How Far Will HR Outsourcing Go?

Sometimes HR outsourcing seems like a snowball rolling downhill, growing in both scope and importance. For HR professionals, the question is just how large the outsourcing phenomenon will get and whether its impact will ultimately change the very nature of HR.
In the early 1990s, companies were just beginning to recognize outsourcing as a business strategy, a possible way of controlling costs and/or improving service. Ten years later, HR outsourcing has evolved into an essential managerial tool. The Outsourcing Institute projects HR outsourcing spending to increase 20% in 2000. And Buck Consultants surveys show that among those employers that were doing any outsourcing at all in 2000, 97% outsourced a function normally handled by HR, up from 40% in 1996. The larger the organization, the more likely it is to outsource HR; 84% of 109 companies with 1,000 or more employees polled by Buck in 2000 were outsourcing at least one HR function.
Estimates of the projected growth of the HR outsourcing industry vary widely. Research firm Dataquest forecasts almost 30% annual growth in HR outsourcing in the U.S. over the next four years. Meanwhile, International Data Corp. projects annual growth of just 7% for outsourcing specific HR functions such as payroll but it foresees 19% annual growth for comprehensive HR outsourcing solutions, including turnkey HR contracts.
Some analysts argue that the trend toward outsourcing HR will slow as technological advancements allow HR departments to reclaim many functions that they once contracted out to vendors. Others predict that the trend toward HR outsourcing will pick up speed as HR finds itself under relentless pressure to accomplish more in less time and as Internet-based technologies make it easier for companies to exchange HR data with outsourcing vendors. Another factor is the tight labor market, which makes it hard to recruit and keep enough internal staff members trained to handle labor-intensive functions. The administration of today’s complex benefit programs, for example, often calls for major investments in staff and technology. If HR outsourcers are eager to solve some of these HR problems for a fair price, why not let them?
Of course, outsourcing bit and pieces of HR could lead to bigger things. Little “outsourcing snowballs” could turn into avalanches with the power to transform the HR profession. Dataquest estimates that the market for integrated, multiprocess HR process management will grow from over $900 million in 1999 to more than $12 billion by 2003 in the U.S. alone. On the horizon is the integration of all HR processes into one big outsourcing contract.
Yet, even as the potential of outsourcing becomes clearer, so do some of the tradeoffs and drawbacks. First, large-scale outsourcing could make companies utterly dependent on their vendors, putting them at risk if the vendor’s business suffers. Second, there are data security concerns. HR information is critical and highly confidential and could be lost or misused. Third, there’s the danger that HR will become “faceless” and unable to provide the human touch that HR issues often require. By farming out HR duties to vendors, the HR department loses its chance to sustain personal contacts.
Fourth, HR outsourcing may send the wrong message to upper management: that HR is not a valuable core function in the organization. And, fifth, outsourcing threatens to destroy HR career ladders and areas of internal expertise. There may be fewer administrative jobs in which to develop HR staff for higher-level HR responsibilities.
Is outsourcing ultimately worth it? Many firms seem to think so. For example, a late 1999 American Compensation Association (now called WorldatWork) survey shows that most responding employers are satisfied with their experiences outsourcing employee benefits. At least into the year 2001, many managers are likely to seek out firms willing to perform noncore HR functions that don’t provide a competitive advantage.
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For outsourcing information, resources and research, see
http://www.outsourcing-center.com.
NikuSource reportedly helps employers find HR outsourcing vendors. Visit the site at
http://www.nikusource.com.
A site that reportedly helps employers who are looking for application service providers can be found at
http://www.webharbor.com.