Gone are the days when organizations could overlook outsourcing and treat it as a cost saving measure. What started off as a cost reduction attempt is now being looked at as a strategic initiative to add value and provide the organization with agility and flexibility to encounter the fast changing business environment.
The Business Process Outsourcing industry is taking a more holistic approach towards outsourcing, with outsourcers looking at partnering with the service provider to transform their processes.
New concepts, such as Platform BPO, as well as an aging Western workforce, may lead to a new outsourcing wave, especially for midmarket firms. While within the BPO industry, services like Contact Center, Finance and Accounting, Data Processing, etc. are at a fairly mature stage there are a few new upcoming services which are finding favour with outsourcers. This is predominantly the effect of a maturing client community which is understanding the need to look beyond cost saving and take a transformational approach towards outsourcing.
Human Resource Outsourcing (HRO) is one such emerging practice in outsourcing. HRO began in 1997 with a single deal, and peaked in 2006 with 51. In 2008, the number is expected to drop to 32.
The global HRO market is expected to be $3.2 billion in 2009 (among about 18 active, experienced suppliers), and Europe’s share of the total has increased from 20 to 30 percent (in number of deals) since 2005. In 2009, contracts worth more than $1.6 billion are up for renewal. Many suppliers, including Mahindra Satyam BPO, are honing their offerings and preparing to address several major HRO trends. There are a few key developments that will shape the future of HRO. Seven key trends are discussed here.
Trend 1: Small will be the new big
Deal sizes are shrinking. In the past several years, the average project size has declined from $374 million in 2000 to $60 million. There is a clear tendency to break monolithic contracts into smaller chunks, introducing competition while spreading risk. This approach has recently morphed into multi-sourcing, whereby one supplier owns a piece of service and provides a common governance framework.
Clients mitigate risks associated with ‘having all their eggs in one basket’ and are not locked in by a single vendor. By undertaking outsourcing in phases, they can easily judge the ROI of each stage. This approach provides the flexibility to take a milestone based approach, or end the project if the benefits are not getting accrued.
Trend 2: Midmarket will emerge as the front runner
Until today, most transformational and large HRO deals involved large companies. Scale was required to make them economically viable for vendors. However, several factors have made HRO an exciting possibility for midmarket companies with an employee count of 3,000 to 15,000. For instance, large multi-process suppliers have become more selective about the deals they pursue. The current economic turmoil is forcing large companies to pursue immediate benefits, rather than undertake a patient approach.
The emergence of new suppliers and models such as Platform BPO is another contributing factor. Since solutions and platforms can be shared easily and tuned to the requirements of midmarket organizations, the segment can also profit from various forms of BPO.
Trend 3: Niche suppliers will be best positioned to forge partnerships to support end-to-end solutions
Large and mid-size companies demand end-to-end outsourcing solutions that cover all aspects of HR, from payroll to claims reimbursements to temporary staffing. To deliver these solutions, suppliers will have to forge partnerships with other providers. Several innovative organizations, notably in the platform and indigenous application space, have emerged recently.
Thanks to SaaS, they can create services that can be delivered to users transparently and efficiently. These partnership options will help traditional suppliers focus on niche offerings while maintaining a competitive and innovative edge.
Trend 4: SaaS-enabled BPO (Platform BPO) is becoming the new wave
Quality is critical for HRO vendors. For years, quality was determined by technical performance availability, scalability and reliability. Today, these issues have largely been solved. IT’s role is now wider, and includes incorporating effective HR best practices into applications.
Best practices must be an integral part of application design and development because they enable cost-efficient and effective use of automated systems. They also deliver real business value.
Platform BPO models offer numerous benefits to companies and suppliers. These include
- Zero upfront capital costs
- Automation with global service delivery models
- Pay-per-user commercial models enabled by global, template-driven and multi-tenant platforms
- Flexible service choices
- Phase-wise outsourcing possibilities that meet near-and long-term objectives
Trend 5: From infrastructure TCO to services TCO
Companies first outsourced business processes to lower total cost of ownership (TCO) of their infrastructures. Business Process Outsourcing generally led to transferring people and infrastructure segments to outsourcing vendors, who offered services for fixed prices.
Over time, the model has shifted toward services TCO. Specific services determine the price of outsourcing, not infrastructure and management. As such, HRO is more transparent and results in more flexible budgeting for the companies that use it.
Trend 6: Global talent and ‘glocal’ delivery models
In recent years, nearshoring and offshoring have become major drivers for global sourcing. Vendors have created global delivery organizations that offer scale and – as a result – cost-effective services. Still, they must consider (and adhere to) country-specific legislation and regulations. Until HR becomes standardized, it will be necessary to support local rules.
Workforce in the United States is aging. An entire generation is beginning to retire, leaving many companies without the ability to support mission-critical business processes. This will drive HRO from emerging countries where highly qualified and relatively inexpensive talent will deliver best practices to organizations across the globe.
While local regulations may curtail offshore adoption of HRO, widening talent issues, coupled with the necessity to standardize processes for rapidly growing global companies, favor global service delivery in the future.
Trend 7: A temporary return to cost-reduction?
With the credit crunch impacting all aspects of the global economy, companies and governments have to rethink their strategies and business plans. As for outsourcing, cost reduction may re-emerge as a key driver. In the long run, however, innovation, business transformation and business optimization must also be considered. These are what will help companies enjoy transformational benefits when the market improves.
About the Author
Chakrapani T is Vice President of Solutions and Relationship Management. He heads pre-sales for Human Resource Outsourcing.
At Mahindra Satyam BPO’s Human Resource practice, we offer customized, cost-effective and comprehensive HR services that help you achieve greater efficiency. Our Human resource offerings include Recruitment, Compensation, Payroll Administration, Employee Data Maintenance, Immigration & Expatriation, Learning & Development, Performance Management, Organization Development and HR Analytics.
To know more about how Mahindra Satyam BPO (now Tech Mahindra) can partner with you to achieve your objectives, mail Connect@mahindrasatyambpo.com with the subject, ‘HR Outsourcing’.