The Outsourcing Rush

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 research@nasscom.org