Long perceived as a “noncore” corporate function, the floodgates have opened for human resources outsourcing (HRO). Once a poor relative of IT and business-process outsourcing, HRO is making a 180-degree turn. In the first half of this year alone, four major M&A deals among HRO suppliers were announced, and no fewer than a dozen large contracts were signed with corporate customers. “We’ve seen an incredible uptick,” says Peter Allen, managing director of global practices at outsourcing advisory firm TPI.

Yet offshoring remains, if not exactly an afterthought, then a decidedly secondary aspect of many HRO deals. Only 10% of HRO engagements are delivered exclusively offshore, according to the recent BPO Customer Satisfaction study by Managing Offshore, InformationWeek, and EquaTerra. A Deloitte Consulting study put the number closer to 5%. And while these figures seem likely to change as HRO clients grow more comfortable with the idea of offshore service delivery, for now most clients want their HR services delivered locally.

That’s because HR—unlike IT and many other back-office business processes—has a pronounced cultural flavor. Personnel and employment rules, tax codes, and benefits practices differ dramatically from country to country. Then, too, most workers want their HR issues dealt with by someone from their own country who shares their cultural assumptions. Political issues are a factor as well. “If you lost your job to an Indian, you don’t want to call someone in India to discuss your unemployment benefits,” says Michel Janssen, managing research director at the Everest Research Institute.

Think Globally, Deliver Locally

Ironically, one major driving force behind several of the recent supplier mergers and acquisitions was the need for these suppliers to offer globally delivered HRO services. As HRO deals become bigger and more encompassing, vendors must be able to serve their clients’ global operations. But this shouldn’t be confused with traditional offshoring. An IT outsourcing (ITO) supplier, for example, can offer low-cost services from India to clients anywhere around the world. But when it comes to strategic HR, rather than transactional or administrative services, most client companies want to keep the work far closer to home.

As a result, HRO providers find they must deliver services from clients’ geographic regions. This, in turn, is driving many of the recent mergers; by forming large, global firms, HRO providers can service multinational clients locally. For example, a single HRO provider might serve a client’s U.S. employees from operations in Florida, European employees from Poland, and Asia-Pacific employees from the Philippines. Mike Nosil, VP of client executive at ExcellerateHRO, an HRO provider recently formed by EDS and Towers Perrin, puts it this way: “We’re using global tools, but on a localized basis.”

Even those companies comfortable with offshored HRO services may not be able to find suppliers capable of providing them, at least not yet. “As a prospective client, you have to ask how global is global,” says Janssen of Everest Research. “While the suppliers are building up the capability, nobody has a complete global solution right now.”

That said, HRO clients are already gaining major benefits from the international reach of suppliers. Take, for example, PrO Unlimited Inc., which finds and hires temps (“contingency workers,” in the company’s lingo) for major corporate clients. But PrO doesn’t actually do the finding. Instead, it subcontracts that portion of the job to a group of qualified suppliers. So, when a client asks PrO to fill a temp spot, PrO in turn alerts its suppliers, which then locate qualified temps and bid for the job. One of PrO’s suppliers, Echo Outsourcing, has an edge on its competitors: The company is owned by SummitHR, a company with major offices in the U.S. and Chenai, India. “We’re effectively an outsourcer to an outsourcer,” says Ranjan Sinha, Summit’s chairman.

In fact, says Terry Weinand, PrO’s COO and executive VP, Echo’s distant location means it can work when U.S. suppliers are sleeping. This gives Echo a jump on filling temp orders, and that, says Weinand, “means our customers can get faster turnaround on their requirements, which allows them to get to market faster with their product.” How do PrO and its clients feel about using temps in India? “While it is rather novel to take this abroad, when it’s done well, most of us don’t even know what’s going on,” he adds.

In a possible sign of things to come, some global companies already find the notion of offshoring HR functions perfectly acceptable. One such manager is Peter Childers, VP of global learning services at Red Hat Inc., a supplier of Linux open-source computer software. “We’re a global company, so for us, offshoring is a funny concept,” he says. “The Internet provides a global, collaborative framework and medium for software development, and our Linux and other open-source code bases are contributed to by people all over the world.”

Four years ago, Red Hat outsourced portions of its global training and certification program to e-learning outsourcing supplier DigitalThink. Last year DigitalThink was acquired by Convergys, which continues to offer e-learning and certification for system administrators to Red Hat customers worldwide. “Having a partner like Convergys is critical,” says Childers.

In the Beginning

For a market segment that is only now coming of age, HRO has been around for a long time—since1949, to be exact, the year when ADP (then known as Automatic Payrolls Inc.) first offered its payroll services. Though no one used the term “outsourcing” back then, that’s basically what it was. Customers appreciate the service, and ADP is today a $7.75 billion (sales) corporation.

ADP has plenty of company. As much as 50 cents of every dollar spent on corporate HR services in the U.S. now goes to a third-party provider of one type or another, says Deloitte Consulting. But until recently, most of that spending was done on so-called point solutions. These provide a single HR service, such as payroll (again, like ADP), workers compensation, payroll taxes, benefits, or training. A company using a point solution essentially outsources a small number of back-office HR functions while keeping the rest of its HR function intact.

That has changed, however, with the emergence of what’s being called HR BPO (human-relations business-process outsourcing). Companies are essentially dismantling their internal HR function and instead outsourcing the whole kit and caboodle to an HRO provider. All that remains of the former HR function are a few senior executives, who manage the HRO relationship and coordinate their efforts with the organization’s top executives. These so-called megadeals typically require the HRO supplier to provide services for seven years for fees worth $250 million, according to TPI.