1.

Introduction:

What Is Outsourcing?
In a nutshell, outsourcing is an accepted management tool for restructuring and
refocusing the way an organization 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 parto formulate a picture of current trends in outsourcing in HR services prevalent in
Indian firms. The research aims to 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 fearof 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
4. 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.
5. 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.
5.1 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.

5.2 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.

5.3 HUMAN RESOURCE OUTSOURCING BASICS

While deciding whether HR outsourcing is right for the company three questions should be
answered.

Is the company comfortable letting someone else handle its HR functions?

 Do the company have dedicated HR representatives or adequate resources to manage its HR
needs?

Can the business afford an HR outsourcing firm? If the company is not comfortable with an
outsider handling their HR functions, outsourcing probably isnt the best option.

5.4 PROCESS

Whether your organization is anticipating its first outsourcing, or if you already have
outsourcing arrangements that your organization would like to improve, preparation is a
key as with all HR initiatives. You should choose functions that are definable, with
measurable goals, because you will need accountability once youve chosen a vendor,
Dubiski said. His recommendations are as follows:
Examine all functions being considered for outsourcing
Ensure they are being done in-house as efficiently as possible. You cant collect enough data
about how you now handle payroll, benefits, etc. Dubiski noted. This will also give you a
baseline for comparing previous results to those from outsourcing.

Create a business case for outsourcing

Do this just as you would for any other initiative. If the employer wants cost savings, explore
ways to obtain those results in-house.
Seek a vendor that will work very closely with your company
Its time-consuming to change vendors if you make a mistake and choose the wrong one,
Dubiski warned.
Make sure your contract with the vendor includes penalty clauses and incentives to
increase accountability
Ask the important questions up front: Does the vendor have a help desk? How late in the day
is it available? How fast will help desk staff answer questions for employees and resolve
problems? Also include a clause specifying that if the outsource vendor makes more than a
certain number of mistakes, the employer is entitled to a partial refund, Dubiski
said.
Consider at the outset how you will measure vendor performance
If there are mismatched expectations about service levels, the outsourcer may not be as
accountable as the buyer of the services would like, Doyle said. Regular reports from the
vendor can help to avoid problems or catch them early, Dubisky suggested.
Learn about security protections the vendor provides
You need a vendor who has lots and lots of control over who has access to employee data,
Doyle said. As concerns about privacy and identity theft increase, we see more and more of
our clients kicking the tires on the confidentiality services we can provide when managing
their employees data.

Based on the recommendations of Dubisky, the following seven steps have been identified in
order to achieve success in HR Outsourcing:
Planning Initiatives:
The first step is to announce initiative after the assessment of risks. Project team is to be
formed, and advisers are to be engaged to train the team. Other resources are to be acquired
and issues like resource management, information management and project management
need to be addressed. Accordingly, objectives then be set.
Exploring Strategic Implications:
The second step is to understand the organizations vision, core competencies, structure,
transformation tools, value chain and strategies. Thereafter decision rights, contract length
and termination date need to be determined. Aligning initiative should follow.
Analyzing Costs and Performance: The next step in the process is to
measure activity and project failure costs. Existing and future performance is then to
be measured along with the estimation of the cost of poor performance. It is also very
important to benchmark costs and performance. Specific risks, asset values, make
total costs, pricing models and final targets need to be determined.
Selecting Providers:
The next crucial step is to select providers. For this purpose, the organizations need to first
set qualifications and evaluation criteria. Providers are then identified and screened. An RFP
is drafted. Proposals are then evaluated based on the qualifications and costs and the provider
is finalized.

5) Negotiating Terms:
Negotiations are then to be planned after addressing high level issues and deal breakers.
Accordingly, term sheets are to be prepared. The contract then need to be negotiated based on
the scope, performance standards, pricing schedules, and terms and conditions; and the
relationship be announced.
Transitioning Resources:
The next important step is to adjust team roles and to compare/merge transition plans. The
transition issues like communication, human resources, and other production factors are to be
addressed. The employees need to be taken into confidence. The organization and the
provider are to meet them, make offers/termination, and provide counseling.
zManaging Relationships:
The last but the most vital step is to adjust management styles, set up oversight council, and
communicate. Meeting agendas, meeting schedule and performance reports need to be
defined and designed. Poor performance is to be confronted and problems, if any, are to be
solved. The ultimate effort is to build the relationship.

6. 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
7.Key Findings

HR outsourcing, in the form of moving one or more HR functions from in-house to an

outside provider, is a practice used by almost six out of 10 organizations. One-third of
organizations do not currently outsource any HR functions, and only a few plan to outsource
in the next three years. HR functions are usually either partially outsourced or completely
outsourced. The difference is that when functions are partially outsourced, the organization
co-manages the function with the vendor; when it is completely outsourced, the vendor takes
full responsibility.

More than one-half of HR professionals indicated that their organizations partially outsourced
an HR function and fewer outsourced completely. Administration of health care benefits,
pension benefits and payroll were functions most commonly cited as partially outsourced.
The top three functions that were outsourced completely were background checks, employee
assistance programs (EAPs) and administration of flexible spending accounts (FSAs).

Some of the most frequently named drivers for outsourcing were reducing operating costs
and controlling for legal risk by improving compliance. However, large-staff-sized
organizations, 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 future outsourcing, about twothirds of HR professionals predicted that
their level of outsourcing would remain the same within the next five years and nearly one-
third expected outsourcing at their organizations to increase. Outsourcing seems 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 is likely to increase in the next five years. Only 2% of HR professionals
predicted that their organizations would outsource their entire HR department within five
years.
About one-half of HR professionals believed that outsourcing has decreased job opportunities
for HR professionals, while about one-quarter perceived an increase in job opportunities. HR
professionals from large-staff-sized organizations, however, appear to be more concerned
than those from small and medium organizations that outsourcing leads to reductions in
HR staff. When asked about the benefits of outsourcing, the majority of HR professionals
indicated that outsourcing allows 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 becomes more strategic with the outsourcing of certain, specifically
transactional, HR functions.

8.Key Research Terms

Correlation
The degree of connectedness or association between two variables. Is there a relationship
between x and y? Correlation does not necessarily indicate causality.

Average
The mathematical average of all of the data points or observations in a set, calculated by
adding the data and dividing the resulting sum by the number of data points. A mean may be
affected by extreme data values.

Random sample
A representative sample of a population where each member of the population has an equal
chance to be chosen for the research. A random sample can be generated in a variety of ways.
If the population is very small, names could be drawn from a hat. Typically, however,
random samples are generated by statistical software.

Sample (represented by n)
A subset of a population that represents the population to be studied. For example, consider
that a researcher wants to study the U.S. population. It would be impractical to study every
U.S. resident, so the researcher chooses a part of it (a sample) representing the entire
population. The sample must have the same characteristics as the entire population. Similarly,
it is not prudent to study all SHRM members in a single study; therefore, usually a smaller,
representative sample is drawn.

Standard deviation (SD)

The dispersion of values around the mean. A small standard deviation indicates low
variability and relatively high consensus among responses. A large standard deviation
indicates high variability and a relative lack of consensus among responses.

Statistical significance
A condition occurring when the researcher can show (through specific tests for significance)
that the likelihood is small that the results occurred by chance. For example, if a researcher
claims that the results are statistically significant at p<.05, the likelihood (probability) of
these results occurring by chance only is less than 5%.
9.A Look Ahead:
A Future View of Human Resource Outsourcing
17

Most human resource outsourcing market analysts believe the market for HR outsourcing
will continue to grow over the coming years. This prediction seems to be supported by this
reports findings that show that almost one-third of HR professionals said their companies
planned to increase the use of outsourcing.

This increased use of outsourcing could be particularly pronounced in larger organizations

due to economies of scale. Not only may larger businesses save money by outsourcing
discrete HR functions, but they may also be more likely to utilize multiple HR outsourcing
services. As existing HR outsourcing providers merge and other major players get in the
game, the trend toward the use of several HR outsourcing services is apt to continue because
larger providers are more likely to offer a larger selection of products and services.

Another factor that may encourage more businesses to outsource multiple HR processes to a
single provider is the increasing integration of business and technology systems. Using a
single HR outsourcing services provider may make it easier to link several different systems
together, creating a more seamless delivery. This may be particularly significant if there is a
rise in the use of self-service HR delivery mechanisms. With an increasing need to save costs,
a greater demand for customization and the growing tech-savvy of the workforce, this seems
likely to occur, and in this case, the seamless delivery of technology-enabled HR services
will be critical.

Because the main reasons for outsourcing are to save money and reduce operating costs,
offshoring where outsourced functions result in jobs moving to other countriescould
become another key driver in the trend toward outsourcing. Improvements in information and
communications technology have enabled many industries to take advantage of the lower
labor costs in India, the Philippines, Russia and China, and HR processes that are currently
being outsourced to companies based in the United States may soon be sent to lowercost
countries to create even greater cost savings. The types of HR functions that are likely to be
offshored, as opposed to outsourced, to companies operating out of the United States may be
slightly different due to a variety of factors such as cultural knowledge or security issues.
This could mean that some functions may be more likely to be only partially outsourced to
other countries. Regardless of the form it takes, the development of the offshoring trend will
have a major impact on HR outsourcing overall.

There are, however, many HR services that will continue to be resistant to both outsourcing
and offshoring due to the nature of the work. Those involving high levels of face-to-face
customer interaction or specialization are likely to be least vulnerable to outsourcing. As
more transactional HR functions are outsourced, the character of the HR positions that
remain could shift as well. Most of the survey respondents felt this shift was toward a more
strategic
role. This could be why at least some of the HR professionals surveyed believed that
outsourcing had improved their job opportunities. These respondents may view outsourcing
as a way to free them up to focus on more visible and high-profile strategic tasks. As SHRM
tracks the outsourcing trend over the coming years, one of the most critical issues it will
continue to examine will be whether the number of HR professionals reporting an
improvement in their own career prospects as a result of the outsourcing trend increases.

10.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.
Tata
Saksoft Ltd.
Mcgraw-Hill Education
11.Conclusion

HR departments today are faced with dual roles. The first involves being a business partner
focusing on core functions that impact bottomline objectives of the organization. Second, HR
professionals are critical in ensuring that the day-to-day needs of employees are addressed.
These two roles afford that HR professionals have the foresight to manage the organizations
strategic approaches while also handling its most immediate and relevant concerns.

As a way to juggle these responsibilities, outsourcing appears to be a viable option that

organizations are embracing. This is especially evident in large-staffsized organizations
which show a trend in utilizing outsourcing slightly more than smaller organizations.
They also report a greater likelihood of increasingly relying upon it in the future. Large
organizations, however, also reported more unfavorable outcomes due to outsourcing, such as
less face-to-face contact with employees and decreases in in-house expertise. HR
professionals from large organizations also expressed greater concern that outsourcing would
lead to reductions in HR staff size, which is corroborated by results of this survey that show
these organizations experiencing decreases in their HR department size in the past five years.
HR professionals are fully aware of the impact of outsourcing on the profession. Some
embrace it, while others do not. Their concerns center around the shifting roles of the HR
professionals that require them to be both transformational and transactional. It is likely that
as an outcome of outsourcing the preferred skills in the profession may shift. Some jobs may
be redistributed such that they require broader business skills as well as specific HR
expertise. These changes, however, are likely to be felt throughout the profession, regardless
of whether an organization outsources its HR functions or not. Depending on the
organizations business goals and corporate culture, outsourcing may not be the most viable
alternative. Yet, the role of HR professionals will continue to alter as the profession advances
into new territory. While most of the discussion about HR outsourcing tends to center on the
cost savings, the advantages and the disadvantages, the real focus may need to be on
preparing for the inevitable impact on the profession itself.

12.BIBLOGRAPHY

ACADEMIC BOOKS:
Human Resource Management by Mumbai University for M.Com. Part 1

ARTICLES:
Dr. Manisha Seth and Dr. Deepa Sethi
Jennifer Schramm, Manager of Workplace Trends and Forecasting
Evren Esen, Survey Analyst

WEBSITES:
www.shrm.org/research
hrmba.blogspot.com