RESEARCH REPORT

ON

“HR OUTSOURCING IN INDIA”

Submitted in the Fulfillment of the Requirement of the Degree for Master of Business Administration

SUBMITTED TO: SUBMITTED BY:

DR. HARI OM SHARMA YOGITA MEHTAHOD (MBA DEPTT.) MBA-IV SEM

INSTITUTE OF MANAGEMENT & TECHNOLOGY, FARIDABAD

Acknowledgement

I express my gratitude and thanks to

our respected faculty Ms Teena to

give me the opportunity to study &

understand the HR OUTSOURCING IN

INDIA. The Research report would not

be the same if there were no

brainstorming sessions regularly held

by our faculty and the indispensable

knowledge and guidance that he

imparted with during and after the

scheduled classes

Yogita Mehta

INTRODUCTION

HR OUTSOURCING: AN INTODUCTION

“HR outsourcing 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."

Today, every organization 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 organization’s core competencies and outsource non-

critical business activities. Therefore, routine administrative work, although

important, can be outsourced to third party vendors.

HR outsourcing has the potential to benefit organizations that want to transform

their ability to manage human capital. Outsourcing can provide the right blend of

cost, service levels, experience and economies of scale that allow companies to

move away from administrative activities and focus on more strategic issues.

The Human Resource (HR) department is critical for employee satisfaction in any

firm. Some businesses don’t have the staff, the budgets or the inclination, to deal

with the nitty-gritty of HR management, so they opt for outsourcing. Deciding

which functions to offload and which firm to outsource is also a major decision.

HR functions include 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

(workers’ compensation, dispute resolution, safety inspection, office policies and

handbooks) and others.

HR outsourcing can be segregated into two broad categories: Transaction and

administration outsourcing and HR consultancy. Transactional outsourcing is

more of day-to-day or month-to-month requirements, and constitutes services

like payroll and benefits. This kind of service is more prevalent in the Indian

market. In the value chain, it falls at the lower-end compared to HR consultancy,

although it happens to be an essential function. It is a fact that companies

continue to manage the strategic and policy functions of their HR departments in-

house.

HR outsourcing can happen in various areas such as payroll, employee benefits

administration, fixed assets administration, network management, receivables

management, logistics management, hardware maintenance, telemarketing, call

centers and database management. In India, the most common processes

outsourced are related to training, payroll processing, surveys, benchmark

studies, and statutory compliance.

HR outsourcing Services could fall into one of four categories:

o PEO - A Professional Employer Organization (PEO) takes legal responsibility

for employees. The PEO and business owner are partners, with the PEO

handling HR aspects and the business handling all other aspects.

o BPO - BPO refers to all fields, but specifically for HR, a BPO would ensure

that a company has access to latest technologies.

o ASP - Application Service Providers (ASPs) host HR software, on the web

and rent it to users.

o E-services - E-services are those HR services that are web-based.

HR OUTSOURCING ASSISTING CHANGE:

Use of HROutsourcin

g

Cost of Technology,Desire for Best Practice Support

Need to remain flexible, Risk Management

Technology Advancement

Talent Shortage

GlobalisationM&A

Org. Changes

Desire/Push to move to Strategic Planning

OBJCETIVES AND RATIONALE OF THE STUDY

OBJECTIVES & RATIONALE OF THE STUDY

Today, every organization is aiming at achieving productivity by enhancing return

on investments and achieving economies of scale. In this context, it makes sense

to focus only on the organizations core competencies and outsource non-critical

business activities.

Corporate focus on the implicit and explicit costs of human resources has never

been greater and outsourcing employee benefits administration can create

greater efficiency while decreasing costs. The study aims at studying the HR

outsourcing phenomena and how companies in India are reacting to this

phenomenon.

The study will throw light on the various aspects like the trends, challenges,

benefits and other issues like process and vendor selection criteria used related

to HR outsourcing in the context of the Indian industry. It will also talk about the

role of outsourcing outfits like India Life Hewitt, Ma Foi, Xansa, Wipro, Accenture

etc in shaping the Indian HR outsourcing industry.

Various objectives of conducting the study are: -

o To study the various challenges faced by the Indian industry pertaining to HR

outsourcing.

o To study the various reasons deterring the Indian HR outsourcing industry to

grow at the pace of the global market.

o To study the trends of HR outsourcing prevailing in the Indian industry.

o To ascertain the future of the HR outsourcing industry in India and the factors

responsible for molding it.

o To find out the various benefits being derived out of HR outsourcing by the

Indian companies.

o To study the impact of HR outsourcing on the internal customers in the Indian

companies.

o To study the criterion used by the Indian companies in selecting the vendor

for outsourcing their HR processes.

o To study the criterion used by the Indian companies in selection of the HR

process to be outsourced.

REVIEW OF LITERATURE

LITERATURE SURVEY:

Outsourcing is a strategic decision to give a task or activity to an independent

contractor who determines how best to do the task or activity. The firm and the

independent contractor become partners and may establish a long-term

relationship.

BENEFITS OF HR OUTSOURCING:

As the Human Resources Outsourcing market rapidly evolves, an ever-changing

set of outsourcing solutions is now available to accelerate enterprise

effectiveness. HR Outsourcing is increasingly seen as a key enabler of people

and team transformation.

Properly defined goals that are supported by innovative outsourcing can drive a

company to the next level of enterprise effectiveness. As people become more

critical to the success of a company, the human resource function will have to

progress from administration to strategy if the organization it supports is going to

remain competitive.

The advantages are clear and compelling: improved business focus, more

productive use of time and resources, and guidance from experts from across the

business spectrum, saving money, focusing on strategy, improving compliance,

improving accuracy, lacking experience in-house, taking advantage of

technological advances, and offering services they could not offer.

Outsourcing HR functions allows a company to focus on its core competencies

and provides administrative relief from many employer-related responsibilities, so

that the company can concentrate on developing strategies that provide

competitive advantage to it.

Traditionally, people have been viewed as liabilities or expenses, instead of

tangible, bottom-line assets. Successful business owners have learned, however,

that their employees have a direct impact on their profitability. The company gets

more out of its business when it gets more out of its people.

Statistical analysis by Watson Wyatt Worldwide, which developed the Human

Capital Index to provide a standard for measuring a company’s people practices,

shows a clear relationship between the effectiveness of a company’s people

practices and the creation of superior market value.

Once HR and other operations are outsourced, many companies experience a

strong return on investment, according to a recent survey of American

executives. The 2006 survey of executives at the IDC Midwest Conference in

Chicago showed nearly 85 percent of the respondents saved as much as they

spent on outsourcing, with 26.4 percent reporting a savings of twice as much.

And the savings, according to nearly 95 percent of the respondents, went toward

operational performance and innovation, which improved shareholder value.

Strong human resources practices have the potential to increase a company’s

productivity and profitability, but HR management has become a colossal task,

demanding considerable resources. Legal and regulatory compliance has

become an overwhelming task, and time spent on administrative obligations is

time spent away from growing business.

Outsourcing is the great equalizer for small to medium-sized firms. Growth-

oriented entrepreneurs can benefit tremendously. Not only do employees

frequently gain access to better benefits, the owner gains freedom to focus.

Outsourcing “people strategies” can help a company gain a competitive

advantage, but it needs professionals who cut through the clutter of HR practices

to learn which have the most positive impact on its business.

DETTERANTS OF HR OUTSOURCING:

There exists a set of basic reasons hampering the growth of HR outsourcing.

Many companies outsource only a bit of their requirements. Various reasons that

deter many organizations are:

o Fear of loosing jobs

o Loss of sensitive information to public/ competition.

o Ethics and quality of outsourcing vendors.

o Possibility of security breaches.

o Cost- benefit equation not clear.

o Lack of psychological acceptance.

DECISION FOR OUTSOURCING:

Baron & Kreps, 1999 gave this matrix which talks about how and when to outsource

activities. According to this matrix, strategic importance of the activity and

interdependence on other activities are the two factors on which the decision of

outsourcing should be based.

The activities that have high strategic importance and high interdependence on other

activities should be kept in-house and the activities that have low strategic

importance and low interdependence must be outsourced.

High

LowStr

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Low HighInterdependence

Insource

Outsource

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ContingentEmployees

Various considerations to be taken into account while outsourcing were given by

Baron & Kreps, 1999 :

o Does learning from this activity spill over to an important “core” activity?

o Can the outsourcing relationship be reversed and the work brought back

inside when conditions change?

o Can the outsource supplier adjust more quickly to changing labor or market

demands than we can?

o Do we have a strong clan-like culture that would be weakened with

employees who have different values or interest?

Outsourcing may not be appropriate when:The task is a core activity critical to

strategy or technology.

1. Task is highly interdependent with core activity due to technology or work

design.

2. Task requires great deal of firm specific human capital or access to

proprietary information.

3. Tasks where the employees work in close proximity to regular, core

employees and are similar socially to them.

METHODOLOGY FOR HR OUTSOURCING:

The methodology of HR outsourcing involves the following steps: -

o Situation analysis – It includes business environment analysis, analysis of the

work process which is to be outsourced and risk analysis.

o Solution design

o Design of performance measures & contract – It includes preparation of the

HR outsourcing contract. The expected service levels are defined and

accountability & performance measures for both the vendor and the company

are set.

SituationAnalysis

Solution Design

Design of Performance

Measures & Contract

Solution Delivery

Solution Performance Management

- Business environment analysis

- Work process analysis- Risk analysis

- Strategic

- Project

- Transactional

- Work Process design

- Service levels

- Accountability & performance measures for both Vendor & Company

- Resourcing

- Work Process management

- Solution management

- Vendor-Company relationship management

- Performance Analysis & Reporting

- Performance GAP Resolution process

o Solution delivery

o Solution performance management – It includes the management of the

vendor-company relationship.

HR OUTSOURCING DELIVERY PROCESS:

Delivery Process Support

HRO Soluti

onsDeliverables

Work Process

Resources

Hr tools

PeopleDoers

Consultants

Project Dedicated Expertise

Admin

BSCKPISLI

• Process

• Procedures

• Rules

• Project Management

• Performance Management

PerformanceMeasurement& Management

PRESENT SCENARIO OF HR OUTSOURCING IN INDIA:

The general opinion among Indian companies is that it is economical to manage

all their HR processes internally. Consequently, there is not much emphasis on

outsourcing. Typically, very small companies (which do not have the competency

to staff a full-fledged HR department) and very large companies (who wish to

outsource all routine HR processes so that they can concentrate on core issues),

are the ones that use HR outsourcing in a significant way. Besides, many

multinational companies are fast adopting these practices.

Sateesh R Kurugod, head of marketing and alliances, Crossdomain Solutions

says that now CXO’s realise that HR teams typically spends over 80 percent of

its time in managing tactical and transaction oriented HR operations. “If these

tactical processes are outsourced, the company could re-deploy their trained HR

resources to core processes,” he adds. Pramode Sadarjoshi, the director and

head of Human Resources of Cognizant Technologies says, “Today, every

organization is aiming at achieving productivity by enhancing return on

investments and achieving the economies of scale. In this context, it makes

business sense to focus only on the organization’s core competencies and

outsource non-critical business activities. Therefore, routine administrative tasks,

although important, can be outsourced to third party vendors.”

Experts 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. All this reflects on the growth of this sector.

HR outsourcing comes third in the list of potentially high paybacks, after IT and

the telecomm industry. However, many companies wrap up their HR

functionalities as something that happens in the back office, and do not give

enough attention to the infrastructure that essentially props up its employees.

Over the years, this has bred neglect, leading to antiquated HR management

systems.

Now, it is time for this mindset to change, because companies are suddenly

waking up to the fact that their HR policies are not in step with the times, and a

major overhaul is called for to keep pace with company acquisitions and

mergers. A few companies have tried mending their HR management system on

their own, but they soon discovered that it is like opening Pandora's Box; more

you inquire into the state of HR policies, you keep unearthing more anomalies.

That's where outsourcing can step in. If you have a problem managing your HR

and bringing the existing system up to scratch, why not let a third party worry

about it? What comes with HR outsourcing is better management at a lower cost

Implications of HR outsourcing for India need to be looked at in two parts —

economic impact and HR impact.

The economic impact is positive, given that India is the beneficiary of the global

outsourcing wave, at least for now. It is creating more jobs and increasing

earnings for the country.

The second part of the India impact is from the HR point of view. What is quite

obvious is the fact that cost arbitrage will not be the driver for this trend within

India, if ever, even if a large organization were to outsource to a small operator.

India must be the country hiring the most in the world. In fact, HR in India would

rank as the most dynamic and turbulent in the whole world today. There are so

many new jobs, so many to hire, so many to train, and so many to retain. After

many years of fighting for identity, HR in India has come of age. HR and

organization building issues are center of the plate in any Indian CEOs agenda

today. CEOs are willing to spend as much as it takes to manage their people and

people processes well. It may never get any better for HR.

With more and more companies looking to rationalize employees on their payroll,

Human Resource outsourcing is slowly becoming the buzz in India. Companies

to whom organizations outsource their human resource function possess the

knowledge and resources to expertly perform part or all of a client’s human

resources function, allowing the client to streamline their internal processes and

concentrate on generating profits in their core business.

Estimates show that the latent size of HR outsourcing in India is about $ 2 billion

with a current market $ 27 million and it is growing at the rate of about 50 per

cent. 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. Companies which haven’t joined the HR outsourcing bandwagon are

either unfamiliar with the process and procedures of HR outsourcing, or are

unaware of the players operating in the area or are unaware of the probable

value obtained from doing so.

Projections show that in the Asia Pacific region, HR outsourcing will go up to

2560 million dollars (Garter 2004). The projections for HR outsourcing processes

are mentioned below: -

Pay roll services 761

Benefits administration 536

Education & training 556

Recruitment & staffing 348

Personnel administration 167

Other HR functions 192

Total 2560

Some key findings of the Outsourcing Asia-Pacific online survey that was

conducted by Hewitt in June 2002 with regards to the Indian market: -

o Outsourcing of the complete HR function was prevalent among foreign

companies that have established operations in India.

o Outsourced expertise where staff expertise is provided as an outsourced

service rather than processing services was observed particularly among

small and medium sized companies that find difficulty retaining skilled,

senior HR staff.

o The outsourcing of HR processing, including payroll and benefits

processing.

Even though across the globe companies are realizing 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. Here people

are also not very clear about what exactly is manpower outsourcing all about.

GROWING IMPORTANCE:

After customer care services and medical transcription, outsourcing of human

resource services or HR BPO is emerging as the next big opportunity for Indian

BPOs with the global market in this segment estimated at $40-60 billion per

annum according to experts.

HR BPO comes to about 33% of the outsourcing pie. India has immense

potential as more than 80% of fortune 1,000 companies will discuss offshore

BPO as a way to cut costs and increase productivity. Sensing the potential,

global BPO players including Fidelity, Exult and Hewitt have begun setting up

operations in India. However, most HR BPO players had not leveraged the

offshore advantage as yet.

The revenues in the HR outsourcing space are projected to increase to $3.5

billion by 2008 according to a Nasscom-McKinsey survey. Even if 10 per cent of

HR outsourcing is off shored in the next 5 years, offshore opportunity can be

anywhere around $1.4 billion.

Research firm Gartner has forecast HR BPO to reach $51 billion and represent

39% of all BPO revenue by 2004-end. In HR BPO, revenues depend on the

number of employees the clients have. This is in sharp contrast to a typical

customer care center, where bills are charged on the workers servicing a client in

the BPOs. Despite huge potential, not many companies have leveraged the

offshore strategy. The main reasons for not leveraging the offshore benefit have

fabeen companies being undercapitalized or not knowing enough about the

offshore business.

Research proves that the market for HR outsourcing in the APAC region could

grow from $1.14 billion in 1999 to $2.56 billion in 2004. Although it is not a very

huge growth, it has still shown an upward trend.

Some of the key companies, which have gone ahead for manpower hiring

outsourcing practices, are Cisco, GE, Honeywell, Sun, i2, LG Soft India, Escosoft

and Legato Systems. While LG Soft India has outsourced its PF management,

Escosoft has outsourced payroll processing, execution of training programmes

and survey conduction. According to Shubho Kundu-senior general manager HR

of LG Soft India, the company has been able to save a lot in terms of reducing

paperwork and interaction with government agencies. Besides, there are other

companies like Xansa India, which is planning to take a plunge in HR outsourcing

business and offer services to its parent organisation. Binnoo Wadhwa, the head

of HR for Xansa India, says that the move showcases the robustness of the HR

department to handle such critical applications.

There are many others who do not believe that HR outsourcing is necessary.

Take the case of Aptech, which has not considered HR outsourcing as the

company feels that HRD is strategically linked to its business. According to this

company any job or function, which is of strategic importance to the organization

should not be left for outsiders or the so-called outsourcing partners.

DRIVERS OF SUCCESSFUL HR OUTSOURCING:

SELECTION OF HR OUTSOURCING VENDOR:

Selection of the right vendor is a very important factor in making it a successful

venture. For some businesses, cost is the deciding factor in vendor selection.

Other companies look for a cultural fit or a commitment to quality. Some things a

company should consider when evaluating a firm include:

o The range of outsourcing services it offers;

o The expertise it has in the particular industry;

o Its general HR experience;

Its understanding of the company’s priorities;

o Its available resources;

o The flexibility of its contracts.

It must be kept in mind that an HR firm is an extension of a company culture, so

the company must try to find one that fits its image.

KEY QUESTIONS ASSOCIATED WITH HUMAN RESOURCE

OUTSOURCING:

Six important questions companies must focus on as they decide whether to

outsource some or all of their HR processes:

What are the external forces that are driving the company to examine

the opportunity for outsourcing HR activities?

Globalization, restructuring, increased administration complexity and cost

pressures are all driving companies to consider the use of HR BTO. As

companies begin to operate in more countries, they are finding it increasingly

difficult and costly to keep track of, and manage, the variety of benefits and

regulatory requirements in each area.

For example, a multinational organization that has been built over time from a

series of acquisitions and buyouts can find itself with a bewildering mix of

compensation packages, pension plans, human resource management (HRM)

systems, hiring guidelines and HR contact centers. Further, as compliance

directives and legal regulations change in each of the countries in which the

company operates, the company’s ability to stay current becomes more difficult

and costly as extensive resources are required to maintain and apply this

knowledge. Allowing an outside party that has already built existing capabilities in

these areas to manage the process becomes an increasingly attractive

proposition.

Finally, overall cost pressures are forcing companies to identify new methods for

cutting administrative expenses. A number of recent studies suggest that

reducing costs is the primary benefit that companies seek when outsourcing HR

processes. As new competitors enter the market, particularly those with lower

labor costs, many companies’ profit margins are put at risk, prompting them to

examine closely all activities where cost reduction is possible. Outsourcing

provides an opportunity for companies to leverage the cost base and experience

of an outside provider, which can potentially lower the cost of delivering HR

services, while maintaining or improving service levels.

What are the initial drivers that make HR outsourcing an attractive

proposition?

A number of internal drivers are also pushing firms to investigate HR

Outsourcing. For example, some companies see it as a means of controlling the

cost and effort associated with operating their HRM systems. After evaluating the

total cost associated with upgrading and maintaining these systems, companies

are increasingly turning to outside providers to manage their HRM systems and

take responsibility for upgrades and system availability.

Companies are also recognizing that they are unable or unwilling to bear the cost

of developing employee or managerial self-service tools; they would prefer to

“rent” these applications from outsourcing providers who have already invested in

development, have the ability to keep up with the latest technology solutions and

can provide best-in-class tool sets.

Also, the level of complexity involved in administering complicated programs and

processes in multiple regulatory environments and managing data across

borders often requires sophisticated expertise, which many companies may not

have in-house. Sourcing this capability from a vendor could offer lower costs and

a higher likelihood of staying current on recent developments.

Third, companies want to reduce the risks associated with business volatility.

Having gone through numerous hiring/layoff cycles, they are looking to increase

process capacity without commensurate increases in full-time headcount. For

example, companies need to increase their ability to recruit without having to

bring on a number of full-time recruiters (because, typically, recruiters are the first

people exposed to layoffs during a business slowdown).

Fourth, as organizations try to shift resources from administrative to more

strategic activities, outsourcing offers one way to build a new sense of focus

within HR organizations. Many HR organizations believe being able to reengineer

their internal processes and deliver strategic HR services is simply too much for

one organization to undertake at the same time. However, by allowing a vendor

to manage many of the administrative processes that take time and energy away

from HR organizations, the internal HR organization can focus its limited

resources on delivering the services that truly provide strategic benefits to the

entire company.

Lastly, for many organizations, outsourcing serves as a catalyst for change.

Implementing and maintaining a client service orientation and metrics-driven

approach are difficult for most HR functions to achieve on their own. In an

outsourced environment, these skills are critical in determining the success or

failure of the arrangement. Therefore, outsourcing efforts can be used as

motivation to move HR service delivery toward a more accountable, results-

oriented focus.

How should the company identify potential processes to be outsourced?

Determining the scope of the outsourcing effort is among the most important and

difficult decisions companies make. Recently, several studies have indicated that

the processes most likely to be outsourced are retirement program administration

(including defined benefit, defined contribution and retiree services) and health

and welfare administration.

Further, these studies found that HR processes closely associated with

employee evaluation and communications are the least likely to be outsourced.

To make the right decisions on which processes to outsource at a particular

company, it is helpful to establish a formal set of evaluation criteria. Paul Adler, a

management professor at the University of Southern California, suggests six

dimensions an organization can use to evaluate HR processes when identifying

their potential for outsourcing: -

a) Dependency – are there specific assets that require dedicated facilities,

equipment, capacity, training or investments?

b) Spillover – is there confidential information or sources of advantage that could

be leaked to competitors?

c) Trust – is there a positive relationship between the two organizations that

could reduce transaction costs associated with contracting and monitoring?

d) Competence – can greater vendor capability in process execution lead to

improved results?

e) Core capability – is this process viewed as a differentiator for the organization

in the marketplace?

f) Commitment/flexibility – is the process stable enough so that changes in

capacity/technology are not required on a frequent basis?

Who should be involved in making the decision to outsource HR

processes?

Decision-makers

Within the HR organization, the CHRO (or equivalent title in the organization)

usually plays an active role in making the outsourcing decision. Ultimately, it is

the CHRO’s responsibility to determine whether the outsourcing arrangement will

enable the HR organization to provide cost-effective, quality service to its internal

clients, while, at the same time, support the organization’s larger strategic

objectives. In addition to the CHRO, the HR Operations Leader is often involved

in developing the specifications of the outsourcing arrangement. While the HR

function clearly has primary responsibility in this area, two other individuals play

important roles in the outsourcing decision.

The Chief Financial Officer often participates in the decision-making process, as

entering into a long-term contract with an outsourcing vendor can have

potentially significant financial ramifications for the corporation. In addition, the

Procurement Manager assumes a prominent role during the vendor selection,

negotiation and contracting process, leveraging experience in developing terms

and conditions that are favorable to the organization.

Influencers.

Two groups of individuals were seen as influencing, if not directly participating in,

the HR BTO decision. Given the importance of integrating HRM systems with

various vendor-driven applications, the Information Technology (IT) organization

should have input in the HR Outsourcing decision process. IT must determine

how the outsourcing arrangement will impact current and future technology

investments and plans.

Also, the leaders of the various business units supported by HR usually provide

input into the decision, as their employees are the ones most likely to be

impacted by changes in processes and service levels.

Approvers.

Typically, the CEO and the Board of Directors are responsible for final approval

of the decision to outsource HR processes. This is particularly true if a significant

number of processes are involved, if the outsourcing arrangement will impact a

large number of jobs throughout the organization or if the arrangement will

require communication with important external stakeholders such as industry

analysts and financial markets. A significant outsourcing deal can signal changes

not only in overall strategy and approach to managing human capital, but also

efforts to cut costs, focus on core competencies and mitigate risks.

Further, a decision to outsource components of the human resources

organization may be perceived by the others in the organization as the first step

toward outsourcing other non-core processes. Given the impact of these types of

arrangements, the CEO and Board of Directors need to understand and

articulate the rationale for the decision.

How should the company evaluate potential vendors?

Once the right individuals have been identified to make the outsourcing decision,

the next major step in the process involves selecting an appropriate vendor. A

number of recent studies have highlighted three primary criteria that companies

use to evaluate vendors.

These include: the vendor’s track record for delivering service, the costs

associated with the outsourcing service and the willingness of the vendor to

guarantee service levels. Other criteria highlighted by these studies included: the

vendor’s technological capability and competence, process expertise, flexible

contracting, recommendations from other companies, relevant industry

experience etc.

To evaluate vendor capabilities in these areas companies undertake a host of

activities including:

Distributing experience questionnaires. As part of this activity, a company

develops a standard experience questionnaire that it sends to multiple

vendors early in the evaluation process to obtain initial insights and compare

vendors’ capabilities. Information that is usually collected as part of this

process includes understanding the vendors’ areas of expertise, client

experience, and approach to contract development, service level creation and

how they address changes in project scope. There are a number of third-party

consultants who, having participated in many vendor selection efforts, have

developed and refined these types of questionnaires to quickly ascertain a

vendor’s particular level of experience.

Conducting a financial and credit review of the vendor. Companies undertake

this activity to determine whether the vendor has the financial resources to

maintain appropriate service levels throughout the lifespan of the contract.

During this review, the potential client examines the vendor’s history of fiscal

responsibility and regulatory compliance, its credit rating and analysts’

predictions of ongoing viability. Companies are also looking for signs that the

vendor is a potential takeover candidate, as an acquisition can often redirect

senior management attention and increase the complexity of the ongoing

relationship.

Conducting a security and compliance review. Given the sensitivity of the

employee data associated with an HR BTO relationship, and the

governmental/industry regulations and standards associated with the privacy

of employee data, companies should conduct a review of the vendor’s

security and compliance policies and procedures. As part of this assessment,

companies should investigate whether a vendor has a demonstrated

knowledge of, and is in compliance with, the regulatory requirements of each

of the countries in which it operates. They also should determine if the vendor

has been fined as a result of noncompliance and if the vendor has access to

regulatory and legal specialists on staff or on retainer.

Conducting reference checks/site visits to other clients. Organizations

considering outsourcing often speak with or visit current clients of vendors

under consideration. This allows them the opportunity to validate other clients’

experiences and identify potential issues in working with the vendor. During

these meetings, evaluators can get a sense from their counterparts at those

other firms as to the vendor’s flexibility, willingness to support new client

programs, ease of partnership and whether the vendor has met the client’s

overall expectations.

Visiting processing/contact centers. Many companies find it quite useful to

visit the actual locations where the vendor is answering employee calls and

processing documents. This gives the prospective client a sense for how the

vendor is organized and what technology is being used. This first-hand view

can be coupled with assessments of the attrition rates at the center and how

service center staff are trained, evaluated and given feedback to continually

improve their performance. These visits also provide potential clients a

glimpse at the level of professionalism and service that their internal clients

will likely receive and the level of investment the vendor is putting into its own

staff and operations.

Meeting potential delivery team leaders. Given the importance of personal

relationships between client and vendor, potential clients should meet the

individuals who will be responsible for both service delivery and the overall

account relationship. These face-to-face meetings can help potential clients

understand the managerial style of their counterparts and the extent to which

specific individuals have authority to act on behalf of the vendor in addressing

client concerns. Further, should the potential client decide to engage the

vendor, these initial face-to-face meetings can begin to lay the groundwork for

the type of trust building that is critical during the transition phase and

subsequent ongoing operations.

How should the company begin to prepare itself for HR outsourcing?

As executives get closer to making the decision to outsource HR processes, they

need to pay special attention to preparing the organization for the eventual

transfer of people, processes and/or technologies to the vendor.

Assembling the team that will lead the outsourcing effort. Once the

decision to outsource as been agreed upon, the organization needs to identify

and select individuals to lead the transition and ongoing management of the

outsourcing arrangement. Initially, the organization needs to identify the roles

and skills that will be required to transfer the outsourced activities to the

vendor and oversee the vendor relationship. Finding these individuals can be

a time-consuming effort, as they often have other significant responsibilities

and need to be made available to work on the outsourcing effort. Therefore, it

is beneficial for the organization to obtain the time and commitment of these

individuals and their managers early in the process, rather than waiting for the

final contract to be signed.

Communicating the effort throughout the HR organization and the lines

of business. Many organizations fall into the trap of developing their

communication strategy after the outsourcing agreement is put into action.

However, effective companies start executing a tailored communication plan

far earlier in the process, as they recognize that rumors will likely surface long

before any formal discussions are in process. Organizations need to develop

formal mechanisms for communicating to HR leaders and staff during the

early stages of an outsourcing effort since these individuals may be called

upon to provide data or reallocate their time to work on outsourcing related

tasks. Further, organizations need to listen closely to informal influencers

within the HR organization and business units, as they may have insight into

potential areas of resistance and concern that can have a negative impact on

the outsourcing effort.

Gathering data on the current state of the HR organization. To develop a

compelling business case for HR BTO, organizations often need to obtain a

clearer understanding of their current spending for HR activities and measure

levels of operational effectiveness. Also, many organizations do not have a

strong sense for the industry and competitive benchmarks that are useful in

comparing HR cost and performance across companies. Collecting this data

can be a time and labor-intensive process that often must be accomplished in

a relatively short amount of time.

While outside resources can be used to facilitate this collection, both internal

HR process experts and individuals with experience in obtaining information

from HRM systems need to be involved. Dedicating these scarce resources is

well worth the effort, as it can help ensure that the organization is entering

into a financially beneficial arrangement.

RESEARCH METHODOLOGY

HYPOTHESIS:

“HR outsourcing: benefits, trends and challenges” is a study aimed to get familiar

with the current scenario of HR outsourcing in Indian companies and the

potential future for the industry vis a vis the global scenario.

HR outsourcing is the next big thing to happen and is rapidly gaining momentum

especially in the US. With respect to the Indian scenario it is still at a nascent

stage but is expected to grow rapidly. India currently is facing an economic boom

and almost every industry is at its best state. Hence there is a need for the

companies operating in a highly competitive and dynamic environment to focus

on their strategic aspect and core competencies. The companies can do this by

outsourcing the unimportant and non-strategic tasks.

Due to the presence of some factors in the Indian market, the HR outsourcing

industry is very small but it is expected to grow in the future. This is evident from

the fact that various big players like Hewitt associates, Xansa, Convergys,

Accenture, Wipro are entering this arena of HR outsourcing in India.

The study is based on the following assumptions and hence the hypothesis for

the study is: -

o Indian companies are outsourcing most of their HR processes.

o HR outsourcing is expected to grow at a rapid pace in the Indian industry.

o Indian companies derive lot of benefits out of HR outsourcing.

o Internal customers of the company are satisfied with the decision of the

company to outsource their HR processes.

o Cost is the main criteria for vendor selection for HR outsourcing by Indian

companies.

RESEARCH DESIGN:

Exploratory research

Exploratory research is often conducted because a problem has not been clearly

defined as yet, or its real scope is as yet unclear. It allows the researcher to

familiarize him/herself with the problem or concept to be studied, and perhaps

generate hypotheses (definition of hypothesis) to be tested.

It is the initial research, before more conclusive research is undertaken.

Exploratory research helps determine the best research design; data collection

method and selection of subjects and sometimes it even conclude that the

problem does not exist.

Exploratory research can be quite informal, relying on secondary research such

as reviewing available literature and/or data, or qualitative approaches such as

informal discussions with consumers, employees, management or competitors,

and more formal approaches through in-depth interviews, focus groups,

projective methods, case studies or pilot studies.

The results of exploratory research can provide significant insight into a given

situation. Although the results of qualitative research can give some indication as

to the "why", "how" and "when" something occurs, it cannot tell us "how often" or

"how many".

Descriptive research

Descriptive research or statistical research provides data about the population or

universe being studied. But it can only describe the "who, what, when, where and

how" of a situation, not what caused it. Therefore, descriptive research is used

when the objective is to provide a systematic description that is as factual and

accurate as possible. It provides the number of times something occurs, or

frequency, lends itself to statistical calculations such as determining the average

number of occurrences or central tendencies.

The two most commonly types of descriptive research designs are

1. Observation

2. Surveys

The study would include exploratory and descriptive research. Exploratory

research would be done by reviewing all the relevant literature on HR

outsourcing. Descriptive research would be conducted through a

questionnaire. The study hence comprises of:

o Secondary data analysis – Secondary data is collected from various research

papers, journals and Internet. This data aided in understanding the subject

better and building the base for collection of primary data and drawing

conclusions.

o Questionnaire – The questionnaire is a mix of objective and open-ended

questions. It is aimed at the employees of the HR department of various

organizations in the Delhi and NCR region.

SAMPLE SIZE:

o The primary data is collected from twenty-five HR personnel of various

companies.

o The respondents belong to the middle or top-level management in the HR

department.

o The data collection includes in its scope both government and private

companies.

o The data is collected from companies belonging to various industries (Power,

IT, Liquor, financial etc) in order to have an idea of the complete Indian

industry as a whole.

o Data would be collected from companies operating in the Delhi and NCR

region.

o HR personnel from the following companies would be the respondents for the

study:

o NTPC

o Xansa

o HCL Technologies

o Radico Khaitan etc

RESEARCH TOOLS:

The study includes exploratory and descriptive research. Exploratory research

would be done by reviewing the literature related to HR outsourcing and

descriptive research would be done by a survey of the HR personnel of various

organizations through a questionnaire.

Questionnaire is used as the tool for collecting primary data from employees

working in HR department of different companies. The questionnaire consists of

both open ended and objective questions on HR outsourcing.

The questions cover all the aspects related to HR outsourcing: -

o Process that has been outsourced.

o Benefits derived by them from outsourcing of HR processes.

o Criterion for selection of the process to be outsourced.

o Criterion for selection of vendor for outsourcing.

o Reasons for not outsourcing in case the company has not outsourced any of

their HR process.

o Person/s involved or responsible for taking the decision for HR outsourcing.

o Outsourcing by the competitors and business partners if any.

o Impact of HR outsourcing by the company on its employees.

RESEARCH FINDINGS

Q1.

The respondents were asked whether they outsource their HR processes. 11 out of 25 i.e. 44% of the respondent’s companies have outsourced their HR processes.

Q2.

The respondents gave the above reasons for not outsourcing their HR processes. 12 out of 14 respondents gave cost as a reason for not outsourcing, security breaches were given as a reason by 9, lack of reliability by 7, data privacy and lack of quality by 5, lack of understanding by 4 and maturity of market by 1. Hence cost, security breaches and lack of reliability were identified as the major reasons for not outsourcing by companies in the Indian market.

Q3.

Recruitment was found to be the mostly outsourced process followed by training

delivery, payroll processing, compensation surveys and statutory compliance. 6

respondents replied that their company has outsourced the recruitment process,

4 replied that they have outsourced their training process, 2 replied they have

outsourced compensation surveys and payroll processing and 1 respondent said

the they have outsourced statutory compliance.

Q4.

8 out of 11 respondents replied that the top management was responsible in

taking decision related to HR outsourcing, 2 out of 11 said that the middle

management was involved in the whole process of HR outsourcing and 1

respondent said that both the middle and top management were involved. Hence

the study throws light on the fact that HR outsourcing is an important decision for

the company and mostly involves top management.

Q5.

9 out of 11 respondents stated checking core capability as a criterion for

selection of the HR process to be outsourced i.e. checking whether the process

is a core capability or not before outsourcing. 5 respondents responded that the

processes which if outsourced pose a risk of data exposure were not outsourced.

3 respondents stated that the processes that are standard across industries are

outsourced and 2 said that process which are less interdependent on other

processes are outsourced. I respondent said that those processes that require

physical presence of the HR personnel are not outsourced. Hence core capability

and risk of data exposure were identified as a criterion for selection of process to

be outsourced by maximum respondents.

Q6.

According to 10 out of 11 respondents, competence is considered as a criterion

for selection of vendor for HR outsourcing. 9 respondents stated experience as a

criterion, 8 stated cost, and 7 stated past records and 2 recommendations from

other companies. Hence competence and technological capability, relevant

industry experience and cost of services were identified as a criterion for

evaluation and selection of potential vendor by the company for HR outsourcing.

Q7.

All the 11 respondents responded that HR outsourcing makes them focus more

on their core activities, 7 said that it saves their time, 6 said that HR outsourcing

provides expertise to the company, 3 said that it saves cost and 2 said that it

requires less manpower to be employed in the company. Hence focus on the

core processes and saving of time were identified as major benefits of HR

outsourcing.

Q8.

7 respondents replied that their competitors also outsource their HR processes. 2

replied that their competitors don’t outsource any HR process and 2 replied that

they don’t know.

Q9.

8 respondents replied that they have not taken feedback from the employees of

the company on the HR outsourcing done by them. 3 respondents replied that

feedback has been taken in their organizations from the employees on the HR

outsourcing done.

Q10.

7 respondents said that they have not taken any feedback from the company’s

employees on the HR outsourcing done. 4 said that the employees of the

company were satisfied with the HR outsourcing done by the company and no

respondent replied that their employees were dissatisfied with it.

SUMMARY AND CONCLUSION

SUMMARY:

HR outsourcing in India is gaining momentum but still the number of

companies outsourcing their HR processes in India are few as

compared to the global scenario. 25 respondents were surveyed, out of

which only 44% replied that their companies have outsourced their HR

processes. Hence it proved that despite of the rapid growth of HR outsourcing

worldwide, not many companies in India outsource their HR processes.

Recruitment was found to be outsourced by maximum number of

companies surveyed. Other HR processes that are outsourced by Indian

companies are training delivery, payroll processing, statutory compliance and

compensation surveys.

73% of the respondents responded that top management was

responsible for taking decisions related to HR outsourcing which

further proves that HR outsourcing is an important decision for the

company. 18% of the respondents said that the middle management was

involved and responsible and 9% said that both the top and middle level

management were involved.

Cost and security breaches were identified as the major reasons for not

outsourcing HR processes by Indian companies. Lack of quality, data

privacy issues, inability of the vendor to understand company culture,

immaturity of the HR outsourcing market were other reasons for not

outsourcing.

Core capability was identified as the major criterion for selecting the

process to be outsourced i.e. the process which is a core capability is

not outsourced. Other criterion used for selecting processes to be

outsourced are standard processes, little interdependency with other

processes and need for physical processes.

Competence & technical capability and relevant industry experience

were identified as major criteria for selection of vendors for outsourcing

HR processes. Other criterion used by Indian companies for evaluating

potential vendors for outsourcing were past track records of the vendor, cost

and recommendations from other companies.

More focus on core activities and time saving were identified as main

benefits of HR outsourcing to Indian companies. Other benefits that were

identified were cost saving, availability of vendor expertise and need for

lesser manpower in the organization.

64% of the respondents replied that HR outsourcing is done by their

competitors, 18% said that their competitors don’t outsource their HR

processes and 18% said that they don’t know whether their competitors

outsource their HR processes or not.

Most of the companies surveyed do not take feedback from their

internal customers on the HR outsourcing done by them. 7 respondents

said that their companies do not take feedback on HR outsourcing from their

employees and 4 respondents said that their companies take feedback from

their employees.

The employees of the companies which outsource their HR processes

are usually satisfied by the outsourcing done. All the 4 respondents

whose company takes feedback on HR outsourcing from their employees

said that their employees were satisfied from the HR outsourcing.

CONCLUSION:

Certain assumptions were made before the study. The hypotheses were tested

through a survey of HR professionals from various industries and the

following results were found. The study gave the following conclusions: -

HR outsourcing is at a nascent stage in India.

The study proved that HR outsourcing is still as a nascent stage in India. Only

44% of the respondents replied that their company has outsourced some of their

HR processes. Hence the first hypothesis i.e. Indian companies are

outsourcing most of their HR processes has proved incorrect. HR

outsourcing is not widely followed by Indian companies due to various reasons

like lack of quality, security breaches, cost, lack of data privacy, lack of reliability,

lack of understanding of the company culture by the vendor and immature HR

outsourcing market etc.

HR outsourcing is expected to grow at a rapid pace in the Indian

industry.

India has immense potential as more than 80% of fortune 1,000 companies are

discussing off shoring as a way to cut costs and increase productivity. Sensing

the potential, global BPO players including Fidelity, Exult and Hewitt have begun

setting up operations in India. Various factors that make India a potential option

are its education system, English advantage, government policies, infrastructure

improvements etc. India would be a destination for HR outsourcing by foreign

companies. But growth in HR outsourcing by Indian companies would be slow vis

a vis the global scenario. Hence the second hypothesis is proved true.

Indian companies derive lot of benefits out of HR outsourcing.

Various benefits are derived by Indian companies from HR outsourcing like more

focus on core activities, time saving, cost saving, expertise and removal of

unnecessary manpower. Focus on core activities, time saving and expertise of

the vendor were the major benefits found out the survey as maximum

respondents listed these benefits. Hence the third hypothesis is proved true.

Internal customers of the company are satisfied with the decision of the

company to outsource their HR processes.

8 respondents out of 11 that outsource their HR processes replied that they have

not taken feedback from the employees of the company on the HR outsourcing

done by them. Also the ones that had taken feedback were satisfied with the

outsourcing done. Hence the fourth hypothesis is partly true as most of the

companies included in the study did not take any feedback from the employees.

Cost is the not the main criteria for vendor selection for HR outsourcing

by Indian companies.

Competence and experience of the vendor were identified as the criterion used

by maximum companies for vendor selection. 10 respondents replied

competence as criterion, 9 replied experience and 8 replied cost as a criterion.

So cost is a criterion for selecting vendors for HR outsourcing by Indian

companies but it is considered after competence and experience. Hence the

fifth hypothesis that cost is the main criteria for vendor selection for HR

outsourcing by Indian companies is proved incorrect.

BIBLIOGRAPHY:

References:

Research papers

o HR outsourcing in India: organized & unorganized sector

Author: Mary Mathew, Welingkar Institute of Management, Mumbai

o Preparing for human resources business transformation outsourcing

IBM Business Consulting Services

Journals

o Successful HR outsourcing means quality service

By Vasanthi Srinivasan, Associate professor, IIM-Bangalore

o HR gains as outsourcing grows

By Ganesh Chella, CEO, Totus Consulting

Internet

o www.indianchild.com

o www.peoplemangement.com

ANNEXURE:

QUESTIONNAIRE:

Q1. Has your company outsourced any of the HR processes?

1. Yes

2. No

Q2. If no, what are the reasons for not outsourcing?

1. Cost of outsourcing activities

2. Lack of data privacy

3. Lack of reliability

4. Lack of understanding of company culture

5. Market not mature

6. Security breaches

7. Lack of quality

Q3. If yes, which HR process of the company has been outsourced?

Q4. Who was responsible or involved in making the decision to outsource HR

processes?

Q5. What was the criteria in selecting the HR process to be outsourced?

1. Little interdependency with other processes

2. Is the process a core capability

3. Potential risk of exposure of secret data

4. Need for physical presence

5. Components of the process standard across companies

Q6. What were the criteria in evaluating the potential vendor for the HR

outsourcing?

1. Vendor’s past track records

2. Costs associated with the service

3. Recommendations from other companies

4. Vendor’s technological capability and competence

5. Relevant industry experience

6. Other. __________________________________

Q7. What are the various benefits derived by the company from HR outsourcing?

1. More focus on core activities

2. Time saving

3. Cost saving

4. Expertise

5. Less number of manpower needed

Q8. Are your competitors and business partners outsourcing any of their HR

services?

1. Yes

2. No

3. Don’t know

Q9. Has the company taken the feedback of the internal customers on the HR

outsourcing done?

1. Yes

2. No

Q10. How does your internal customers feel about the HR outsourcing done by

the company?

1. Satisfied

2. Dissatisfied

3. Never asked

Name: ___________________________________

Designation: ______________________________

Company: _______________________________