Human Resource Outsourcing: Emerging Trends

Human Resource Outsourcing (HRO) is a process in which a company uses the services of a third party to take care of its HR functions. A company may outsource a few or all of its HR-related activities to a single provider or a combination of service providers located in onshore or offshore destinations like India, China and the Philippines. HRO is being billed by some as the future of corporate HR strategies, making the next generation of in-house HR professionals simply integrators of the company's outsourced services. The worldwide HRO revenue reached $59 billion in 2006.

Yet, 2006 also saw some HRO suppliers struggle with profitability and retrench employees in order to improve their bottom-line results. This is expected to exert a drag on the market, especially on the growth of the U.S. segment, through 2007.

Key Processes
Businesses outsourcing HR processes are typically small to midsize with number of employees ranging from 25 to 1,500. The primary candidates for globalization of HRO services are the processes related to payroll, benefits administration, e-training, recruitment and non-voice employee data management. HR-related IT is also frequently offshored. Payroll services and benefits administration services comprise the largest segment of the total worldwide HRO market — this was nearly three-fourths of the total market in 2006. The remainder of the market includes education and training, hiring and recruiting, and personnel administration services.

HRO Services

Strategic HR policy formulation Aligning HR goals with that of organization Manpower planning Retention planning Major labor issues Professional recruitment Change management Benchmarking. Collaborative Training and development Workforce management Human resources information system Performance management Regulatory compliances. Administrative Payroll management Benefits administration Pension administration Non-professional recruitments/background recruitment activities. Improving employee relations

The health care and energy sectors lead HRO offshore adoption, followed by the manufacturing, telecommunications, financial services, hi-tech and retail sectors. Multiprocess HRO transactions include three or more HR processes having an annual contract value of more than one million dollars, serving more than 3,000 employees and having a duration of three years or more. Such transactions have grown at a significantly faster rate than single-process HR functional services market over the last few years. The worldwide multiprocess HRO market was estimated at about $14 billion in 2005. Multiprocess HRO is about an eight-year old market. Despite its rapid adoption, meaningful penetration of multiprocess HRO is yet to be realized. Currently, the market is barely touched in terms of the potential number of companies that can outsource HR. However, 2007 will be a milestone year in the development of the this market, as first-generation buyers renew their outsourcing transactions and attempt to address some key challenges that buyers and suppliers had to face during the first wave of HRO.

Centers of Excellence
The most popular location for HRO is Europe , with many top HRO companies having centers in Western Europe . However, with costs on the rise, companies are looking for cheaper alternatives. Many are turning to Central and Eastern Europe , and some are looking further east to India and Southeast Asia .

Some top cities for HRO are Brussels , Paris , London , Warsaw and Prague . Other emerging cities include Mumbai, Delhi , Manila and Dalian .

ARINSO International, Hewitt Associates, Manpower and SharedXpertise are some HRO companies with a presence in Brussels.

Adecco, Boyden, EADS and European Human Resource Consultants are a few of the leading HRO service providers in Paris.

London has by far the most HRO companies in Europe . Some of these include Accenture HR Services, ACS, Alexander Mann Solutions, Bnb Outsourced Solutions, Ceridian and Crystal RPO. Glasgow in Scotland houses the HRO center for Hewitt.

Eastern Europe is fast becoming a preferred HRO destination, though it still requires more time to reach the level of Western Europe. Some of the popular destinations for HRO in Eastern Europe include:

• Poland: Staff Poland has a center in Warsaw, and Hewitt has opened a captive center in Krakow
• Czechoslovakia: ADP Employer Services and Accenture have centers in Prague
• Romania: Accenture has a center in Bucharest
• Hungary: IBM has a center in Budapest
• Ukraine: ZEST Outsourcing has a center in Kiev.

As the cost of operations and staffing goes up in Europe, many companies are looking for alternatives in India, which currently has the largest number of HRO offshore centers. Companies are also considering other Asia-Pacific destinations.

In India, Delhi (national capital) houses HRO centers for ATS Services, Secova, Hewitt (captive) and Fidelity, among others. Mumbai has centers for Caliber Point Business Solutions and Hewitt (captive). Chennai has centers of SummitHR and Standard Chartered Bank (captive), while Bangalore has centers for Fidelity, Accenture and Convergys.

Other important centers of HRO firms in the Asia-Pacific region include:

• China: Accenture, IBM and Convergys in Dalian; CDP Group in Shanghai
• Philippines: IBM, Accenture, DDC HRO and DesktopStaff in Manila
• Indonesia: Inovasia in Jakarta
• Malaysia: Convergys in Kuala Lumpur
• Australia: Hudson in Canberra City.

Emerging Trends
A majority (around 60%) of business organizations use the centralized shared-services model for HR services, while about 40% use a model that combines some sort of outsourcing which internally provides HR services, according to a study by BenchmarkReports.com. The research findings indicate that not a single company among the 40 companies studied by the firm has completely outsourced its HR functions.

Outsourcing will heavily increase in the next few years, but reliance on shared service centers will also continue to increase, and is expected to remain the preferred sourcing alternative for HRO. Over the next few years, businesses will see significantly more HRO work being executed by offshore shared services centers, as opposed to having it delivered through outsourcing.

As the HRO industry matures, vendors will seek contracts to handle end-to-end work. This will directly benefit the customers, and will expand the scope for ongoing process improvement within the industry itself, hopefully leading to wider business benefits such as improved cash flow and improved access to financial information in addition to further cost reduction.

Such improvement is derived from identifying bottlenecks between processes and gradually eliminating manual intervention within HRO. Technology will increasingly become a leverage to deliver scalability, productivity and quality. Access to better technology and systems is becoming a key driver for HRO.

The demand for HRO will continue to rise significantly. Sole-sourced and multisourced outsourcing contracts will become increasingly common in a global marketplace that is more knowledgeable and experienced about sourcing. Private-equity investments will energize the mid market, making this segment a significant player in HRO. There will be almost double the number of HRO contracts signed in 2007 compared to the last year.