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HR Outsourcing-Part I - HR Outsourcing: Meaning, Need,

Types, Forces, Outsourcing HR Services, Benefits,

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PART I

HR Outsourcing
A company may outsource a few or all of its HR related activities to a single or
combination of service provides located in offshore destinations like India, China,
Philippines etc. Generally those HR functions, which are not critical and confidential, are
outsourced.

Human resource outsourcing is a momentous strategic HR initiative. It helps organization

to focus on internal resources towards doing what they do best and simultaneously helps
to control the bottom lines.

HR outsourcing helps an organization to gain cost and time efficiencies and provides
cutting edge over their human resource strategies and improves services to their
employees. HR is an essential partner in developing and executing organizational
strategy.

Learn about:-

1. Introductions and Meaning of HR Outsourcing

2. Need for HR Outsourcing

3. Types

4. Forces for Driving

5. Outsourcing of HR Services

6. Benefits

7. Barriers 8. Future Development.

HR Outsourcing: Meaning, Need, Types, Forces, Outsourcing HR

Services, Benefits, Barriers and Future Development

Contents:

1. Introduction and Meaning of HR Outsourcing

2. Need for HR Outsourcing
3. Types of HR Outsourcing
4. Forces for Driving HR Outsourcing
5. Outsourcing of HR Services
6. Benefits of HR Outsourcing
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7. Barriers of HR Outsourcing
8. Future Development of HR Outsourcing

HR Outsourcing – Introduction and Meaning

Outsourcing is a force behind the virtual organization movement. Outsourcing is simply
obtaining work previously done by employees inside the company from sources outside
the company. If someone has specialized in an activity which is not strategically critical to
our business – and is able to do that cost effectively, it is better to get it from outside.

The organization gets benefitted in the form of excellent quality, reliable supply, and rock
bottom price. It can also focus exclusively on doing what it is good at – thereby enhancing
its own competitive advantage.

People are the most important asset of an organization. Leading companies around the
world are taking more strategic approach to managing their human resources. They are
outsourcing day to day human resource functions so as to focus on strategic HR issues that
impact corporate performance and shareholder value.

Human Resource Outsourcing is a process in which a company utilizes the services of the
third party to take care of its HR functions. A company may outsource a few or all of its
HR related activities to a single or combination of service provides located in offshore
destinations like India, China, Philippines etc. Generally those HR functions which are not
critical and confidential are outsourced.

Recruitment and selection, payroll and compensation management, staff training,

employee benefits and service, job evaluation are examples of such functions. The
decision by Unilever, for example in 2006, to outsource its HR activities – mostly
transaction oriented such as pay roll administration, applicant tracking, training and
development, record keeping, performance appraisal follow up etc. – to Accenture appears
to be in the right direction.

These are basically people and effort intensive activities but are routine in nature. Such
repetitive work can easily be turned over to a third party specialist-who would be able to
deliver excellent results, leading to significant savings in cost and effort. Through
standardization of processes the specialist is able to deliver service at unbelievable speed
also.

At the same time, the organization should continue to perform transformational HR roles –
such as attracting and retaining talent, bringing about strategic change in partnership with
line managers, championing employee concerns etc. Across boardrooms and business
schools HR is primarily viewed as a powerful tool to attract and retain talent, build
workforce capabilities, handle grievances and bring out the best in people.

With high attrition rates still haunting most people intensive industries, an active and
vibrant HR can be a key differentiator between mediocre and high performance
organization. Seen against this backdrop, it is not surprising to find that routine activities
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such as pensions/benefits, stock options, health benefits and payroll are among the most
popular HR programs being outsourced partially or completely. HR outsourcing is
growing as HR programmes and services become more complex.

Price Waterhouse Coopers has developed a Total Human Resource Outsourcing Model
which offers companies end to end HR services and a single delivery capability. According
to a Survey by “The Conference Board and sponsored by Accenture, more than three
fourths of executives in large North-American and European firms currently outsource
more than one HR function.”

Human resource outsourcing is a momentous strategic HR initiative. It helps organization

to focus on internal resources towards doing what they do best and simultaneously helps to
control the bottom lines. HR outsourcing helps an organization to gain cost and time
efficiencies and provides cutting edge over their human resource strategies and improves
services to their employees. HR is an essential partner in developing and executing
organizational strategy.

As is evident HR is something that is really critical to an organizations functioning. HR

responsibilities includes all the related functions that work towards employee wellbeing in
the organization including payroll, benefits, hiring, firing, and keeping up to date with
state and federal tax laws.

Increasingly many large firms are getting their HR activities done by outside suppliers and
contractors. Employee hiring, training and development and maintenance of statutory
records are the usual functions of contracted out to outsiders. P&G has signed a 10-year,
$400 million deal with IBM to handle employee services.

IBM will support almost 98000 of P & G employees in nearly 80 countries with services
such as payroll processing, benefits administration, compensation, planning, expatriate and
relocation services and travel and expense management.

The recent competitive challenges of the global marketplace are creating demand for
expert human resource outsourcing. The outsourcing providers in order to manage non
value adding administrative business function of their businesses thereby facilitating the
businesses can concentrate on their cost competencies.

Outsourcing is work done for a company by another company or people other than the
original company’s employees. Outsourcing entails purchasing a product or process from
an outside supplier rather than producing this product or process in-house. The business
that is outsourcing will train outsourcing provider to form a supply chain partnership.

HR Outsourcing is rapidly emerging as one of the world’s most exciting business trends. It
reflects the need, recognized by increasing numbers of organizations, to focus on their core
areas of business – and to outsource processes that add little or no value in terms of
achieving their business objectives.
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HR Outsourcing – Need
Many factors will contribute to any organization’s decision to outsource its HR functions.

The following are some of the needs of HR Outsourcing:

i. Enabling businesses to focus on core operations

ii. Delivering cost savings – whether direct or indirect

iii. Helping to create a stable, cost-effective operating platform

iv. Transferring focus from internal processes to achievement of business goals

v. Realizing investment in HR transformation and IT systems

vi. Ensuring compliance with legal, regulatory and best practice requirements, and

vii. Transferring risk and liability for people issues.

HR Outsourcing – 3 Broad Types: Application Service Provider

(ASP), Business Process Outsourcing (BPO) and Total HR
Outsourcing

HR – outsourcing can be broadly divided into three types:

1. Application Service Provider (ASP)

2. Business Process Outsourcing (BPO)

3. Total HR Outsourcing

Type # 1. Application Service Provider:

ADVERTISEMENTS:

A host of companies specialise in providing hardware and software applications to support

large organisations, including application vendors like PeopleSoft, Oracle, etc. which have
developed application packages (PeopleSoft HRMS, Oracle HRMS), for supporting
human resource activities in an organisation.
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They install, customise and provide support for running these applications. The major
disadvantage with ASP is the costs associated with application software. Secondly, the
successful implementation of the application software is doubtful.

Type # 2. Business Process Outsourcing:

The major difference between BPO and ASP is that in BPO, the client is in direct contact
with the employees through call centres or support centres. MNCs generally opt for BPO
as they operate in many countries and employ a large number of people. While certain
firms wish to retain the power to control human resources, others hand over the power to
the service providers.

Type # 3. Total HR Outsourcing:

In this type of outsourcing, the entire HR function is run by the service provider. There is
no specific HR department in the organisation. The client organisation only has senior HR
professionals who are also HR- strategists. A host of non-strategic functions and employee
contact is done by the service provider.

HR Outsourcing – 3 Main Forces Driving the Engine of HR

Outsourcing
When management of a company’s employees is entrusted to a third party, they are
expected to provide the whole range of human resource services against payment. There
are three main forces that are driving the engine of HR outsourcing.

Firstly, high manpower turnover places heavy challenge on the HR department to design
HR services that are similar with their competitors. When employees are changing their
employer at the drop of a hat, organizational HR practices for customized services give
way to standardized services.

The power of unique organizational culture is not that effective to attract people from
outside or to retain the existing employees for long if the prospective or the present
employees have no interest to know about it. Faced with depleting stock of talents,
increasing number of companies are trying to benchmark their HR practices with one or
the other competitors to catch up with them both in terms of their expenditure on
manpower and in terms of manpower productivity.

More and more HR services are likely to get standardized as employees change their
employers more frequently. This has been a matter of concern for technically qualified
managerial employees whose development costs are high and time consuming. Though,
such imitative HR practices have no effect on employee turnover intention but companies
get cost parity for managing their employees.

A second force for HR service standardization is the accumulated research findings in

public domain on human behaviour under varieties of contractual and organizational
control conditions. Availability of such findings on employee behaviour and expectation
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shapes not just the domain knowledge of organizational HR managers but also the
expectations of potential as well as current employees.

Example – A manager expects and demands bonus from his/her employer because he/she
has learnt about such practices from friends working in other companies or he/she may
have read about it in a newspaper or book.

A third force that makes the practice of outsourced HR services a popular option is the
increasing inroad of IT and modern communications systems in the management of human
resources. Availability of low-cost IT and communication has been making the need of
collocation of HR service designers and the service users, i.e., the employees superfluous.
An external HR service provider could generate such standardized services and sell them
too many similar organizations.

As a result of high volume generation, it can support major technological investment

which will reduce the organization’s operating cost substantially. Benchmarking of internal
processes including HR processes allows one to learn from the good practices of others
and avoid the costly exercise of learning by failing. But acquiring and processing this
market-related HR information requires specialized dedicated employees which an
organization can find too costly because such information is used only occasionally.

Further, since market practices change continuously, an organization spends considerable

amount of resources to keep track of those changes which may be used only once in five
years. The areas that mark such rapid standardization are employee search services,
developmental resource for specialized expertise, industry practice for employee
performance appraisal system, compensation and incentive practices in similar industries,
and employee management for low value standardized jobs.

An external vendor, because of its dedicated business in these areas, is likely to have better
knowledge about such market practices than any single organization. By outsourcing these
services from outside, an organization can enhance the knowledge intensity of its HR
personnel.