Why Companies Outsource Human Resources

More than 80 percent of companies currently outsource one or more human resources function, while 25 percent outsource the entire business process; reported recent surveys by Accenture, a major HR consulting firm. In 2006 the market for bundled, integrated outsourced HR services was projected to reach $12 billion. By 2007, analysts expect the total market for human resources outsourcing to grow to almost $26 billion.

The range of human resources processes typically being outsourced has expanded, as well. For years companies outsourced such standard processes as payroll, benefits administration and preliminary resumé reviewing. Today, however, organizations are also outsourcing strategic processes, i.e., compensation, recruiting and interviewing, advanced analytics and resource planning. Some, in fact, are turning to outsourcing providers for comprehensive end-to-end solutions for their noncore business functions.

The functions most often outsourced are 401(k) administration (88 percent), pension administration (57%), recruitment (40 percent), training and professional development (29 percent), payroll (23 percent), health and safety (10 percent) and performance evaluation (1 percent).

What Makes HR Outsourcing So Popular

According to the Accenture survey of 150 senior executives from Fortune 1000 companies, lower costs were cited as the principal reason for outsourcing (88 percent of respondents) Companies expect their arrangement with an outsourcing provider to cost less than maintaining an internal human resources function. Since outsourcing can improve HR process efficiency and service delivery, transaction costs often go down. Furthermore, since outsourcing frees companies from having to put out the continual capital investments necessary to maintain up-to-date HR systems and infrastructure, fixed costs frequently are also reduced.

Eighty-two percent of survey respondents cited access to greater expertise as another important driver for outsourcing HR. Many companies have dismantled their HR functions while undergoing restructuring or downsizing, and have lost in-house knowledge. Many companies are simply may be too small to attract and retain the caliber of HR specialists necessary to maintain a state-of-the-art function. Many organizations have come to rely on outsourcing in order to benefit from a provider's staff of top talent. In short, they outsource to have the work done by experts.

Such access to expertise also includes access to leading-edge technology-technology requiring significant capital outlay, and which a company may be unwilling to invest in or to afford, such as:

• Enterprise Resource Planning (ERP) systems
• Web-enabled processes
• Data warehousing and knowledge management systems

Interestingly, two-thirds (66 percent) of respondents stated they outsource to free up their HR departments to focus on broader company issues. This appears to be a growing trend. Following the lead of other internal functions like information technology, HR has been shifting from a tactical, administrative function to a strategic business-planning group. Many HR departments, however, are not able to dedicate resources toward noncore business needs because they are preoccupied with transactional activities. Through outsourcing noncore processes, in-house professionals can move away from routine tasks and take on a more strategic role, while the outsourcing provider takes care of the day-to-day administrative duties.

Additionally, in a related survey of more than 800 executives worldwide, Accenture reported that an overwhelming majority (86 percent) of respondents said that outsourcing gave them more control over business results in a variety of critical areas, such as the ability to plan. More than half (55 percent) said that outsourcing allowed their companies to implement strategies and change at a faster and more controlled rate. 57 percent said they began to experience control gains within the first eight months of an outsourcing agreement.

Finally, 64 percent of respondents said they outsource to gain access to more information, and 58 percent said they outsource to receive quicker response times.

"Executives are clearly coming to appreciate that there are advantages to outsourcing their HR," said Randall F. Muck, a managing partner of Accenture. "In addition to realizing lower costs and getting access to expertise, they are recognizing that outsourcing frees up their HR professionals' time so they may focus on issues of greater strategic importance to the company."

For more information on implementing a comprehensive HR solution for your company, contact Extensis directly at 888/473-6398, or email us by clicking here