Monday, May 30, 2005

HR Outsourcing Perils

The past: HRO has long been the leading unit of BPO and is by far the most outsourced business process. Gartner Dataquest believes 85% of US enterprises will outsource at least one component of their HR functions.
The present: The demonstrated growth is the core payroll and benefits business. But the strongest growth sector is in recruiting, the integrated front end to the employee life cycle.
HRO is experiencing the greatest margin pressure. These include three types of companies. Telecommunications firms dealing with pricing pressure from competition and heavy debt loads from past infrastructure investments. Retail companies with reduced sales and increased price competition for their products. Government organizations with declining tax revenues that are now forced to do more with less rather than increase taxes.
Three Types of HRO Suppliers
Suppliers can be divided into three types.
First, there are the suppliers that specialize in discrete sub processes of HR like payroll, benefits, hiring and recruiting, and training and education. Then there are the one-stop-shop suppliers that aggregate multiple HR functions like payroll and benefits into one HRO offering.
Overlapping with the second type is a new breed of super-suppliers that offer full service at lower cost.
These companies will take advantage of economies of scale because they already have significant processing facilities worldwide they can use for HRO. It's a relatively simple transformation process to take their existing service offerings and add an HR dimension to them.
A Better Alternative: Offshore Outsourcing
Offshore outsourcing is a major trend driving HRO. Offshore HRO concentrates on processing services that involve manual operations with little added value such as generation of employment contracts. India, the Philippines, China, South America, and Eastern Europe as the leading regions for offshore HRO.
Tougher to outsource offshore, processes like benefits where workers have to understand employment issues unique to individual countries. For instance, a US buyer may want to outsource benefits to a supplier with offshore facilities in China, but the average Chinese worker may not understand what the plan is.
Advanced expertise and multinational scope are where the super-suppliers enjoy a distinct advantage. They have multipurpose processing centers around the world that can offer these services to multiple nationalities and partner with local suppliers where they don't have a presence. The supplier retains a client account management team geographically close to the buyer -- these people interface with the buyer, while the supplier farms out the work to its offshore operations.
The author of the article is John Parker, A-1 Technology, Inc, an offshore outsourcing company