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
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