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Gartner Analyst Rebecca Scholl says the prospects are good, as more human resources professionals take their destiny into their own hands.

If you had any doubt that the trend to HR outsourcing is for real-that it's not a phantasm but a true phenomenon of global business-this interview with Rebecca Scholl, senior analyst for Gartner, will set your mind at ease. Scholl explains why outsourcing is gaining ground among informed HR decision-makers. Conducting the interview for 'HRO Today' is Joe Vales, a leading advisor to outsourcing vendors and venture capital firms who also contributes the 'Cuppa Joe' column each month.

HRO Today: What percentage of companies are currently outsourcing HR processes?

Rebecca Scholl: Looking at the firms we've sampled over the last two years, we find that penetration for HR outsourcing is very much on the increase. Two years ago, it was in the 60% range. This is for companies that are outsourcing at least one HR function. Today, the penetration for HR outsourcing has jumped to the 80% range. Not only is this penetration higher, but it's growing faster than ever before.

HRO: What HR processes are the most frequently outsourced, and do you expect this to continue?

RS: The most frequently outsourced HR processes remain payroll and employee benefits. But there are significant differences in the way these are outsourced. Payroll is usually outsourced as a total process; whereas benefits are outsourced on a piecemeal basis. It's more of a partial outsourcing; sometimes it's only the 401(k) program; sometimes just the health and welfare program. Looking ahead, I think this will remain so for some time. However, another area for strong outsourcing growth is education and training services. In contrast, outsourcing of hiring and recruitment processes may be somewhat slower to catch on. This is due to their very strategic position in many businesses.

HRO: Is demand for HR outsourcing finally catching up with the supply of vendors?

RS: HR outsourcing is a supply-driven market. For the last few years, suppliers have been out across the nation evangelizing about the benefits of outsourcing, and prospects and clients now understand the outsourcing concept and how to relate it to their plans for implementing new technology. But there is a significant level of confusion in the marketplace about individual outsourced (OS) offerings and how they are differentiated. Contributing to this confusion is the absence of standards to help define offerings. And by standards, I mean specific and consistent definitions of outsourced processes. In many instances, suppliers are talking about the same things-using the same terminology-when discussing offerings, but these offerings may vary significantly in what is actually delivered to the client. It's an unfortunate misunderstanding.

HRO: What are the driving factors that are now contributing to the increase in HR outsourcing?

RS: The things that are driving the outsourcing trend haven't changed much in the last few years. Still strong among these are the desire to focus on a company's core business, improving HR service levels, shortening implementation times, and, of course, holding down costs. Although cost is usually not mentioned as the primary consideration in the outsourcing decision, the reality is that cost is a very big consideration, maybe number one, because it's the first obstacle to overcome when selling an outsourced service. One driver that we've noted as decreasing in importance is the potential for outsourcing to supplement the IT staff and internal resources.

HRO: What about a client's concerns for service? Can buyers identify and qualify the levels of service they want to have?

RS: No. Most of the buyers we've spoken to can't define the levels of service they think they need. They can't do this for HR, but they can for other BPO processes such as contact centers. They have the metrics to assist them, and this makes it relatively easy to compare the value of outsourcing with the value of "insourcing" such a function. In HR, this is much more difficult because there are no baselines to follow. In order to realistically qualify levels of service, a company would first have to assess what it is accomplishing in its HR department, estimate how well the department is doing, process-by-process. Then, this has to be reflected in its service agreement with the outsourcing vendor and, of course, all along the way, service levels in these agreements must remain flexible.

HRO: At the buyer or user level, who is actually driving the demand for outsourcing HR services?

RS: Just a few years ago, outsourcing was very much a top-down decision that was imposed on the HR department. But today, more and more we see vice presidents of HR really taking their destiny in their own hands and suggesting outsourcing as a valid alternative. Typically now, it's the vice president of a business unit or CFO who will initiate the outsourcing decision. Next, the CIO will get involved in the vendor-selection process, with the final decision in the hands of an executive management team.

HRO: Do you see the demand for HR outsourcing moving more toward enterprise-wide solutions, or will demand remain more skewed toward single-function solutions?

RS: In general, there is much more demand now for integrated HR services than there was in the past. But I think we were too "bullish" about the time it would take for integrated services to penetrate user mindsets. Recently, we thought that by 2005 one-third of HR outsourcing would be comprehensive or integrated outsourcing. But now, we realize the figure may be no more than 25% by 2005, which is still pretty high.

However, it's important to understand that there are strong synergies between payroll and benefits administration, and even though a prospect may be interested in outsourcing just a single process now, that company is looking for a supplier who, over time, will be able to handle additional processes.

HRO: Do you think that more suppliers will come together as partners to provide integrated solutions to clients?

RS: I wouldn't say that this has become a formalized trend as yet. Certainly, here and there, you'll find supplier partnerships that are opportunistic. But the typical outsourcing supplier is still very concerned with finding and defining its own particular place in the market. While additional partnerships are being formed, they don't appear to be very well thought out.

HRO: What must happen to create better supplier partnerships?

RS: First, suppliers must have a clear idea of why they should be partnering, and of the objectives of the partnership. Then, each party must know exactly what to bring to the table that is significant and isn't being delivered by the other party to the partnership. Essentially, they need to have a sound partnering strategy.

HRO: Do you see demand for HR outsourcing growing at different rates in the United States compared to globally? Among small versus large client companies? And do the growth rates vary by verticals?

RS: The U.S. remains by far the primary market for HR outsourcing, and continues to grow at a healthy rate. Some European countries are growing faster than the U.S. because they are still catching up, but others will be slow to adopt full BPO due to legislative and cultural issues surrounding outsourcing.

Regarding size of client company, the fastest growth for outsourcing is still coming from large companies. Although, for the outsourcing of single HR processes, growth is speeding up among midsize companies. They're really seeing the value of payroll outsourcing.

In answer to the question of growth among verticals, you must first examine the indicators that put an industry in a good position to outsource. Is it a competitive industry? Is it a consolidating industry? Is it a deregulated industry? Is it characterized by high growth? All of these indicators create good candidates for outsourcing. Industries possessing these indicators include financial services, energy, manufacturing, and health care in the areas of claims processing, billing, and accounts receivable.

HRO: What are the key criteria for selecting an HR outsourcing vendor?

RS: Over the last two years, customer service has been the number one concern expressed by client companies. Before that, they were looking first for proof of concept and a vendor's references. Today they are searching for vendors with whom they can establish a good working relationship. Filling out the list of leading criteria are process expertise, domain knowledge, and the vendor's financial stability.

HRO: What is the current satisfaction level among users of HR outsourcing?

RS: As reflected in our latest sample, slightly over 50% of respondents say they are highly satisfied with their existing HR-outsourcing relationship. However, the level of satisfaction is usually low during the first year of the relationship; it gets a little better in the second year, and becomes much better in the third year. This is mostly due to the transition process. In general, we see no real difference in the satisfaction level for HR outsourcing compared to the results of outsourcing any other back-office process.

Meet Rebecca Scholl

Rebecca Scholl is a Senior Analyst in Gartner's Research organization, conducting research and providing consulting services in the area of business process outsourcing (BPO), with a special focus on human resources outsourcing, finance and accounting outsourcing, and offshore BPO. Her clients include some of the leading BPO providers. Before joining Gartner in 1998, Scholl was a consultant for a French analyst firm in Paris (BIPE) since 1992, where she specialized in the telecommunications and media markets. She holds a master of science degree in management and a degree in international economics. She is fluent in English, French, Spanish, German and Russian.