By Lowell Williams

HR Outsourcing (HRO) is an integral part of the overall business-process outsourcing landscape. Practically, every daily headline in the business pages reinforces the need to operate at maximum efficiency, control selling, general and administrative costs, and rationalize resources.

We are seeing accelerating interest in assessments and HRO evaluations as customer companies begin exploring how the service model works and who the providers are in the marketplace. Companies are looking for rapid studies of the "size of the prize," i.e. what can be saved through HRO and where they can realize the most immediate savings. 

Not surprising in this economic turmoil, there is a focus on cost savings. The turbulence is also creating a need to spinoff assets. Many of the companies spun off to private-equity firms are being forced into "shotgun marriages" with outsourcing providers. Private-equity firms understand the benefits of outsourcing and want to ensure they never have an internal payroll department, an accounts payable service center or internal benefits administration.

Dynamics of the HRO Market

The two hottest customer-side areas of focus for the first half of 2008 are recruitment and learning — content, administration, delivery and fulfillment of course materials. Different segments of a company often have their own training budgets, with corporate HR leading only one segment of the total activity.  In recruiting, many companies still use numerous contingency fee recruiters, so in one respect the function is already outsourced. The overarching question becomes whether one new provider could deliver better service at a lower cost. The answer is often yes. Service providers are delivering excellent learning administration services, with some content, and they can also deliver excellent hiring results when measured by time to hire, cost to hire and quality of hires.

Simultaneous to this burgeoning interest in sourced services, the provider landscape is undergoing rapid consolidation and contraction, plus new entrants are coming to market with HR services. Clearly, there has been a period of overexpansion and thin or non-existent margins during the period from 2002 to fall of 2007. Hewitt Associates took on the early HRO contracts signed by Exult, and has been in the process of rationalizing those contracts and trying to get to solid profitability. This has led to the contraction of HRO services and outlook outside the U.S., notably in the Glasgow (Scotland) and Krakow (Poland) service centers. 

Other providers have not been able to deliver on their early promise, and recent management changes at Excellerate HRO indicate some internal margin and growth problems in this joint venture between Towers Perrin and EDS.  The fact HP has acquired EDS makes that issue even tougher because HP is itself in the payroll delivery business and has recently undertaken to provide some other HR services directly.
In spite of this contraction and consolidation, there is still a broad spectrum of providers active in the marketplace offering services to companies of all sizes and in all price ranges:

·Accenture 
·Arinso
·IBM 
·Fidelity
·Convergys 
·Savista
·ACS 
·ADP.

There are more than 20 providers that bill themselves as "full-service HRO providers" so the above list is not exhaustive. Instead, it is a list of major providers with extensive history in servicing different segments of the HRO market. 

Additionally, India-based Hexaware's CaliberPoint and TCS, which were previously providing contract services to North American and European providers, have begun offering services directly to the European and U.S. markets. The advent of the Indian providers has led some analysts to predict a "race to the bottom" in terms of pricing or a commoditization of services and prices.  But there is no reason to believe that competing on price is in the best interests of the Indian-based providers.  Not only do they have to build out their service delivery capacity, they also recognize that many HR services require experienced employees and very complex technology. 

It should be noted that India-based providers often bring very strong systems and system-integration skills to their service delivery model. Several of the Indian providers have been supplying applications development, full number upgrades, enhancements and other IT-related services to the U.S. and European customers for a number of years. Consequently, Indian providers typically have deep IT benches with programmers who are expert at PeopleSoft, SAP HR, GEAC, Lawson and Oracle HR systems.  This will be a substantial ongoing advantage for many of these providers as they expand into HR services within the U.S. and European markets.