How do companies gain access to the most technology possible in a cost effective way? This is a particularly challenging question for human resource (HR) departments, since they constantly have to make the most of their limited technology investments - investments which became even more limited as companies scaled back their total technology investments in the tough economic climate.
Marc Pramuk, program manager for HR management and staffing for IDC, says access to technology is "the biggest driver in HR outsourcing (HRO) today." Companies are putting together "more comprehensive" outsourcing initiatives - bundling their HR technology with their HR processes -- to get more from their technology investment as well as gain access to technology they couldn't touch any other way. "BPO is a phenomenon; it's here to stay," he reports.
One reason BPO is a current option is that suppliers are now able to perform both parts of the equation. Pramuk says software companies have now become outsourcing service providers. The No. 1 reason for this change is technology itself has become a commodity, which put severe downward pressure on prices. Software firms are purchasing companies that can plug into their architecture and deliver new value for their clients. (e.g. Microsoft bought Great Plains; Ceridian did a joint venture with Ultimate Software; Intuit bought a payroll service bureau.) "The big value delivered by software firms now comes not from the software but from managing and delivering the business outcomes from using the software," Pramuk observes.
The same move to BPO is happening at the other end: Service providers now want software capabilities so they, too, are heading out on a buying spree for HR technology platforms. (Mercer Human Resource Consulting bought SynHRgy HR Techologies; Fidelity acquired an IBM HR application; Hewitt Associates bought eCyborg.)
Even the ERP folks are getting into the act. Pramuk says companies like PeopleSoft, SAP, and Workscape are adding extra capabilities.
Pramuk points out all this has happened since September 2003. "It's getting where the distinction between software manufacturers and service providers is going away. Everyone looks like a BPO provider," says Pramuk. Why? Because buyers want a one-stop shop and no longer see a distinction between the end (process execution) and the means (software), he explains.
At the same time, HR departments are finding themselves under new pressures. Pramuk says boards wants HR executives to run the department like a business. "HR results now must be business results. Management wants to know how the HR function is contributing to corporate cost reduction and value creation," the analyst notes. That means they have to automate activities to keep costs in line. At the same time, they need more meaningful data so they can make more informed decisions.
Given these new options, Pramuk says the real question is: Do you want to own the technology or not? He estimates a major install or upgrade of a big name ERP system today could cost $1 to 5 million or more - and then the company has to write checks for system integration, maintenance, and upgrades. What's more, it takes years for the benefits to the HR department to pay back that multi-million dollar investment - "assuming it even pays for itself," says the IDC executive. Calculating the value from an ERP system "becomes a bit fuzzy," he says.
Given the choice, companies are choosing the leasing option - outsourcing. Outsourcing gives them quicker and better access to the requisite technology. And it allows them to run HR as a business.
Lessons from the Outsourcing Journal:
- Gaining access to technology is the current driver to HR outsourcing.
- The distinction between software companies and service providers is vanishing as both make purchases to offer a comprehensive package that includes business processes and the underlying technology.
- HR executives now have to run their department like a business and demonstrate how they cut costs and add value. Outsourcing the transactional and non-core pieces help them do that.
Pramuk will discuss this topic at the HRO World Conference and Expo in New York City.