Imagine dining at a salad bar where you're forced to put each dish on a separate plate: one for the green beans, one for the mashed potatoes, one for the cold cuts, and so on.
Strange thought, huh? But the dizzying array of HR outsourcing services now available could be compared to such a salad bar. A new report from Gartner Dataquest identifies no less than eight core HR processes that outsourcing technology has automated in a bid to liberate HR departments from the manual drudgery of the pre-Internet era. These are:
• payroll
• benefits
• education and training
• recruiting
• personnel administration
• organizational development
• compensation planning and strategy
• contingent workforce management
Although no single outsourcer provides all eight services, most are feverishly partnering to combine many of these services on a single platform to attract more business.
And business, it seems, is looking up for the HR outsourcing market. With a swift annual growth rate of 21.9%, the U.S. human resources outsourcing market is poised to grow from $21.7 billion in 2000 to $58.5 billion in 2005, according to the Gartner Dataquest study.
Growing sophistication in HR applications accounts for much of the anticipated boom, according to the report. Employee self-service, portals, data management applications, and the integration of related products and services are increasingly enabling remote delivery and automation of traditionally labor-intensive processes.
"Internet-based HR technology has had a positive impact on outsourcing, as many enterprises turn to outsourcing to accelerate technology adoption and alleviate the burden of managing day-to-day operations, as well as to achieve true process transformation," says Rebecca Scholl, senior analyst for Gartner Dataquest's IT services worldwide group.
HR outsourcers to particularly large clients are gaining the most traction and leading the way in the transformation of HR processes, sources say.
Study findings
"But not all outsourcers will benefit from this transformation," according to Scholl. "Successful outsourcers will become strategic partners for enterprises ready to reinvent their HR departments."
Moreover, the Dataquest study finds, only HR departments that are ready to become strategic partners will fully benefit from the "access to world-class processes, competitive advantage and increased shareholder value" that outsourcing arrangements can bring.
HR departments that are truly becoming strategic partners tend to reside in large ($500 million in revenue) or very large ($1 billion in revenue) corporations, according to the report. These companies are most likely, for example, to have taken a stab at designing a "human capital management strategy."
Mid-size companies are considered far less likely to have achieved an organizational or technological platform on which to build an HCM strategy, and much more concerned about cost savings than on the strategic benefits of outsourcing. Thus, these companies are seen as risky clients for the major outsourcing providers and are thus far under-served in the market.
Small and fast-growing companies seem to be in a class of their own. Although the low-end of the market may not be ready for or concerned about strategic outsourcing, it does represent a mature opportunity for niche providers of HR outsourcing services. No vendor, the study notes, is targeting all three (small, mid-size and large) market segments at once.
The study, which involved 114 U.S. end-user organizations and 16 vendors, concludes that HR's need to embrace a strategic corporate role and avoid becoming a "dying breed" is among the top drivers of HR outsourcing today, at least among the largest companies.
Other drivers include: globalization, mergers and acquisitions, a shortage of skilled labor with HR expertise, an economic downturn, the rise of fast-growth companies, and the consolidation and increasing quality of vendor offerings.
Vendors respond
HR outsourcing vendors for large corporate clients confirm that the Gartner Dataquest study reflects many of their own business experiences of late. Not only do these companies report a strong wave of new business, they also say their current clients are adding on more outsourcing services.
"As I look at our top four clients, we're seeing revenue growth anywhere from 35% to 300%, based on the outsourcing services that we're bringing to the table and providing them," says Morris Applewhite, vice president of sales and marketing for Convergys Employee Care.
In recent years, Convergys has expanded its service menu significantly, moving from meat-and-potatoes health and welfare administration into innovative areas such as applicant screening, new hire services, and employee benefit counseling.
Through its SAP back-end platform, the company has also taken on payroll, pension, and stock options administration services. Partnerships with companies such as HR knowledgebase provider Authoria allow Convergys to pre-integrate even more services into its application service provider (ASP) business model.
"Our pipeline has just mushroomed, and we've experienced some 30% top-line growth from 1999 to 2000," says Applewhite. "Clients are beginning to realize the value of a true outsourcing partnership. We've been able to create value for them, and they have become more comfortable in outsourcing beyond the simple transactional capabilities."
Convergys serves extra-large corporations, with its smallest client at 20,000 employees and its largest at 400,000.
Applewhite explains that the company's strategy of targeting such large firms embodies a philosophy of business partnership between outsourcer and client. Representatives from Convergys work closely with clients to design, implement, and maintain technology services.
The arrangement tends to create strong working bonds between outsourcer and client, says Applewhite, and it provides clients with a "depth of data management" that allows clients, including top HR executives, to become strategic internal consultants at their own companies.
"One of the early concerns that we've been able to break through is the fear that the executive might lose control through outsourcing," explains Applewhite.
Appetite for ASPs
Workscape, also an HR outsourcer for large corporations, corroborates the shift to strategic outsourcing that is turning mere "clients" into "business partners" of sorts.
With a total of 300 clients in the 5,000-or-more employee range, Workscape's products and services reach nine million end-user employees nationwide. Companies may choose to buy Workscape's benefits, compensation planning, and personnel administration software outright or lease it on an ASP model. Clients include General Motors, Chrysler, and FedEx.
Tim McDonald, senior vice president of corporate marketing, likes to refer to Workscape as an "ASP with service windows" because, he says, the company offers more than just technology hosting services.
"We're seeing more growth in our ASP model," says McDonald. "Large companies obviously have very complex requirements, so they're not interested in just buying a software package from you. They're interested in asking you to host the application but also work with them to get it up and running."
The annual benefits enrollment process is a good example, says McDonald. Because needs around open enrollment change significantly each year, Workscape sends a service delivery team to work with clients in spring to get all the new benefits information in the application.
Team members also support clients during open enrollment season and during what McDonald terms the "near death experience" of annual compensation planning.
Most of Workscape's clients house "very lean" HR staffs, says McDonald, because they've made a commitment to strategic HR. The outsourcing arrangement greatly reduces a client's dependence on HR staff members, particularly at the analyst level, observes McDonald.
Clients such as GM and Chrysler, says McDonald, are leading the strategic push to leverage technology for HR administrative services. Workscape is currently developing employee self-service portals for both companies that will provide a single point of integration for multiple HR applications.
From such a portal, entering a user name and password only once, an employee will be able to access all of her personal and benefits information. She'll also be able to change her address, re-allocate 401(k) investments, enroll in a health plan and perform other self-service functions.
Tossed salad
The integrated portal McDonald describes is an example of "Web services," which Gartner Dataquest concludes will eventually characterize HR outsourcing delivery as vendors conform to common standards of data exchange such as those developed by the HR-XML Consortium.
"Web services refers to the ability to deploy multiple applications on a common technology platform and to have the information integrated and inter-operable across applications," explains McDonald.
Total integration, in other words, will allow you to put each dish from the HR outsourcing salad bar on the same plate.
