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Market watch: The outsourcing game

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For a long time outsourcing has been the business buzzword of choice. Companies, seeing widespread media coverage on the phenomenon and hearing about the cost benefits of pursuing an outsourcing strategy, may well have thought to jump on the outsourcing bandwagon; John Willmott of BPO analysts, NelsonHall looks at the issues.


Take HR outsourcing (HRO). Recent research by NelsonHall has delved into the HRO market to unearth the latest trends. HR is an area that has been earmarked as one of the key areas to watch in terms of outsourcing. According to the NelsonHall study, the growth prediction for the total global HRO market is 11 per cent to $33 billion by 2008.

However, such overall figures for market size and growth disguise the true nature of the HR outsourcing market, with the bulk of the market still comprised of single services provision in established areas including payroll services with true multi-process HR outsourcing only now beginning to become more widely established in Europe.

In the UK, as elsewhere in Europe, payroll outsourcing is well established. The growth in payroll outsourcing was initially driven by the need to update payroll software and to meet the demands of constantly changing legislative requirements.

The thought process was that payroll providers would be better placed to provide these continual updates than end user companies. This led to the emergence of the “payroll bureau,” with suppliers taking responsibility for computer processing and payroll production.

At the outset these payroll service suppliers rarely provided the service of inputting payroll data, with end user organisations still preferring to do this part of the payroll process in-house. The next stage was a steadily increasing demand for fully managed payroll services and integration of payroll into other related areas, including benefits administration.

More recently, organisations have begun to realise the benefits of outsourcing a wider range of transactional HR activities and there is now a definite trend for companies to move towards a multi process HRO model, NelsonHall’s research shows that this area is set for phenomenal growth.

Compared to the overall growth rate of the HRO market, multi process outsourcing in the HR sector is set to burgeon by 21 per cent, reaching $7 billion by 2008. Multi process outsourcing is the process of outsourcing a number of HR functions, rather than just a single function such as payroll services.

However, there is much more driving this new form of HR outsourcing than cost reduction. HR outsourcing is now being used both to implement new E-HR service models and to support internal HR personnel in making the transition from administrators and support staff to strategic business partners.

This is moving HR outsourcing away from its traditional single function domain of payroll services to take-on a more all-encompassing transactional and administrative support role across a wide range of HR functions. Accordingly HR outsourcing is moving away from support for individual HR silos to a cross-functional multi-process role.

For example, many multinational organisations have a need to standardise personnel processes and information globally and use outsourcing as a means of cost-effectively achieving this goal.

Frequently an outsourced relationship can be more effective in driving out cost than an in-house shared service centre. This is borne out by the NelsonHall study.

It has found that organisations outsourcing multiple HR processes expect reduction in HR operating costs of between 20 and 40 per cent.

In the case of HR outsourcing, cost reduction is primarily achieved through process standardisation and the introduction of self-service facilities, though the use of near shore (typically Eastern Europe) facilities is now beginning to increase in importance.

In Europe, there are legislative and cultural factors that make HR service delivery less suitable than other processes for offshore service delivery. Accordingly in Europe many outsourced facilities and shared services supporting the HR function are migrating nearshore to the new EU countries rather than offshore to Asia.

However, there are also significant additional non-cost benefits from HR process standardisation including consistent management information and improved self-service support for managers and personnel. An outsourced transactional HR service also has the benefits of freeing the retained HR organisation to focus on adding value in key areas such as succession planning and organisational development.

As a result of all these factors, the scope of HR processes that organisations are deciding to outsource is growing and companies are now using suppliers to manage employee administration and data management, recruitment administration, workforce development administration and learning services administration, in addition to the more traditional areas of payroll and benefits administration.

Where multiple-process HRO is concerned, some organisations still use more than one supplier to outsource separately discrete functions such as payroll services, benefits administration and recruitment services.

However, the increasing trend, particularly where organisations are seeking to implement outsourced employee care services supported by E-HR self-service capabilities, is for organisations to outsource these employee care services and the administration of a range of other HR services to a single HR outsourcing contractor.

This prime contractor may continue to utilise sub-contractors as required for the delivery of individual services such as country-specific payroll services or expat services. Supporting this trend is a high level of partnering and acquisition activity within HR outsourcing vendors as they seek to move towards full-service HR capability. A recent example of this is benefits administration specialist Hewitt Associates recent acquisition of multi-process HR BPO specialist Exult.

However, organisations are still advised to retain an in-house outsourcing team to manage their HR outsourcing supplier. And all organisations should retain a separate retained in-house HR function to concentrate on the more strategic aspects of workforce development, with the outsourcer focusing on transactional and support activities.

As companies increasingly use outsourcing and offshoring as a way to gain a competitive edge and cut costs, all horizontal processes are assessed in terms of whether they would best be managed in-house or outsourced.

Deciding which processes to outsource can be difficult for many companies, so doing the groundwork and deciding whether HRO is right for your business is imperative. Whatever the outcome, remember that the outsourcing service provider should provide the information to support the retained HR function in its strategic role and that HR personnel will also be required to manage the outsourcer.

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Annie Hayes

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