and services delivered during the initial design and implementation of the HR solution as well as on an ongoing basis. This includes serv-ices consulting, system integration, training and education, application outsourcing, etc.Source: NASSCOM Strategic Review 2011


HRO

Figure 3: Transactional vs. strategic HRO services

Source: KPMG Research and Analysis

is 43 percent of total BPO spend, will grow at a slightly lower CAGR of 4.8 percent during the same period to reach around uSD 83.6 billion by 2014 and still contribute nearly the same percent to the total BPO spend pie.

These numbers reaffirm the fact that organizations worldwide will continue to spend a significant portion of their revenues on managing their human resources. This also indicates the continuous commitment of enterprises worldwide to their HR outsourcing plans and the strategic intent behind it.

Scope for Outsourcing Human Resource ServicesWhile human resource outsourcing continues to grow, it is still a very long way from full-scope HR outsourcing in

comparison to what we have witnessed in IT outsourcing space.

Figure 2: Potential scope of HR services outsourcing (illustrative list)

Source: KPMG Research and Analysis

What started more than a dec-ade ago still continues today. Most of the HRO contracts have transactional HR work getting outsourced, for example; payroll processing, employ-ee background check, staffing, training, benefits administration, etc. Organizations choose to retain more strategic HR initiatives like organization develop-ment, change manage-ment, etc. in-house. A few organizations hire external consultants to offer such services, but typically it’s a one-off case in the


Experts

history of that organization rather than a cyclical or regular activity.

At a high level, today’s HR is seen as a more strategic department seeking answers to issues relating to multi-cultural complexities, leader-ship development or change manage-ment which are core to the organ-ization and hence the reasons for keeping them in-house. Probably they will always remain in-house and only more mundane and transac-tional processes will continue to be outsourced. However, that’s not a concern when it comes to using out-sourcing for HR transformation.

The Big Question: Are organizations transforming their HR by outsourcing?

To my mind the top few reasons why organizations outsource HR are; they get the opportunity to reduce costs, get access to external HR exper-tise, ability to focus on strategic HR priorities, relieved of possible labor regulatory issues, and a possibility of improving service quality. However, the following parameters are typi-cally measured by these organizations to determine the HRO engagement success; operational efficiency, operat-ing costs, service quality, employee satisfaction, HR staff reduction or changes, etc.

While a vast majority of business leaders will quote of having achieved their HR outsourcing objectives to a

large extent, most of the met-rics chosen do not indicate any HR transformation happening in reality. This only indicates that purely outsourcing or set-ting-up an HR SSC or hav-ing “n” number of HR busi-ness partners will not ensure HR transformation.

The ‘how-to’ of HR Transformation – A perspective

It is quite evident that out-sourcing an organizations HR

functions will certainly do the ground work for focusing on strategic issues as the routine, low-end and trans-actional tasks will no longer eat-up HRDs time and energy. At the same time certain processes or systems must be paid attention or be in place to expect real HR transformation. Some pointers in this direction are men-tioned below:

n Partner with the “right” service provider - The degree of buyer satisfaction in a HRO engagement varies according to certain key attributes while evaluating ven-dors. These are-l Per-employee costs l Staff Quality of service provider

and their expertisel Technology capabilitiesThose companies which under-

estimate these key attributes and focus more on the overall cost savings remain typically less than satisfied or dissatisfied with their HRO ven-dor, leading to spending time and energy in managing vendor relation-ship and service related issues. Service providers’ offering a combination of competitive pricing and strong key attributes typically create long-term customer satisfaction.

It might sound clichéd but part-nering is the key. The idea is that if the parties involved in the deal work closely together as partners they both

Global ServiceS MaGazine

Past Issues

2011 May issue

The Promise of iaaSNew Opportu-nities in Global Sourcing: IaaS and Analytics

2011 april issue

The new rules in bPoLearn about what will drive the BPO sector in this special report.

2011 March issue

contact center industry: where do You Go From Here?Contact Centers and the Challenge of Social Media

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can learn in the process and forge a win-win relationship, instead of the iterative negotiations thought to char-acterize a typical transactional HRO engagement.

n Establish HR transformation metrics - As the saying goes “what cannot be measured cannot be improved”. While this is true, it is virtually impossible to list out how to measure HR transformation, the ultimate metric being “how much value is being created”? In the context of HR this could

mean- establishing HR metrics based on input, efficiency, effectiveness and outcome based metrics, establishing the correlation between HR and busi-ness scorecards. Examples of such metrics could be; ‘on-boarding vs. attrition’, which could help in pri-oritizing HR resources to make maxi-mum business impact. Others like revenue per employee or profits per employee could give a financial per-spective to HR value creation.

n Redefine new HR roles with-in the retained HRD based on business initiatives to serve - Due to off-loading of administra-tive work, HR roles need to be redefined within the organization. But instead of doing that first, what is essential is to identify the critical business needs and ini-tiatives of the business units and then realign the HRD with suit-able roles and responsibilities that will add maximum value to the unit and deliver business results. HRD also needs to probably re-skill its retained staff or employ new staff to suit the new and more strategic roles.A failure to redefine HR roles will

only mean that the HR spends more time on keeping a check on the out-sourced service provider which will ultimately lead to the failure of the transformation initiative.

n top Management role crucial for successful HR transformation - ultimately the success of HR transformation lies with the top management’s involvement and drive. They need to believe and propagate the notion within their organization that talent leads to superior corporate performance. At the same time understand that HR is not the only one account-able for employee and employee processes but it is every business leader’s responsibility.

ConclusionOutsourcing to a third-party ven-

dor or setting-up an HR SSC or any other model will not guarantee suc-cessful HR transformation. It’s only the beginning and demonstrates a change in the delivery mechanism while possibly allowing the HR to focus on strategic issues that will add business value. What happens later will be the crucial part to determine success. Management has to realize its role in empowering the human resources department in taking itself to a new level to realize transforma-tion in the true sense. HR business partners should redefine their staff roles to enable them to think and act in a more strategic sense in line with the business units’ top priorities. HR transformation should be measured with appropriate metrics so that effec-tiveness of the process is tracked and suitable and timely measures are taken to make the process more robust.

HR transformation will change the way organizations behave and deliver. Success lies not in ‘in-sourcing’ or ‘outsourcing’ but in the synergies between the transformation objective, implementation and the key stake-holders drive to achieve it. GS

Kumar Parakala is Head of IT Advisory, KPMG EMA & India and Chief Operating Officer, Advisory in KPMG in India. He is also a global head for Sourcing advisory.

2011 February issue

next & best Practices in Global SourcingThought-leading Practi- tioners’ Viewpoint

Client priorities are shifting and there is no consistent correlation of the benefits of outsourcing to business impact.

2011 January issue

Utility computing: The reality check

In the dec-ade that went by, the out-sourcing industry had many momen-tous shifts

click Here To read

click Here To read

2010 archiveswww.globalservicesmedia.

com/e-magazine

HRO


xperts By Nigel Hughes, global services Director, Compass Management Consulting

the French Banking sector: sourcing strategies, trends, and observationsFrench banks outsource about 20 percent of their it costs. approximately 80 percent of French banks now outsource facilities management, though not as part of a comprehen-sive it services agreement.

French financial serv-ices organization have in recent years undertaken some new and noteworthy

approaches to sourcing strategies, including a focus on consolidat-ing operations through captives, and forming partnerships both within and outside the banking sector to manage growth

My Paris-based Compass col league Guil laume Almeras recently compiled a series of observations of sourcing strategies among French banks.

First off, from the French perspective, outsourcing does not necessarily mean a reloca-tion of activities. When relo-cation does occur, it is often through a captive model. In addition, sourcing strategies tend to encompass a compre-hensive range of objectives, and don’t focus narrowly on cost reduction.

Overall, French banks outsource about 20 percent of their IT costs. Approximately 80 percent of French banks now outsource facilities

In terms of metrics and perform-ance improvement strategies, the con-cept of activity-based invoicing in internally-managed operations is gain-ing increasing attention. By allowing each discrete activity to be assessed as it would be with an external provider,

this trend suggests growing interest in outsourcing.

Customer sup-port activities (including call cent-ers) are generally nei-ther outsourced nor relocated, and dur-ing the past few years some banks have undergone a wave of re-inshoring. Credit handling is still high-ly centralized, even within the major banking groups.

In recent years large-scale partner-ships have been used to help French banks

manage expansion. Four specific examples stand out:

In 2010, Crédit Agricole SA took over asset management activities from

management, though not as part of a comprehensive IT services agreement.

BPO with the European banking sector has traditionally been limited to HR and accounting. However, this is changing as close to 70 percent of French banks now outsource check

processing, with other functions such as securities and electronic banking following suit, as evidenced by a joint BNP Paribas and Natixis platform.

33 Globalservices www.globalservicesmedia.com February 2011

In 2002, Société Générale, formed an equal partnership with Axa to handle employee saving plans through a common platform. In 2009, Société Générale entered into a partnership with the Banque Postale for consumer loans, at the same time handing over European and Asian asset management to Amundi, in which they own just a 25 percent share. Together with Crédit Agricole CIB, Société Générale set up a 50/50 joint venture in the Newedge brokerage.

Finally, the recent financial crisis saw Banques Populaires and Caisses d’Epargne enter into a joint venture through the co-purchase of a com-mon investment banking subsidary Natixis, thus forming the group BPCE.

If this pattern continues, the French banking sector will likely be transformed over the next decade, as a clear distinction will emerge between the production and distribution of services.

In addition, banks will likely offer customers a range of products devel-oped by competitors. An example of this trend already exists, with Caisses d’Epargne offering consumer loans

Société Générale through the creation of Amundi, a new joint subsidiary that is 75 percent owned by Crédit Agricole SA. In addition, Crédit Agricole SA took over HSBC’s deposit activities.

Newcomer Banque Postale has used joint ventures as a core element of its development strategy in key sectors such as consumer loans, casu-alty insurance, and health insurance. (LBP Financement, 65% owned), damage insurance (LBP Assurance IARD, with Groupama), health insurance (Efprimo with Mutuelle Générale). New ventures with LBP Financement, LBP Assurance IARD (with Groupama), and Efprimo (with Mutuelle Generale) comple-ment Banque Postale’s longstanding life insurance offering partnership with CNP Assurance. With Société Générale, LBP also has a shared elec-tronic banking platform (Transactis). Through these initiatives, Banque Postale is leveraging partnerships to offer customers a wide range of serv-ice offerings, rather than developing them all in-house. While this model has been used around the world, it is new to France. Interestingly, Société Générale has started to adopt a similar model for some of its activities.

through Cetelem, a BNP Paribas product.

Lacking a competitive advantage in a particular offering, banks can purchase that offering from a compet-itor and sell it through their network, under a custom brand name, or under the competitor’s name.

Assuming these trends presage an increase in merger activity, the new entities will likely turn to outsourcing to reduce costs within the combined organizations.

A final observation: over the past decade, French banks have fallen behind their global peers in terms of operational efficiency and pro-ductivity. The main factors driv-ing this gap have been exceedingly high staffing levels, including a high proportion of managerial staff, and a lack of process automation and standardization.

Based on these findings, it can be concluded that significant operational improvement opportunities exist within the French banking sector. GS

Nigel Hughes is Director of Global Service Development at Compass Management Con-sulting. Bill Huber is Partner and Director of CPO Services at TPI.

The French Banking Sector

hro: so old, yet so new

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