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Content

1

Acknowledgement.

Executive Summary.

Declaration

Chapter 1 - Introduction.

Chapter 3 - Review of Literature.

Chapter 4 Research Methodology

Chapter 5 Research Analysis and Findings.

Chapter 6 Summary and Conclusion.

Select Bibliography

References:

Annexure

Questionnaire


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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.

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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 onthe companies.

In the last the report contains a suggestive model and SWOT

analysis of HRO given by me as a recommendation.

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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 Modelis the fulfillment of course semester and is a copy

of my own work.

Name : Laxmidhar Pradhan

Regd.No: 511137153

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Chapter 1

Introduction

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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.

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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 andenables 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

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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 partiesprimarily 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 capitalgoods. India's economy is no longer just an IT-services, outsourcing-

driven 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.

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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 off-

shoring 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 companiescoming 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 for

management decision-making. As cost savings 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 willstrive 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 benefitsadministration 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, multi-

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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 HROservice 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 processes across multiple clients. Whereas some

organizations can easily adapt to an outsourcing model and rapidly

transition many or all existing business processes to the

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 onmany 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, wherethey 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 largecontract 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 twocorporations 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 technology-

based 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 maximizereturns 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 long-

term needs.

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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 cost-

effective 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

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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

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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

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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.

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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.

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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 environmental issues and

disseminate good practice.

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.

GE MONEY

A global leader in consumer finance

More than 118 million satisfied customers.

A remarkable presence in more than 50 countries.

Total assets worth more than US $ 105 Billion.

Around the world, GE Money says Yes to possibilities for millions of

people. The new global umbrella brand of GE Consumer Finance, GE

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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 products to meet individual needs

- Customized products for individual consumers and retailers

- Easy access through 4500 outlets

- Vast network across 60 locations in India

- Product offerings include Car Finance, Home Loans,

Personal Loans, etc.

- Joint ventures with Maruti and State Bank of India

Amidst a plethora of existing financial services, products from GE

Money stand apart. This is because of the product features and

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customer-friendly processes.

- Simplified and innovative processes

- Reduced approval time

- Flexible documentation 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.

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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 HRfunction 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

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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%

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How common is HRO?

: 58% of companies outsource some HR function

: 91% of companies with $1 billion+ annual revenues are now

considering HRO

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

470

10

20

30

40

50

60

70

80

90

100

companies that

outsource some HR

function

companies with $1

billion + annual

revenues considering

HRO

HRO growth from

second half of 2004 to

first half of 2005

companies that outsource some HRfunction

companies with $1 billion + annualrevenues considering HRO

HRO growth from second half of 2004to first half of 2005


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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 as the

interest in and the need for the outsourcing of broad-based HRversus transaction-based HR escalate.

Implication(s): Organizations interested in outsourcing multiple HR

processes and/or total HR outsourcing are now seeking a reduction in

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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 amain 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

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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 executivelevel and play a strategic role in initiating and facilitating HRO

implementations within their organizations.

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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, the ability to manage vendor relationships,

benchmarking, performance measurement and project 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 thedemand 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

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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 medium-

sized 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 numbersof 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 babyboomers 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.

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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

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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 re-

establishing 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 inthe 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."

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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%

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

0 10 20 30 40 50 60 70 80

Healthcare Benefits

Administration

COBRA

FSA Administration

Employee Assistance

/ Counseling

Background Checks

Series1


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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 thetransfer 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.

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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%

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58

0 2 4 6 8 10

Employee Communication

Plans

Policy

Development/Implementation

Strategic Business Planning

Performance Management

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Why Outsource?

"We see a tremendous savings opportunity in HR outsourcing. If it's

not there, we'll walk away."

Gregg Phillips

Deputy Executive Commissioner for Social Services,

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 commonthan in the private sector, the rationale for outsourcing is essentially

the same. Three basic financial drivers behind HRO are noted:

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).

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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. HRfunctions 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

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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

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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. EquaTerrapolled 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 self-

service 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

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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 self-

service (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 in the

Outsourcing Market: The

Realities for the World's Largest

Organizations

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

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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

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: 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, financialreporting 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

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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 (IT,

accounting)

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

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: 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

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0 20 40 60 80 100

achieved

unexpected

benefits

achieved hoped-

for benefits

satisfied

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Chapter 3

Research Methodology

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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 Questionnaire5. Use percentage analysis

6. Interpret the Results

7. Find out what is the prime reason for HRO i

laxmidhar project

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