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A Study on Trends in HR Outsourcing in Indian Context

Contents 3. Executive Summary 4. Introduction 5. Literature review 6. Objective of the research 7. Scope/Utility of the research 8. Research Methodology 8.1 Sampling technique 8.2 Data collection 9. Analysis of Questionnaire 10. Conclusion and Suggestions 11. Limitations 12. Appendix: I-Questionnaire II- Introductory Letter

3. Executive summary
This research is aimed at analyzing the current state of the HR outsourcing market in India and the trends that are prevalent in the same. Today, in this era of globalization there is high degree of competition in all areas. One very important trend in the recent times has been the growth of human resource outsourcing. Rapidly changing market dynamics and global competitive pressures have caused organizations to spend more time focusing on their core business. Organizations are fast realizing that they can't be all things to all people. So companies now, be it a software company, a service provider or a manufacturing firm, decide what they are good at and outsource everything else, i.e., focus on their core competency, and let someone else do the rest in a more efficient and cost-effective manner. As a result, human resources outsourcing is becoming increasingly prevalent. The number of companies outsourcing HR activities continues to rise, and the scope of outsourced HR activities continues to expand. HR outsourcing can happen in HR functions, like payroll administration (producing checks, handling taxes, dealing with sick-time and vacations), employee benefits (Health, Medical, Life insurance, Cafeteria, etc), human resource management (hiring and firing, background interviews, exit interviews and wage reviews), risk management, etc. Outsourcing has become a common response to manage people and technology resources strategically, enhance services, and manage costs more effectively. Outsourcing non-core activities allows HR professionals to move away from routine administration to a more strategic role. The organization can focus on higher valueadded activities while the outsourcing provider takes care of the day-to-day administration. Critical internal resources, such as technology and talent, can be devoted to company's core business. Outsourcing reduces the need for large capital expenditures in non-core functions. Thus, outsourcing becomes a strategy for reducing the capital intensity of the business. This strategy has gained popularity as companies aim to become more nimble and gain the speed and flexibility necessary to compete in today's business environment. A growing number of executives understand the

benefits it can bring in terms of not only cost savings, but also heightened strategic focus. Many recognize outsourcing relationships as long-term partnerships created to further the strategic goals of the organization. Companies to whom organizations outsource their Human Resources function possess the knowledge and resources to expertly perform part or all of a clients' human resources function, allowing the client to streamline their internal processes and concentrate on generating profit in their core business. But still in India, people are not very clear about what exactly is manpower outsourcing all about, and issues like quality and trust needs to be addressed properly. Experts say the basic reasons hampering the growth of HR outsourcing in India are confidentiality and cost factors. Moreover, the fear of losing jobs, losing control over confidential data, ethics and quality of outsourcing vendors, security breaches and overall confidence in the vendors deters many organizations. 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. This is where Indian HR outsourcing companies face a major handicap. However, the future seems to be very promising. Estimates show that the latent size of HR outsourcing in India is about $ 2 billion with a current market of $ 27 million and it is growing at an alarming rate of about 50 per cent. India has immense potential as more than 80% of fortune 1,000 companies are discussing HR outsourcing as a way to cut costs and increase productivity. As part of our research, we gathered information from a number of companies about HR outsourcing and the reasons for which they outsource or dont outsource. Also, we tried to find out about the preferred models for outsourcing and perceived advantages and disadvantages. Research Process adopted was as follows: 1. Defining the objective of the research and reviewing literature available on it (Secondary Research) 2. Research Design: Developing Research Plan and implementing it - designing questionnaire - deciding on the sample size - taking interviews 3. Collecting data

4. Analyzing data 5. Preparation of report 6. Interpreting and reporting the findings Some of the companies included in the survey were: HDFC Bank B.H.E.L. ICICI Lombard TCS Cognizant JCB India Ltd. Star Wire India Ltd. Sterling & Wilson Pvt. Ltd. Career Launcher Saksoft Ltd. Mcgraw-Hill Education

4. Introduction:
What Is Outsourcing? In a nutshell, outsourcing is an accepted management tool for restructuring and refocusing the way an organization does business. It challenges management to build a more flexible organization centred on the core competencies of the business. In making the determination that a business has more to gain by having certain "noncore" aspects of the business outsourced to a third-party service provider, the organization transfers responsibility for one or more activities or functions that would normally be performed in-house to a qualified vendor, for a specified period of time and at a negotiated fee, in accordance with terms stipulated in a service level agreement (SLA). In essence, the organization is making a decision to send certain parts of the business out to a provider whose "core competency" is that part of the business. HR outsourcing (HRO) is the application of different business models and techniques to new forms of activities - or processes and radically redesigning them to create outputs of value for end users such as customers or employees. HRO can be traced back to the definitive work of Michael Hammer and Jim Champy in Re-engineering the Corporation. This spawned the business process re-engineering (BPR) industry in the 1990s. Business process outsourcing (BPO) is based on the principles of reengineering, but also combines them with the ownership and management of processes on behalf of management by an outside vendor. BPO has been applied to many transactional processes that can be easily defined or 'scaled' and transferred to third party ownership with deeper expertise than themselves. Until recently, the management of IT systems has been the major element of the outsourcing market. An ongoing debate concerns which business processes are 'core' to organisations - in the sense of core competencies that drive competitive advantage. Any non-core - or peripheral - activities are outsourced. Typically, Services are improved Overheads are reduced

Many processes are automated - thus reducing people The outsourcing of HR processes emerged in the late 1990s, pioneered by firms specialising primarily in IT outsourcing - although not exclusively - in the US such as ACS, EDS and Accenture. Many transactional HR processes are outsourced and are increasingly associated with electronic delivery - or 'e-HR'. Much day-to-day HR administration can now be transferred to third party providers. Payroll and benefits is widely outsourced with organisations benefiting from economies of scale and powerful Enterprise Resource Planning (ERP) solutions. Competition among HRO providers has dramatically reduced prices. Other advantages for clients include: cost reductions service improvements upgrading technology being better able to respond to business change. Types of HR Outsourcing In the past, HR outsourcing was thought of as hiring a vendor to provide a service. With the new focus on outsourcing, there is more of an opportunity to partner with the vendor to provide the service on a longer term basis rather than just a one-time vendor contract. HR outsourcing can include: Discrete services: In this instance, one element of a business process or a single set of high-volume repetitive functions is outsourced to a third-party administrator. Examples of discrete services could include the annual open enrolment process, flexible spending accounts or employee background checks. Multi-process services: The complete outsourcing of one or more functional human resource processes would be an example of multi-process outsourcing (also called blended services). As such, the outsourcing of either health and welfare benefits administration or defined retirement plan and 401(k) plan administration to a thirdparty administrator would be an example of multi-process or blended services outsourcing. Total HR outsourcing: Total HR outsourcing represents the transfer of the majority of HR services to a third party, to include recruitment, payroll, HRIS, benefits, compensation and communications, as well as the transition of HR management and staff. However, HR executive management would normally remain in place within the

organization, along with strategic planning related to people management and other key HR functions at the discretion of management.

5. Literature review:
Global Scenario SHRM Human Resource Outsourcing Survey Report The 2004 survey report revealed that HR outsourcing was a practice used by almost six out of 10 organizations. However, one-third of organizations did not outsource any HR functions, and only a few planned to outsource HR functions in the next three years. HR functions were usually partially outsourced or completely outsourced. The difference is that when functions are partially outsourced, the organization co-manages the function with the vendor; when they are completely outsourced, the vendor takes full responsibility. More than one-half of HR professionals indicated that their organizations partially outsourced an HR function. Administration of health care benefits, pension benefits and payroll were examples of functions most commonly cited as partially outsourced. The top three functions that were outsourced completely were background checks, employee assistance programs and administration of flexible spending accounts. Some of the most frequently named drivers for outsourcing were reducing operating costs and controlling legal risk by improving compliance. However, large-staff-sized operations, compared with small organizations, were twice as likely to indicate that their reason for outsourcing was an attempt to free up the time of their HR staff to focus more on organizational strategy. When asked about the future of outsourcing, about two-thirds of HR professionals predicted that their level of outsourcing would remain the same over the next five years, and nearly one-third expected their organizations to increase their level of HR outsourcing. Outsourcing seemed to be favored to a greater extent in large-staff-sized organizations: almost twice as many HR professionals from these organizations, compared with medium organizations, indicated that HR outsourcing was likely to increase in the next five years. When asked about the benefits of outsourcing, the majority of HR professionals indicated that outsourcing allowed HR professionals the chance to concentrate their efforts on core business functions, such as organizational strategy development and execution. Correspondingly, nearly three-quarters of HR professionals agreed that the role of HR professionals became more strategic with the outsourcing of certain, specifically transactional, HR functions.

Present scenario in India With more and more companies looking to rationalise employees on their payroll, manpower outsourcing is slowly becoming the new buzz in India too. And the trend seems to have hit not just big multinational companies but the public sector and government undertakings as well, though on a very low key yet in the latter. Estimates show that the latent size of HR outsourcing in India is about $2 billion with a current market of $27 million and it is growing at a rate of about 50 per cent. Experts, however, say though foreign companies are outsourcing jobs to India, putting the country in the middle of outsourcing boom, the Indian companies do not seem to be enamoured by the opportunity till now and are not adopting HR outsourcing practices in a big way. "HR outsourcing in India has not seen the required momentum and is limited to a trickle effect, with companies outsourcing a few selected low-end HR processes," says Anil Mahajan, executive director, Talent Hunt Pvt Ltd, a leading HR firm in New Delhi. A recent survey 'Outsourcing in the Asia-Pacific', conducted by Hewitt Associates, a global HR outsourcing and consulting firm, confirms the situation. The survey showed that many companies in the region are either unfamiliar with the process and procedures of HR outsourcing, or are unaware of the players operating in the area. "Even though across the globe companies are realising that headcount is directly related to the revenue and are outsourcing most of their transaction and administration related work, the general opinion among the Indian companies is that it is still economical to manage all their HR process internally," Mahajan says, adding: "Here people are also not very clear about what exactly is manpower outsourcing all about.Explaining about the concept of HR outsourcing, Kris Lakshmikanth, founder CEO & managing director of The Head Hunter, a recruiting firm in Bangalore, says, "It is a process of outsourcing involving particular tasks like recruitment, making payroll, training and development to a third party who have expertise in these respective fields." "HR outsourcing can happen in areas such as payroll, employee benefits administration, fixed assets administration, network, receivable and logistics management, hardware maintenance, telemarketing, call centres and database management. In India, the most common processes outsourced are related to training,

payroll processing, surveys, benchmark studies and statutory compliance," Mahajan adds. Elaborating about the benefits of manpower outsourcing, Lakshmikanth says, "Today, every organisation is aiming at achieving productivity by enhancing return on investments and achieving the economies of scale. In this context, it makes sense to focus only on the organisation's core competencies and outsource non-critical business activities. Therefore, routine administrative work, although important, can be outsourced to third party vendors." Experts say the basic reasons hampering the growth of HR outsourcing in India are confidentiality and cost factors. Besides the fear of losing jobs, losing control over confidential data, ethics and quality of outsourcing vendors, security breaches and overall confidence in the vendors deters many organisations. Quality at times forms another roadblock. According to Mahajan, most companies are not sure about the end result, which they will receive from the vendor. Also currently there are no standard benchmarks available so pricing varies a lot from vendor to vendor for similar services. This gives the customer the feeling that they are not getting best value for their money, he adds. But, as the Hewitt survey puts it with economic slump showing signs of improvement, many HR outsourcing vendors are optimistic that things will look up in the near future. Experts also believe that in present times HR outsourcing is undergoing a transition phase. "There has also been a transition on its user acceptance, where it is moving from a corporate domain to public sector undertakings and the government sector. However, it would still be sometime before we see increased levels of HR activities being outsourced," they say.

Key Points we noted:


HRO market is still in transition Vast difference exists between the state of HRO market in India and the global scenario People not yet clear about HRO in India Public Sector hasnt yet taken to outsourcing Cost/benefits and confidentiality are most important considerations in HRO More freelancers exist in the market than organized players Size of companies is also an important factor in HRO

HRO is expected to gain momentum in the coming years

6. Objective of the research


The objective of this research is to formulate a picture of current trends in outsourcing in HR services prevalent in Indian firms. The research aims to discern common factors promoting or inhibiting the growth of HR outsourcing industry in India. Also, the data collected will help in finding parameters which are most common in terms of HR outsourcing. The research tries to determine patterns while comparing organizations involved in HR outsourcing against those which are not.

7. Scope/Utility of the research:


The research can be very useful to the HR professionals to understand the current trends in the market with regards to outsourcing of HR services. It will give them a comparison of the firms outsourcing HR services with those that have completely inhouse HR functions. They will get to know about the perceived advantages and disadvantages of HR outsourcing and also the important considerations to be kept in mind. Outsourcing Vendors can also find this research useful in understanding the needs of their potential and existing clientele. The students can also benefit from this research as they will become aware of the new trends in the field of HR and will be better prepared for the challenges ahead of them when they join the industry as HR professionals.

8. Research Methodology
Two methodologies were adopted while undertaking the research: Secondary data collection: large amount of secondary data is available in the forms of articles, journals, and previously conducted researches on the similar topics. This data was collected and studied to determine some of the broad trends prevalent in HR outsourcing across the world and the presence of HR outsourcing industry in India. Also, the data thus gathered helped in identifying key parameters to examine through further exploration and thus helped in defining the hypotheses for further study as well as designing the questionnaire. Primary data collection: Primary data was collected through the means of a sample survey. For this purpose, a questionnaire was mailed to some of the HR managers and executives in various organizations and their response was solicited. The data collected through this survey was then analyzed to determine patterns and for testing the validity of the hypotheses formulated.

8.1 Sampling technique:


The sampling technique used for the survey was non-probabilistic in nature. Convenient sampling technique was used owing to limited number of resources for carrying out the research. Also, the respondents chosen were from varying sectors and thus provided a good estimate of the overall picture prevalent. Target group for carrying out the survey was the HR departments of various organizations. The study objective itself omitted the need to study small scale organizations as they generally dont have a separate HR division as such and hence were not considered for carrying out the survey.

8.2 Data Collection:


A questionnaire was developed and administered via email to the respondents. The questionnaire was accompanied by an introductory letter stating the purpose of the

research and promising confidentiality. Responses were then collected and analyzed to arrive at certain conclusions.

9. Analysis of the Questionnaire:

10. CONCLUSION AND SUGGESTIONS

11. Limitations
The limitations of our research are: The sample which we took does not represent the whole population as the numbers of respondents were very less We used convenience sampling technique owing to limited resources which is not ideal for this kind of research Our limited experience was another constraint on the quality of the research We could not include the HRO vendors in our research to gain their perspective Our respondents were from specific areas and did not cover the whole of India We missed out on some sectors in our research

12. Appendix
I-Questionnaire

Survey on current trends in HR Outsourcing Data being collected through this questionnaire is purely for academic research and will be kept confidential. (Please put X against an option to select it.) Name of Organization: Location: Which sector your organization belongs to?
Manufacturing Sector IT Sector ITES / BPO Sector Retail Sector FMCG Sector Government Organization Any other, Please mention

For how long has your organization been in service?


< 3 years 3 years 5 years > 5 years

Do you outsource any of your HR services?


Yes No

If the answer to above question is No, skip next question.

Which of these HRM services are outsourced by your organization (Select all services being outsourced)? HR service Providing Temporary staff Recruitment & selection Training & Development Managing Payroll systems Managing benefits Conducting Employee Any other surveys service Complete HR function being outsourced, please mention below. Which of these factors are major reasons for outsourcing HR services? (Please rank them from 1 onwards in order of decreasing importance.) Cost savings Increased capacity Lack of internal staff / capabilities Access to better systems and technology Other factors (Please mention) Which of these are major risks associated with outsourcing HR services? (Please rank them from 1 onwards in order of decreasing importance.)

Mismatch of cultures Security of Database Financial stability of chosen vendor Justification of cost-benefit calculations Other factors (Please mention)

While outsourcing more than one HR services, which of the following approach do you utilize? (Organizations which dont outsource HR services skip this question.) Consolidating all HR services under one vendor

Employing different vendors for different HR services according to specialization

While outsourcing HR services, which of these parameters are most important parameters for vendor selection. (Please rank them from 1 onwards in order of decreasing importance.)
Cost Brand Name of Service Provider (Proven Track

Record) Range of Services being offered


Flexible Contract Options Other factors (Please mention)

Do you think that outsourcing HR services has achieved its purpose for your organization? (Organizations which dont outsource HR services skip this question.)
Yes No

Which metric do you use for measuring the effectiveness of outsourcing HR services? (Please select all the measures being used.) None Cost saved due to outsourcing Service level improvement Increase in employee satisfaction Other factors (Please mention)

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