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Human resource outsourcing (HRO) has moved from being just another new hot trend on the outsourcing landscape to being a significant factor for cost savings by as much as 20 percent of the total HR spend for large corporations.

A new Yankee Group study titled "Should Organizations Embrace HR BPO?" says that HR BPO is reducing HR administrative costs by as much as one-fifth of total HR costs for corporations with more than 10,000 employees. HR BPO, also called broad-based HRO, transitions HR management responsibility to a single supplier. The study found that taking advantage of the integrated HR services offerings and economies of scale provided by a single supplier made this 20 percent cost reduction possible.

"These are significant savings on internal administration and discrete third-party services like payroll and benefits," says Philip Fersht, Vice President, Research, Business Services, Software and Systems Infrastructure, Yankee Group. He says many corporations spend more than $5,000 per employee on total HR costs. The study says that a 20,000-employee company which effects a fifteen percent reduction in workforce costs and a five percent increase in revenue will have a financial impact in excess of $1 billion provided the outsourcing process is managed effectively and sensibly.

According to the study, the average annual running cost for HRO suppliers was $1,500-$2,000 per supported employee.

(Source: Yankee Group, 2005).

What is HR BPO?

Fersht classifies the overall delivery of HRO services into three areas:

1. HR business process outsourcing, which includes broad-based HR outsourcing services
2. HR consulting services
3. HR volume-processing services, which generally means HR transactional/functional services outsourcing

He says that HR BPO services are the aggregation and integration of multiple discrete HR services like recruitment, payroll, benefits administration, and performance management by a single service provider and delivered to the end customer via a single delivery source. The service provider also adds HR transformation, compliance, and consulting expertise associated with HR delivery, besides adopting management responsibility for the majority of HR functions.

Market Size

The Yankee Group says that the broad-based HR outsourcing services market makes up barely a sixth of the $51 billion global HR-related outsourcing market at present, says Fersht, adding that figure is likely to surge significantly as a result of large and medium enterprises opting for more aggregated services managed externally.

Fersht predict this share to increase to almost 30 percent of an $80 billion global market size by 2008, as enterprises move towards aggregated services at the expense of HR volume-processing services and secondly, because of significant shifts in the way businesses are operating and changing in this post-recessionary era.

Key Triggers for HR BPO Growth

The Yankee Group predicts that short-to-medium term spending in this sector will largely be centered on organizations simply shifting their existing expenditures on external HR activities to consolidated offerings from a single service provider.

"There will be some early adopters, namely those who have already been outsourcing many of their HR functions, but the spending will really start to accelerate once the business cases of HRO become clear," Fersht explains. Once companies begin to witness the successful integration of HR solutions and the added business benefits, the door is then open for HRO suppliers to demonstrate the real return on investment (ROI) of sacrificing internal HR spending to invest in their value added offerings, he says.

"The timing of this shift will be dictated by the suppliers' ability to demonstrate that their solutions aren't simply offering their customers cost savings, but adding real value," he says. Enterprises want to know how these HR managed services are going to offer real strategic value to them, once they have been relinquished from their internal administrative responsibilities. As many of the early adopters of HR BPO services become accustomed to the cheaper services available, the initial cost-savings are quickly forgotten, he says.

Besides the obvious cost factor, Fersht lists some key triggers that will drive the increased adoption of HRO services:

1. Access to new technology, often at deferred costs will improve management decision-making
2. Self-service applications will improve employee compliance and enhance employee satisfaction
3. Adoption will move HR out of the human resource department and make it pervasive across the organization. The adoption of many general HR processes and systems is creating viable alternatives to internal HR generalists. Moreover, good HR cannot be restricted within the HR department
4. Back office functions will see improvements
5. Performance management will become more strategic and the need for tighter measurement within HR processes is clearly becoming apparent for the majority of companies?especially among medium-sized and large enterprises
6. Mergers among enterprises will help reduce internal HR resources and provide an alternative to integrating two sets of HR infrastructure. Outsourcing the HR platform can enable greater focus on integrating best practices, rationalizing the organizational structure and knitting together two corporate cultures. HRO will allow for proper focus on some critical success factors for a successful merger
7. Enterprises' vision for a broader shared services strategy will drive increased HRO

The final driver, Fersht says, will be the entry of new players in the HRO services market. As many of the large-scale services suppliers look to new and innovative ways to drive incremental revenue, there is likely to be significant marketing investments that demonstrate the ROI for enterprises going down the BPO path. For example, IBM has recently launched a major media advertising campaign to communicate the benefits of outsourcing HR services, Fersht says.

More Strategic Value, Not Just Costs

Fersht says that there is no data more vital to managing and growing a business than what is stored in the HR department. "Whether a company has 5,000 or 50,000 employees, the key issue here is the complexity of human resources rather than the sheer number of employees served," he emphasizes. He says that seamlessly integrating this data across the enterprise enables senior managers to hire, retain, manage, monitor, and develop their most valuable asset: talent.

Fersht says that large enterprises must make sure that they have a well-crafted HR outsourcing configuration which can give executives console views into their workforce lifecycle management, effectively managing employee performance coupled with the rapid access to information they need to make quick decisions. "Giving C-level managers a 360-degree view of their employees is vital for developing business-driven IT and network architectures to respond to the needs of the business," explains Fersht.

Outsourcing to a full-service HR specialist can enable enterprises to take advantage of a fully-integrated HR suite that can provide extremely valuable data to support management decision-making. Working with an HRO provider, organizations can design full-service HR applications; develop fully integrated employee self-service portals; and build metrics and procedures to monitor and optimize employee performance -- often at deferred costs, he adds.

How the study was done: Over a six-month period ending January 2005, the Yankee Group conducted interviews with large enterprises that have gone through the HR BPO process. It also interviewed many BPO suppliers. The researchers continually updated the data through on-going analysis, market surveys, and quantitative tools.

Publish Date: March 2005

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