Shyamal Majumdar: HR outsourcing in the fast lane

HUMAN FACTOR

Of the 124 major deals since 1997, more than half were inked in the past two years.

It would have been big news even a couple of years ago. But when Unilever announced last week that it would outsource to Accenture all the functions that at one time were considered a bastion of corporate responsibility "" the care of human resources "" it was treated as just another routine announcement by a corporate behemoth. Which just shows that human resource outsourcing has become a here-and-now, commonly accepted business practice.

Under the deal, Unilever is expected to shift a part of its 3,300 global HR staff employees to Accenture. The level of sophistication achieved by HR outsourcing firms is evident from the fact that Accenture will provide a range of learning services to nearly 200,000 Unilever employees in more than 20 languages from its delivery centres in Bangalore, Manila, Dalian, Bucharest, Prague and Curitiba. Though the financial details of the deal are not known, analysts say it would not be far behind the biggest deal last year: Convergys's $1.1 billion agreement to manage human resources for DuPont until 2018.

Unilever will surely have many followers. In fact, a study conducted by the Human Resources Outsourcing Association in the US reveals that 39 per cent of organisations all over the world are considering outsourcing three or more non-essential administrative work such as the management of pensions, benefits, and payroll HR functions in the next 12 to 24 months. And, estimates made by Everest Research shows that of the 124 major outsourcing deals struck since 1997, more than half were inked in the past two years.

The reason for the huge growth in outsourcing is obvious. Given the mounting number of paperwork, HR departments in many companies have ballooned into mini-empires struggling to manage a typhoon of paperwork and the cost of maintaining the huge staff is humungous. Research has shown that 87 per cent of the funds in a mid-sized company's budget for HR goes towards routine processing transactions, rather than strategies that could actually impact business, enabling it to gain efficiencies. Mid-sized companies in fact spend almost twice as much as large companies in maintaining an HR head count.

There is no doubt that HR outsourcing has tremendous cost savings potential for companies. Typically, companies end up saving up to 30 to 40 per cent of their cost by outsourcing their HR processes. Data also show that the real cost of providing HR services in participating organisations is between 1.8 times and 2.8 times the employment cost of the HR staff, with the average being around 2.6 times.

So the benefits are obvious, but some HR experts say these figures alone should not prompt companies to rush through outsourcing deals. They cite multiple other studies showing that while a majority of companies farm out work to outside providers to save money, cost reduction is frequently not achieved. According to a Society for Human Resource Management survey, the number one reason (56 per cent) for outsourcing among respondents was to save money or reduce operating costs. Yet only 31 per cent of the survey respondents indicated that they actually achieved cost savings. The remaining 69 per cent indicated that costs remained the same (23 per cent) or increased (9 per cent), or they did not know whether savings were achieved (37 per cent).

Despite these results, there is no doubt that there will be cost savings, but HR is more than mere accountancy, experts say. The HR staff refuse to share strategic information with the outsourcer, knowing their jobs were to be axed. Some companies also show reluctance in handing over sensitive tasks to outsourcing firms altogether, fearing the damage done from a job mishandled could be too costly.

Where do Indian companies figure in all this? They are just skimming the surface, it seems. Consider the figures: the total market for HR outsourcing in the whole of Asia Pacific is around $4 billion. That's just about 5 per cent of the world market, and India's share even in this small pie is negligible.

The biggest problem "" and this is why the HR outsourcing industry in India is on the back foot "" is the government and the industry's failure to tackle issues like data security and data privacy. Most foreign companies insist that their outsourcing agreements contain detailed and precise contractual specifications regarding data privacy and protections.

It's almost a chicken-and-egg situation. Lack of data privacy concerns in India have ensured that the vast majority of the HR outsourcing giants keep away from India (only 2 per cent of the Indian HR outsourcing market is controlled by the organised sector), while the unorganised sector, which controls 98 per cent of the market, couldn't care less about these issues.