PROJECT REPORT

ON

HR OUTSOURCING IN INDIA

For the partial fulfillment of the requirement ofMaster of Business Administration

(MBA -2009-2011)

Submitted To: Submitted By:

Mr.Sumit Bajpai (Uday Pratap Singh)(H.O.D MBA Dept.) Roll No.0928770053

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Naraina College Of Engineering And Technology(1432)Ratanpur, Panki, Kanpur – 208020

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DECLARATION

I hereby declare that the project report entitled “HR Outsourcing

in India” submitted in partial fulfillment of the requirements for

the degree of M.B.A is my original work and not submitted for the

award of any other degree, diploma, fellowship, or any other

similar title or prizes. I would like to category mention that all the

information that have been collected, analyzed and known for the

project is entirely authentic possession of mine

Place: Noida

UDAY PRATAP SINGH

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ACKNOWLEDGEMENT

One of the most pleasant aspects of writing an acknowledgement is the opportunity to

thank all those who have contributed to it. Unfortunately, the list of expression of

gratitude- no matter how extensive – is always incomplete and inadequate. This

acknowledgement is no exception.

First of all, I wish to express my sincere gratitude to Ms. GAURAV SONKAR ,

Faculty Guide, for giving me opportunity to do research under her profound guidance.

Because of her inspiring guidance, motivation, positive criticism, continuous

encouragement and untiring supervision this work could be brought to its present shape.

I would like to thank all of them who in one way or the other have helped me.

UDAY PRATAP SINGH

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TABLE OF CONTENTS

1. Introduction

2. Objective of the Study

3. Review of Literature

4. Research Methodology

5. Findings

6. Summary & Conclusion

7. Annexure – Questionnaire

8. Bibliography

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PREFACE

The research report is hard intends to reflect some of the basic issue covered

under the “HR OUTSOURCING IN INDIA”. The total aspects has been

formulated and presented on the basic of idea and information gathered by this

investigator during a shorter span of research i.e. an important portion of the

MBA curriculum

Leading to an opportunity for the participant to have a practical exposure of the

content under the topic beyond what have already been studies during the

classroom interaction.

This report has been written in response to a comprehensive study,

conducted on the “HR OUTSOURCING IN INDIA”. The report mentions and

evaluate the varies aspect , after a thorough analysis of the various facts stand

figures, a set of recommendations has been given at the end of the report.

We are confident that anyone who goes through the report will learn how much

we have learnt& benefited during this period

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Executive Summary

Globalization of economies over the past years have reduced international trade

barriers and have resulted in an increasingly interlinked global economy and

intense global competition, putting pressure on business managers across the

world to cut costs of operations. At the same time a paradigm shift in the

possibilities of communication that the Internet and the telecommunications

revolution has bought about has opened up a plethora of opportunities in

outsourcing business processes across continents.

Traditionally starting with just sub-contracting in manufacturing, now a holistic

definition of outsourcing involves transferring any value contributing activities,

processes and/or services to the premises of one’s own or an agent primarily to

save cost and/or to increasingly focus on its area of core competence.

Business Process Outsourcing (BPO) is a boon for developing countries but, of

late, it has become a political issue for the US with major economic implications.

Our paper analyses why outsourcing is here to stay, basing the argument on

sound conceptual reasoning, disregarding the political arguments involved.

However, given the political pressures under which many of the MNCs operate,

the likelihood of more of the value added but not very core activities outsourced

while some of the real non-core not outsourced cannot be ruled out.

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INTRODUCTION

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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.

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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.

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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:

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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.

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HR OUTSOURCING ASSISTING CHANGE:

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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

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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: -

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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.

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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.

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REVIEW OF LITERATURE

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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 crit ical to the success of a company, the

human resource function wil l have to progress from administration to

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strategy if the organization it supports is going to remain

competit ive.

The advantages are clear and compell ing: improved business focus,

more productive use of t ime 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 responsibil i t ies, so that the company can

concentrate on developing strategies that provide competit ive

advantage to it.

Tradit ionally, people have been viewed as l iabil i t ies or expenses,

instead of tangible, bottom-line assets. Successful business owners

have learned, however, that their employees have a direct impact on

their profitabil i ty. The company gets more out of i ts business when it

gets more out of i ts people.

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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 profitabil i ty, 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 t ime spent away from

growing business.

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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

competit ive advantage, but it needs professionals who cut through

the clutter of HR practices to learn which have the most posit ive

impact on its business.

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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 sensit ive information to public/ competit ion.

o Ethics and quality of outsourcing vendors.

o Possibil i ty of security breaches.

o Cost- benefit equation not clear.

o Lack of psychological acceptance.

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DECISION FOR OUTSOURCING:

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

to outsource activit ies. According to this matrix, strategic importance of

the activity and interdependence on other activit ies are the two factors

on which the decision of outsourcing should be based.

The activit ies that have high strategic importance and high

interdependence on other activit ies should be kept in-house and the

activit ies that have low strategic importance and low interdependence must be

outsourced.

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27

High

Low

Str

ateg

ic I

mp

orta

nce

Str

ateg

ic I

mp

orta

nce

Low High

Interdependence

Insource

Outsource

???

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.

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

employees and are similar socially to them.

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METHODOLOGY FOR HR OUTSOURCING:

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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

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.

o Solution delivery

o Solution performance management – It includes the management of the

vendor-company relationship.

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HR OUTSOURCING DELIVERY PROCESS:

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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 ful l-f ledged 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 signif icant way. Besides, many

multinational companies are fast adopting these practices.

Sateesh R Kurugod, head of marketing and all iances, Crossdomain

Solutions says that now CXO’s realise that HR teams typically

spends over 80 percent of i ts t ime 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, i t makes business sense to focus only on the organization’s

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core competencies and outsource non-crit ical business activit ies.

Therefore, routine administrative tasks, although important, can be

outsourced to third party vendors.”

Experts believe that in present t imes HR outsourcing is undergoing a

transit ion phase. "There has also been a transit ion 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 l ist of potential ly high paybacks,

after IT and the telecomm industry. However, many companies wrap

up their HR functionalit ies as something that happens in the back

off ice, and do not give enough attention to the infrastructure that

essential ly props up its employees. Over the years, this has bred

neglect, leading to antiquated HR management systems.

Now, it is t ime 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 acquisit ions and mergers. A few companies have tried

mending their HR management system on their own, but they soon

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discovered that it is l ike 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 posit ive, 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 wil l not be the

driver for this trend within India, i f 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 f ighting for

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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 wil l ing 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 cl ient’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 bil l ion with a current market $ 27 mil l ion and it is growing

at the rate of about 50 per cent. HR outsourcing in India has not

seen the required momentum and is l imited to a tr ickle 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

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

from doing so.

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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

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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.

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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.

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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

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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.

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DRIVERS OF SUCCESSFUL HR OUTSOURCING:

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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 f i t or a

commitment to quality. Some things a company should consider

when evaluating a f irm 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 priorit ies;

o Its available resources;

o The flexibil i ty of i ts contracts.

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

culture, so the company must try to f ind one that f i ts 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

f inding it increasingly diff icult and costly to keep track of, and

manage, the variety of benefits and regulatory requirements in each

area .

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For example, a multinational organization that has been built over

t ime from a series of acquisit ions 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 abil i ty to stay current becomes more

diff icult and costly as extensive resources are required to maintain

and apply this knowledge. Allowing an outside party that has already

built existing capabil i t ies in these areas to manage the process

becomes an increasingly attractive proposit ion.

Finally, overall cost pressures are forcing companies to identify new

methods for cutt ing 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 r isk, prompting

them to examine closely all activit ies where cost reduction is

possible. Outsourcing provides an opportunity for companies to

leverage the cost base and experience of an outside provider, which

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can potential ly 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

controll ing 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

responsibil i ty for upgrades and system availabil i ty.

Companies are also recognizing that they are unable or unwil l ing 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

abil i ty to keep up with the latest technology solutions and can

provide best-in-class tool sets.

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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 capabil i ty from a vendor could offer lower costs and a higher

l ikelihood of staying current on recent developments.

Third, companies want to reduce the risks associated with business

volati l i ty. Having gone through numerous hiring/layoff cycles, they

are looking to increase process capacity without commensurate

increases in ful l-t ime headcount. For example, companies need to

increase their abil i ty to recruit without having to bring on a number

of ful l-t ime 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 activit ies, 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

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manage many of the administrative processes that take time and

energy away from HR organizations, the internal HR organization

can focus its l imited 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 cl ient service orientation

and metrics-driven approach are diff icult for most HR functions to

achieve on their own. In an outsourced environment, these skil ls are

crit ical in determining the success or fai lure 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 diff icult decisions companies make. Recently, several

studies have indicated that the processes most l ikely to be

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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 l ikely 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 specif ic assets that require dedicated

facil i t ies, equipment, capacity, training or investments?

b) Spil lover – is there confidential information or sources of

advantage that could be leaked to competitors?

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c) Trust – is there a posit ive relationship between the two

organizations that could reduce transaction costs associated with

contracting and monitoring?

d) Competence – can greater vendor capabil i ty in process execution

lead to improved results?

e) Core capabil i ty – is this process viewed as a differentiator for the

organization in the marketplace?

f) Commitment/f lexibil i ty – 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

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Within the HR organization, the CHRO (or equivalent t i t le in the

organization) usually plays an active role in making the outsourcing

decision. Ult imately, i t is the CHRO’s responsibil i ty to determine

whether the outsourcing arrangement wil l enable the HR

organization to provide cost-effective, quality service to its internal

cl ients, while, at the same time, support the organization’s larger

strategic objectives. In addit ion to the CHRO, the HR Operations

Leader is often involved in developing the specif ications of the

outsourcing arrangement. While the HR function clearly has primary

responsibil i ty 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 potential ly signif icant f inancial ramifications for the

corporation. In addit ion, the Procurement Manager assumes a

prominent role during the vendor selection, negotiation and

contracting process, leveraging experience in developing terms and

condit ions that are favorable to the organization.

Influencers.

52

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 wil l 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 l ikely to be impacted by changes in processes and

service levels.

Approvers.

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

f inal approval of the decision to outsource HR processes. This is

particularly true if a signif icant number of processes are involved, if

the outsourcing arrangement wil l impact a large number of jobs

throughout the organization or if the arrangement wil l require

communication with important external stakeholders such as

53

industry analysts and financial markets. A signif icant 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 identif ied 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.

54

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

costs associated with the outsourcing service and the wil l ingness of

the vendor to guarantee service levels. Other criteria highlighted by

these studies included: the vendor’s technological capabil i ty and

competence, process expertise, f lexible contracting,

recommendations from other companies, relevant industry

experience etc.

To evaluate vendor capabil i t ies in these areas companies undertake

a host of activit ies 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 init ial insights and compare vendors’ capabil i t ies.

Information that is usually collected as part of this process

includes understanding the vendors’ areas of expertise, cl ient

experience, and approach to contract development, service level

creation and how they address changes in project scope. There

55

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 f inancial 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 l i fespan of the contract. During this

review, the potential cl ient examines the vendor’s history of f iscal

responsibil i ty and regulatory compliance, its credit rating and

analysts’ predictions of ongoing viabil i ty. Companies are also

looking for signs that the vendor is a potential takeover

candidate, as an acquisit ion can often redirect senior

management attention and increase the complexity of the ongoing

relationship.

Conducting a security and compliance review . Given the

sensit ivity of the employee data associated with an HR BTO

relationship, and the governmental/ industry regulations and

standards associated with the privacy of employee data,

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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 cl ients .

Organizations considering outsourcing often speak with or visit

current cl ients of vendors under consideration. This allows them

the opportunity to validate other cl ients’ experiences and identify

potential issues in working with the vendor. During these

meetings, evaluators can get a sense from their counterparts at

those other f irms as to the vendor’s f lexibil i ty, wil l ingness to

support new client programs, ease of partnership and whether the

vendor has met the client’s overall expectations.

Visit ing processing/contact centers. Many companies f ind it quite

useful to visit the actual locations where the vendor is answering

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employee calls and processing documents. This gives the

prospective cl ient a sense for how the vendor is organized and

what technology is being used. This f irst-hand view can be

coupled with assessments of the attr i t ion 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 cl ients a glimpse at the level of

professionalism and service that their internal cl ients wil l l ikely

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

cl ients should meet the individuals who wil l be responsible for

both service delivery and the overall account relationship. These

face-to-face meetings can help potential cl ients understand the

managerial style of their counterparts and the extent to which

specif ic individuals have authority to act on behalf of the vendor

in addressing client concerns. Further, should the potential cl ient

decide to engage the vendor, these init ial face-to-face meetings

can begin to lay the groundwork for the type of trust building that

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is crit ical during the transit ion 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

transit ion and ongoing management of the outsourcing

arrangement. Init ial ly, the organization needs to identify the roles

and skil ls that wil l be required to transfer the outsourced

activit ies to the vendor and oversee the vendor relationship.

Finding these individuals can be a t ime-consuming effort, as they

often have other signif icant responsibil i t ies and need to be made

available to work on the outsourcing effort. Therefore, i t is

beneficial for the organization to obtain the time and commitment

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of these individuals and their managers early in the process,

rather than waiting for the f inal 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 earl ier in the

process, as they recognize that rumors wil l l ikely 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 t ime to work on outsourcing related tasks. Further,

organizations need to l isten 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.

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

develop a compell ing business case for HR BTO, organizations

often need to obtain a clearer understanding of their current

spending for HR activit ies and measure levels of operational

effectiveness. Also, many organizations do not have a strong

sense for the industry and competit ive benchmarks that are

useful in comparing HR cost and performance across companies.

Collecting this data can be a t ime and labor-intensive process

that often must be accomplished in a relatively short amount of

t ime.

While outside resources can be used to facil i tate 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 f inancially

beneficial arrangement.

61

RESEARCH METHODOLOGY

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HYPOTHESIS:

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

to get famil iar 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 sti l l at a nascent stage but is expected to grow rapidly. India

currently is facing an economic boom and almost every industry is at

i ts best state. Hence there is a need for the companies operating in

a highly competit ive 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 i t is expected to grow in the

future. This is evident from the fact that various big players l ike

Hewitt associates, Xansa, Convergys, Accenture, Wipro are entering

this arena of HR outsourcing in India.

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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.

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RESEARCH DESIGN:

Exploratory research

Exploratory research is often conducted because a problem has not

been clearly defined as yet, or i ts real scope is as yet unclear. It

al lows the researcher to famil iarize him/herself with the problem or

concept to be studied, and perhaps generate hypotheses (definit ion

of hypothesis) to be tested.

It is the init ial 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 l i terature 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.

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The results of exploratory research can provide signif icant insight

into a given situation. Although the results of qualitative research

can give some indication as to the "why", "how" and "when"

something occurs, i t cannot tel l 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 t imes something occurs, or

frequency, lends itself to statistical calculations such as determining

the average number of occurrences or central tendencies.

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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.

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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, f inancial 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:

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o NTPC

o Xansa

o HCL Technologies

o Radico Khaitan etc

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RESEARCH TOOLS:

The study includes exploratory and descriptive research. Exploratory

research would be done by reviewing the l i terature 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.

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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.

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RESEARCH FINDINGS

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

80

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.

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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.

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SUMMARY AND CONCLUSION

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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

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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, inabil i ty 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,

l i t t le interdependency with other processes and need for physical

processes.

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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 identif ied were cost saving, availabil i ty

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.

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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.

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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 sti l l 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

fol lowed by Indian companies due to various reasons l ike lack of

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

reliabil i ty, lack of understanding of the company culture by the

vendor and immature HR outsourcing market etc.

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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 l ike more focus on core activit ies, t ime saving, cost

saving, expertise and removal of unnecessary manpower. Focus on

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core activit ies, t ime saving and expertise of the vendor were the

major benefits found out the survey as maximum respondents l isted

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 identif ied as the

criterion used by maximum companies for vendor selection. 10

respondents replied competence as criterion, 9 replied experience

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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.

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92

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 activit ies

2. Lack of data privacy

3. Lack of reliabil i ty

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?

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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. Litt le interdependency with other processes

2. Is the process a core capabil i ty

3. Potential r isk 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

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4. Vendor’s technological capabil i ty 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 activit ies

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

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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: _______________________________

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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

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By Ganesh Chella, CEO, Totus Consulting

Internet

o www.indianchild.com

o www.peoplemangement.com

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