HR Outsourcing - Industry Background and Market Size

Many large corporations have begun to outsource discrete, non-core functions of their operations, such as payroll and benefits administration, in order to address many of the problems found in traditional human resources departments.

The Internet makes the HR BPO delivery model possible by facilitating interactive communications among large groups of individuals in multiple geographic locations. It is estimated that by using the functionality of the Internet to move HR delivery to a largely self-service mode, organizations can achieve annual HR cost reductions of approximately 25%-30%.

To date, however, HR departments have not fully utilized the Internet because they have not broadly implemented any mechanism for effectively centralizing and organizing the large amount of information and electronic transmissions within the HR organization. Accordingly, the Internet's use in HR departments has been mostly limited to one-on-one e-mail communications or process-specific internal networks.

HR in Global 500 Companies
The initial targets for HR outsourcing are the human resources departments in the Global 500. According to Fortune's Global 500 list for 2002, the Global 500 corporations employed more than 47 million people in 2001, and the median number of employees for these corporations was approximately 63,000, in multiple locations and countries. An employee base of this magnitude presents logistical complexities, and the HR functions of Global 500 companies are often complicated by multiple human resources groups for different business units and a lack of central information repositories and coordinated communications infrastructures.

As a result, the HR operational processes of large corporations often are redundant and inefficient. In addition, the large number of third-party vendors typically used by a HR department to handle discrete functions complicates HR process management. By necessity, HR departments typically devote most of their resources to administrative functions rather than strategic planning and initiatives. At the same time, corporations that extend cost-cutting to their HR departments often focus more on reducing staff than on re-engineering service delivery.

The figure below illustrates the functionality expected of a typical HR department.

The Size of the HR Process Outsourcing Market
Many large corporations outsource discrete, non-core functions of their operations, such as payroll, tax filings, and benefits administration.

The market for multi-process HR outsourcing is relatively new. It is estimated that approximately 300 of the Global 500 are viable candidates for HR outsourcing. Based on the median employee base and estimates of annual spending per employee for various services, we estimate that the addressable market basic HR outsourcing consists of annual spending of approximately $29 billion per year.

Comprehensive HR process outsourcing for large corporations requires a well-developed service delivery infrastructure and significant expertise in analyzing, providing, and managing HR processes across many divisions and third-party vendors. It also necessitates policies, procedures, operations, and technologies that yield superior performance as measured by productivity, cost, quality, and customer satisfaction metrics.

Examples of HR Outsourcing Agreements

Company	Contract Date	Anticipated Term (Yrs)	Processes	Est. Affected Empoyees
Bank of America	November 2000	10	Substantial HR, some finance and accounting	143,000
BP P.I.C	December 1999	7	Comprehensive HR	56,000
International Paper Co.	October 2001	10	Substantial HR,some finance and accounting	70,000
Pactiv Corporation	January 2003	5	Payroll	10,000
Prudential Financial	January 2002	10	Comprehensive HR, some finance and accounting	47,000
Unisys Corporation	August 2000	7	Comprehensive HR	16,000

The bottom line: HR outsourcing is gaining momentum. However, a major obstacle for the pioneers to overcome is doubt or skepticism concerning whether they will actually achieve the much touted HR outsourcing business benefits. But this depends on careful and systematic execution rather than on just the quality of the strategy.