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Missing the HR outsourcing bus

Shyamal Majumdar | December 19, 2003

It's set to become a $ 51 billion market worldwide in 2004, representing 39 per cent of the total business process outsourcing revenue. But India seems to be losing its way in human resource outsourcing, which has been the fastest growing BPO segment in the world in recent years.

Outsourcing and India: Complete Coverage

Listen to Avinash Vashistha, managing partner of the California-based neoIT, the world's leading offshore advisory. "India is barely skimming the surface of the HR outsourcing market potential," says Vashistha.

A lot many would agree with him. Consider the figures: the total market for HR outsourcing in the whole of Asia Pacific is estimated to go up to a mere $ 2.56 billion in 2004 (see table). That's just about 5 per cent of the world market. "India's share even in this small pie is negligible," says Vashistha.

Projection 2004

HR outsourcing forecasts by process in Asia Pacific (In $ million)

Payroll services

761.20

Benefits administration

535.65

Education and training

555.99

Recruiting and staffing

347.98

Personnel administration

167.16

Other HR functions

191.97

Total

2,560.00

Source: Gartner

Which is a pity, considering that HR outsourcing has tremendous cost savings potential for companies. Typically, companies end up saving up to 30 to 40 per cent of their cost by outsourcing their HR processes.

A study by Hewitt Bacon & Woodrow discovered that the costs related to an organisation's HR services typically exceed what's apparent. The data shows that the real cost of providing HR services in participating organisations was between 1.8 times and 2.8 times the employment cost of the HR staff, with the average being around 2.6 times.

The finding dramatically underscores the gross underestimation by some organisations of the business case for making substantial changes to HR service-delivery mechanisms.

Research has also shown that 87 per cent of the funds mid-sized companies budget for HR goes towards routine processing transactions, rather than strategies that could actually impact business, enabling it to gain efficiencies. Mid-sized companies in fact spend almost twice as much as large companies in maintaining an HR head count.

The biggest problem -- and this is why the HR outsourcing industry in India is on the back foot -- is the government and the industry's failure to tackle issues like data security and data privacy. Most foreign companies insist that their outsourcing agreements contain detailed and precise contractual specifications regarding data privacy and protections.

For example, though no US law currently prohibits information -- such as social security and driver's licence numbers, employment histories, and medical records -- from being shipped to or accessed from other countries, the number of US companies required to comply with industry-specific and state laws is growing.

This is where Indian HR outsourcing companies face a major handicap. While more than 40 countries around the world have enacted, or are preparing to enact, laws that protect the privacy and integrity of personal consumer data, the Indian government is still grappling with drafting a data protection law designed to quell growing privacy concerns from their offshore clients.

It's almost a chicken-and-egg situation. Lack of data privacy concerns in India have ensured that the vast majority of the HR outsourcing giants keep away from India (only 2 per cent of the Indian HR outsourcing market is controlled by the organised sector), while the unorganised sector, which controls 98 per cent of the market, couldn't care less about these issues.

This has directly contributed to the growing perception that Indian outsourcing companies lack domain expertise. For instance, Exult, the global HR outsourcing giant, wanted to outsource end-to-end HR-related work to a third party in India but was unable to find one with the requisite expertise. This prompted the company to set up its own captive outsourcing unit in India.

HR consultants say quality is indeed a major issue with HR outsourcing in India. That a majority shares this view comes across clearly from a June 2002 on-line survey by Hewitt Associates on outsourcing in Asia Pacific. According to about 55 per cent of the participants in the survey, the biggest apprehension was the quality of the outsourcing vendors.

So what's the way out? Indian companies wanting to outsource HR would do well to draw lessons from a landmark deal signed between BP Plc and Exult in December 1999. That $ 600 million, seven-year contract -- under which Exult took over all HR services of BP -- provides a window into the many opportunities -- and complexities -- of HR outsourcing.

The key factors that emerge from the deal are: how to minimise dependency risks (too much dependence on one vendor); how to deal with spillover risks (contracting with an outsider exposes a company to the possibility that confidential information might leak out); how to build mutual trust (BP, for example, took 8 per cent stake in Exult); and how to defend strategic capabilities (a company should not outsource any activity that directly contributes to its strategic, competitive advantage).

If you want your HR outsourcing decision to pay off handsomely, thrash out these issues before signing an agreement. BP and Exult did this with great effect.


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