Comments or suggestions?

about this or future e-newsletters.

Human Resource Outsourcing: The future of HR?

Outsourcing. Some companies swear by it. Others refuse to do it. Some view it as necessary to achieve success. But the truth is that outsourcing has become an integral part of the corporate landscape.

Human resource outsourcing (HRO), in particular, has grown into a widely used business method, despite being a concept still in its adolescence and often fraught with emotion.
Many companies are leery at the thought of outsourcing functions that have been handled in-house since the start of their business.

Despite this, the fact remains that nearly every company of substantial size relies on outsourcing for some aspect of human capital management (HCM). Whether it's using external recruiters, administering drug tests or managing a benefits program, companies of all sizes find themselves outsourcing some or all of their HR functions.

HRO has grown past being just a service bureau that provides a limited number of services. Today, HRO has expanded to encompass all HR functions, with providers becoming a one-stop shops for organizations looking to outsource any and all of their company's HR responsibilities.

Why use an HRO provider?
Deciding to work with an HRO provider can be one of the toughest decisions your company has to make. So why have so many companies decided to go ahead and outsource some or all of their HR functions? According to a survey conducted by the Aberdeen Group, companies have three primary drivers in making an HRO decision:

• To reduce the cost of HR (64 percent of respondents).
• To free up time and resources for the company to focus on its core business objectives (59 percent).
• To improve HR service to its end users (33 percent).

HRO providers can provide economy of scale, therefore providing a less expensive option for organizations. By using offshore call centers, data management facilities and by hiring qualified specialists, HRO providers are able to deliver both cheaper services and improved customer service to many organizations.

Who is outsourcing HR?
Many believe that HRO has been slow moving in terms of corporate acceptance because of how firmly embedded organizational HR departments are and because larger, higher-revenue companies don't feel the need to outsource everything. Despite initial slow adoption of HRO, it has grown into an attractive and viable way to manage HR.

The Aberdeen Group research found that 82 percent of survey respondents said they were either currently outsourcing HR, involved in transitioning HR functions to an HRO provider or planning to use an HRO provider in the near future.

The size of a company largely influences outsourcing decisions. Approximately 66 percent of companies with more than $1 billion in revenue currently use HRO providers. In comparison, 40 percent of mid-sized companies ($50 - $999 million) and 39 percent of small companies (less than $50 million) currently outsource some or all of their HR functions.

The most commonly outsourced area of HR is 401(k) management, with 54 percent of companies outsourcing this function.

The challenges of HRO
There may be plenty of seemingly great reasons for companies to use HRO, but it also comes with its challenges.

Organizations today balk at moving towards total HRO because of the lack of a strong business case. Until HRO providers are able to find substantiated points of outsourcing value and show positive financial implications, companies will continue to question the overall return on investment.

Participants in the recent Aberdeen Group survey indicated that to consider moving to a total HRO model, three points must be demonstrated:

• The outsourced services are better than what is currently provided in-house (77 percent).
• Balance of cost and level of service is better than the company can provide internally (66 percent).
• The cost of providing benefits and other services is radically less when outsourced (60 percent).

The message from potential HRO users is clear: prove that outsourced services are superior and cheaper than what the organization currently has in place.

The future of HRO
Where does HRO go from here? Only time will tell.

Ninety percent of the companies involved in the Aberdeen Group survey said they are either having expectations met or exceeded by their HRO provider. That said, only 35 percent of companies indicated that they definitely plan on renewing their HRO contract, while another 35 percent said they still didn't know.

Learn more about HRO
To learn more about HRO and the findings of the Aberdeen Group survey, download the free white paper, The HRO Benchmark Report, provided to you by the Aberdeen Group and Ceridian.

Attend a free Ceridian Web forum featuring David Foster from the Aberdeen Group on March 7, 2006, The Need-to-Know on HRO: Research Results from Aberdeen Group.

To learn how Ceridian can help your organization with HRO, please contact your Ceridian representative.

Sources

The HRO Benchmark Report, Aberdeen Group, 2006