By Riaan Terblanche, MD HRO

Outsourcing a strategically important business function like Human Resources is a difficult business decision to make. The reason ranges from losing control over knowledge and processes to the pitfalls surrounding total quality management.

Whereas only large multinational organisations outsourced HR administration functions, like Payroll, Recruitment or Benefit Administration, to off shore locations, the statistics now show that more and more company, even in the 1000 to 20000 headcount bracket start doing this in an effort to cut cost in a deteriorating global economy. Given the state of the global economy Human Resources, as a non-profit cost centre, is an ideal candidate for outsourcing.

Almost 10% of Fortune 500 companies have some kind of HR BPO deal that covers full spectrum outsourcing, says Naomi Lee Bloom, a Managing Partner of Bloom & Wallace and expert in the HR systems and HR BPO industry. “Between 50 and 60, depending on the exact criteria, multi-year, multi-process (that is; core HRM recordkeeping, Payroll, Benefits Administration, Employee Self Service and Call Centre) HRM BPO deals have been signed to date,” says Bloom.

There is also a vast middle market of deals that don’t have that level of complexity. “Those are signing up in droves,” she says, adding that through the end of 2010 there have been somewhere between 50 and 100 comprehensive middle market deals. “I define the "vast middle market" more in terms of their complexity factors than by their revenue or headcount.

In fact, consultant Bill Kutik, of Kutik Communications, asserts that HR BPO is the fastest growing segment of the overall Business Process Outsourcing (BPO) market. “It has become enormously competitive because vendors of all stripes have looked at the 10-figure, five- to seven-year deals that Exult was signing and said, “I want some of that.’”

From the many functions in Human Resources it is typically the non-strategic and burdensome administrative functions that are shipped off to third party suppliers of Business Process Outsourcing but this trend is also changing to include more strategic functions such as Organisational Design and Talent and Performance Management.

Recent case studies indicate that where the three pillars of outsourcing are involved on an integrated basis the potential success of HR Outsourcing is significantly increased.

1)       Cost Gains: More often than not the primary reason behind outsourcing is cost savings. If this is the only reason and the outsourcing decision is based on cost savings in isolation, there is little guarantee of success. In fact an analysis of the typical risk clauses in SLA’s governing this space it is clear that cost savings alone are unable to guarantee outsourcing success.

2)       Efficiency Gains: This is turning out to be a key driver in the outsourcing environment. Where third party suppliers of BPO are innovators and doing things smarter the chances of successful outsourcing is greatly improved. Often this is a function of the Outsourcing partner’s ability to innovate with technology as an enabler as opposed to simply employing standard HCM platforms and traditional technology.

3)       Transformation Gains: The SIPP (Standard Integrated People Practices) model in Human Resources in addition to a Right First Time methodology inevitable leads to cost savings and innovation on standardisation. Often the correct approach and definition of “work” as opposed to “people” is what confuses HR’s capability to drive organisation’s strategic outcomes.  

Where these three pillars are present in an integrated model to provide outsourcing solutions to HR functionality, the case studies show significant improvement in successful outcomes.