First we reengineered business processes. Now we’re shipping them out.
Although business process outsourcing has yet to fully take off in the Canadian corporate world, it’s definitely a trend worth noting. Everything from payroll to sales force automation is starting to be turned over to external service providers as more and more firms realize that BPO holds similar benefits to those achieved by outsourcing technology functions.
A case in point is human resource management. This is one business process that only just now is starting to be outsourced in a significant way, but according to industry research firm International Data Corp. (IDC), it is expected to experience strong growth over the next five years. In a recent study titled Human Resources Business Process Outsourcing: A Market Overview and Service Provider Analysis, IDC analyses the U.S. market for HR outsourcing services, finding that it was worth US$6.7 billion in 1998 alone. By 2003, spending on HR business process outsourcing in the United States is expected to reach US$10.2 billion, according to IDC.
HR outsourcing figures for the Canadian market are not so clear, says Lars Gorannson, director of professional services and outsourcing research at IDC Canada Ltd. in Toronto. But he says that although HR BPO is in its infancy, it is definitely a growing market here as well. He points to narrowly defined business processes, such as specific accounting functions and cheque processing, as functions that have been outsourced for a few years now.
“There are a number of players that come from different backgrounds,” Goransson says. “Firms like ADP or Ceridian come from the payroll processing field. They want to go in [to customer sites] and take on more HR responsibilities – not just payroll, but benefits administration, training, you name it. Then you have firms like PricewaterhouseCoopers or IBM that are approaching this opportunity from an IT point of view primarily. And then you have niche firms.”
HEADING FOR A GROWTH SPURT
The IDC study breaks the overall HR outsourcing services market into two segments: processing services and business process outsourcing. Currently, the largest segment of the HR outsourcing market is the processing services segment, which includes activities such as payroll processing and benefit-claims filing. However, IDC predicts the BPO segment, which includes managing employee benefits and other HR administration duties, will grow almost three times faster than processing services.
One reason for this, according to IDC, is that human resource processes and programs have become increasingly complex and burdensome to internal HR departments. In an effort to run HR activities more efficiently and to become more effective at hiring and keeping qualified employees, employers have adopted innovative self-service and Web-enabled HR systems and training programs. However, these in turn have created new pressures for the already strained human, technological and financial resources within most HR departments.
As a result, companies are starting to demand comprehensive, end-to-end HR solutions from their service providers, with the expectation that the outsourcer will bring leading-edge technology to the provision of efficient and cost-effective HR services.
And as is the case with most outsourcing activities, companies can concentrate on their core competencies by handing over non-core HR processes to third parties and focusing only on the administrative HR functions they want to retain.
Goransson says he does not think HR business process outsourcing will be for every company. “You’ll see some companies that are dead set against it, because it’s a philosophical question about control and how you run a business,” he says.
The main inhibitors to HR outsourcing, according to the IDC study, all stem from fear – fear of losing control, fear of losing confidentiality, fear of change on the part of management. Another primary inhibitor is a lack of education regarding HR outsourcing services.
“The onus is obviously on the outsourcer to provide assurance and create the technical infrastructure to make clients comfortable,” Goransson says, adding that a large outsourcer such as IBM may have the advantage here, due to the brand equity associated with its name.
If HR outsourcing services do become the norm in the future, they could have a “profound effect,” Goransson says, “because if you take on a functional process for a company, if you do everything that covers HR or finance, say, you become very, very intimately tied to that company.”
LARGE FIRMS EYE BPO
Goransson predicts that BPO in general, not just as it pertains to HR management, will gradually catch on with large customers that have global operations. “Over time, you’ll see service offerings targeting all business processes that can be identified within a company. Some [outsourcing service providers] will be very niche-oriented, and some will be very broadly focused and they may bring in niche providers for certain aspects” of the business process outsourcing, he says.
He cited PricewaterhouseCoopers as an example of a full-service BPO provider. “They’ll take your entire department and they’ll offer you the best-of-breed practices within, let’s say, financial services, and they’ll ensure that it stays best of breed through their expertise. That’s their value-add, and they can offer that at a global scale.”
However, he cautions that BPO is still a very young market in Canada. “There’s been a lot of hype and talk about this for a long time, but not a lot of activity so far.”
Linda Stuart is a veteran technology writer and editor. She is associate editor of CIO Canada.
