Outsourcing is changing HR, and HR is changing outsourcing. From its early roots of handling payroll processing, the outsourcing of Human Resources (“HR”) functions grew strong and produced outsourcing offshoots in benefits administration. Business processes such as health care, pension and 401k plans soon flourished, and HR became a stalwart market segment within the outsourcing industry. Today, we see vigorous growth once again in HR outsourcing; it is a dynamic market?growing rapidly, with movement in several directions, and gathering more momentum every day.
Strategic Good Sense
What is causing the growth in outsourcing of HR processes is that companies are increasingly able to recognize what processes are good candidates for outsourcing. The process must be highly important but not a core function–by that, I mean it is not what differentiates a company in the marketplace. It is not core to who the company is nor how it competes. HR functions are not core, but they are highly important and are, therefore, ideal for outsourcing; and many companies are now recognizing that. It just makes strategic sense to outsource non-core functions. It saves time and money, while it increases the quality of services.
Who the New Players Are
Although it has a long tenure in outsourcing, the use of outsourcing in the HR world has been highly segmented. Historically, the outsourcing of payroll processing through suppliers such as Ceridian Corp. and Automatic Data Processing, Inc. (“ADP”) has been the mainstay. The new growth and momentum is the outsourcing of the entire HR division and all of its processes.
Many companies are recognizing that. The niche players understand that they are no longer capturing the market and that they need to offer more than their traditional niche services if they are going to stay in the game. Just last month, Ceridian Corp. (which has been a provider of payroll and tax filing services) acquired ABR Information Services Inc. (the nation’s largest compliance administrator for COBRA and the Health Insurance Portability and Accountability Act). The acquisition greatly increases the HR benefits services Ceridian can offer to clients. Many payroll processing outsourcers have been buying employee-leasing firms in order to add benefits to their existing client services. In early 1998, ADP formed an alliance and acquired an insurance program management company to increase its professional services.
New players, providing consolidated HR services, are coming into the arena. Companies such as Hewitt Associates L.L.C. and the Big Five accounting firms–most notably, PricewaterhouseCoopers (“PwC”) are starting to offer an integrated HR function. Integrated HR functions can be customized to individual clients’ needs and budget.
Movement in the market is also notable in that venture capitalists are beginning to back emerging HR outsourcing suppliers; additionally, relocation services are now being outsourced.
Other Momentum Drivers
ERP software systems, such as SAP or Baan, enable the seamless integration of HR services through economies of scale and superior process leverage, making it possible to provide high-quality service at a lower total cost. PwC recognized the advantage in managing HR services for several customers from one facility an extended its relationship with PeopleSoft in order to leverage economies of scale.
Another driver causing the momentous growth in integrated HR outsourcing functions is the increasingly complex process of handling HR processes for global companies. Multinational companies simply cannot afford to keep these processes in-house. Outsourcing suppliers bring to bear expertise and economies of scale, lowering the cost of such services and providing a seamless program.
An HR challenge also exists for small- to mid-sized businesses that are growing rapidly; often, they struggle to find the staffing resources that are necessary to keep up with expanding business. Similarly, mergers and acquisitions create transition problems in moving employees from one benefit plan to another that are best handled through an outsourcing supplier that provides a total consolidation of HR services.
The Challenge of the People
Nevertheless, challenges always exist where there is growth and change. The phenomenon of the emerging market is creating a great challenge in HR. Although it gives HR executives an opportunity to rid themselves of administrative headaches, it also presents a potential threat to traditional HR functions which, until now, have been left alone. The transitioning of employees remains one of the highest risks of outsourcing. This is an issue always at the forefront when a company is about to outsource and must be handled with care, humanity and a great deal of planning. In the articles about DataQuest and Unisys in this edition of Outsourcing Journal, these topics are explored.
The “legal voice” and “customer voice” articles in this edition of Outsourcing Journal discuss the opportunities in this emerging HR market. As always, we will keep an eye on the market, track its development and keep you, our readers, informed.