Research quarterly; HR outsourcing: reaping strategic value for your organization

HR Magazine, Sept, 2005 by Leslie A. Weatherly

Abstract

Companies of all sizes and industries are outsourcing parts of their HR business processes in record numbers to effect improvements in efficiency, service and cost. Vendors are driving this shift away from the traditional HR service delivery model with promises of increased access to better technology and systems, at a reduced cost, in conjunction with improved levels of quality and service to the customer. Between the dynamic challenges employers face and the intense competitive pressures in the vendor community, it would appear that HR outsourcing (HRO) has, in fact, evolved to give employers more choice and an increasingly flexible, creative and comprehensive menu of services. This article explores some of the reasons behind the transformation of the HRO industry. It then provides information to help HR business leaders make informed choices regarding HRO options as a means to reap professional experience in relation to HRO and strategic value for their organizations.

Introduction

The HRO market is in transition. Until recently, the market followed a relatively predictable path, with the majority of HR outsourcing engagements conforming to conventional transaction-focused, single-process business arrangements with individual third-party providers (e.g., payroll services, health care and pension plan administrators, temporary staffing agencies, etc.). However, it is now clear that the HRO market has achieved a degree of maturity on the business life-cycle continuum. A second-generation market has emerged, the HRO multi-process market. As the HRO vendors have begun to partner with and acquire other firms, they are broadening their service capabilities to include organizational and people development, employee data management, workforce planning and deployment, and human capital services. In fact, a 2004 market research study by a well-known business process outsourcing (BPO) analyst firm forecasts that the worldwide market for multi-process HR BPO will grow at the rate of 21% annually, reaching $7 billion by 2008. (1) This forecast is highly significant because this same study forecasts that the total HR outsourcing market will grow by just 11% to $33 billion worldwide by 2008. In other words, in terms of projected growth, the multi-process component of the HRO market is expected to be appreciably more robust in terms of projected growth than the market for those organizations electing to outsource the HR function in its entirety.

What Is Outsourcing?

In a nutshell, outsourcing is an accepted management tool for restructuring and refocusing the way an organization does business. It challenges management to build a more flexible organization centered on the core competencies of the business. In making the determination that a business has more to gain by having certain "non-core" aspects of the business outsourced to a third-party service provider, the organization transfers responsibility for one or more activities or functions that would normally be performed in-house to a qualified vendor, for a specified period of time and at a negotiated fee, in accordance with terms stipulated in a service level agreement (SLA). In essence, the organization is making a decision to send certain parts of the business out to a provider whose "core competency" is that part of the business.

Types of HR Outsourcing

In the past, HR outsourcing was thought of as hiring a vendor to provide a service. With the new focus on outsourcing, there is more of an opportunity to partner with the vendor to provide the service on a longer term basis rather than just a one-time vendor contract. HR outsourcing can include:

* Discrete services: In this instance, one element of a business process or a single set of high-volume repetitive functions is outsourced to a third-party administrator. Examples of discrete services could include the annual open enrollment process, flexible spending accounts or employee background checks.

* Multi-process services: The complete outsourcing of one or more functional human resource processes would be an example of multi-process outsourcing (also called blended services). As such, the outsourcing of either health and welfare benefits administration or defined retirement plan and 401(k) plan administration to a third-party administrator would be an example of multi-process or blended services outsourcing.

* Total HR outsourcing: Total HR outsourcing represents the transfer of the majority of HR services to a third party, to include recruitment, payroll, HRIS, benefits, compensation and communications, as well as the transition of HR management and staff. However, HR executive management would normally remain in place within the organization, along with strategic planning related to people management and other key HR functions at the discretion of management.

Why Outsource HR?

"We see a tremendous savings opportunity in HR outsourcing. If it's not there, we'll walk away."

Gregg Phillips

Deputy Executive Commissioner for Social Services, Texas Health and Human Services Commission