The global human resource outsourcing (HRO) market is all set to exceed the $78.8b mark by 2010 at a healthy CAGR of 10.71% over the 2000-2010 period. As stated in a recent report the United States, with a share estimated at 48.90% in 2006, forms the largest market for HRO, while fastest growth is expected to emanate from countries in the Asian region, with a projected CAGR of 15.7% over the aforementioned period.
With only about 5% of Fortune 2000 companies and 1% mid-market companies involved in the multi-process HR BPO contracts, there lies huge potential for HRO market. Enhanced global delivery capabilities of HRO service providers are driving demand for large multi-purpose HRO contracts. By offering plethora of services, new players entering into HRO middle-market are aptly addressing the HR requirements of companies with about 1,000 to 10,000 employees.
In terms of service sectors, payroll services market constitutes the largest outsourced service, with a share estimated at 29.3% in 2006. Fastest growth, however, is expected to emanate from the education and training services market that is expected to post a CAGR of 13.1% over the 2000-2010 period. Outsourcing of administrative functions to third parties is not new, and dates back to the 1940s, when Automated Data Processing instigated service offerings. In the year 1949, ADP (formerly Automatic Payrolls Inc.) was the first company to offer payroll services to its customers. However, most of the services provided in the past were for single-process, transaction-focused HR services such as workers compensation, payroll, payroll taxes, training, or employee benefits. Additionally, client companies generally outsourced a few back-office HR functions, while performing other HR functions in-house. In 1998, Proctor & Gamble signed a 10-year contract worth $400m with IBM for outsourcing of its HR functions.
Contract negotiation cycles are getting shorter and buyer confidence being increased with Tier 1 HRO service providers entering into large and complex contracts that require huge capital investment in regional shared service centers with excellent HR expertise. By offering plethora of services, new players entering into HRO middle-market are aptly addressing the HR requirements of companies with about 1,000 to 10,000 employees. Number of contracts received by HRO suppliers is increasing, with the time span ranging from seven to ten years, as compared to earlier five-year term. Increased HR service offerings that include payroll, benefits administration, and employee care are expected to drive prices down. Further, by leveraging offshore resources and refining delivery systems, HR service outsourcing providers can significantly offer cost savings. Surging interest of multi-national organizations to benefit from multi-national contracts is expected to raise multi-country HRO capabilities of HR service providers.
HRO is also driven by offshore outsourcing trend with most of the outsourcing focused on processing services. Philippines, India, South America, and China are some of the major regions with more offshore contracts. There is a shift in vendor focus from payroll, benefits administration, and employee care services to recruitment, absence management, and learning services. Also, there exists a market shift in vendor focus towards business case metrics development. HRO is still a growing market and is rapidly transforming to an industry that supports complete business processes from an earlier model of payrolls service bureau.
HRO industry is likely to witness growth in the business from mid-market companies. It is expected that HRO suppliers would receive more number of outsourcing deals that are of smaller value from mid-market clients in the near future. Though few mid-sized companies can spend substantial amounts of over $25m per year on HRO, the number is on the rise.
The industry is also anticipated to witness an increase in M&A activity. Further, HRO suppliers are likely to be very selective in entering into M&A deals. For instance, a supplier involved in training services may take over a company specialized in payroll and benefits administration, or a HRO supplier with operations in Europe may acquire a supplier with Asian and US operations. The market is likely to observe robust growth in next few years, as at present only 10% of large companies are outsourcing their HR functions. The offshore HRO market is also likely to witness growth, as suppliers are intending to offer HR related services from areas with low labor costs. It is expected that half of the total HRO work would be performed outside the US, over the next five years.
Organizations are innovating on various tools such as performance indicators and standard HRO performance metrics for critically analyzing HRO processes. They are employing these tools to determine return on investment, and to monitor Service Level Agreements (SLAs) related to HRO functions. Corporate HR leaders are ensuring that services offered by HR providers are actually worth the value paid.
Source(s): Global Industry Analysts, Inc.