In an economy where saving money was paramount, cost was not the number one reason why companies chose to outsource their human resources (HR) process. Mike Atwood, president of Everest Group’s manufacturing, distribution, and retail practice, says companies are now “accepting the proposition that they can gain real value in outsourcing HR.”
“HR today is all about Web-enablement and process reengineering as well as reducing costs,” says Margaret-Ann Cole, implementation director, Mellon HR Solutions, a service provider in Fort Lee, New Jersey.
Outsourcing’s power is to “put in the hands of managers information they never had before – information crucial to managing their staffs,” Cole continues. Managers can use this information for promotion decisions, succession planning or payroll considerations. “General managers had no idea before,” she notes.
Marc Pramuk, senior industry analyst at IDC, a Framingham, Massachusetts research company, reports HR outsourcing is the fastest growing segment of the BPO market, which IDC predicts will reach $1.6 billion by 2006.
Transaction engines clearly propelled that growth. Peter Bourke, president of Spherion Outsourcing Group, a service provider based in Alpharetta, Georgia, says the transaction engines that processed payroll and benefits administration were a key consideration in the HR value proposition last year precisely because they improve quality and cut cost. He points out companies wanting to get their arms around HR administration, for example, “want a service provider with a transaction engine.”
Bourke says this year buyers understood one way service providers could cut costs is by using offshore labor. Service providers will continue to look for offshore solutions to take advantage of the cost savings from labor arbitrage. “Companies began to question the sense of having a tier one supplier using its own staff to process transactions,” he reports.
Transaction engines can wring out costs because of the nature of the HR process. “Much of the HR work done in the back office is mundane and labor-intensive. It’s never part of the company’s core competency and has nothing to do with how the company differentiates itself in the marketplace,” says Pramuk. IDC reports 60 percent of the standard HR process is administration. Customer service accounts for 30 percent and strategic planning only 10 percent under the old system.
The Need for Reengineering
Cole points out that the popular self-serve HR option is not synonymous with Web-enablement. She says companies must recognize a paradigm shift is required. “Giving people tools isn’t enough. You have to change their behavior,” she says presciently. Understandably, companies are finding the process engineering part “a big hurdle requiring a bigger effort than anyone imagined.” One big problem: Senior managers want to delegate the use of these tools to their assistants. “This cuts at the core of the system’s effectiveness,” she notes.
Finally – Global Acceptance
2002 was notable because there were few large outsourcing transactions. Bourke believes “companies were slow to make decisions because of the uncertain economy.” Rising healthcare benefit costs did encourage companies to consider outsourcing their benefits administration because the outsourcing savings helped defray the healthcare increase. “Employers must figure out how to offset their higher rates. Outsourcing helps through efficient procurement and streamlined administration,” says John Gran, senior vice president, marketing, for UltraLink, a Costa Mesa, California HR health and welfare service provider.
2002 was also a year where HR outsourcing achieved a great deal of “global acceptance,” according to Mark King, president of ACS, a Dallas, Texas-based BPO and IT service provider. “BPO providers like Exult have done a good job of proving to the marketplace it’s OK to outsource your HR,” he says.
2002 saw a new kind of HR transaction. Historically, service providers have taken over much of a buyer’s legacy system and then worked in their people, technology and facilities over time. Last year Exult, an Irvine, California service provider, completed a 10-year transaction with Prudential Life Insurance, skipping the legacy part. “They wanted the most cost effective solution, so we started with a clean slate,” says Jim Madden, chairman and CEO.
Madden believes this landmark transaction will become a harbinger of future deals. “Companies will want to do a clean sweep to get to the right answers as quickly as possible,” he says.
“Clearly, HR has a large IT support function that would be very convenient to outsource with the HR function if the buyer and service provider can resolve the integration issues,” adds Atwood.
King observes buyers are looking for service providers with stability and history. “Trust has become much more important in an outsourcing partner. WorldCom and Enron helped us, especially in HR, which is a very touchy-feely process,” he says. ACS has never even had a company-wide layoff, he points out.
Bourke says another trend was a shift from a desire for end-to-end outsourcing to a preference for service providers with an expertise in specific function areas. “Next year the specialists will prevail,” he believes.
Predictions for 2003
As companies become more comfortable with HR outsourcing, they will be more amenable to outsourcing processes that were once unthinkable. Bourke predicts buyers will begin to outsource strategic functions like recruiting, especially since “the talent gap will get worse, not better.” He says the minute the economy starts picking up, companies will consider outsourcing recruiting “so they can attract the best candidates who will stay longer.”
Bourke believes the need for transaction processing efficiencies will continue to drive HR BPO. Madden feels companies will gain more experience in balancing offshore and onshore labor assignments. “We’ll never be able to move all labor offshore,” the Exult CEO says. “It’s not either/or. We’ll have to find a balance.”
King predicts a service provider shakeout will occur this year; many of the smaller providers won’t survive.
Cole predicts the success of change management efforts will be a hallmark of 2003. She says some companies have been reluctant to jump in because they now know Web-enabled HR requires “a huge reengineering up front.” But the effort will be worth it. “Once we crack that, the results will be unbelievable,” says Cole.
BPO Outsourcing Trends for 2003:
- Web-enablement and transaction engines will spearhead the increasing drive to outsource HR BPO.
- This year companies will begin to outsource strategic parts of the HR process like recruiting.
- Service providers will continue to look to offshoring back-office elements of their HR offerings in order to pass reduced costs back to their clients.
- Buyers will outsource IT with the business process in their quest to create value.