HR Outsourcing To Increase In 2008

November 6 2007 - While HR outsourcing has remained relatively flat since 2005, it is expected to increase in 2008, according to the Everest Research Institute's annual Human Resources Outsourcing (HRO) market study. The most commonly outsourced HR functions include:

• payroll
• benefits
• employee data management
• information systems, and
• contact centers

The study states that all market segments show significant growth potential but mid-sized companies in North America and Europe are most likely to be the greatest outsourcers.

Everest Research Institute calculate that the cumulative total contract value of HR outsourcing transactions came to US $21.2 billion in 2006 and should reach US $25.4 billion by the end of 2007. The Institute's Human Resources Outsourcing (HRO) Annual Report: November 2007 attributes future outsourcing growth to 'existing suppliers that have decreased transition costs and timeframes and are promoting standardized offerings.' Overall, the Institute considers that the penetration level of HRO is currently 'low in all market segments and across geographies.'

North America currently accounts for 70% of HRO transactions, although European buyers have shown significant activity in the last 3 years. The leading buyers of human resource outsourcing come from the following sectors:

• manufacturing
• financial services
• high-tech and telecom

Monica Barron, Vice President, Everest Research Institute commented:

"Over the last three years, we've seen a flat market in terms of the number of global HRO deals made due to the limited capacity of suppliers; however, the share of regional transactions has increased, especially for mid-sized companies of 3,000 to 15,000 employees. Existing suppliers are building capability and new suppliers are entering the market, indicating continued market evolution and growth. We've seen a definitive move away from the 'lift-shift' model, where the supplier takes over the buyer's existing staff, processes, and technologies largely 'as-is' to provide outsourcing services. Buyers are leveraging a transformation-transfer model in which standardized processes and technologies are implemented and provided by the supplier."

Buyers who do not feel comfortable with 'full-scope, large scale transformation' are also using a a 'componentized' HRO model. They are engaging HRO suppliers who can divide the outsourcing engagement into components, outsourcing them in phases.

Rajesh Ranjan, an Everest Research Institute Senior Research Analyst and co-author of the report said:

"As buyers are deciding to move toward a componentized route, either in terms of scope of process or geographic scope, suppliers must have flexible offerings and contract terms to meet their requirements. At the same time, suppliers will need to ensure that their offering is scalable so as to be the supplier of choice when buyers decide to expand their scope of outsourcing."

In terms of total contract value the study observes that Accenture, Convergys and IBM have achieved notable HRO market shares but Hewitt retains market leadership in terms of annual contract value.

Other major findings include:

• Process Scope: On average, a HRO transaction includes six to 7 HR processes. Training, recruitment and compensation have been increasingly included in HRO deals since 2004 but almost 50% of transactions only include the outsourcing of administrative services and technology. There has been a decline in the inclusion of benefits administration in full scope HRO deals.
• Size and Term: 75% of HRO transactions have a duration of five to 10 years, with an average of 6.5 years. Average HRO transaction size is less than US $100 million, with a steady increase in the number of smaller transactions (less than US $200 million).
• Pricing: Following a considerable fall in pricing, average prices are now rising for organizations with more than 15,000 employees. The study concludes that this is due to 'suppliers' stronger definitions of their operational criteria, sole-source agreements with targeted industry clients and clear focus on attaining profitability.'
• Offshore Adoption: 46% of HRO transactions currently include an offshore component but 68% of transactions where more than 15,000 employee are involved include an offshore component. There is a rising trend here as suppliers make use of offshore delivery to reduce costs.
• Technology: HR information systems were outsourced in almost 85% of transactions, demonstrating the key role of technology in human resource outsourcing. Market penetration of proprietary solutions has increased since 2004.

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