History of HR Outsourcing
Global economic volatility has brought about interesting times for HR teams everywhere. This instability leaves HR dealing with turmoil and having to manage the needs of employees who must weather the storm. When business leaders are looking to cut overhead, being able to justify the HR team’s time and resources is more important than ever. Reporting is crucial as a means of demonstrating HR’s value to the business, and technology can play an important role in helping the HR team operate as efficiently as possible.
However, at a time when budgets are stretched, how can HR choose between the myriad technology delivery models available? The average HR manager wants a global view of HR, as well as in-depth local knowledge and expertise that’s not bogged down in administration. But is it possible to have your cake and eat it, too?
HR outsourcing (HRO) has been around for over a decade now and has promised many of the benefits HR leaders want – and need – in volatile times: variable costing models, economies of scale, integrated technology available globally, risk mitigation, and constant innovation. HRO has been both the subject and the object of significant transformation. It has not only transformed the HR profession by enabling HR leaders to offload transactional tasks and focus on business value, but HRO has also transformed itself quite a bit. In this Gartner newsletter I invite you to look back on how HRO has evolved over the last decade—and look forward, into the future of HRO.
From zero to HeRO
Gartner defines comprehensive, HR business process outsourcing (BPO) — also referred to as end-to-end HRO — as “supporting multiple HR business processes through a singular BPO contract.” Because HRO is currently on the cusp of moving from adolescence to early maturity on Gartner’s “hype cycle,” it’s a great time to look back at a short history of HRO.
Let’s start with the birth and early childhood of HRO. It was BP who pioneered the HRO industry back in 1998. The BP contract was illustrative for HRO 1.0, or the first generation of HR outsourcing contracts. HRO 1.0 came on the back of the mega-mergers of the late nineties and was characterized by a “lift-and-shift” approach, whereby the vendor would take responsibility for the customer’s HR systems and process landscape, as is.
The subsequent reality proved that the lift-and-shift model lacked process alignment, technology streamlining, and an understanding of global complexity or privacy standards. HRO 1.0 proved to be hard to sustain and after a couple of years, many HRO 1.0 deals suffered from scope reduction or rollout delays. HRO 1.0 appeared to be a bit of a crybaby!
Childhood to adolescence
Enter HRO 2.0, and HR Transformation. In the late nineties, Dave Ulrich applied to HR service delivery what Henry Ford had done to the automobile industry at the start of the 20th century: He defined specialized roles for the different HR tasks at hand. The Ulrich model confirmed the concept that HR professionals must create practices that make employees more competitive, not more comfortable. This model was widely adopted by business consultants and helped trigger the wonderful world of HR Transformation.
HRO 2.0 addressed many of the shortfalls of the previous generation of HRO contracts, with HR processes being thoroughly mapped out and aligned; transition plans being established; service-level agreements (SLAs) maturing; and internal HR systems being scrutinized prior to transition. In the spirit of Ulrich, HRO 2.0 introduced the thinking that HR professionals should join with managers in championing HR issues.
But the actual execution of an HR Transformation project slowed down HRO 2.0 deals considerably by introducing complex transition phases. Process alignment among dozens of countries appeared cumbersome; technologies failed to scale; and standardization initiatives got lost in the shuffle. In addition, employees had a tendency to blame the HRO provider for every little HR problem, tainting the reputation of both HRO and the provider.
All of the above resulted in slow transition projects and highly customized HR systems, wrecking many HRO business cases. The appetite for standardization appeared to be true only on paper. Version 2.0 brought significant maturity to the industry, but it was only the next stage in the HRO journey. As the HRO industry entered its second decade — from childhood to early adolescence—the proverbial “boys” were separated from the “men” on the provider side, resulting in a wave of M&A activity in HRO.
Enter HRO 3.0, and with it, a technology-inspired view of HR outsourcing. Parallel to the advent of the HRO industry, two major IT trends took center stage. The first was the rise of software as a service (SaaS), whereby standardized-yet-configurable software is offered in a “charge by the drink” model via the Internet on a single, shared code base. The second was the consumerization of IT, where users, including employees, managers and HR professionals in HRO, took over the driver’s seat of technology innovation, demanding usability, ubiquity, simplicity, and ease of access from software and hardware providers.
In this context, the industry saw its first wave of renewals, or re-contracting, of major deals. In addition, corporate procurement departments had gained significant experience in negotiating outsourcing contracts, resulting in more educated buyers.
Head in the cloud
These broader IT trends provided the fixes HRO 2.0 needed: speed, scalable technology platforms, and user-centric design. Both the emerging industry trends and the shortcomings of early HRO 2.0 deals pointed out the importance of an integrated, multi-tenant, technology foundation to build the big house of HRO. The rise of cloud computing and SaaS also delivered proof that organizations were willing to align internal processes, provided it could be done painlessly, rapidly and easily—something made possible through configuration instead of coding.
Multi-tenant and shared-client architecture have continued to undergo nearly non-stop improvement since those early days. SaaS allows for constant innovation and economies of scale, and as a hybrid, can also integrate with on-premise deployment options. Last but not least, this unified technology integrates HR administration, payroll, analytics, and talent management into one delivery system.
Platform for scale
The next stage in process automation was business process utility (BPU), which introduced “the robot” to BPO, eliminating manual intervention from key HR processes such as payroll. HRO has witnessed the fastest adoption of BPU services, when compared with the rest of the broader BPO market. BPU— also referred to as BPaaS (business process as a service)—is essentially a pre-built solution designed for scalable, one-to-many delivery, which is delivered as a cloud-based offering.
BPU's popularity reflected buyer rejection of the huge HRO 1.0 and 2.0 megadeals of the early- to mid-2000s in favor of more scalable, easy-to-use, pay-as-you-go alternatives. As a result, current payroll-focused HR BPU offerings are tried, true, and tested.
HRO 3.0 is also significantly different from the younger generations in that it puts the user at the heart of HR. Back-end processing is still at the core of HRO, but it’s nothing without superior self-service for employees, managers, HR business partners, and service center professionals alike. These four groups can now work in concert, each with its own relevant, role-based view on people data.
What’s more, advanced knowledge management solutions provide additional self-service options through electronic storage of policies and employee records. It all adds up to consistently high satisfaction among users, which, in turn, translates to high user adoption rates.
Industry standards such as Generally Accepted Accounting Procedures (GAAP) and Information Technology Infrastructure Library (ITIL) have brought increased transparency, inter-operability, and competition to the finance and information technology outsourcing industries. Unfortunately, the notion of widespread industry standardization is still largely absent in HR.
Standardized HR services and processes, including payroll, would mean increased process automation and would employ a flexible, “fit-to-standard” approach. Rather than starting from a blank sheet of paper, a step-by-step approach is applied, allowing configuration by “switching” parameters on and off. The end result: faster implementation, more flexible deployment, better overall process control, and transformation phases that demonstrate success right from the start.
Process completeness & global reach
Another factor to consider when implementing IT to support HR is how it’s actually going to be used. In addition to processes and administration, HR directors need to look at how IT can support the more strategic part of HR, including talent management and succession planning.
First of all, the focus should be exclusively HR. The multi-tower deals and massive projects of the past that encompassed finance, procurement and other business areas are over. HR is finally getting the attention it deserves.
The most robust solutions cover all areas of HR, beginning with enabling and streamlining processes (the original focus of HR), including workforce administration, payroll, time management, organization management and benefits. More recently, talent management processes have been added to the mix: learning, recruitment, and compensation. And let’s not forget the important additions of other key areas that include analytics and reporting, as well as content and document management.
In other words, it’s crucial to get the basics right first—HR administration, workforce, payroll, etc.—and then “grow as you go” into value-added processes. Start at the core, and then move into more complex areas. And, regardless, it’s always important to remember that the quality of the data determines the success of any project.
You’ll also want to consider a framework that enables the inclusion of third-parties in areas like learning and recruitment fulfillment. A flexible and open technology platform (BPaaS) will enable you to make connections with third parties for bringing in courses and learning content, for example, as well as potential candidates’ resumes content and market data (for compensation benchmarking), or for pushing out vacancies.
In today’s shrinking world, global reach, coverage and compliance will impact nearly everyone. So any effective solutions should be automatically preconfigured for scores of countries and many languages. (For example, NGA’s: preconfigured for 100+ countries and 30+ languages).
Where do we go from here?
Against a landscape of an increasingly complex and volatile world, we see a continuum of HR services appear to meet evolving HR needs and requirements: organizations today can choose to deploy HR technology OnPremise, host it in a single-tenant environment, deploy it on a multi-tenant, shared platform, and on the platform, add BPO-type, involving HR service centers around the world. Some define it as Hybrid HR, others as HR-as-you-like-it; one thing is certain: the opportunities are endless.
Today, and historically, clients have wanted the best of all worlds: improved performance and innovation in HR process management, but at the lowest possible cost. Of course, that’s what we all want. But, it seems, the question of innovation nearly always comes to the fore and takes precedence, even in deals structured to deliver the lowest possible costs.
Quo vadis, innovation?
It’s a question worth pondering, even in the face of today’s economic instability. In fact, smart organizations continue investing in new systems to improve efficiency. Because areas like reporting, talent management, and competence management have become even more critical to organizational effectiveness and success, HR needs to weigh the available options very carefully, understanding that different companies will need different delivery models.
Across the board, however, one thing will never change: now more than ever, companies need an HR function that is strategic and visionary, one that will lead them. Having the right delivery model will demonstrate—and enhance—HR’s value to management and the rest of the organization.