While you may sometimes feel so frustrated with your human-resources department that you'd like to send them to the moon, offshoring HR processes to India or the Philippines is another matter altogether.

For many companies, human-resources outsourcing, known as HRO, is a practical, cost-saving alternative. But offshoring HRO is still a tactic adopted only by the select few. The practice of sending HR work to India and other faraway, low-cost labor markets is still in its infancy. Offshore HRO pioneers are primarily large companies with long, well-established track records in outsourcing IT and other business processes, and with long-term, solid relationships with their outsourcing vendors. Outsourcing beginners, beware: Offshoring HRO is not for you, at least not yet.

Properly understood, HRO is a subset of business-process outsourcing, or BPO. HRO involves the external management of all or some of a company’s HR department by an outsourcing vendor. For example, a company might choose to outsource only payroll, benefits administration, or training; or it might mix and match several functions; or, in a bold move, it might give the entire HR department over to an outsourcing vendor.


From an outsourcing perspective, HR is a broad spectrum of mostly transactional initiatives and applications, including compensation, benefits, administration, payroll, retirement, employee intranets, travel and expenses reimbursement, and a few other related back-office processes. Today, “enterprise HRO” is defined as a third party taking over management of a client’s core HR data management, payroll, self-service, and call-center functions.

Historically, the primary driver for HRO has been the desire to reduce costs. Savings from HRO can be in the range of 20% or more annually, according to EquaTerra Inc., a sourcing life-cycle-management company. Greater cost savings can be achieved when capital-expenditure avoidance is factored in. “These early deals have been led by the CEO, CFO, or COO of the company,” says Mark Hodges, EquaTerra’s co-founder and chairman.

HRO drivers differ depending on job function, however, and there’s a growing mission gap between HR leaders and top corporate management. For HR leaders, the leading driver of HRO is service improvement; for top management, it’s cost reduction, according to a recent Conference Board survey. In fact, for top management, costs reduction is at least twice as important as service improvement.

Also, as HRO matures, new drivers are emerging. For example, many HR professionals realize they must exit the transaction business. HR, they are finding, doesn’t need to own and operate the transactional elements of its business processes; instead, others can do that work can better. This, in turn, promises to allow corporate HR departments to strengthen their focus on issues related to corporate strategy and contribute at a new, higher level.

From Tiny Acorns Grow?

As stated earlier, offshore HRO is still in its infancy. In fact, less than 3% of all HRO outsourcing involves offshoring, according to the Society for HR Management. “There is a lot of buzz, but not a lot of activity,” says David Dell, president of the Sustainable Profitability Group and author of a recent Conference Board report on HRO.

Much of the activity, in fact, centers not so much on true offshored HRO as on a few large companies—including General Electric, Hewlett-Packard, and Boeing—opening their own shared-service centers in low-cost offshore locations. Most of the true HRO offshore action is strategic. Large outsourcing vendors are anticipating growth and making mergers and acquisitions to prepare.

How big is the market now? Depends on whom you ask. Market watcher Gartner estimates that of all BPO—of which HRO is the largest component—only about 1% or 2% of that labor cost is delivered from an offshore location. Of that 1% to 2%, Gartner figures, about 70% goes to call centers, customer help lines, 1-800 numbers, even internal help desks for IT; about 10% goes to chat services, E-mail and Web-based chat; and the remaining 20% goes to transaction-processing services, which includes some aspects of payroll, payment services, checks clearing, credit-clearing services, and some aspects of billing. Yet offshored BPO is growing quickly; by 2007, Gartner estimates, its share of the total BPO labor cost will rise to about 14%. “The HR work that is going offshore is mostly transaction processes,” says Robert H. Brown, a Gartner analyst.

On a dollar basis, Gartner estimates that the HRO market was worth about $25 billion in 2002, and will grow to nearly $38 billion by 2007, for a five-year CAGR of 8.6%. “HR is the biggest chunk of the BPO market, and the most mature,” says Brown. Indeed, market watchers Meta Group predict that by 2007, 90% of Global 2000 firms will have outsourced at least one HR administrative component, and 15% will have outsourced all HR transactions.

Looking just at very large HRO deals, Hodges of EquaTerra estimates that through the end of last year, there were about 50 large HRO contracts in existence. As Hodges defines “large,” these contracts each had a total value of at least $200 million, terms of at least five years, and include at least five HR processes.

One such deal has been done by Sony Electronics, which outsourced its HR systems, transactional, and content work to Hewitt Associates in late 2002. The deal covers Sony’s staffing, transferring, talent management, compensation changes, employee benefits, organizational reporting and hierarchy, and more. “Our primary objectives were cost reduction, technology optimization, and consistent delivery--allowing the HR organization to focus on strategic talent management initiatives,” says Patricia Boggi-Gibbons, Sony’s senior general manager of HR. Still, the vast majority of the work is performed in the United States, she adds.

But that’s not the case for at least one large client of EDS. The client company, a multinational with some 30,000 employees, has outsourced to EDS its payroll, recruiting, staffing, relocation and expatriate administration, and will be adding workforce development—that is, training, performance management, succession planning, workforce development (including a major SAP implementation), and compensation practices. Yet even here, the EDS centers are in the same region as the operation they serve: Hungary for Europe, Malaysia for Asia, and a to-be-determined North American city for U.S. operations. “In the HR space, you don’t take over and put in all new processes and procedures,” says Mike Nosil, director of HR business-process services at EDS. “Instead, you adopt much of what they do.”

One force driving the move toward HRO, whether onshore or off, is the simple fact that HRO mainly works as advertised. In a recent survey of large companies that are outsourcing at least one major HR function, The Conference Board found that nearly 45% of the companies say they have fully achieved their objectives, and that none plan to bring HR back in-house. In fact, the survey finds, when HRO contracts run out, more than 70% of companies will either renegotiate with the same provider or simply extend the contract on the same terms.

Along with this high level of customer satisfaction comes a growing trust. More than a few companies consider HR too intimate to hand over to a services company. But that’s changing, says Phil Fersht, an analyst with Yankee Group. “The ability to source the majority, or all, of the HR function to a vendor as part of a BPO arrangement is a major shift,” he says. “Many organizations now trust a services company to handle some of their most intimate business.”