Why HR outsourcing is so hot

By Mike Corbett, Executive Director of the InternationalAssociation of Outsourcing Professionals

Outsourcing’s traditional leader, information technology, has been taking a back seat lately to a newcomer – human resources outsourcing. Woodlands, Texas, outsourcing consultancy Technology Partners International recently reported that computer outsourcing deals for the third quarter in a row are headed for a 10-15 percent drop in value, with total deals for 2005 expected to come in at between US$60 billion and US$65 billion, down from US$72 billion a year ago. On the flipside, Boston-based Yankee Group reports that human resources outsourcing is growing 21 percent a year and will reach US$42 billion by 2008. So why is HRO so hot?

The three Ss
The reason for HRO’s emergence comes down to three Ss: Savings, Systems and Service.

Savings
With so much of an organization’s HR operation being transactional in nature – payroll, benefits administration, record-keeping – it is not uncommon for corporations to achieve cost savings in the range of 20 percent or more through HR outsourcing. After all, outsourcing service providers perform this type of work for a living. They can provide the benefits of reengineering and economy all at once. Large HRO providers service millions of employees working in thousands of client companies. They have an economy of scale and scope that few organizations could ever get to on their own.

Systems
Increasingly, to realize these savings and more, HRO includes the outsourcing of the underlying IT systems as well. Few companies can, or if they could, would even want to, make the investment needed to develop and maintain state-of-the-art systems to support their HR needs. Even packaged ERP solutions pale in comparison to proprietary solutions developed and offered as part of the HRO services delivered by the field’s top providers. Even when companies’ start with purchased off-the-shelf ERP solutions, the related consulting and customisation costs can be staggering – in some cases in excess of US$10 million. Any company not in the HR business is going to find a lot of better places to spend that kind of money.

Services
The final factor, and it is often just as if not more important than the others, is service – service to the company’s employees and service to its decision-making executives. For employees, HRO can mean 24/7 online, chat, and call center support wherever they are, anywhere in the world. It can also mean more rapid introduction of new benefits programs and new employee services.

For executives, HRO can mean better information leading to better decision-making. Outsourcing can enhance the quality, timeliness and availability of information. It can also free the company’s own HR professionals to focus their time on increasing the value of its human resources, as opposed to spending their time overseeing the day-to-day operations of the transaction processing center.

Is integration the key?
The key, though, to getting these benefits appears to be integration. That is, entering into more comprehensive contracts covering a full suite of HR services. This kind of bundling not only enables an employer to give its workers better services through outsourcing, but costs less as well. It also means that the company has true partners in the development and delivery of new services that meet the needs of an ever-changing workforce.
In deciding whether or not HRO makes sense, executives might ask themselves three questions:

1. If starting the HR function from scratch today, would they really build the needed transaction processing capabilities internally?
2. Are they so good at processing HR transactions that other companies would hire them to do it?
3. Is this an area from which their future leaders will come?

If the answer is ‘no’ to any of these questions, then HRO is at least worth looking into.
Of course, it’s not likely that with a 10-year head start HRO will actually overtake IT outsourcing in total spending anytime soon, but it certainly appears that HRO is going to continue to be one of outsourcing’s real success stories for years to come.