The recruitment process outsourcing (RPO) market has, over the past decade, greatly benefitted from the dislocations in financial markets caused by the 2007/08 global economic crisis.
While corporates lowered headcounts and stripped associated hiring costs in the depths of the crisis, a new dynamic in hiring took prominence as confidence returned to markets. The demand for talent became a business imperative.
However, with the benefits of these ‘passive’ forces now wearing thinner, RPO providers are having to think more creatively and laterally about how they continue to provide value beyond more traditional recruitment arrangements.
Generally, an RPO agreement is where a third party provider takes on part or all of the recruitment activities of a business, from working with business managers to identify skills gaps, to sourcing and screening candidates, through to on-boarding. The market first emerged in the 1990s and has gained remarkable traction in recent years to become a $3-5 billion global industry today, achieving double-digit growth over the last five years. This has been driven by both increased RPO adoption by corporates, and growth in employee churn.
Historical drivers of recent RPO adoption growth
Following the global financial crisis, many companies reduced their in-house recruitment capability to cut costs during a period of limited hiring activity. As the need to recruit returned, many firms chose to adopt an RPO provider rather than rebuild this capability as it offered a simple, immediate solution that could be scaled when required.
Secondly, in terms of value, RPOs have historically focused on sourcing and basic screening of candidates, with later-stage processes – including assessment, interview coordination, and background checks – left to the client. However, this is changing as clients seek to streamline their recruitment processes for reasons of cost and time.
In addition, emerging tech-enabled and artificial intelligence solutions offer tantalising opportunities to not only radically reduce costs but to re-shape the candidate experience. Whilst many corporates are enthused by such opportunities, many are unwilling to make significant investment bets in such non-core areas. And this is where RPO providers are recognised by clients to have an important role to play, given their expertise and implementation experience in technology.
The employee churn tailwind
In common with more traditional recruitment, a key driver of RPO market growth is the volume of candidates. This is because, although there is typically a fixed fee element, RPO revenues are largely based on the number of hires made. Over 2009-10, while the global RPO market was still relatively small, recruitment volumes plummeted globally – not just because firms froze or reduced employee numbers, but falling voluntary churn reduced the number of hires businesses needed to make in order to maintain their headcount.
The importance of voluntary churn to hire volumes should not be underestimated: statistics from Compensation Force / Compdata Surveys in the US suggested that voluntary churn fell from around 13% of the total workforce each year in 2008 to 9% in 2010. A similar effect was reported in Europe, the other established RPO market.
Since that point, employee confidence – and thus voluntary churn – has returned, buoying the market for RPO providers and recruitment firms and providing a tailwind to growth in the overall value of RPOs.
Given that employee churn has now returned to pre-financial crisis levels, future growth in the overall value of RPOs must come from a combination of increased scope (processes outsourced, countries covered) and penetration within firms of sufficient size to require some form of centralised recruitment offering.
Traditionally, US companies have only outsourced sourcing and screening. As time-to-hire comes under increased scrutiny, this appears to be changing with newer RPO contracts including a wider spectrum of services. In addition, companies with an existing RPO offering are seeking to extend existing RPO arrangements into less well developed markets such as SE Asia and China.
To date, the main adopters of RPO have been in financial services, followed by pharmaceuticals and manufacturing. While growth is still possible in these segments – particularly amongst mid-sized firms – the real opportunity for RPOs will be in other segments where the benefits of an RPO arrangement have been less explored.
Given that the tailwind of employee churn appears to have run its course, RPO providers will need to look further than their traditional strongholds to sustain current growth rates. This will require providers to look at new sectors, new geographies and new services to maintain growth and continue demonstrating the value they provide.
We've spoken to 10 leading RPO players, along with talent acquisition technology providers and multinational corporates to find out how the RPO model has evolved and their expectations for the next few years. Download the report here to find out more. [ 778 kb ]
For more information, or to have a discussion, please contact Andrew Hawkins.