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