Trendspotting: 7 key trends
in HR Outsourcing
Gone are the days when organizations could overlook outsourcing and treat it as
a cost saving measure. What started off as a cost reduction attempt is now being
looked at as a strategic initiative to add value and provide the organization with
agility and flexibility to encounter the fast changing business environment. The
Business Process Outsourcing industry is taking a more holistic approach
towards outsourcing, with outsourcers looking at partnering with the service
provider to transform their processes.
New concepts, such as Platform BPO, as well as an aging Western workforce,
may lead to a new outsourcing wave, especially for midmarket firms. While
About the Author within the BPO industry, services like Contact Center, Finance and Accounting,
Chakrapani T is Vice President of Data Processing, etc. are at a fairly mature stage there are a few new upcoming
Solutions and Relationship Management.
services which are finding favour with outsourcers. This is predominantly the
He heads pre-sales for
Human Resource Outsourcing. effect of a maturing client community which is understanding the need to look
beyond cost saving and take a transformational approach towards outsourcing.
Human Resource Outsourcing (HRO) is one such emerging practice in
outsourcing. HRO began in 1997 with a single deal, and peaked in 2006 with 51.
In 2008, the number is expected to drop to 32.
Number of HRO Transactions 1997 - 2008
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Everest Research Institute
The global HRO market is expected to be $3.2 billion in 2009 (among about 18
active, experienced suppliers), and Europe's share of the total has increased from
20 to 30 percent (in number of deals) since 2005. In 2009, contracts worth more
than $1.6 billion are up for renewal. Many suppliers, including Mahindra Satyam
BPO, are honing their offerings and preparing to address several major HRO
trends. There are a few key developments that will shape the future of HRO.
Seven key trends are discussed here.
Trend 1: Small will be the new big
Deal sizes are shrinking. In the past several years, the average project size has
declined from $374 million in 2000 to $60 million. There is a clear tendency to
break monolithic contracts into smaller chunks, introducing competition while
spreading risk. This approach has recently morphed into multi-sourcing,
whereby one supplier owns a piece of service and provides a common
governance framework. Clients mitigate risks associated with 'having all their
eggs in one basket' and are not locked in by a single vendor. By undertaking
outsourcing in phases, they can easily judge the ROI of each stage. This
approach provides the flexibility to take a milestone based approach, or end the
project if the benefits are not getting accrued.
Average HRO transaction size (2000 - July 2008);
US$ million, three-year trailing
80 80 83
2000 2001 2002 2003 2004 2005 2006 2007 2008
Average over three years, including the mentioned year and past two years
2 HRO transactions with TCV greater than US$1 billion
Sample size: 257 transactions as of July 2008 for which data is available
Source: Everest Research Institute (2008)
Trend 2: Midmarket will emerge as the front runner
Until today, most transformational and large HRO deals involved large
companies. Scale was required to make them economically viable for vendors.
However, several factors have made HRO an exciting possibility for midmarket
companies with an employee count of 3,000 to 15,000. For instance, large multi-
process suppliers have become more selective about the deals they pursue. The
current economic turmoil is forcing large companies to pursue immediate
benefits, rather than undertake a patient approach. The emergence of new
suppliers and models such as Platform BPO is another contributing factor. Since
solutions and platforms can be shared easily and tuned to the requirements of
midmarket organizations, the segment can also profit from various forms of BPO.
Trend 3: Niche suppliers will be best positioned to forge partnerships
to support end-to-end solutions
Large and mid-size companies demand end-to-end outsourcing solutions that
cover all aspects of HR, from payroll to claims reimbursements to temporary
staffing. To deliver these solutions, suppliers will have to forge partnerships with
other providers. Several innovative organizations, notably in the platform and
indigenous application space, have emerged recently. Thanks to SaaS, they can
create services that can be delivered to users transparently and efficiently.
These partnership options will help traditional suppliers focus on niche offerings
while maintaining a competitive and innovative edge.
Trend 4: SaaS-enabled BPO (Platform BPO) is becoming the new wave
Quality is critical for HRO vendors. For years, quality was determined by
technical performance—availability, scalability and reliability. Today, these
issues have largely been solved. IT's role is now wider, and includes
incorporating effective HR best practices into applications. Best practices must
be an integral part of application design and development because they enable
cost-efficient and effective use of automated systems. They also deliver real
Platform BPO models offer numerous benefits to companies and suppliers.
? Zero upfront capital costs
? with global service delivery models
? Pay-per-user commercial models enabled by global, template-driven and
? Flexible service choices
? outsourcing possibilities that meet near-and long-term objectives
Trend 5: From infrastructure TCO to services TCO
Companies first outsourced business processes to lower total cost of ownership
(TCO) of their infrastructures. Business Process Outsourcing generally led to
transferring people and infrastructure segments to outsourcing vendors, who
offered services for fixed prices. Over time, the model has shifted toward
services TCO. Specific services determine the price of outsourcing, not
infrastructure and management. As such, HRO is more transparent and results
in more flexible budgeting for the companies that use it.
Trend 6: Global talent and ‘glocal’ delivery models
In recent years, nearshoring and offshoring have become major drivers for global
sourcing. Vendors have created global delivery organizations that offer scale and
– as a result – cost-effective services. Still, they must consider (and adhere to)
country-specific legislation and regulations. Until HR becomes standardized, it
will be necessary to support local rules.
Workforce in the United States is aging. An entire generation is beginning to
retire, leaving many companies without the ability to support mission-critical
business processes. This will drive HRO from emerging countries where highly
qualified and relatively inexpensive talent will deliver best practices to
organizations across the globe.
While local regulations may curtail offshore adoption of HRO, widening talent
issues, coupled with the necessity to standardize processes for rapidly growing
global companies, favor global service delivery in the future.