Content Acknowledgement. Executive Summary. Declaration Chapter 1 - Introduction. Chapter 3 - Review of Literature. Literature..

Chapter 4 Research Methodology mmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmm Chapter 5 Research Analysis and Findings. Chapter 6 Summary and Conclusion. Select Bibliography References: Annexure Questionnaire

Acknowledgement I, Laxmidhar Pradhan, owe enormous intellectual debt towards my guide, who has augmented my knowledge in the field of Outsourcing Human Resource Functions as a business Model, helping me learn about the process and giving me valuable insight into the subject. I am obliged to him for being extremely patient, giving me sufficient time for discussions and guidance at all stages through the course of this research. My increased spectrum of knowledge in this field is the result of his constant supervision and direction that has helped me to absorb relevant and high quality information. I would like to thank him for his guidance and enriching my thoughts in this field from different perspectives. Last but not the least, I feel indebted to all those persons which have provided information and helped me directly or indirectly in successful completion of this study.

Executive Summary The report on Outsourcing Human Resource Functions as a business Model deals with the emerging trends of Human Resource Outsourcing (HRO). The research is primary as well as secondary in nature. The primary research is done through a survey. The questionnaire was prepared after exploratory research. The questionnaire mapped the reasons for HRO. The questionnaire was filled by HR managers of 5 different companies and was then analyzed using percentage analysis. The result that came out is that HRO leads to the Strategic HR in the company. The secondary research dealt with the HRO market and its impact on the companies. In the last the report contains a suggestive model and SWOT analysis of HRO given by me as a recommendation.

Declaration

I Laxmidhar Pradhan student of MBA-HR in Sikkim Manipal University Directorate of Distance Education hereby declare that my project report on Outsourcing Human Resource Functions as a business Model is the fulfillment of course semester and is a copy of my own work.

Name

: Laxmidhar Pradhan

Regd.No: 511137153

Chapter 1 Introduction

1. Introduction What is HRO? HRO stands for Human Resource Outsourcing. HR is getting outsourced to third party providers who can bring in the benefits of knowing the domain. HR as an activity, it comprises of a group of activities, which include payroll management, training, staffing, benefits administration, travel and expenses management, retirement and benefits planning, risk management, compensation consulting, etc. These activities are outsourced by which the client can concentrate on their core competency. In the US context, HR outsourcing is a huge area. For instance, nearly about 29-30 per cent of the outsourcing space is HR. A Human Resources (HR) Department is critical component in any business, no matter how small it is. Human Resources responsibilities include payroll, benefits, hiring, firing, and keeping up to date with government regulations and tax laws. Any mix-up concerning these issues can cause major legal problems for your business, as well as major employee dissatisfaction. Today, HR Outsourcing goes beyond just handling payroll and benefits.

A three-way relationship is established when a company enters into agreement with HRO company: between company, employees and the service company. HRO allows you systematically and strategically enhance the total quality of an organization, which results in greater efficiency and productivity. Why HR Outsourcing works Outsourcing your HR functions allows a company to cut costs and enables it to focus on what it do best. "The current economic climate is forcing organizations to explore tactics to remain competitive. Business process outsourcing of certain functions is an increasingly popular way to improve basic services while allowing HR professionals time to play a more strategic role in their organizations." Wise HR Outsourcing can provide a number of long-term benefits:

Control capital costs Increase efficiency Reduce labor costs Start new projects quickly Focus on your core business Reduce risk

Outsourcing to India appears to be the biggest trend during the recent past. It has several reasons why more and more companies are looking forward to Outsourcing to India. If we put other reasons apart the strongest reason for Outsourcing to India is the human talent this country has and that too at very low costs. Twelve months ago, anybody suggesting that India's economic growth will exceed 8 per cent in the coming fiscal year (ending March 2006), that its equity market would be up and touch 12000 marks and its foreign exchange reserves will cross US$100 billion, would have met with skepticism, if not utmost disbelief. Well that is in reality the performance the Indian economy has just turned in. Along the way, it has shattered a many a myths which India-watchers (especially skeptics) have long believed. The first myth while Outsourcing to India is that coalition governments in a noisy democracy like India will fail to deliver high growth. Despite their rivalries and their bickering, all of India's main political parties primarily agree on most structural reforms - the need for a stronger and greater emphasis on growth rather than redistribution; clearer policy frameworks in infrastructural areas like telecom and roads; power, more open policies on external trade and foreign investment; faster fiscal and financial reforms and more aggressive slashing of red tape. Though, in labor reforms and privatization, there are significant differences of view, yet when it comes to Outsourcing to India the companies are getting what they want. The second myth of outsourcing to India is that high growth is not possible without equal high-quality infrastructure. India's
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infrastructure remains inadequate (leaving perhaps, the telecom sector), yet, growth has been satisfactory and more and more companies are Outsourcing to India. It is true however, that this is unlikely to be sustained without infrastructure development. But this is now happening in India: the country's construction industry as well as capital goods industries like cement and steel is in overdrive, feeding a frenzy of nationwide road-building program, the building of hundreds of malls, a housing boom, multiplexes, office complexes and industrial parks in cities across the country. Another myth while Outsourcing to India that the country is strong in services rather than manufacturing. This is not true today than it was a couple of years ago. After having incorporated new technologies, bagging hundreds of OEM contracts and focusing on export markets India's manufacturers have grown up and are now globally competitive in many areas, including autos and auto-parts, pharmaceuticals, chemicals and an array of engineering and capital goods. India's economy is no longer just an IT-services, outsourcingdriven story, back-office, as is widely perceived. The new emerging areas are in the technology related and engineering services area and outsourcing in these areas is projected to grow to $ 40 billion by 2020.

The global spend on business process outsourcing is estimated to be $234 billion in 2005, while global human resources outsourcing (a comparatively new phenomenon) is estimated to touch $67 billion, which is 29 per cent of the global BPO pie. Out of the $3.6 billion revenue earned from information technology enabled services in 2004 by Indian companies, revenues from HRO services were only 2 per cent or $70 million. But HRO is projected as the fastest growing segment over the next three years with large-scale off shoring already taking place and larger international players like Fidelity, Exult and Hewitt setting up operations in India. The revenues in the HR outsourcing space are projected to increase to $3.5 billion by 2008 according to a Nasscom-McKinsey survey. Even if 10 per cent of HR outsourcing is off shored in the next 5 years, offshore opportunity can be anywhere around $1.4 billion.

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The first Indian company to exploit the potential of the HR BPO space is the Chennai-based Secova eServices, co-founded by V Chandrasekharan and Venkat Tadanki. V Chandrasekharan, Secova's co-founder and chief technology officer, talks on this next big HRO wave and its future growth, in an exclusive interview with Shobha Warrier. What is HR BPO? How does it function? Business process outsourcing itself is a fairly new concept. HR is one of the areas where there is significant amount of administrative activity. HR BPO is getting outsourced to third party providers who can bring in the benefits of knowing the domain. HR outsourcing as an activity has been prevalent in the United States for a fairly long time. What kind of activities is covered under HR outsourcing? There are several players in the field. For example, the payroll part of a company is a fairly complex exercise internally. So, if somebody in the US wants to start a company, they look for an outsourcer to take care of the payroll. They give the entire data to be processed by the outsourcer. Similarly, if you take HR as an activity, it comprises of a group of activities, which include payroll management, training, staffing, benefits administration, travel and expenses management, retirement

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and benefits planning, risk management, compensation consulting, etc. In the US context, HR outsourcing is a huge area. For instance, nearly about 29-30 per cent of the outsourcing space is HR. In fact, it is much larger than customer care as an opportunity. Have the US companies been outsourcing HR for a long time, or is it a new phenomenon? HR outsourcing has been there in many countries for a long time, particularly in the US. The work was outsourced to companies in the US itself. In the case of HR BPO, you need a front end in the US unlike customer care because if we have to process the pay roll, printing the cheques, filing the tax returns etc. have to take place in the United States itself. So, it is like having a US front-end led organization with an offshoring unit here. Secova was the first Indian company to do HR outsourcing from India. How did you capture this huge opportunity? HR BPO is a huge opportunity. Its market size is close to around $60 million. Venkat, the CEO of this company, was the co-founder of Daksh, which was a huge success in customer care. He felt we should look at value-added opportunities as customer care space was getting crowded. So we started looking at other opportunities.

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We were looking at HR, finance accounting as two significant areas. If we look at the BPO pie, after customer care, HR is the largest. We also believed that HR is new and when we did a detailed analysis, we found that saw that 70-80 per cent of all HR activities are rule based, repeatable and are required to be done for large groups of employees, ideal for off-shoring. As soon as we got the funding from IL&FS, we set up a centre in Chennai in November 2003. Were the companies reluctant to offshore HR? They raised several questions. They wanted to know how we would handle security concerns. Both Venkat Tadanki and Bob Parke, vice president, strategy & business processes, are based in the US. Bob is a US citizen and has been in the HR domain for a long time, so it was easy to convince the customers. When they meet the customers, they make the customers understand what we are talking about. We have that domain confidence. We also have a US front end organization now. In HR BPO, is it very important to have a US front-end office? It is important to have a US front-end office as it helps in our operation- delivery processes. You said HR BPO is a huge opportunity for India. Is it because the US-based companies are looking at off shoring as the most cost competitive thing to do?
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Yes, we are only in the early part of the cycle. It is not like customer care where so many players are involved right now. Some of the early indicators are that larger players like Fidelity, Hewitt and Exult have set up their delivery centers in India. That's a clear indicator that a lot of work is going to come this way. I don't think customers are going out and demanding for an offshore vendor. That may not happen. What is happening is, the moment we talk about the best-shore advantage, it is seen as a good alternative. The flood of companies coming to set up call centers is not there in HR for sure, at least for now. Gartner Inc says that India has the potential to take at least 10-15 per cent of the US share of $51 billion. Do you feel this is a big opportunity for India to tap? Absolutely, it is growing at 14 per cent per annum. The other significant factor is that if you take the total HR spend, out of Rs 100, what is off shored is only Rs 6! It is just 6 per cent. That shows the kind of opportunity that can be tapped. If you look at Nasscom figures, the delivery happening out of India is miniscule. HR outsourcing is happening mostly within the US now. We have to look at the US as the number one target market. That is the biggest regulatory system.

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Are you looking at the bigger companies in the US? No, we are presently looking at only the 'mid-market' segment which itself is worth $20 billion, and under serviced. Mid-segment definition in HR parlance is a company that has 2,000 to 25,000 employees. So, in some sense, we will have a Fortune 100 company in revenue terms but they fall under the mid-segment as far as HR is concerned when the number of employees is less. Some of our clients are Fortune 500 and Fortune 1000 companies. Of the $20 billion, there is a market potential of $14 billion for 'payroll' and 'benefits administration' which is a significant opportunity for Indian vendors. 2006 Predictions for HRO: The Year of the Global Deal As the industry matures, a cornucopia of positive developments will further span HRO growth. Expect the provider landscape to shift in the New Year. By Phil Fersht Next year will be a watershed year for human resources outsourcing. Whereas 2005 saw the customer, supplier, and consultant battle with complexity, compliance, security, and cost issues, the outcome in 2006 will see a realization of the hard work, evaluation, and investment with a succession of ground-breaking multinational contracts. Bottom-line, HRO has proved more complex than even the most cynical of us believed, but the industry has held fast to the
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reality that huge business benefits can be had for organizations moving towards an HRO model: focusing core people-management areas of HR, accessing better technology, and reducing unnecessary transactional and administrative overhead.

Last year proved to be the transition year between the much-vaunted Generation 1 and Generation 2 of HRO. As painful as it has been for some, the experiences of the past 12 months have proved necessary for this industry to succeed. Having worked intimately with the service providers, sourcing advisors, and buyers, this has been a tireless year for me personally. I have witnessed the industrys infrastructure being built, metrics developed for real business cases, and intelligent strategies being formulated. What is most encouraging going into 2006 is the fact that we have an established set of service providers, most of whom are deep in multiple, large contract negotiations; are building out their global delivery capabilities; have recognized their challenges in addition to their strengths; and areperhaps most importantlydeadly serious about this market. The following are my key predictions for the industry in the year ahead:

Prediction 1: Confidence will rebound. The growing confidence coming out of this transition year will see multi-process HRO expenditure increase 20 percent in 2006 to reach $4.3 billion worldwide, according to market data released by Nelson Hall this month. The industry initially moved too quickly during Generation 1, with new market entrants eagerly grabbing market share and several high-profile HRO failures holding the industry back. Now that we have
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arrived at a new wave of HRO evaluations, the situation has moved full circle: HRO service providers have been getting nervous, buyers are realizing their ideal end-state will be more complex to achieve than originally anticipated, and sourcing advisors have found themselves caught in the middle of the scenario.

What is plainly apparent is that 2005 failed to produce the large number of high-end, enterprise deals many had hoped for; many contracts have taken (and are still taking) much longer to come to closure than anyone predicted, and the whole industry has taken a more cautious approach than some of the gung-ho forecasts a few analyst firms previously predicted. This painful transition has proved necessary to get us to the next stagethis Second Generation HRO, where we are beginning to see HRO delivery balance the operational process, technology, and HR domain capabilities to succeed. Key forecast assumptions for this area include:

The market remains largely untapped. Fewer than 5 percent of Fortune 2000 and 1 percent of mid-market companies have engaged in multi-process HR BPO contracts.

Increased delivery capabilities of HRO and BPO service providers. As Tier 1 HRO providers take on large, complex contracts that necessitate investment in leveraged, regional shared-services centers with HR expertise, contract negotiation cycles will shorten, and buyer confidence will increase. New entrants into the HRO middle-market (1000 to 10,000
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employees) are driving higher demand and interest with increased offerings.

Utility offerings in employee care, benefits administration, and payroll will continue to drive down pricing. As service providers further leverage offshore resources and refine their delivery models in the utility areas of HRO, contract pricing will consistently offer cost savings that drive rapid adoption of HR services. Increased interest in multinational contracts. Multinational organizations interest in taking advantage of multi-country HRO deals will increase. The multinational HRO capabilities of service providers continue to develop.

Intense HRO evaluations will result in increased contract closures. The large number of contracts under evaluation and exploratory diagnostic exercises currently underway will start to result in increased contract realization as the market continues to mature.

Increased number of bundled BPO contracts. HR is becoming part of a large number of multi-tower BPO contracts under discussion that include finance and accounting as well as procurement elements.

Increased use of workforce performance- management metrics within organizations. The focus on linkages between workforce productivity, aging workforce, and the cost of healthcare and
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pensions will continue to increase as organizations strive for greater efficiency and better quality of information As cost savings for management decision-making. become

standard within HRO contracts, the focus will rapidly shift towards the development of business-case metrics to highlight the impact of a streamlined and more strategic HR function that can be aligned with corporate strategy. Prediction 2: Buyers, service providers, and consultants will get the HRO balance right. In 2006, HRO buyers will become better educated from the sourcing advisor, service provider, consultant, and analyst alike to find a common ground with the provider community and build pragmatic and cost-effective solutions that work for both sides. The lessons of the past couple of years have been learned, and both service providers and industry advisors alike will educate the buyer from the get-go on the realities of HRO and the metrics needed to reach the desired end state. Many sourcing advisors will strive harder to work with their clients to find a common ground between what is realistic and what is wishful thinking and construct solutions that are financially feasible for both sides. Give-and-take is needed between both service provider and buyer. Where the sourcing advisor is present, they may find more success in finding this balance. Bottom-line: The industry must find this middle ground or there will not be an industry.

Prediction 3: We will see increased global BPO solutions, with HR as a key component. The successful service providers will be
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braver and take on more of a financial burden in global BPO deals so it can develop the kernel of the ideal utility model. Tier 1 HRO service providers have realized this business is extremely complex and requires a great deal of investment and patience as well as the acquisition of new skills and not simply a repurposing and repackaging of existing resources.

More to the point, they are intensely examining how to deploy a genuine utility model in this business, or they will never turn a profit. Buyers who think they can score a quick cost-savings hit because they already have a shared-services center infrastructure are mistaken. What has largely occurred to this point is that most service providers who have taken on the existing shared-services resources of their clients have struggled to leverage these across other clients; these centers are too customized and it is extremely costly and cumbersome to attempt to service additional clients. So how will the service provider offer cost savings of 20 percent when it cannot turn new clients to a utility model?

The answer is that they simply cannot. The alternative model is for vendors to take on clients who can leverage the providers own service centers. If a provider adopts this policy and goes about acquiring a handful of clients, it will eventually turn a profit on these deals. The recent DuPont contract with Convergys is a clear example of this move, where the sourcing advisor worked tirelessly with DuPont to find a provider prepared to invest in its own global delivery capability. Convergys is now investing heavily in its regional HR
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services centers with employee-care staff and building a genuine global delivery infrastructure.

A similar global focus can be seen with IBM, Accenture, Hewitt, ADP, ACS, and ExcellerateHRO, who are striving to invest in new global clients to develop a genuine HRO utility model. These companies have been plowing significant resources into building regional service hubs across Asia, Europe, and the Americas.

We are also in the midst of a wave of new multi-tower BPO contracts many of which will be kicked off in 2006. Accenture, for example, has steadfastly pursued its multiple domain skills across HR, finance and accounting, and procurement/supply chain as it seeks to develop its position as a leading, multi-domain BPO vendor. Some of next years multi-tower deals will include major business functions such as accounts payable, payroll, and benefits administration in single-vendor deals. IBM is also likely to remain aggressive in multi-tower deals as it builds out its Business Transformation Outsourcing practice. More encouraging is the willingness of some major HR services companies to partner with each other on global deals, almost unheard of in HRO in the past. The outsourcing acumen and diligence required to effect a successful HR partnership across domains such as payroll, benefits admin, and employee care are extremely demanding, but we are already seeing competing service
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providers working hard together in a pragmatic fashion to secure clients on a global basis. Another key factor that some aspiring HRO service providers are considering is whether to develop a genuine utility model in one of the key domains to reap key competitive advantages that can be leveraged across the end-to-end HR delivery spectrum. The example of Hewitt in North America is the clearest example yet on how to deliver profitable, multi-process HRO centered on its established benefits administration utility services model. Hewitt has such a command of the benefits admin service market that it has been able to leverage its profits in this area to invest in other HR functions such as recruiting, learning, and payroll. This will make it extremely competitive as a multi-process HRO service provider. Not only that, the company has developed and acquired HR domain expertise and adopted this to an operational outsourcing model that works. When we look at the European market, the key utility domain is payroll. Without owning this component, it is hard to see how service providers are going to carve out these promised, 20-percent savings. Bottom-line: Ambitious HRO service providers will have to realize that HRO is plainly much more than being strategic and transformational; they also need to possess the operational capabilities in transactional process areas to provide utility services that work and are profitable. Prediction 4: Some significant mergers, acquisitions, and partnerships will emerge as Tier 1 service providers continue to develop their HRO delivery infrastructure. The new year will
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witness some new entrants, and at least one major HRO-focused acquisition will occur. The challenges of 2005 deterred companies from making bold acquisitions in HRO. However, with the emergence of the HRO utility model, the intense activity of HRO evaluation at the sourcing advisor level, and the clear winning business scenario of a successful HRO transformation, we are going to see some major market moves. Successful HRO companies must possess operational process expertise, HR domain skills, and IT implementation know-howor at least some of these skillssupplemented by strong alliances to fill gaps in their delivery portfolios. In addition, we are seeing several BPO vendors look at HRO seriously and are ready to make their move; 2005 (and earlier) proved too financially risky for many firms, but now that demand is clearly there, they will make their move. Expect new entrants to come from other BPO areas such as finance and accounting and from functions such as benefits administration, payroll, and recruiting. The major question is: how will they enter this market? We have seen several failures in HRO from companies who made tenuous partnerships but never invested significantly. Those that simply did not have the HR acumen, technology platform, or global footprint have not been taken seriously in the vendor selection process. We will also see more focused HRO positioning next year, with companies such as Accenture, for example, focusing on global, multi23

tower deals in which HR is a key element. Others, such as Ceridian, are focusing heavily on the mid-market for future growth. IBM will surely make a strong play after a year of investment in its global HR footprint; however, do not expect Big Blue to make any quick-fire purchases. If it makes a move, it will likely be in a niche expertise area or inherit HRO assets as part of a wider corporate acquisition. The continual speculation of a Hewitt acquisition will no doubt remain, but at the end of the day, none has been bold enough to make a multi-billion-dollar play in HR, and takeover deals of this size are few and far between these days. ADP has to be considered a major dark horse in 2006 as it quietly goes about developing an expanding client base on its SAP-based Global View platform. ARINSOs new euHReka HRO platform will also have a strong part to play in 2006, particularly with its pan-European payroll expertise. However, the company needs to decide how to position itself on a global basis i.e., as a payroll implementation provider that partners with HRO service providers or as a bona fide, end-to-end HRO vendor in its own right. ExcellerateHRO is working hard to make up for lost time and should find its continual development in 2005, combined with a solid fiscal year for EDS, to its advantage as it seeks to bring customers onto its new Towers Perrin-based solution. ACS has worked hard to consolidate its clients in 2005 and is clearly making moves to focus on more HR transformation-focused client wins next year. The company clearly has the outsourcing acumen to be successful, but it
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remains to be seen whether it can truly leverage the expertise acquired from its MellonHR acquisition. Convergys is arguably the star of 2005despite Hewitts dominance considering it is the recipient of four client wins, including the recent mega DuPont contract. In 2006, it will face numerous challenges as it brings clients along smoothly, develop its global delivery model, and integrate its newly acquired F&A business. Hewitt finds itself in the most dominant market position in HRO. It will be almost impossible to unseat at the leadership position in the U.S. high-end enterprise deals. The key challenge for Hewitt is to make the strategic decision on whether it works on consolidating what it has on an Anglo-U.S. level, branches out to pick up some major global deals, or expand further with offerings across BPO towers into finance and accounting or procurement. Bottom-line: The HRO service provider market has never been healthier, and 2006 is surely the time to see some real competitive bite. Prediction 5: Technology remains a key enabler of successful HRO. Next year will witness increased momentum towards HRO among many organizations, to improve alignment of IT as an enabler of successful business process redesign in an outsourced model. Most of todays current IT systems are primarily focused on administrative tasks that are optimized within the four walls of the enterprise. Many organizations still persist in tying themselves to tightly integrated and monolithic business processes, where integration was a mere afterthought. The movement towards more
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flexible sourcing options and the Sarbanes-Oxley experience are highlighting many of these shortcomings. The movement towards HRO has been emphatic over the past five years but has reached a state of flux with todays providers realizing that this is a complex business, and you cant simply deploy outsourcing solutions with the vain hope that the associated technology morass miraculously untangles itself. Moreover, every organizations business processes are unique to themselves, much to the chagrin of ambitious outsourcers trying quickly to leverage common transition processes many or across all multiple clients. Whereas some to the organizations can easily adapt to an outsourcing model and rapidly existing business processes management of a third party, others need to adopt alternative sourcing solutions when it is more cost effective or beneficial to their particular business. The one major constant in the equation is the need for flexibility. HR data is the fulcrum of any business; the ability to have real-time, integrated information about staff profiles and performance, compensation, and location is paramount to providing management with crucial information to make decisions about their organization. Hence, there is a vital need for an integrated system that can consolidate all of this data to enable staff to be managed, monitored, compensated, organized, and trained more effectively. Moreover, for the international corporation, it is one benefit to manage HR operations at the country level, but the benefits of managing an
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integrated global HR operation increase exponentially in todays markets. The problem many of these companies face is that outsourcing decisions are usually made at the CEO/CFO level to reduce costs and improve HR service delivery and strategy. This is often done without a great deal of investigation into how the organization can redesign its existing business processes to accommodate the introduction of a third-party provider. Many of todays HR systems have been built around business models developed in the early 1990s; with integration of systems and business process a mere afterthought. Todays organizations are dealing with a much more fluid, less hierarchical organization of information workers and complex process networks of managing partners, suppliers and customers. And if these complications were not enough, there is also the necessity to build controlsnamely Sarbanes-Oxley and SAS 70 into business processes, which are increasingly shedding light on many companies shortcomings in business process management. The answer lies in mapping out an organizations business processes to understand the sourcing break-points where data leaves the organization, thus enabling the outsourcer and its customer to develop flexible systems that can reuse componentized business services within an outsourcing data model. Outsourcing is providing real business case examples of why and how IT infrastructures need to change to accommodate todays changing business models and organizational structures.
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HRO has a real opportunity to bring the worlds of operational business services, people management strategy, and technology together in an integrated fashion that has only really been promised, but not delivered upon very successfully, in recent years. The tough lessons of 2005 are good news for the future: Todays key service providers are more serious than ever; they have learned where they need to invest, with whom they need to partner (or acquire), and how to better educate both their existing and prospective customers, who have wised up to this industry. We have witnessed an immature industry go through essential growing pains in 2005 to reach this stage where customer, buyer, and consultant are much more mature and patient regarding how to tackle HRO. The new year will see the beginnings of new growth and a new maturity, despite the constant challenges and increasing complexity that make life difficult for todays business leaders looking to develop truly competitive modernized global organizations, where they can leverage the benefits that can be gleaned from an outsourced model.

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Leading BPO analyst firm Nelson Hall has published its 2006 predictions for HR Outsourcing. This report "2006 Predictions for HRO: The Year of the Global Deal" anticipates 2006 as a watershed year for HR Outsourcing, with 2005 representing the transition year between Generation 1 and Generation 2 HR Outsourcing. Within Generation 1 HR outsourcing contracts, signed between 1999 and 2004, vendors typically adopted the existing shared service operations of clients, while within Generation 2 contracts, vendors will
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increasingly develop their own shared service capabilities for greater service standardization across multiple clients. Generation 1 HRO contracts have proved very tough for providers to develop genuine utility in this industry, which ultimately impacts their ability to deliver HRO at the promised cost savings of 20-30%. Ultimately, a large, complex organization's business processes are highly unique to itself, and it has proved nigh-on impossible for even the most ambitious provider to utilize these unique processes across other similar companies. The Generation 2 HRO deals, which will begin to materialize in 2006, will see HRO service providers cherry-pick clients where they can transform their processes onto to their own developing BPO delivery infrastructures. As painful as it has proved for some, the experiences of the last 12 months have proved necessary for this industry to succeed. This has been a year that has witnessed the infrastructure for this industry being built, metrics developed for real business cases by many fledgling HRO adopters, and intelligent strategies being formulated by many of the services providers. What is most encouraging going into 2006, is the fact the HRO industry has a maturing and established array of service providers, most of whom are deep in multiple large contract negotiations, are building out their global delivery capabilities, have recognized their challenges, in addition to their strengths, and are perhaps most importantly deadly serious about this market
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Other predictions, resulting from this change in emphasis in HR outsourcing include:

A rebound in market confidence Adoption of a more pragmatic approach to HR outsourcing by buyers, service providers and consultants Increased global HR outsourcing activity Continuing slow growth of multi-tower BPO adoption across a range of business functions, but increased vendor partnering activity to build utilities within a greater range of HR service functions.

Nelson Halls 2006 HR Outsourcing predictions are published within Nelson Halls HR Outsourcing subscription program. Other recent publications within this program include:

Targeting Multi-Process HR Outsourcing Global HR Outsourcing Market Forecast

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Chapter 2

Review of Literature

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2. Review of Literature Company Profiles Hedrick & Struggles Hedrick & Struggles provides exceptional service and expertise to deliver effective leadership solutions for clients. We are the world's premier provider of senior-level executive search and leadership consulting services, including talent management, board building, executive on-boarding and M&A effectiveness. For more than 50 years, we have focused on quality service and built strong leadership teams through our relationships with clients and individuals worldwide. Today, Heidrick & Struggles leadership experts operate from principal business centers in North America, Latin America, Europe and Asia Pacific. For more than 50 years, Heidrick & Struggles has specialized in chief executive, board member and senior-level management search assignments for a wide variety of clients, including multinational corporations, mid-cap and startup companies, nonprofit entities, educational institutions, foundations, associations and governmental units. Today we serve our clients in a broader leadership advisory role, offering complementary services including executive assessment, coaching and professional development to senior management teams.
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Company History Our beginning

In 1953, Gardner Heidrick and John Struggles sent a printed card to businesses in the Midwest announcing the organization of Heidrick & Struggles in Chicago, Illinois. This announcement heralded the beginning of one of the first executive search firms in the United States, a firm that would grow to have global representation and presence in every major industry. Shaping the organization

After a mutual friend introduced them, Gardner and John realized they were in full agreement on the values and principles by which they would run their business. From the beginning, the partners agreed they would be guided by a commitment to quality, client service, teamwork, integrity and a drive for excellence. A global force

By 1957, the firm signed its first clients outside of the Midwest and soon expanded its US office locations coast to coast, into Los Angeles and San Francisco, and east into New York. In 1968 Heidrick & Struggles established its first international presence with an office in the United Kingdom. The firm continued its expansion during the subsequent decades into the principal cities of North America and Europe and, later, in Asia Pacific and Latin America. Along with this growth came the

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development of specialized industry and functional practices to allow for intense focus and expertise. Executive search became accepted by companies all over the world and our assignments were increasingly global in nature. As new kinds of businesses arose, changing the needs of markets and clients, Heidrick & Struggles evolved its geographic structure and practice categories to reflect the new environment. In 1983, Heidrick & Struggles International was established as a separate entity, encompassing all European operations. The two corporations reunited in 1999 to form the integrated global firm of today. That same year, Heidrick & Struggles International, Inc. (HSII) became a publicly traded company on the NASDAQ stock market. In recent years, Heidrick & Struggles has developed services to complement the core executive search business and to serve the broader leadership needs of clients. Uniting these services with a greater focus on major account development has enabled us to build deeper, lasting relationships. Enduring values

Today our global network of search professionals and leadership consultants maintains the enduring values with which Heidrick & Struggles was establishedquality, client service, teamwork, integrity and the drive for excellence. They have led us to success, earning us the respect of both our peers and the leaders of industries we serve.
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These values will continue to be at the core of everything we do to help our clients build the best leadership teams in the world. Perot System Since 1988, Perot Systems Corporation has delivered technologybased business solutions to help organizations worldwide control costs and cultivate growth. Drawing on deep industry expertise and a portfolio of interrelated consulting, business process, application, and infrastructure services, perot system blend strategic design, proven technology, and timely delivery to create solutions that maximize returns on IT investments. And through collaborative, long-term relationships, perot system enable its customers to achieve and sustain measurable results. Perot System is a global provider of technology-based business solutions. Perot system offers a full array of services that support business strategies and facilitate improvements for customers in selected industries and the government sector. Drawing upon extensive capabilities in consulting, business processes, applications, and IT infrastructure, it leverage deep industry expertise to craft integrated, industry-specific solutions to meet each customers current and longterm needs.

36

How Perot System Work? Using a collaborative approach, it provide

industry-specific counsel and implementation. Perot Systems offers leadership in business analysis and strategy, systems design and integration, and operations alignment to help customers envision, design, and deliver their strategies and IT initiatives. Perot System enable its customers to create an adaptive technology infrastructure that can streamline business processes, raise market value, increase competitive advantage, and support new and costeffective sources of productivity and growth. And as thought leaders, it understand how to leverage powerful thinking inside an organization and integrate innovative ideas with proven technologies and processes for superior results. Why Perot System is Different? Through industry and technology expertise plus collaborative, customer-focused relationships, it help businesses achieve and sustain measurable results. Perot Systems professional integrity and collaborative approach, and its strong track record of bringing ingenuity, expertise, and value to every job help it to build solid relationships that enable its customers to achieve measurable results. HR policies
37

The company has been very innovative in its HR policies and has introduced concepts like 3Ts, 3Cs and 3As, which has helped Perot System, improve its communication, synchronization within teams and achieve sustained growth even during tough times. While 3T stands for Triumph through Teamwork, 3C is for Contact, Connect and Communicate and 3A stands for Access, Assist and Advice. The 3T programme seeks to foster teamwork through various types of teambuilding programmes, including outbound, adventure sports-based training sessions, while 3C is aimed at discovering latent talents. The 3A programme is especially targeted at employees spread across the globe. It is a mail/Intranet-based system providing employees at all locations a single window through which they can get information, voice concerns and can also get their grievances addressed. The company also follows project based hierarchy, with no designations to differentiate associates from one project to another. In such a system, there is no room for resentment. The purpose is to offer an open-ended environment and level playing field within the organization, he says. While constituting a new team, people at a higher level in the previous team can be placed below those at a lower level in the new team. Firmly believing that employee development results in the overall growth of the organization, the company pays a lot of emphasis on career development activities of its employees. Not only is there a

38

wide scope for lateral movement, but an emphasis on the rotation plan to utilise the latent potential of professionals. ABB Ltd. ABB is a leader in power and automation technologies that enable utility and industry customers to improve performance while lowering environmental impact. ABBs vision is to be The Value Creator. Working closely with our customers, understanding their business needs and local market conditions. We ensure our Customer's success through our innovative products, systems, services and complete solutions; combining world-class technologies, proven expertise and strong local insight. In turn, our customer's success is echoed as Value for our stakeholders i.e. shareholders, employees and the communities in which we operate, ABB India serves utility and industry customers with the complete range of ABBs offerings. The company has a vast installed base, extensive local manufacturing at 8 units and a countrywide marketing and service presence. As a strategic thrust to standard products business, ABB has a national channel partner network, which ensures geographical reach and penetration of its products and services. In order to leverage Indias intrinsic technology strengths and the vast pool of highly qualified software professionals, ABB has set up a global R&D Centre in Bangalore, which focuses on Industrial IT
39

development and deployment. It also helps maintain and support a range of software intensive products and acts as a partner for the ABB R&D centers as well as business areas within the group. HINDUSTAN LEVER LIMITED Unilever's mission is to add Vitality to life. It meet everyday needs for nutrition, hygiene and personal care with brands that help people feel good, look good and get more out of life. Unilever's deep roots in local cultures and markets around the world give them a strong relationship with consumers and are the foundation for its future growth. Unilever will bring its wealth of knowledge and international expertise to the service of local consumers a truly multi-local multinational.

Our long-term success requires a total commitment to exceptional standards of performance and productivity, to working together effectively, and to a willingness to embrace new ideas and learn continuously. To succeed also requires, Unilever believe, the highest standards of corporate behavior towards everyone it work with, the communities it touch, and the environment on which it have an impact. This is road to sustainable, profitable growth, creating long-term value for its shareholders, its people, and its business partners.

40

Unilever has earned a reputation for conducting its business with integrity and with respect for the interests of those our activities can affect. This reputation is an asset, just as real as our people and brands. Unilever's first priority is to be a successful business and that means investing for growth and balancing short-term and long-term interests. It also means caring about Unilever's consumers, employees and shareholders, its business partners and the world in which they live. Employees Unilever is committed to diversity in a working environment where there is mutual trust and respect and where everyone feels responsible for the performance and reputation of our company. Consumers Unilever is committed to providing branded products and services which consistently offer value in terms of price and quality, and which are safe for their intended use. Products and services will be accurately and properly labeled, advertised and communicated. Community Involvement

Unilever strives to be a trusted corporate citizen and, as an integral part of society, to fulfill our responsibilities to the societies and communities in which it operate.

41

The

Environment

Unilever is committed to making continuous improvements in the management of its environmental impact and to the longer-term goal of developing a sustainable business.

Unilever will work in partnership with others to promote environmental care, increase understanding of good environmental issues and disseminate Competition Unilever believes in vigorous yet fair competition and supports the development of appropriate competition laws. Unilever companies and employees will conduct their operations in accordance with the principles of fair competition and all applicable regulations. practice.

GE MONEY A More A global than leader 118 presence worth in million in more than consumer satisfied than US $ 50 105 finance customers. countries. Billion.

remarkable assets

Total

more

Around the world, GE Money says Yes to possibilities for millions of people. The new global umbrella brand of GE Consumer Finance, GE
42

Money has a formidable presence in consumer finance with a variety of product offerings:

Private label credit cards Promotional retail finance Personal Loans Auto Finance Corporate Cards for commercial customers Home Loans Home Equity Loans/Loans Against Property

In India, GE Money is a leading provider of financial services to suit varying needs. With joint ventures and customized products, GE Money adds value to its partners as well as individual customers. GE Money offers: Innovative Easy Vast products access network to meet individual 4500 locations needs outlets in India etc.

Customized products for individual consumers and retailers through 60 across

Product offerings include Car Finance, Home Loans, Loans, Joint ventures with Maruti and State Bank of India

Personal

Amidst a plethora of existing financial services, products from GE Money stand apart. This is because of the product features and
43

customer-friendly Simplified Reduced Flexible and innovative approval documentation

processes. processes time policies

GE Money ensures that customers get an easy, simple and speedy experience. As part of the General Electric family - GE Money, also known as GE Consumer Finance, is the personal finance provider of choice for over 130 million people worldwide. With a global presence across 54 countries, we have a rich history of providing fast, dependable financial solutions to both consumers as well as small to medium size businesses, retailers, auto companies and mortgage brokers. The company was established back in the 1930s - to finance home appliances during the Great Depression in the United States of America.

44

The Outsourced HR Functions by these companies: Heidrick & Struggles: The HR of Hedrick & Struggles is in-house but it outsources the induction of new joiners and some part of training modules from a third party. The HR head of Heidrick & Struggles stated that outsourcing induction and training modules help their HR department to focus more on strategic issues. ABB: The HR of ABB is in-house as well but it outsources the employee engagement activities from a third party. The HR manager of ABB says that they cannot trust the outsourcers for every HR function so they outsource only a small part of it which of course reduces their work and give them time to think something strategic. Perot System: The HR of Perot System is again in-house but it outsources the special training and recruitment of its employees from a third party. According to HR manager of Perot System outsourcing recruitment and training decreases their cost of recruiting and training a person by 1.5 times. So outsourcing becomes a Strategic decision. GE Money: The HR of GE Money is in-house but it outsource payroll from a third party. The Sr. HR Manager of GE Money stated that payroll is the function of HR which is more administrative in nature which hampers time of their talented HR professionals. So they are outsourcing it, but at the same time they are not satisfied with the quality of work they receive from their outsourcers. HLL: The HR of HLL is in-house and they have a very strong HR policies and initiatives but they outsource some special training
45

modules from the third party. The HR manager of HLL does not believe in outsourcing because of trust and quality reasons but at the same time he says outsourcing one or two functions which can be actually time consuming for the in-house employees can be outsourced but it requires a high quality assurance.

Types of Outsourcing : Business Process Outsourcing : Information Technology - 28% : Human Resources 16% : Sales & Marketing 15% : Finance 11% : Administrative 9% : All Others 22%

46

How common is HRO? : 58% of companies outsource some HR function : 91% of companies with $1 billion+ annual revenues are now considering HRO
100 90 80 70 60 50 40 30 20 10 0 com panies that outsource som HR e function com panies with $1 billion + annual revenues considering HR O HRO growth from second half of 2004 to first half of 2005 com panies that outsource som HR e function com panies with $1 billion + annual revenues considering HR O HR growth from second half of 2004 O to first half of 2005

: HRO grew 28% from second half of 2004 to first half of 2005

47

The HRO Market In next 5 years, global spending on HRO will double from $40 billion to $80 billion5 : From 2002 to 2004, 14% increase in large firms that would consider HRO

Trends to Watch in HR BPO According to SHRM's HR Outsourcing Special Expertise Panel, the following BPO trends are expected to gain momentum within the next two to five years. As such, these trends and their possible implications on the future of the HR profession were further examined as part of the research for this article. 1. Growth in multi-process HRO and total HRO market is expected to continue. Emerging trend: The demand for the outsourcing of increasingly complex HR functions is likely to grow. On the supply side, the overarching challenge for HRO vendors will be their ability to manage multi-process, multi-client shared-service environments versus transaction-based HR escalate. Implication(s): Organizations interested in outsourcing multiple HR processes and/or total HR outsourcing are now seeking a reduction in
48

as the

interest in and the need for the outsourcing of broad-based HR

HR operating costs and an improvement in HR service quality and efficiency at the same time. Critical components for calculating HRO success will be whether vendors follow through on promises to introduce and/or upgrade to state-of-the-art e-HR service delivery models and provide improved access to management information, in conjunction with performance metrics that demonstrate whether proof of return on investment has, in fact, been realized-all without any dilution in company culture, loss of data security and in compliance with confidentiality and privacy requirements. 2. Increasing weight of non-cost factors as decision drivers in HRO. Emerging trend: Short-term cost savings may not remain the primary driver in outsourcing HR function(s). The 2004 Bureau of National Affairs survey of HRO found that gaining access to greater expertise (69%) and improving service quality (44%) were the top two reasons to outsource; only 28% of respondents mentioned cost savings as a main driver for outsourcing. Implication(s): While it should be noted that the overwhelming majority of outsourcing surveys continue to list cost as the primary driver behind outsourcing decisions, regardless of business function, non-cost related factors appear to be playing an increasingly influential role in HR-related outsourcing decisions. This is because decisions made for short-term cost savings reasons alone may not hold up over the long term. Along with cost considerations, strategic drivers may play an increasingly important role as companies focus on core missions that align more closely with their products and
49

services. This may require a shift in company vision and people management practices, including workforce development, as a necessary cost of doing business. 3. "Commoditization" of many HR functions continues. Emerging trend: HR services, especially transaction-based HRO tasks, may become increasingly "commoditized" and, therefore, susceptible to market-place competition. This may, in turn, drive down the cost of HRO for transaction-based and/or discrete outsourcing services as new customers begin to enter the HRO marketplace. Implication(s): How HR staffing will be impacted internally as discrete services are outsourced will vary with each organization. In certain cases, this arrangement will benefit HR, leaving more time for the internal HR staff to refocus their efforts on the core competencies of the organization. In other cases, HR department may be expected to become more productive with a reduced staff. To ensure that HR has an equitable voice in the introduction of a discussion regarding HRO, HR business leaders can gain credibility by initiating and leading HR outsourcing and decision-making initiatives within their organizations. 4. Development of new roles for senior HR business leaders. Emerging trend: HR business leaders will be visible at the executive level and play a strategic role in initiating and facilitating HRO implementations within their organizations.

50

Implication(s): Senior HR business leaders will be actively engaged in the negotiation, selection, implementation and management of HRO providers. The complexity and accountability of HR in relation to HRO within the organization will be heightened. However, the competencies and skill sets required to manage HRO contracts are specialized, and not all senior HR practitioners will possess this expertise. New skill sets and competencies for HR practice leaders that will be required to bridge this gap include negotiation, contract management, skills. 5. As HRO adoption becomes more commonplace within organizations, the number and type of career opportunities for HR professionals will change. Emerging trend: The number of job opportunities within organizations for entry-level HR professionals will begin to decline, while the demand for strategic HR expertise will be emphasized. Implication(s): Fewer internal HR roles will be available in the coming years for entry-level HR professionals to gain in-house experience. As in-house HR services shift to HRO providers, it may ultimately become more common for entry-level HR professionals to gain their initial HR experience in an HRO work environment, i.e., new entrants to the HR profession may have the opportunity to work for multiple clients from different industries at the same time. This diversity of experience may prove beneficial from a career perspective over the long term, as HR practitioners rise through the ranks to assume
51

the

ability

to

manage

vendor

relationships,

benchmarking, performance measurement and project management

senior strategic leadership roles in organizations within the HRO industry and in private and public sector organizations. 6. Small/medium-sized HRO markets will expand.

Emerging trend: Although total HRO is expected to remain dominant in organizations with sales in excess of $1 billion, small- and mediumsized organizations are expected to significantly expand their use of HRO services by offloading repetitive, time-consuming tasks. Implication(s): Advances in technology should permit highly

capitalized players to provide value-added services to large numbers of small clients by further reducing costs and increasing efficiencies. This trend is expected to intensify as employees become more comfortable with interface technologies, such as benefits portals, and accept "low-touch" (i.e., technology-based) HR practices. Cost savings and increased quality can be realized through economies of scale, expertise and scalability of resources. However, small- and medium-sized businesses should proceed with caution until vendors are able to ensure that data integrity, data security and employee privacy are protected. 7. Demographic changes increase HRO's appeal.

Emerging trend: Recruitment and selection are expected to become increasingly competitive, especially for technical positions, as baby boomers retire and the labor market tightens due to a labor shortage complicated by low immigration rates, low birth rates from the 1980s and 1990s and declining literacy rates in relation to science, math and technology in the United States.
52

Implication(s): There are two possible directions in relation to recruitment: 1) more emphasis on HRO recruitment; or 2) the search for talent remaining a key focus for internal HR staff members in certain organizations. The benefits of HRO recruitment are likely to come to the forefront, as Generation X and younger employees may not need the "personal touch" provided by the in-house HR staff, making HRO and the related use of "low-touch" technologies more palatable. However, more mature workers may not be as receptive to the use of technology for personal issues such as benefits. 8. Demand for standardized HRO performance metrics and key performance indicators will continue. Emerging trend: As the demand for outsourcing disclosure and accountability increases, it will be critical for organizations to have standardized HRO performance metrics and key performance indicators available for benchmarking purposes. Implication(s): These tools will be used to monitor vendor and demonstrate proof of return on investment in relation to the HRO process. It will be imperative, from a strategic perspective, that HR business leaders be able to critically analyze the performance and benchmarking metrics presented by outsourcing providers to ensure that they accurately account for the value of the services provided. 9. Sole-sourcing may be identified as a viable HRO option in terms of cost, quality of service and efficiency. Emerging trend: Sole-sourcing is the practice of working with a single service provider to define, negotiate and purchase services. In
53

theory, sole-sourcing relationships should be able to streamline operations and deliver significant potential economies of scale over multi-vendor outsourcing initiatives in terms of the cost, service, response time and other issues deemed critical to a successful outsourcing outcome. Implication(s): Management of HRO projects is simplified when only one vendor is involved. By the same token, dependence on one outsourcing firm to deliver a number of services can be risky, as personnel changes or failure to appropriately manage the client's resources may result in reduced client satisfaction (both on the part of management and employees) and/or in the event of financial instability on the part of the HRO provider. 10. HRO failures may cause a reassessment of HRO decisions. Emerging trend: Although not a common practice, some organizations (both large and small) are exploring the feasibility of reestablishing HR processes internally that were once outsourced. Implication(s): Returning an HR function in-house after a failed HRO experience may be difficult, especially if HR was responsible for the original outsourcing decision. HR leadership will need to determine transfer-back costs and perhaps even bear the blame for its failure, depending on how the recommendation to outsource came about in the first place. On the other hand, HR systems, core competencies, corporate memory, etc., might be deemed too costly to re-establish in a total HRO situation. As a result, smaller companies, in particular, may be forced to become outsourcing "captives."
54

5 Most Commonly Outsourced HR Services 1. Background Checks 73% 2. Employee Assistance/Counseling 66% 3. FSA Administration 67% 4. COBRA 55% 5. Healthcare Benefits Administration 60%

Background Checks

Em ployee Assistance / Counseling

FSA Administration

Series1

COBRA

Healthcare Benefits Administration 0 10 20 30 40 50 60 70 80

Types of HR Outsourcing In the past, HR outsourcing was thought of as hiring a vendor to provide a service. With the new focus on outsourcing, there is more
55

of an opportunity to partner with the vendor to provide the service on a longer term basis rather than just a one-time vendor contract. HR outsourcing can include:

Discrete services: In this instance, one element of a business process or a single set of high-volume repetitive functions is outsourced to a third-party administrator. Examples of discrete services could include the annual open enrollment process, flexible spending accounts or employee background checks. Multi-process services: The complete outsourcing of one or more functional human resource processes would be an example of multi-process outsourcing (also called blended services). As such, the outsourcing of either health and welfare benefits administration or defined retirement plan and 401(k) plan administration to a third-party administrator would be an example of multi-process or blended services outsourcing. Total HR outsourcing: Total HR outsourcing represents the transfer of the majority of HR services to a third party, to include recruitment, payroll, HRIS, benefits, compensation and communications, as well as the transition of HR management and staff. However, HR executive management would normally remain in place within the organization, along with strategic planning related to people management and other key HR functions at the discretion of management.

56

Other Types of HR Outsourcing : Pension Benefits Administration 55% : Temporary Staffing 54% : Retirement Benefits Administration 47% : Payroll & Software Services 48% : Recruiting, Staffing & Search Non-executives - 30% Executives - 29% : Employee Relocation 29% : Training and Development 21% : Incentives 19% : HRIS & Web-based Services 15% : Reference Checks : PEOs and ASOs : Sourcing Consultants & Legal Services : Screening & Workplace Security : Process, Project, and Systems Management

Least Commonly Outsourced Functions : Performance Management 3% : Strategic Business Planning 4% : Policy Development/Implementation 4% : Employee Communication Plans 10%

57

P rfo m n M n g m n e r a ce a a e e t

S a g B sin ss P n in tr te ic u e la n g S rie e s1 P licy o D v lo m n m le e ta n e e p e t/I p m n tio

E p y e C m u ica n m lo e o m n tio P n la s 0 2 4 6 8 1 0

58

Why Outsource? "We see a tremendous savings opportunity in HR outsourcing. If it's not there, we'll walk away." Gregg Deputy Executive Commissioner for Social Texas Health and Human Services Commission According to a recent study on HRO in government organizations, while HR outsourcing in the public sector is significantly less common than in the private sector, the rationale for outsourcing is essentially the same. Three basic financial drivers behind HRO are noted:

Phillips Services,

To save money (ongoing expenditures). To avoid capital outlay (often a more important consideration than direct cost savings). To turn a fixed cost into a variable one (i.e., if the workforce shrinks, HR costs can be reduced accordingly).

59

Other Benefits to HRO : Access to outside HR expertise : Greater diversity of HR services : Leverage vendor investments in technology rarely available to HR organization : Limit fiduciary, audit, and litigation risks and liabilities : Upgrade level of customer service : Ease time pressure demands : Better, faster, cheaper Drivers and Risks of HR Outsourcing The outsourcing decision should only be made after thorough examination and planning and after an in-depth investigation into the qualifications and experience of the vendors under consideration. Studies on HR Outsourcing SHRM Human Resource Outsourcing Survey Report

This 2004 survey report revealed that HR outsourcing was a practice used by almost six out of 10 organizations. However, one-third of organizations did not outsource any HR functions, and only a few planned to outsource HR functions in the next three years. HR functions were usually partially outsourced or completely outsourced. The difference is that when functions are partially outsourced, the organization co-manages the function with the vendor; when they are completely outsourced, the vendor takes full responsibility (for factors
60

in considering an outsourcing vendor). More than one-half of HR professionals indicated that their organizations partially outsourced an HR function. Administration of health care benefits, pension benefits and payroll were examples of functions most commonly cited as partially outsourced. The top three functions that were outsourced completely were background checks, employee assistance programs and administration of flexible spending accounts. Some of the most frequently named drivers for outsourcing were reducing operating costs and controlling legal risk by improving compliance. However, large-staff-sized operations, compared with small organizations, were twice as likely to indicate that their reason for outsourcing was an attempt to free up the time of their HR staff to focus more on organizational strategy. When asked about the future of outsourcing, about two-thirds of HR professionals predicted that their level of outsourcing would remain the same over the next five years, and nearly one-third expected their organizations to increase their level of HR outsourcing. Outsourcing seemed to be favored to a greater extent in large-staff-sized organizations: almost twice as many HR professionals from these organizations, compared with medium organizations, indicated that HR outsourcing was likely to increase in the next five years. When asked about the benefits of outsourcing, the majority of HR professionals indicated that outsourcing allowed HR professionals the chance to concentrate their efforts on core business functions, such as organizational strategy development and execution. Correspondingly, nearly three-quarters of HR professionals agreed that the role of HR professionals became more

61

strategic with the outsourcing of certain, specifically transactional, HR functions.

Transforming HR: Realities, Futures and the Role of BPO This study was conducted by EquaTerra in March 2005. EquaTerra polled 589 executive management and HR decision makers, 75% of whom were manager level or above. Most respondents were generally satisfied with the current state of HR in their organizations, according to the study. HR processes fared better than HR information technology (HRIT) applications and systems. HRIT dissatisfaction was attributed to both antiquated and underperforming systems, as well as general dissatisfaction with aggressive selfservice automation efforts. The survey revealed no significant difference in satisfaction levels across organizational size or industry. Most organizations have already moved away from the traditional
62

distributed HRIT model (currently used by only 16% of respondents) toward a shared-services model (used by 56%). While the study reflected only 3% of companies in a predominately outsourced HR environment, 25% of respondents were operating in a blended environment encompassing distributed shared services and outsourced HR operations. The top six efforts to transform HR undertaken by survey respondents, in priority order, were process improvements/business process reengineering (61%), HR selfservice (61%), upgraded HRIT (56%), HR benchmarking (41%), reorganization/downsizing (38%) and shared-services environment (32%). The top six barriers to HR transformation were lack of resources/high cost (66%), not deemed critical (40%), inadequate support of HRIT (39%), other more critical issues to address (35%), lack of skills to undertake (31%) and inability to build a compelling business case (21%). Calling a Change Market: in the The

Outsourcing Organizations

Realities for the World's Largest According to a study released by Deloitte Consulting, the world's largest companies should be able to replicate the vendor's advantages in-house and rely on vendors going forward only under specific circumstances. This is because "in
63

the real world, outsourcing frequently fails to deliver on its promise," according to the study. Lack of transparency in relation to vendor costs due to bundling of services and a variety of marketing techniques has created suspicion about the potential for true savings from outsourcing. The study finds that the fundamental belief system held by most companies is that cost savings are delivered mostly through the vendors' ability to achieve economies of scale (70%), followed by capabilities (48%) and knowledge/experience (39%). The findings also reflect that outsourcing is still highly driven by cost savings as an expected benefit (83%), cost savings as a key driver of outsourcing (70%) and cost savings as the primary criterion for choosing a vendor (43%). However, vendor complacency, coupled with employee turnover, the unsatisfactory delivery of vendor resources and unbalanced contracts, has prompted some organizations to increase their demands for vendor accountability. The message from this study for HR business leaders is that outsourcing demands an intensive ongoing working relationship with the vendor and cannot be perceived by the organization as a simple handoff. The organization must be clear about its goals and objectives upfront and disciplined about managing all aspects of the outsourcing contract and relationship from beginning to end.

Outsourcing Myths : Outsourcing is just a fad : Outsourcing can be kept secret from employees
64

: Outsourcing is only for the largest companies : Messes must be fixed before outsourcing : Outsourcing is for everyone

The Future of HRO HRO is the fastest growing segment of the BPO industry. Some experts argue that within the next five years, HRO companies will employ half of all HR professionals. In the broader context, BPO is the delegation of one or more IT-intensive business processes to an external provider that, in turn, owns, administers and manages a selected process or set of related processes, based on defined and measurable performance metrics. Currently, the most frequently outsourced processes in order of priority are: IT development, customer service, HR/payroll processes, IT support, transaction management, travel expense reimbursement, tax consulting, financial reporting and general accounting. It is projected that HR/payroll processes, general accounting and travel expense reimbursement will see the fastest increase in growth going forward.

1. Growth-Maturation of HRO market 2. Increasing weight of non-cost drivers 3. Commodization of HR functions 4. New roles for internal HR departments 5. New career opportunities for HR professionals 6. Expansion of small/mid-sized HRO markets
65

7. Demographic changes 8. Improved HRO metrics 9. Reshaping of industry Impact on Companies : Employee reactions : HR executives taking part in operational and strategic decisions : Elimination of bureaucracy : Customer service improvements : Growth of self-service platform : Slimming down staff : Cost savings : Model will serve to guide other organizational functions accounting) (IT,

Impact on HR Profession : Internal HR at significant disadvantage in cost per transaction : Loss of control of key processes : Enhanced credibility : Strategic focus : Decentralized structure : Internal politics HR as business partner : Move to customer service culture : Management and Organizational Development big picture view
66

: New roles consultant and HR strategist : Develop competencies to remain valuable : HR is exposed and more visible as organizational function : HR is far more measurable : Align HR strategy with corporate goals Recent survey of 129 large companies representing 2 million employees: : 89% satisfied with outsourcing arrangement : 85% achieved hoped-for benefits : Additional 20% achieved unexpected benefits

satisfied

achieved hopedfor benefits

Series1

achieved unexpected benefits

0 20 40 60 80 100

67

Chapter 3

Research Methodology

68

3. Research Methodology Objective: To find and analyze the reasons for human resource outsourcing (HRO) in different companies and how does HRO serve as a business model to the company. Type of Research: The research is qualitative and descriptive in nature as the research deals with the reasons as to why companies are outsourcing their human resource functions. Methodology: 1. Conduct a survey using a questionnaire.
2. The sample of a survey will be the HR personnel of the

company. 3. The Sample size will be 5. 4. Analyze the Questionnaire 5. Use percentage analysis 6. Interpret the Results 7. Find out what is the prime reason for HRO in the company. 8. Give a suggestive model for HRO.

69

Chapter 4 Research Analysis & Findings

70

4. Research and Analysis

71

% gly Disa gree Growth 1. The company has shown 0 tremendous growth. 2. The turnover of the 0

% hat Disagre e 0 0 0

% Neutr al

% hat Agree

% gly Agre e

Stron Somew

Somew Stron

20 0 0

40 40 20

40 60 80

company has increased. 3. The company is a leading 0 example in its line of business. Strategic HR 1. The functioning of HR 0 department has become more strategic in nature. 2. The objective of HR 0 department is aligned with the vision of a company. 3. The HR department is 0 able to understand employee and resolve related

40

60

20

80

20

80

issues in a more effective manner. Work Efficiency 1. The employees of the 0 company complete are their able to tasks 40 40 0 0

20

40

40

efficiently. 2. The TAT (Turn Around 20 Time) of the tasks has decreased. 3. Number of working hours 20 dedicated assigned to a directly has project

60

20

0
72

Percentage Analysis of the Questionnaire

TH E CO M PANY H AS SH O W N TREM END O U S G RO W TH

6 Degree Of Agreeableness 5 4 3 2 1 0 C O M P A N IE S
H id ric k & s tru g g le s A B B L td . P e ro t S ys te m G E M oney HLL

Degree of Agreeableness:

73

Strongly disagree 1 Somewhat Disagree 2 Neutral 3 Somewhat Agree 4 Strongly Agree 5

T H E T U R N O V E R O F T H E C O M P A N Y H A S IN C R E A S E D

6 5 Degree Of Agreeableness 4 3 2 1 0 C o m p a n ie s
H id r ic k & s tr u g g le s A B B L td . P e r o t S y s te m G E M oney HLL

Degree of Agreeableness:

74

Strongly disagree 1 Somewhat Disagree 2 Neutral 3 Somewhat Agree 4 Strongly Agree 5

T H E C O M P A N Y IS A L E A D IN G E X A M P L E IN IT S L IN E O B U S IN E S S
6 5 Degree Of Agreeableness 4 3 2 1 0 C o m p a n ie s
H id r ic k & s tru g g le s A B B L td . P e r o t S y s te m G E M oney HLL

Degree of Agreeableness:

75

Strongly disagree 1 Somewhat Disagree 2 Neutral 3 Somewhat Agree 4 Strongly Agree 5

T H E F U N C T IO N IN G O F H R D E P T T . H A S B E C O M E M O R E S T R A T E G IC IN N A T U R E

6 5 Degree Of Agreeableness 4 3 2 1 0 C o m p a n ie s
H id r ic k & s tr u g g le s A B B L td . P e r o t S ys te m G E M oney HLL

Degree of Agreeableness:

76

Strongly disagree 1 Somewhat Disagree 2 Neutral 3 Somewhat Agree 4 Strongly Agree 5

T H E O B J E C T IV E O F H R D E P T T . IS A L L IG N E D W IT H T H V IS IO N O F A C O M P A N Y
6 5 Degree Of Agreeableness 4 3 2 1 0 C o m p a n ie s
H id r ic k & s tr u g g le s A B B L td . P e r o t S y s te m G E M oney HLL

Degree of Agreeableness:

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Strongly disagree 1 Somewhat Disagree 2 Neutral 3 Somewhat Agree 4 Strongly Agree 5

T H E H R D E P T T . IS A B L E T O U N D E R S T A N D A N D R E S O L V E E M P L O Y E E R E L A T E D IS S U E S IN A M O R E E F F E C T IV E M ANNER
6 5 Degree Of Agreeableness 4 3 2 1 0 C o m p a n ie s
H id r ic k & s tru g g le s A B B L td . P e ro t S ys te m G E M oney HLL

Degree of Agreeableness: Strongly disagree 1

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Somewhat Disagree 2 Neutral 3 Somewhat Agree 4 Strongly Agree 5

TH E EM PLO YEE O F THE CO M PANY ARE ABLE TO CO M PLE T H E IR T A S K S E F F IC IE N T L Y

6 5 Degree Of Agreeableness 4 3 2 1 0 C o m p a n ie s
H id r ic k & s tru g g le s A B B L td . P e ro t S ys te m G E M oney HLL

Degree of Agreeableness: Strongly disagree 1 Somewhat Disagree 2 Neutral 3

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Somewhat Agree 4 Strongly Agree 5

T H E T A T (T U R N A R O U N D T IM E ) O F T H E C O M P A N Y H A S IN C R E A S E D

5
Degree Of Agreeableness

4 3 2 1 0
C o m p a n ie s

H id ric k & s tru g g le s A B B L td . P e ro t S ys te m G E M oney HLL

Degree of Agreeableness: Strongly disagree 1 Somewhat Disagree 2

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Neutral 3 Somewhat Agree 4 Strongly Agree 5

N U M B E R O F W O R K IN G H O U R S D E D IC A T E D T O A D IR E C T L A S S IG N E D P R O J E C T H A S IN C R E A S E D
5 Degree Of Agreeableness 4 3 2 1 0 C om pany
H id r ic k & s tr u g g le s A B B L td . P e ro t S ys te m G E M oney HLL

Degree of Agreeableness: Strongly disagree 1 Somewhat Disagree 2 Neutral 3

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Somewhat Agree 4 Strongly Agree 5

T H E M O T IV A T IO N L E V E L O F E M P L O Y E E S H A S IN C R E A S

6 5 Degree Of Agreeableness 4 3 2 1 0 C o m p a n ie s
H id r ic k & s tr u g g le s A B B L td . P e r o t S ys te m G E M oney HLL

Degree of Agreeableness: Strongly disagree 1 Somewhat Disagree 2

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Neutral 3 Somewhat Agree 4 Strongly Agree 5

T H E E M P L O Y E E S F E E L T H A T T H E R E IS B IA S N E S S IN T H E SYSTEM
5 Degree Of Agreeableness 4 3 2 1 0 C o m p a n ie s
H id r ic k & s tru g g le s A B B L td . P e ro t S ys te m G E M oney HLL

Degree of Agreeableness: Strongly disagree 1 Somewhat Disagree 2

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Neutral 3 Somewhat Agree 4 Strongly Agree 5

T H E A T T R IT IO N R A T E O F T H E C O M P A N Y H A S IN C R E A
5 4 Degree Of Agreeableness 3 2 1 0 C o m p a n ie s
H id r ic k & s tr u g g le s A B B L td . P e r o t S y s te m G E M oney HLL

Degree of Agreeableness: Strongly disagree 1 Somewhat Disagree 2

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Neutral 3 Somewhat Agree 4 Strongly Agree 5 Results Growth 40% of the company somewhat agrees that they have shown tremendous growth. 40% of the company strongly agrees that they have shown tremendous growth. 20% of the companies are at neutral side.

40% of the company somewhat agrees that the turnover of the company has increased.

60% of the company strongly agrees that the turnover of the company has increased. 20% of the company somewhat agrees that the company is a leading example in its line of business. 80% of the company strongly agrees that the company is a leading example in its line of business. Strategic HR

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 40% of the companies somewhat agrees that the functioning of HR department has become more strategic in nature.

60% of the companies strongly agrees that the functioning of

HR department has become more strategic in nature. 20% of the company somewhat agrees that the objective of HR department is aligned with the vision of a company. 80% of the company strongly agrees that the objective of HR department is aligned with the vision of a company.

20% of the employees somewhat agrees that the HR

department is able to understand and resolve employee related issues in a more effective manner.

80% of the employees strongly agree that the HR

department is able to understand and resolve employee related issues in a more effective manner. Work Efficiency 40% of the company somewhat agree that the employees of the company are able to complete their tasks efficiently. 40% of the company strongly agree that the employees of the company are able to complete their tasks efficiently. 20% of the companies are at neutral side.

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20% of the company strongly disagree that the TAT (Turn

around Time) of the tasks has decreased. 40% of the company somewhat disagree that the TAT (Turn around Time) of the tasks has decreased. 40% of the companies are at neutral side. 20% of employees strongly disagree that the number of working hours dedicated to a directly assigned project has decreased. 60% of employees somewhat disagree that the number of working hours dedicated to a directly assigned project has decreased. 20% of the companies are at neutral side. Employee Satisfaction 40% of the employees somewhat agree that the motivation level of employees has increased. 60% of the employees strongly agree that the motivation level of employees has increased. 40% of the companies strongly disagree that the employees feel that the system is unbiased. 40% of the companies somewhat disagree that the employees feel that the system is unbiased.
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 20% of the companies somewhat agree that the employees feel that the system is unbiased. 20% of the company somewhat disagree that the attrition rate of the company has decreased. 60% of the company somewhat agree that the attrition rate of the company has decreased. 20% of the companies are at neutral side.

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% o f c o m p a n ie s w h ic h a g re e s th a t H R O le a d s to th e g ro w th o f th e c o m p a n y

0% 7%
% o f a g re e % o f d is a g re e % o f N e u tra l

93%

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% o f c o m p an ies w h ich a g rees th at H R O lea d s to th e strateg ic H R in th e co m p a n y

0%
% of a g ree % of d is a g re e % of N eu tral

100%

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% o f c o m p a n ie s w h ic h a g re e s th a t H R O le a d s to e m p lo y e e s a tis fa c tio n

40%

47%

% of ag ree % of d is a g r e e % of N e u tra l

13%

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% of companies which agrees that HRO leds to the work efficiency

27%

% of agree % of disagree
55% 18%

% of Neutral

From the Pie-Charts it is clear that: One of the main reasons why companies outsource HR functions is the Strategic HR.

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Chapter 5 Conclusion & Recommendations

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5. Conclusion & Recommendations Conclusion "Adding value is going to be critical in the next phase of HRO. The first wave of HRO engagements was really all about achieving cost savings. And while cost savings will always be a critical driver for HRO adoption, productivity will gain in importance. HRO, in the second wave, will increasingly be viewed as a strategic tool for achieving high performance. HRO is, after all, a proven, reliable, affordable means to achieving productivity gains." Gill Accenture HRO is not just about cost savings. HRO is, in many ways, forcing a change in how HR does business by making HR business leaders refocus on what is important to the organization. For those organizations serious about getting out from under the yoke of transaction-based HR processing and reaping strategic value from the HRO process, repositioning HR within the organization through multi-process or second-generation HRO means that:

Rider

The diversity and quality of HR services will be enhanced. HR staff can now have more time to focus on core business functions. HR staff can utilize internal resources more effectively and efficiently.
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HR staff will have access to subject-matter expertise not previously available in-house.

"Currently, most HR leaders can still choose whether they will respond to change or whether they will lead change. HR executives still have the opportunity to shape how they and the HR function respond to the demands that their function is experiencing. To us, the path is clear. We believe that HR executives who stick with the status quo and maintain a focus on transactional work will soon become obsolete. At the same time, we believe that HR professionals who meet the need for strategic expertise concerning human capital management and organizational effectiveness will contribute value that far exceeds the past contributions of the HR function. In the process, they will make themselves indispensable to their organizations." In today's competitive business environment, HRO is an accepted management practice and an opportunity that should be embraced, not ignored, by the savvy HR business leader. With the proper research and analysis, it is a tool that can be applied strategically to reap value for the organization. Outsourcing can be used to achieve cost-effective solutions that leverage technology and knowledge to transform the business of human resource management. While HRO is not the right answer in every situation, used wisely and judiciously, it can be positioned to the strategic advantage of the HR profession and the stakeholders it serves.

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Recommendations Making the HR Outsourcing Decision Some observers see outsourcing as a key trend (perhaps even the key trend) shaping the future of human resources (HR). They envision HR departments focused entirely on strategic activities, leaving all the transactional and administrative activities to vendors. But, the author cautions that outsourcing any business activity creates potential risks as well as benefits: Companies can find themselves overly dependent on suppliers, and they can lose strength in strategically core competencies. Given the importance of the outsourcing decision and the amount of academic and practitioner literature on it, there is surprisingly little consensus about the topic, says the author, probably because of the multiplicity and complexity of the factors involved. The author synthesizes the strongest of the available research and identifies the six key factors that companies should consider when making important outsourcing decisions. The framework, which helps assess the pros and cons of outsourcing, can be applied specifically to HR functions. In particular, it can help explicate the managerial issues of outsourcing agreements such as the recent landmark deal between BP and Exult Inc. That $600 million, seven-year arrangement provides a window into the many opportunities and complexities of HR outsourcing.

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SWOT Analysis of HRO

Strength Allow HR to focus on core competencies Creates strategic opportunities for HR professionals Improve quality, efficiency, and effectiveness Relief from administrative burdens Reduce operating costs Opportunity Growth in multi-process HRO and total HRO market is expected to continue Development of new roles for senior HR business leaders Small/medium-sized HRO markets will expand Demographic changes increase HRO's appeal

Weakness Difficulty in managing relationships with vendors Lack of vendor knowledge regarding industry Lack of trust upon vendors

Threat Over promise and under deliver Nonperformance of key function Cost Loss of institutional knowledge Difficulty managing vendor relationship Change in providers business or financial stability Lack of fit with company culture Organizational resistance or unreadiness

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Outsourcing Model 1. Planning 2. Exploring strategic initiatives 3. Analyzing costs/performance 4. Selecting providers 5. Negotiating terms 6. Transitioning resources 7. Managing relationships Planning : Prepare HR Develop and communicate new HR strategy Define new roles and responsibilities Restructure HR Hire new employees to fill skill gaps Provide training for employees in new roles : Prepare Organization Develop HR strategy within overall organizational strategy Communication plan : Resolve Are issue HR of whose payroll actually individuals employees are now on employees of provider? Does head of HR work for company or provider?
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Exploring Strategic Initiatives : Assessment Self examination SWOT of department Organizational scan : Define opportunities and benefits : Build the business case consider all costs and impacts on organization : All functions that are not core competencies should be considered for HRO nothing is sacred : Consider the driver behind HRO decision

Analyzing Cost/Performance : Understand market trends and competitive position : Identify goals and objectives : Determine added value : Gather baseline HR costs and metrics : Compare current HR operations to benchmarks : Determine which processes have highest strategic importance and add most value

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Identifying a Provider : Referrals/Networking : Newspapers and Magazines (HRO Today) : Internet : Mailings : Professional Association Lists Negotiating Terms : Good contracts make good partners : Maintain heat of competition during negotiation : Reasonable, but clearly established, expectations : Well-documented deliverables regarding every aspect of deal : Attorney involvement Specifications of Contract : Contract Duration Exact beginning and ending dates Financial penalties for early termination : Parties to the Contract Allow for additions or deletions (in case of acquisitions or divestitures) Require vendor to name all subcontractors and give you right of approval for those introduced later
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: Services Performed Specify all functions to be provided Outline all support services Ensure escalation process and dispute governance included : Performance Standards Tweak standard performance guarantees Reinforce performance guarantees through at-risk fees : Hold-Harmless Statement : Hold-Harmless Statement : Fees : Data Security : Communication Review : Contingency Plans : Audits : Final Contract Review

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Bibliography
References Online Resources Better Management.com www.bettermanagement.com EquaTerra www.equaterra.com Human Capital Magazine www.humancapitalmag.com HRO Today www.hrotoday.com/org HR Executive www.hrexecutive.com Outsourcing Institute www.outsourcing.com The Outsourcing Management Zone www.theoutsourcerzone.com/law.htm Books Out of Site: An Inside Look at HR Outsourcing by Beaman (2005) Strategic Outsourcing: A Structured Approach to Outsourcing Decisions and Initiatives by Graver The Challenge of Outsourcing Human Resources by Vanson (2006)

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Annexure

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Questionnaire Please state your honest answers regarding the following statements. The questionnaire contains two parts, Part A and Part B. Read the instructions carefully and fill in the answers. Name_______________________ Designation__________________ Company Name_______________ Part A Answer the following questions in yes or No:1. Do the company have HR department? __________________________________ 2. Does the company outsource any HR function/s? __________________________ 3. Does outsourcing of HR activities affect in the growth of the company?________ 4. Are employees satisfied with the outsourcing of HR function? ________________ 5. Does outsourcing increase the efficiency of work? _________________________ 6. Does the company outsource all HR functions? ____________________________ 7. Is there any customized software outsourced for any HR function?____________

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Part B Answer the following questions in one or two sentences:1. What is the main function of the company?

2. What is the no. of employees of the company?

3. What is the turnover of the company?

4. How does outsourcing of HR function contribute to the revenues of the company?

5. How does outsourcing of HR function increases the efficiency of work?

6. According to you is outsourcing of HR function a strategic decision? Why?

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