Monday, May 2, 2005

Recruitment & Workforce

HR outsourcing gains with mid-markets

By Daryl Ashley

Everywhere you go, businesspeople are talking about human resource outsourcing (HRO). In the past few years, Fortune 500 and now mid-market companies have been moving to this business model.

Industry analysts report that the U.S. HRO market accounted for $24 billion in 2004 and is expected to rise to $42 billion by 2008. Why has HR outsourcing become commonplace for many organizations?

With intense corporate pressures for HR to be more cost-efficient and productive, outsourcing provides a reliable means for HR professionals to focus on more strategic business initiatives that meet longer-term corporate goals and objectives while outsourcing administrative tasks.

Although interest in outsourced HR services has grown by leaps and bounds, many corporations have chosen not to outsource all their HR functions. While some very large corporations - those with more than 25,000 employees - are able to readily realize the cost savings needed to drive total outsourcing of HR and enjoy a single point of accountability, many corporations have found their best approach is to outsource only select HR functions.

Previously, the decision to outsource a particular HR service has depended on the importance of that service.

For example, the following questions should be answered when making the decision to outsource or keep the work in-house including:

• Is this HR function truly a strategic activity?

• How well has this HR service been provided in the past?

Often, those electing to outsource have been delivering HR services that were not strategic and needed improvement. As many HR staffs have been reduced over the past few years, there has been a significant trend toward leveraging outsourcing service providers' expertise rather than building that expertise in-house.

The likely HR functions for outsourcing are those that are highly repeatable, are similar for most businesses or industries or have highly fluctuating volumes because of seasonality or other business events such as annual benefits enrollment.

2005 outsourcing outlook

As outsourcing continues its momentum through 2005, two trends should emerge: companies will look to HRO not only to reduce costs but also to improve workforce productivity; and HRO will gain increased acceptance among mid-market companies that range from 2,500 to 25,000 employees.

Analysts have predicted HRO agreements would change to include higher value-added HR functions such as recruiting, training, performance management and compensation planning. Along with exploiting the outsourcing service provider's automated applications and lower-cost labor, clients can also benefit from a vendor's expertise in these higher-level HR functions.

As HRO's focus expands from cost reduction to include improving workforce performance, more mid-size employers will be considering HRO, allowing vendors with multiple offerings to deliver real value to mid-tier corporations. Because mid-size companies are focusing on rapid growth and generating revenues, they don't have the time to focus on back-office issues and highly administrative transactional HR functions such as payroll, benefits and retirement savings.

As a result, HR departments at mid-market companies are increasingly evaluating outsourcing as a viable option for reducing costs, increasing productivity and gaining a competitive business advantage.

These changes will modify the competitive landscape for HRO service providers. The systems used by the larger HR outsourcing service providers were not designed for the mid-tier employer market and will not be able to deliver the cost savings to these employers. These large HRO players' workforce management offerings will not fulfill the market's needs and will make way for competitive vendors that can meet the needs of mid-market companies.

The decision to outsource

Many companies today view HR outsourcing as one of the most viable ways to save money and improve services while also making a strategic contribution to the business. No matter what level of outsourcing companies seek, they are not asking for cookie-cutter solutions. They are asking for flexibility and creativity from outsourcing providers in formulating a shared solution with designated responsibilities.

And while complete HR outsourcing may be suitable for some organizations, not all companies can benefit from an all-or-nothing approach. Before selecting a vendor, companies must make certain that partner will work with the organization to identify what is unique about the company, what kinds of goals it is trying to achieve, what processes are working well that they want to maintain, and what isn't working any longer.

Only then can they put together an appropriate system for meeting the company's goals of lowering HR costs and improving organizational performance.

Daryl Ashley is vice president of Strategy and Solutions for Workscape (www.workscape.com), a human resources outsourcing firm based in Framingham.