HR Outsourcing: Where It Needs To Go | Article

BinocularsHuman resources outsourcing (HRO) is enjoying healthy growth because buyers are reaping significant benefits. But there’s still room for improvement in this very hot sector.

The past: HRO has long been the vanguard of BPO and is by far the most outsourced business process. Estimates of industry growth vary but seem to average a healthy compound annual growth rate (CAGR) from 2001 through 2007 from 8.6% (Gartner Dataquest) to 12% (Yankee Group). By 2005 — next year! — Gartner Dataquest believes 85% of US enterprises will outsource at least one component of their HR functions.

That’s a big number. These figures are especially promising, according to Gartner Dataquest, given the relative immaturity of the European and Asia-Pacific HRO markets.

The present: Suppliers with different areas of specialization are experiencing double-digit growth also. Mike Christie, HR Outsourcing Consultant with Hewitt Associates, says Hewitt posted a 15 percent increase in overall revenues last year. Most of the increased activity was in its core business — benefits, workforce administration, and payroll.

Kevin Campbell, Exult’s President and Chief Operating Officer, says Exult demonstrated good growth in its core payroll and benefits business. But he says the strongest growth sector is in recruiting, the integrated front end to the employee life cycle. “Exult will recruit over 40,000 people on behalf of clients this year,” he says. For its part, Exult’s revenues grew 18% last year, reports Campbell.

Glenn Davidson, Chief of Market Strategy and Corporate Development for Accenture HR Services, confides that “we’re seeing the most interest in HRO from those sectors of our economy that are experiencing the greatest margin pressure.” He says these include three types of companies:

  • telecommunications firms dealing with pricing pressure from competition and heavy debt loads from past infrastructure investments
  • retail companies with reduced sales and increased price competition for their products due to the slow economy
  • government organizations with declining tax revenues who are now forced to do more with less rather than increase taxes.

In addition, “a dramatic consolidation” in the HRO industry in the United States is under way Phil Fersht, Senior Analyst, Business Process Outsourcing for the Yankee Group. “A lot of the discrete players [specializing in one aspect of HR like payroll] are struggling with their business models and getting bought quickly,” he observes.

Three Types of HRO Suppliers

Fersht divides suppliers into three types. First, there are the suppliers like Hewitt Associates and Automatic Data Processing (ADP) that specialize in discrete subprocesses of HR like payroll, benefits, hiring and recruiting, and training and education. Then there are the one-stop-shop suppliers like Exult and Fidelity Employer Services that aggregate multiple HR functions like payroll and benefits into one HRO offering.

Overlapping with the second type is a new breed of super-suppliers that offer full service at lower cost. EDS, IBM Business Consulting Services, and Accenture make up this top tier that, Fersht predicts, will be the leaders in profitability. These companies will take advantage of economies of scale because they already have significant processing facilities worldwide they can use for HRO. “For them,” Fersht points out, “it’s a relatively simple transformation process to take their existing service offerings and add an HR dimension to them. They can already do the IT/ERP rollouts, so they just need to add the manual side and some of the expertise.”

Fersht predicts that smaller discrete suppliers like Hewitt and ADP will continue to serve the mid-market buyers with 500 to 2000 employees while one-stop-shop and super-suppliers will focus on buyers with 10,000 or more employees.

A Better Alternative: Offshore

Offshore outsourcing is a major trend driving HRO. Offshore HRO, he says, concentrates on processing services that involve manual operations with little added value such as generation of employment contracts. Fersht ranks India, the Philippines, China, South America, and Eastern Europe as the leading regions for offshore HRO in that order.

Tougher to outsource offshore, Fersht notes, are processes like benefits where workers have to understand employment issues unique to individual countries. For instance, a US buyer may want to outsource benefits to a supplier with offshore facilities in China, but the average Chinese worker may not understand what a 401(k) plan is.

Advanced expertise and multinational scope are where the super-suppliers enjoy a distinct advantage. According to Fersht, they have multipurpose processing centers around the world that can offer these services to multiple nationalities and partner with local suppliers where they don’t have a presence. For big jobs done by big suppliers for big buyers, Fersht says the supplier retains a client account management team geographically close to the buyer — these people interface with the buyer, while the supplier farms out the work to its offshore operations.

Oddly, says Fersht, not many foreign suppliers are taking the lead in HRO, even for simple processing work that does not require any specialized expertise.

New Outsourcing Models

Michel Janssen, President, Supplier Solutions Practice, Everest Group, has observed the evolution of emerging outsourcing models over the last year and thinks suppliers are settling on three main ones. Some with premier IT expertise like Affiliated Computer Services and EDS, Janssen says, are adopting an ERP-centric model in which they assume responsibility for the buyer’s human resources module in their ERP system and manage it better and cheaper. The upside for the buyer is eliminated software costs and better HR service. Janssen, cautions suppliers to be careful because they are assuming an onerous responsibility — every new vendor version of a buyer’s ERP product forces the supplier to upgrade the customer.

Other suppliers like ADP and Ceridian focus on what Janssen calls a payroll-plus model where they leverage their existing experience in payroll but add new non-payroll features and functionalities to be able to offer tiered service plans like silver, gold, and platinum that better match buyer’s needs. Fersht believes this trend signals an up-market move by discrete HRO suppliers from mid-size to larger projects and competition with some one-stop-shop and super suppliers. Obviously, while buyers can leverage the vast specialized expertise in these suppliers’ chosen HR niche, the downside is they will have to migrate their data onto external systems, a classic source of buyer trepidation.

The third model is a hybrid of the first two. Here the supplier leverages its payroll expertise and services multiple buyers on its own ERP platform. Janssen says Fidelity, for instance, has invested heavily in its new multi-client HR platform. In this model, buyers gain the suppliers’ payroll smarts and divest themselves of expensive software but have to send their data out-of-house. Meanwhile, says Janssen, suppliers can leverage economies of scale and upgrade all their buyers at one time when new versions of the ERP software come out.

Still Room for Improvement

The future: While HRO has come a long way fast, Janssen suggests there are several areas in which improvements are still possible. No supplier has as yet come up with a standard way of doing an HR process that is common around the world. In fact, he says, you’d be hard put to define a regional standard — pan-European, for instance.

Though he allows that the super-suppliers may have global scope, infrastructure, and personnel, he thinks they still lack advanced expertise in specific areas, like benefits for different countries. The best efforts are coming from multi-function suppliers like Exult that “are using different payroll providers to fill the different niches in different countries.”

Janssen also believes that the way buyers measure supplier success could stand some change. Most buyers now look at metrics like a supplier’s call center response time or ERP system uptime. Janssen thinks suppliers need to evolve additional metrics that aren’t transactional in nature and that measure more strategic value like workforce productivity, absenteeism rates, and employee turnover.

For instance, to reduce employee turnover, he says a buyer might suggest that the supplier not get paid until an employee has stayed on the job for 120 days. If the employee leaves, then buyer and supplier can in retrospect pinpoint why — say, a bad manager — and come up with a fix. This obviously yields more long-term value for the buyer than a more transactional method of measurement such as screening 100 resumes to select a promising employee. That front-loaded approach might let bad apples through — say, an applicant didn’t include his criminal background on his resume — and doesn’t allow for helpful follow-up to actually fix the problem.

Also, though offshore HRO is booming, Janssen feels suppliers need to address several issues to maintain momentum. Offshore workers hired to do simple manual process work can’t be expected to demonstrate advanced expertise such as understanding different health care plans in different countries or answering policy-based questions like “I’m having trouble with my supervisor — what should I do?” These require judgment calls these workers are not equipped to make. He also says there is often cultural static from things like the strong accents of foreign workers fielding calls in an offshore call center for an American customer base. Janssen also believes the security issue still demands attention — how comfortable are buyers with having their proprietary data being transmitted offshore? The network, application, and data center security may all be bulletproof, but tell that to a prospect who’s giving you the crown jewels.

HRO is also becoming more self-service. Traditionally company personnel dealt with an in-house HR department or outsourced call center for benefits and employment questions; now they are forced to perform HR activities like withdrawing money from their 401 (k) plans using self-service over the Web. This requires employees to be more proactive, and Janssen thinks suppliers have not yet defined the self-service line beyond which buyers’ personnel are hesitant to go.

Like most everything in life, HRO has come a long way. But there’s still a long way to go. Stay tuned.

Lessons from the Outsourcing Journal:

  • There are three types of HRO suppliers — specialists in discrete processes, one-stop-shops that aggregate multiple HR functions into one HRO offering, and super-suppliers with worldwide processing facilities offering full service at lower cost.
  • HRO suppliers have adopted three models —
    1. ERP-centric where they take over the buyer’s ERP system and manage it better and cheaper
    2. Payroll-Plus where they build on their payroll expertise with new non-payroll features and functionality
    3. A hybrid model where they leverage their payroll expertise and service multiple buyers on their own ERP platform.
  • Several areas in HRO still need improving:
    1. No supplier has devised a standard way of doing HRO around the world
    2. Suppliers need to evolve new non-transactional metrics that measure more strategic value
    3. Offshore issues like that fact that workers hired to do manual processes can’t be expected to demonstrate advanced expertise.


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