HR Outsourcing

What is Outsourcing?

The performance by outside parties, on a recurring basis, of tasks that would otherwise be performed in-house.

Other Definitions

In-sourcing Off-shoring Co-sourcing Outplacement

In sourcing – This refers to when companies look at their pool of employees to find those who may be tapped to do certain needed jobs. They may offer these employees extra training or they may merely find the employees that already possess the skills to take on specialty work.

Off shoring - Off shoring simply means having the outsourced business functions done in another country. Frequently, work is off shored in order to reduce labor expenses. Other times, the reasons for off shoring are strategic -- to enter new markets, to tap talent currently unavailable domestically or to overcome regulations that prevent specific activities domestically.

Co sourcing – Co sourcing is where a business function is performed by both internal staff and external resources, such as consultants or outsourcing vendors, with specialized knowledge of the business function.

Out placement - Outplacement is a term used to describe the efforts made by a downsizing company to help its redundant employees through the redundancy transition and help them re-orientate to the job market . A consultancy firm usually provides the outplacement services.

Types of Outsourcing Business Process Outsourcing Information Technology - 28% Human Resources – 16% Sales & Marketing – 15% Finance – 11% Administrative – 9% All Others – 22%

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

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companies thatoutsource some HR

function

companies with $1billion + annual

revenues consideringHRO

HRO growth fromsecond 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

The HRO Market

In next 5 years, global spending on HRO will double – from $40 billion to $80 billion

From 2002 to 2004, 14% increase in large firms that would consider HRO

Areas where HRO will work

Relocation Recruiting/

Staffing Competence

Development Salary

Administration Consulting and

Training

HR Information Systems

Disciplinary Issues HR Surveys HR Research Staff Loans and

Perks Manpower and

Career Planning

Least Commonly Outsourced Functions

Performance Management 3% Strategic Business Planning – 4% Policy Development/Implementation – 4% Employee Communication Plans – 10%

Why are organizations outsourcing?

Preference for HRO

Outsourcing of BOP (Bottom of Pyramid functions) instead of BPO

Saves key people’s time Concentration on core competency Enhancing profitability Mid-sized cos - >87% of funds towards

routine processing transactions Best systems, most experienced minds

Advantages of HRO Reducing or eliminating fines and penalties by keeping

pace with changing government regulations. Achieving measurable, bottom-line results by

increasing efficiency and leveraging outsourcee’s economies of scale.

Lowering infrastructure and facility costs by having the HR function administered off-site.

Sharpening your business focus by eliminating interruptions caused by employer obligations, risks and liability.

Improving employee retention and morale by providing timely answers to payroll and benefits questions.

Advantages (contd..)

Expanding scope and level of service. Your HR department can’t be subject experts in all areas – our staff of more than 65 HR professionals can.

Implementing organizational initiatives that link to your overall business plan: HR becomes strategic, not tactical.

Overall, companies tend to outsource to alleviate administrative burdens and focus on strategic areas

Why outsource HR REDUCE COST OF HR AND CONTINUE TO PROVIDE VALUE

Tightening labour markets and competitive product markets – pressure to reduce head count

Cut costs Add value Do more with less

Upgrade, but not upsize Downsize, but not downgrade

HR itself is becoming the target of belt tightening Shed routine administrative tasks and focus on

talent management

Strategic outsourcing

Beyond cost control Specialization and expertise that goes with it for

which there is no need on a regular full time basis Focus on quality, technology and service delivery Outsourcing to best of class, best of industry Problems with technology – address need for

customization (which presently means largely adjusting to supply side than demand side)

Deciding Whether to outsource?

Create a project team Analyse the current position Pay attention to people issues Benchmark Come to a decision

What is core to the business and the future of business?

What can bring competitive advantage?

Deciding whether to outsource

Decide what to outsource Tender the package Choose a partner Introduce your staff to the agency Draw up the contract Test the contract

Pros and cons

Pros Cost and savings Financial and operational

flexibility Need to focus on few

things Access to quality,

expertise and better management skills

Staffing flexibility

Cons Need greater coordination

flow with agencies Reduces organizational

learning by depleting its skill base

Loss of control Adverse affects on morale

and motivation Job insecurity

Factors hampering HRO Cost factor & Confidentiality The fear of losing jobs Loss of sensitive information to

public/competition Ethics and quality of outsourcing vendors Possibility of security breaches Cost-benefit equation not clear Lack of psychological acceptance

Outsource activities that

Have high volumes Are repetitive and

routine Reflect consistent

customer needs Have opportunities to

leverage Are service and

efficiency driven Are easily measurable in

terms of performance

Support key business processes

Get influenced by external forces

Require high content expertise

Are ad-hoc, periodic future oriented projects

Are difficult to measure Have high impact on

organization as a result of non performance, failure or mistake

Retain activities that

Dominant trends3 main HR outsourcing industry segments

Consultants Administrative – service providers Technology enablers

Customizing imported software products remains an issue: supply oriented rather than demand based customization

Typical Problems

Integration with over all strategy Fragmented and piecemeal approach – cleaning part

of the pool Absence of formal outsourcing process Limited cost analysis Core business definition – Everything is core? Contract management how to ensure that we achieve

desired objectives Work flow, supply chain and logistics management

critical to outsourcing process

Risks of HR outsourcing

Trust Confidentiality Dependency Spillover risks Relative proficiency Strategic capability Commitment Flexibility

Managing people issues

What happens to people? When to communicate? Who to communicate with?

Those whose jobs are outsourced and those whose jobs are not outsourced

How do you deal in the transition phase? What about HR staff?

Who will survive who has to leave? How will the HR department look like, post

outsourcing?

Current outsourcing trends worldwide Outsourcing in traditional areas like customer care, financial

services, manufacturing, IT, ITES is growing. Large multinational companies are investing in captive BPO units

in supplier countries in multiple locations, to reduce risk and control quality.

Outsourcing is becoming more sophisticated. Customers are looking for business process excellence, speed to market, improvement in quality, benchmarking to world-class standards. CEOs are involved to ensure the long-term success of strategic offshoring decisions. On their part, suppliers understand that they must compete globally and that outsourcing will play a more transformational and strategic role for the client.

There is increasing global competition and pressure on margins from emerging lower-cost outsourcing destinations.

Current outsourcing trends worldwide Risk factors for outsourcing like terrorism and

war, disaster and disease make contingency plans a necessity.

The IT industry will see roughly 10 to 15% of its jobs move overseas during the next ten years, inviting more political debate.

For the past two decades, China has been growing at an astounding 9.5% a year and India by 6%. They are impacting the global economy and leading the outsourcing revolution.

Future outsourcing trends worldwide Outsourcing expenditure will continue to rise. More countries will find outsourcing attractive,

creating a multi-polar world. Following the lead of the US and UK, the European Union markets will expand their offshoring programs, while Japan will increasingly look to China for its needs.

Customers will take greater control in driving and designing deals.

The interlinking of the supply chains brought about because of outsourcing will create stability as companies will put pressure on governments to avoid wars.

Future outsourcing trends worldwide Risk factors and unexpected occurrences like war,

terrorism, disease, natural disasters and economic upheavals can throw a wrench in the works.

The rising price of oil will put increasing pressure on companies to both utilize technology and outsource to remain profitable.

The rising price of oil will cause oil consuming countries like the USA to be less competitive resulting in more outsourcing to India and China.

India will show excellence in Services that require advanced English like Research and Analysis Outsourcing, Content and Medicine.

Future outsourcing trends worldwide Political backlash over outsourcing is likely to

lessen over time as economies strengthen and companies continue to reap the benefits of offshoring.

Technological power will shift from the West to the East as India and China emerge as big players in the global outsourcing market. The two countries have the size and weight to transform the 21st global economy.

By 2015 China will be No. 1, India No: 2 in the global top five outsourcing destinations.

Vendor focus will shift from basic skills, costs and processes to domain knowledge, transition challenges, change management, HR issues and governance.

Future outsourcing trends worldwide Regional outsourcing hubs will develop as

companies will take strategic near-shoring initiatives to minimize risk and leveragecultural and linguistic compatibility. The supplier countries are in the same time zone as their customers.

The large diverse Indian companies will face stiff competition from new focused smaller companies. Because these companies are able to focus and become excellent in one are they will be able to provide a higher level of service.

Opportunities Areas for India Research and Development

 Product Innovation - Companies are going beyond basic

research to invest in innovation and new product

development. Companies that have invested in R&D in India

are Cisco Systems, Motorola, Hewlett-Packard, Google

General Motors Corp. and Boeing Co among others.

Co-development- In pharmaceuticals, India has the

opportunity of co-development and ownership of new

patented drugs through drug research, clinical trials and

manufacturing. Indian pharma major Ranbaxy has an

agreement with MNC GlaxoSmithKline to commercialize

compounds they develop together.

Opportunities Areas for India Legal Outsourcing

India ’s large pool of qualified English-speaking lawyers with experience in the British legal system can offer paralegal support, legal support and patent services. A few Indian companies affiliated with American law firms are now able capture a tiny piece of the American market. They are now doing legal research at very high rates by Indian standards but yet 50% below typical American rates.

Engineering OutsourcingIndia can provide high-quality engineering services in the fields of:

Mechanical & Electronic engineering - analysis and design , embedded software

Plant Design, Process Engineering Plant Automation Services Enterprise Asset Management and OEM solutions

Opportunities Areas for India Remote Infrastructure Management Services

India can offer management services for IT infrastructure, applications operations, IT security and maintenance. This sector presents great potential through large-value multi-year contracts

Accounting ServicesWe are in the initial stage where payroll processing services and some accounting is being done for large American companies. This trend will continue and soon a full range of accounting and tax services will be provided by Indian companies.

Opportunities Areas for India Outsourcing opportunities for India exist

in other fields like Financial Research, content development, medical writing: animation, film, publishing, web services; Human Resource outsourcing: recruitment, training, Education, Nanotechnology and many others.

Challenges for India Rising competition In the next ten years, China will replace India in its

number 1 position in the global ITES-BPO industry. Rising costs and low efficiency in many cities like

Bangalore will make software outsourcing less attractive in future. The giants may show a drop in earnings.

India ’s terrible Infrastructure will continue to be a drag on the potential of India giving other countries the competitive advantage.

Other competing countries providing low-cost outsourcing options will exert a downward push on costs – East Europe, Latin America, South Africa

Challenges for India Infrastructure India ’s ability to develop infrastructure is far outpaced by

neighboring China Metro cities are getting saturated and costs are rising --

Tier II towns need to develop infrastructure but India’s track record does not bode well for fast development.

Human resources and training The demand-supply gap in India for knowledge workers

is being felt now in Bangalore but may peak India wide in 2008-2009

The education system needs transformation to produce people with skill sets that match industry needs.