Survey data from 2003 and 2005 show HR executives increasing outsourcing in some but not all functions.
Those of us who watch and report on HR outsourcing have observed that growth in discrete processing and HR BPO has been strong over the past 12 to 18 months. The outlook for HR BPO in the U.S. is particularly robust, and IDC forecasts that spending on HR discrete outsourcing and on HR BPO will be nearly equal by 2009. Going beyond observable trends, how has demand changed for HRO, and where is it headed?
IDC surveys buyers to assess the current state and future plans for spending on technology and services. Looking at the differences between responses from surveys conducted two years apart reveals some stark contrasts in how executives characterized their future plans for HR outsourcing. IDC conducted the same survey in 2003 and in 2005. Here are some key differences found between the two sets of responses.
At a macro level in 2003, only 32 percent surveyed had plans to increase HRO, while 64 percent indicated that their HRO spending would remain the same for the following 12 months (see Fig. 1). Turning the calendar forward to 2005, 55 percent of respondents told us that they plan to increase their HRO spending for the next year; and as you’d expect, fewer 2005 executives, or 39 percent, said that spending will stay the same. In both 2003 and 2005, a minority of respondents forecasted that they would actually lower their future spending, although slightly more 2005 respondents indicated that their ousourcing spending would decrease.
IDC also categorized and presented HR at a functional level and asked respondents about the percentage of these functions they were likely to outsource in the next 12 months. This gets at not just the probability of outsourcing but the breadth of scope likely to be outsourced. The five basic categories included HR record keeping, payroll, benefits, talent functions such as recruitment and learning, and other.
In all but the talent functions the planned percentage of outsourcing predicted increased fairly dramatically in 2005 over 2003. For example, the percentage of the payroll function predicted to be outsourced went from 5.2 percent in 2003 to 29.3 percent in 2005. So, even though more than 5 percent of respondents already outsourced payroll at the time of the survey in 2003, it is clear that the executives didn’t see it as fully outsourced nor did they foresee the outsourced portion growing. In 2005, however, respondents project that they plan to expand their outsourcing engagements around payroll. Some of these would include tax filing, time and attendance, and payroll reporting. For example, 35 percent of 2005 respondents indicate that they would be willing to outsource payroll reporting in the next 12 months.
A similar scenario played out with benefits administration. In 2003, executives said that they would likely outsource 14 percent of their benefits administration, while in 2005 this jumped to 23 percent. Like payroll, there were benefits sub-processes such as workers’ compensation less likely to be included in an outsourcing engagement. The exception to the comparison phenomenon was the talent-related functions where the percentage of future outsourcing forecasted actually stayed virtually identical in 2005 from 2003. And, the surveys reveal that despite the passage of time, certain HR functions remain somewhat immune to outsourcing. Leading this list were employee relations and compensation planning.
These comparisons tell us that executives have stepped up their consideration of HR outsourcing. They’re also telling us that companies are much more likely to broaden the scope of their outsourcing engagements, which bodes well for HR BPO.
