HR Outsourcing : Issues &
Challenges for Indian
Companies
Prepared By:
TANUKA BHATTACHARYA
SHRI SHANKARACHARYA INSTITUTE OF
TECHNOLOGY & MANAGEMENT
Introduction
History of Outsourcing
• Barter system- First instance of outsourcing
• Idea was rooted in 1776 in “competitive
advantage theory” propagated by Adam Smith.
• Early examples of outsourcing-
-England Textile Industries in 1830
-Making of American wagon covers
: A job outsourced to Scotland.
More Recent examples:-
• Eastman Kodak
• Nike
Outsourcing is defined as :-
Delegation of task to an outside entity.
Functions outsourced to a third party under
contract.
Buying goods or services instead of producing
them in house.
• Outsourcing includes:-
- Offshoring
- Nearshoring
Changing Trends in HR Outsourcing
Traditional Outsourcing
• Different HR functions were outsourced to different
vendors.
Recruiting Payroll
company
Benefit
Training
Admin
Supplier Supplier
3 4
Supplier Supplier
1 2
Outsourcing the whole process to a
single vendor
Benefit Admin Com. Plan
& Strat.
Pay Roll
Education &
Training
Value Chain
Cont. Integrator
Workforce
Mgt. Org Dvpt.
Personnel
Admin Recruiting
Success rate of world wide spending on
outsourcing services
85% 45%
2001 -2005
2006
Outsourcing HR: Spending
18
16
14
12
In
Billion 10 Pay Roll
Dollars 8 Benefit Admin
6 Person. Admin
4
2
0
2002 2003 2004 2005 (Years)
Gartner Group, HR Outsourcing: Time to
Deliver Results-2001
Drivers for HR Outsourcing
• Downsizing
• Rapid growth
• Globalization
• Increased competition
• Restructuring
Rationale for HR outsourcing
• Stage of evolution of the HR function
• Need for expertise
• Time pressure
• Cost reduction
Cost reduction main rational to
outsource
Cost reduction
Top mgt
Line mgt
Service HR
improvement
Resource
availability
0 20 40 60 80
Percentage of Respondents
Criteria for Outsourcing
1. Model for Virtual HR
Based on these theories:
• Transactional Cost theory
• Resource Based prospective
Framework to decide which function
to Outsource
High Idiosyncratic
Core
HR Activities
HR Activities
Uniqueness
Peripheral Traditional
Low HR Activities HR Activities
Low High
Value
n Speaker’s Theory
Classification of HR Activities:-
• Type of Activity
• Strategic value of Activity
HR Functions Outsourced in Practice
• Frequently outsourced functions: Fully or
Partially
Pay Roll
HRIS
Fully
Recruiting Partial
Trng & Dvpt
Other Benefit Mgt
0 20 40 60
HR Executives views on HR
Outsourcing
HR Functions Views in %
YES NO
Employee Communication 13% 87%
Assessment 43% 57%
Recruiting 52% 48%
HRIS 35% 65%
Case Study-1
Bank Of America
• Leading financial service organization
• Approximately 1, 85, 000 employees.
• 4200 banking centers
HR- Department
• 1300 employees in HR
• Have outsourced many of their HR activities to
Exult like,
- International relocation
-administration , regional staffing,”life event
coordination”(Leave and Retirement) policy and
general benefits etc.
Motives for outsourcing
• Reduce Costs
• Focus resources on core
activities and core
competencies
• Expand and improve
services.
• Benefits from Vendor’s
investments and
innovation
• Improve career
opportunities for staff.
• Increases Flexibility
Results from outsourcing
• Activities like Payroll,benefits, administration
were completed within 7 months.
• Cost reduction goal of 12 per-cent annually
was achieved.
• Could focus on more strategic tasks like
process design and development.
• Increase in Percentage of internal
recruitment from 16% to 35%.
Case Study-2
Sunoco Inc
Headquartered in Philadelphia
Leading Manufacturer and Marketer of
Petroleum and Petrochemicals.
Approximately 14000 Employees
5 Different Business Units
45 Employees in Central HR Department
HR Functions Outsourced at Sunoco
Drug Screening
Central advertising for new employees
Posting of Employment Advertisement online
Executive Search
Salary Surveys and Statistics
Outsourcing Payroll Function
• Outsourcing Payroll to third party vendor
• Preparation for New Millennium
• People Soft HRMS
Bane or Disadvantages
• Dependence on Vendors
• High Costs
• Loss of Control
• Low morale among permanent employees
• New Risks
• Sub-standard Service
Conclusion
1. Human Resource Outsourcing is still in
developmental stage.
2. Issue like Data security needs attention.
3. Its neither a Boon nor a Bane, and depends on
organization and situation.