The HR Outsourcing Rush
Your Special Friend
The worldwide HR outsourcing market is set to grow from $21.7 bn in
2000 to $58.5 bn in 2005. If forecasts are anything to go by, this is
the fastest growing outsourcing segment...
Dataquest
Thursday, March 13, 2003
HR services are among the key elements in the enlarging outsourcing
game. Recognizing the fact that senior management needs to get out of
mundane day-to-day processing work, and focus instead on strategic
planning, core competencies, customer satisfaction and decision
making, a number of large companies, across the globe have begun
opting for outsourcing of their HR services. According to analysts,
cost reduction is usually cited by companies as the most crucial
reason for HR outsourcing as it is stated to lead to savings of over
30 to 40 percent for customers. However, cost alone is not the only
factor. Once considered the major reason for HR outsourcing practices,
cost is being supplanted by other, more strategic reasons. A 2001
Gartner Focus Report (Outsourcing: Time to Deliver Results) states
that "only those companies ready to address the necessary
transformation of their HR processes will find that outsourcing will
bring access to world-class processes, competitive advantage and
increased shareholder value..."
This gradual dependence by organizations on professional and
specialized companies to handle their none core (and sometimes even
core) HR activities is creating a massive market for such services.
According to a study by global market intelligence major, McKinsey &
Co the global HR outsourcing market is valued at $78 billion by 2004.
The opportunity therefore is expansive.
HR outsourcing: Key drivers
No matter in which part of the world companies are located, they share
some common reasons for outsourcing their HR activities. Typically
companies outsource their HR to contain and manage costs, hire and
retain talent, develop infrastructure, create and administer benefits
and compensation programs, and get a company-wide view of HR
resources.
The issue of build versus buy is also stated to be a strong driver for
outsourcing. In this case, companies choose to "leapfrog" their
efforts by hiring an outsourced service provider to get things up and
running quickly.
Some HR departments within companies are going for one-stop solutions
HR outsourcing shops where activities such as payroll, compensation,
benefits, and BPO are handled by the service provider.
It has been found that HR organizations, particularly in US-based
firms, are starting to outsource even some of their core tasks, like
parts of training or recruitment. These firms are learning how to take
core functions apart and outsource some of their elements, further
reducing the burden on the HR department of the organization.
In yet other cases, HR organizations are not thinking in terms of core
or non-core activities. They are simply categorizing transactional
activities and looking for a different way to perform them.
Reasons for outsourcing
Cost effectiveness
Reduced administrative costs
Capitalizing on technological advances/expertise
Improved customer service
Redirecting HR focus toward strategy/planning
Focus on core business
Reduced corporate overhead
Provision of "seamless" delivery of services
Insufficient staff
According to another Business Intelligence leader, the Gartner Group
the worldwide HR outsourcing market is projected to grow from $21.7
billion in 2000 to $58.5 billion in 2005. The market for comprehensive
HR outsourcing in fact, is considered to be the fastest growing
segments of the outsourcing market.
From backroom to boardroom: HR is arriving
Quite clearly, HR outsourcing is arriving. The HR department, long
considered a cost center, performing back end tasks, has had to
re-orient and re-engineer itself in line with the demands of the
emerging e-conomy. It has had to take on the role of a business
partner, which performs core HR functions that have a direct impact on
the revenue building capability of the company.
HR is clearly going through a process of evolution—moving gradually
from the backroom to occupy a key place in the boardroom. It is
fighting perceptions that place it in a non-strategic role and instead
positioning itself as a strategic partner that addresses business
issues. It's role has now become strategic, from being transactional.
Previously, HR spent wasteful hours in answering employee queries.
Today, outsourcing companies take care of these needs, providing
employees a window into aspects such as payroll and benefit details,
at a mouse click.
This has happened as a result of outsourcing of peripheral but
necessary administrative tasks such as payroll, benefits,
education/training, recruiting, personnel administration,
organizational development, contingent workforce management and
workforce analysis by HR departments of companies. While earlier,
these comprised the bulk of the HR work of these departments, today,
these activities are being perceived as a distraction, that takes away
from HR's main job which is recruiting and retaining the best of the
best in the business.
Size: No longer a barrier to outsourcing
In fact, it is not just the HR departments of larger companies that
are undergoing this makeover and catalyzing the outsourcing trend.
Smaller and mid-sized companies, traditionally out of this magic
circle, are now also being driven by factors such as bottom line
consciousness to take the outsourcing route. Until recently, these
companies were maintaining large headcounts and spending excessively
on areas such as HR expenses.
A study in fact conducted by the Institute of Management Accountants
(IMA) in mid 1990s, showed that mid-sized companies spent almost twice
as much as large companies in maintaining an HR head count that was
also possibly twice the size, as compared to the bigger organizations.
It was discovered that more than 87% of the funds mid-sized companies
budgeted for finance and HR were going towards routine processing
transactions, rather than policy making strategies and analysis that
could actually impact the business, enabling it to gain efficiencies,
improve productivity and the bottom line.
The large outsourcing service providers too went for the larger
players, who translated into a better business opportunity.
Today, however, the trend has changed. Irrespective of size, companies
are coming forward to outsource their non-core processes, in an effort
to cut costs and maintain growth. The global economic slowdown has
only served to heighten this movement, with companies narrowing their
area of focus to only their core work, with the rest getting
outsourced to large outsourcing services providers in often faraway
destinations.
HR outsourcing trends by region
HR needs and outsourcing services, though often the same, do differ
from region to region. Here are some of the differences between areas,
in terms of HR services and outsourcing needs.
Europe
Continental Europe, comprising many countries, reflects a mix of
cultures, languages and legal environments. Some countries are heavily
regulated while most have state-run benefits for employees. Yet,
despite this, there is a great deal of interest in HR outsourcing,
particularly in the area of shared services. It is seen that the HR
departments in these countries are looking at improving services
tactically and strategically. They want to streamline the
administration of payroll and expatriate services and find
opportunities to maximize information on a global basis. Forward
thinkers in HR are also keeping outsourcing in mind as they look ahead
to the day when there is a greater need for private or company-based
retirement systems. The private markets and individual responsibility
will eventually translate into programs that will need development and
administration.
United Kingdom
The market for HR outsourcing in the UK is driven by three key
factors. One is to free up resources, which will reduce costs and add
value to the organization. The second is to maximize the value-add by
using management information that results from the delivery of
services. The third driver is to improve service levels of the HR
function. In particular, there is a lot of activity around adding
flexible benefits programs in various organizations in the UK. HR
organizations see the benefits of these programs to better attract and
retain needed talent.
Asia-Pacific
Details on APAC's HR outsourcing market have been provided recently by
leading HR consultancy firm Hewitt Associates. A June 2002 on-line
survey by the firm on "Outsourcing in the Asia Pacific" survey, threw
up some interesting highlights. The survey, responded to by over 424
company representatives around the Asia-Pacific region, pointed to the
following:
As many as half of all participants, or 50.04%, cited concentration on
core competencies
29.9% of all participants said they had considered outsourcing as a
means by which to control costs
An average of 5.7%companies across the various geographical locations
placed a great emphasis on confidentiality
Across the region, payroll processing and training and development
were the most important functions, accounting for 20.3% and 18.9%,
respectively of all participants
Benefits administration ranked third, accounting for 15.6 percent of
participants
India was home to marginally th greatest percentage of companies that
had not yet considered outsourcing HR functions—amounting to 26.2% of
participants. Some 19.9% of participants in India also claimed there
was a lack of suitable vendors
According to 53.3% of the participants, the biggest apprehension about
outsourcing among participants was the quality of the outsourcing
vendor
Security was the second biggest concern
India
The common language and one government make it easier for India to
embrace outsourcing than the rest of the Asia-Pacific region.
Nevertheless, businesses in India bear the stamp of at least 50 years
of history. It is a highly regulated market, which demands a lot of
reporting. This need becomes more problematic with low computer
penetration and inadequate telecom infrastructure. Companies operating
in India find themselves in a very competitive job market that is
restricted by those elements.
However, there is a marked interest in outsourcing to improve on
services such as payroll and benefits, as well as complete HR
delivery. The trend toward outsourcing all HR functions is starting to
take hold, particularly for companies that have been operating in
other parts of the Asia-Pacific region and are starting up operations
in India. Companies are looking to outsourcing the complete range of
HR delivery and designing products on policies, compensation,
structure, and recruitment.
By opting for HR outsourcing Indian companies are not only making
their own HR global class, they are also creating a significant
opportunity for service providers in the domestic space. India, with
its 40 million workforce, is stated to be a huge market for HR
services. Currently, the organized sector of HR servicing is catering
to only about two percent of the total market.
For HR outsourcing services providers operating out of India, these
statistics reflect a major advantage. Not only do they have a wide
playing field in the global arena for these services, they also have a
high-potential domestic market to turn to, which will fuel their
future growth.
India as an HR outsourcing destination
Even as the HR outsourcing bug is biting Indian companies on the
customer side, on the supply side too, India is beginning to get
serious about participating in the grand HR outsourcing opportunity.
Of course, there are still few players operating in this field. There
are hardly five to six names in this market and none are
multiple-nation-servicing. Companies like India Life Hewitt are still
in the process of extending their services to the Asia-Pacific and
Middle East region. However, overseas HR servicing companies are
beginning to view the Indian market as a viable investment
destination, where they can set up shop to address the rest of the
international market.
Indian HR outsourcing services providers, meanwhile are gaining from
the onslaught of projects coming their way, both from international
and domestically located customers. In terms of processes too, these
providers are "moving up the value chain," so to say. From the
tactical and straightforward handling of payroll and benefits, these
HR services providers are moving into the more strategic world of BPO.
HR-enablers are helping HR managers free themselves from the drudgery
of routine jobs and work towards taking employee services to a
superior level.
Conclusion
HR outsourcing is growing into a major opportunity for both global and
Indian players. India, with its intrinsic advantages such as low cost,
ready pool of English speaking manpower and geographic positioning is
emerging as a viable destination for HR outsourcing companies to set
up their businesses. The HR outsourcing business opportunity is large
and India is likely to garner a larger and larger piece of this pie in
the future.
Team DQ
For more information or enquiries, write in to rese...@nasscom.org