A Study on Trends in HR Outsourcing in

Indian Context

Submitted to:
Asst Prof Sarada

Submitted By:
B.Rajesh

PGDM (HR)-II
1. ACKNOWLEDGEMENT

We are grateful to our faculty Asst Prof. Arvind Chaturvedi for providing us with
this opportunity to conduct this valuable project. We are also thankful to him for the
precious time and guidance given by him.

We also thank all the people who participated in this research.

B.Rajesh

2. Contents
3. Executive Summary
4. Introduction
5. Literature review
6. Objective of the research
7. Scope/Utility of the research
8. Research Methodology
8.1 Sampling technique
8.2 Data collection
9. Analysis of Questionnaire
10. Conclusion and Suggestions
11. Limitations
12. Appendix: I-Questionnaire
II- Introductory Letter

3. Executive summary
This research is aimed at analyzing the current state of the HR outsourcing market in
India and the trends that are prevalent in the same. Today, in this era of globalization
there is high degree of competition in all areas. One very important trend in the recent
times has been the growth of human resource outsourcing. Rapidly changing market
dynamics and global competitive pressures have caused organizations to spend more
time focusing on their core business. Organizations are fast realizing that they can't be
all things to all people. So companies now, be it a software company, a service
provider or a manufacturing firm, decide what they are good at and outsource
everything else, i.e., focus on their core competency, and let someone else do the rest
in a more efficient and cost-effective manner.
As a result, human resources outsourcing is becoming increasingly prevalent. The
number of companies outsourcing HR activities continues to rise, and the scope of
outsourced HR activities continues to expand. HR outsourcing can happen in HR
functions, like 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, etc. Outsourcing has
become a common response to manage people and technology resources strategically,
enhance services, and manage costs more effectively.
Outsourcing non-core activities allows HR professionals to move away from routine
administration to a more strategic role. The organization can focus on higher value-
added activities while the outsourcing provider takes care of the day-to-day
administration. Critical internal resources, such as technology and talent, can be
devoted to company's core business. Outsourcing reduces the need for large capital
expenditures in non-core functions. Thus, outsourcing becomes a strategy for reducing
the capital intensity of the business. This strategy has gained popularity as companies
aim to become more nimble and gain the speed and flexibility necessary to compete in
today's business environment. A growing number of executives understand the
benefits it can bring in terms of not only cost savings, but also heightened strategic
focus. Many recognize outsourcing relationships as long-term partnerships created to
further the strategic goals of the organization.
Companies to whom organizations outsource their Human Resources function possess
the knowledge and resources to expertly perform part or all of a clients' human
resources function, allowing the client to streamline their internal processes and
concentrate on generating profit in their core business. But still in India, people are not
very clear about what exactly is manpower outsourcing all about, and issues like
quality and trust needs to be addressed properly. Experts say the basic reasons
hampering the growth of HR outsourcing in India are confidentiality and cost factors.
Moreover, the fear of losing jobs, losing control over confidential data, ethics and
quality of outsourcing vendors, security breaches and overall confidence in the
vendors deters many organizations. 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. This is where Indian HR
outsourcing companies face a major handicap.
However, the future seems to be very promising. Estimates show that the latent size of
HR outsourcing in India is about $ 2 billion with a current market of $ 27 million and
it is growing at an alarming rate of about 50 per cent. India has immense potential as
more than 80% of fortune 1,000 companies are discussing HR outsourcing as a way to
cut costs and increase productivity.
4. Introduction:
What Is Outsourcing?

In a nutshell, outsourcing is an accepted management tool for restructuring and

refocusing the way an organization does business. It challenges management to build a
more flexible organization centred on the core competencies of the business. In
making the determination that a business has more to gain by having certain "non-
core" aspects of the business outsourced to a third-party service provider, the
organization transfers responsibility for one or more activities or functions that would
normally be performed in-house to a qualified vendor, for a specified period of time
and at a negotiated fee, in accordance with terms stipulated in a service level
agreement (SLA). In essence, the organization is making a decision to send certain
parts of the business out to a provider whose "core competency" is that part of the
business.
HR outsourcing (HRO) is the application of different business models and techniques
to new forms of activities - or processes – and radically redesigning them to create
outputs of value for end users such as customers or employees. HRO can be traced
back to the definitive work of Michael Hammer and Jim Champy in Re-engineering
the Corporation. This spawned the business process re-engineering (BPR) industry in
the 1990s. Business process outsourcing (BPO) is based on the principles of re-
engineering, but also combines them with the ownership and management of processes
on behalf of management by an outside vendor.
BPO has been applied to many transactional processes that can be easily defined or
'scaled' and transferred to third party ownership with deeper expertise than themselves.
Until recently, the management of IT systems has been the major element of the
outsourcing market. An ongoing debate concerns which business processes are 'core'
to organisations - in the sense of core competencies that drive competitive advantage.
Any non-core - or peripheral - activities are outsourced. Typically,
• Services are improved
• Overheads are reduced
• Many processes are automated - thus reducing people

The outsourcing of HR processes emerged in the late 1990s, pioneered by firms

specialising primarily in IT outsourcing - although not exclusively - in the US such as
ACS, EDS and Accenture. Many transactional HR processes are outsourced and are
increasingly associated with electronic delivery - or 'e-HR'. Much day-to-day HR
administration can now be transferred to third party providers. Payroll and benefits is
widely outsourced with organisations benefiting from economies of scale and
powerful Enterprise Resource Planning (ERP) solutions. Competition among HRO
providers has dramatically reduced prices. Other advantages for clients include:
• cost reductions
• service improvements
• upgrading technology
• being better able to respond to business change.
Types of HR Outsourcing

In the past, HR outsourcing was thought of as hiring a vendor to provide a service.

With the new focus on outsourcing, there is more of an opportunity to partner with the
vendor to provide the service on a longer term basis rather than just a one-time vendor
contract. HR outsourcing can include:
Discrete services: In this instance, one element of a business process or a single set of
high-volume repetitive functions is outsourced to a third-party administrator.
Examples of discrete services could include the annual open enrolment process,
flexible spending accounts or employee background checks.
Multi-process services: The complete outsourcing of one or more functional human
resource processes would be an example of multi-process outsourcing (also called
blended services). As such, the outsourcing of either health and welfare benefits
administration or defined retirement plan and 401(k) plan administration to a third-
party administrator would be an example of multi-process or blended services
outsourcing.
Total HR outsourcing: Total HR outsourcing represents the transfer of the majority of
HR services to a third party, to include recruitment, payroll, HRIS, benefits,
compensation and communications, as well as the transition of HR management and
staff. However, HR executive management would normally remain in place within the
organization, along with strategic planning related to people management and other
key HR functions at the discretion of management.

5. Literature review:
Global Scenario
SHRM Human Resource Outsourcing Survey Report
The 2004 survey report revealed that HR outsourcing was a practice used by almost
six out of 10 organizations. However, one-third of organizations did not outsource any
HR functions, and only a few planned to outsource HR functions in the next three
years. HR functions were usually partially outsourced or completely outsourced. The
difference is that when functions are partially outsourced, the organization co-manages
the function with the vendor; when they are completely outsourced, the vendor takes
full responsibility. More than one-half of HR professionals indicated that their
organizations partially outsourced an HR function. Administration of health care
benefits, pension benefits and payroll were examples of functions most commonly
cited as partially outsourced. The top three functions that were outsourced completely
were background checks, employee assistance programs and administration of flexible
spending accounts. Some of the most frequently named drivers for outsourcing were
reducing operating costs and controlling legal risk by improving compliance.
However, large-staff-sized operations, compared with small organizations, were twice
as likely to indicate that their reason for outsourcing was an attempt to free up the time
of their HR staff to focus more on organizational strategy. When asked about the
future of outsourcing, about two-thirds of HR professionals predicted that their level of
outsourcing would remain the same over the next five years, and nearly one-third
expected their organizations to increase their level of HR outsourcing. Outsourcing
seemed to be favored to a greater extent in large-staff-sized organizations: almost
twice as many HR professionals from these organizations, compared with medium
organizations, indicated that HR outsourcing was likely to increase in the next five
years. When asked about the benefits of outsourcing, the majority of HR professionals
indicated that outsourcing allowed HR professionals the chance to concentrate their
efforts on core business functions, such as organizational strategy development and
execution. Correspondingly, nearly three-quarters of HR professionals agreed that the
role of HR professionals became more strategic with the outsourcing of certain,
specifically transactional, HR functions.
Present scenario in India
With more and more companies looking to rationalise employees on their payroll,
manpower outsourcing is slowly becoming the new buzz in India too.
And the trend seems to have hit not just big multinational companies but the public
sector and government undertakings as well, though on a very low key yet in the latter.
Estimates show that the latent size of HR outsourcing in India is about $2 billion with
a current market of $27 million and it is growing at a rate of about 50 per cent.
Experts, however, say though foreign companies are outsourcing jobs to India, putting
the country in the middle of outsourcing boom, the Indian companies do not seem to
be enamoured by the opportunity till now and are not adopting HR outsourcing
practices in a big way. "HR outsourcing in India has not seen the required momentum
and is limited to a trickle effect, with companies outsourcing a few selected low-end
HR processes," says Anil Mahajan, executive director, Talent Hunt Pvt Ltd, a leading
HR firm in New Delhi.
A recent survey 'Outsourcing in the Asia-Pacific', conducted by Hewitt Associates, a
global HR outsourcing and consulting firm, confirms the situation. The survey showed
that many companies in the region are either unfamiliar with the process and
procedures of HR outsourcing, or are unaware of the players operating in the area.
"Even though across the globe companies are realising 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," Mahajan says, adding: "Here
people are also not very clear about what exactly is manpower outsourcing all
about.”Explaining about the concept of HR outsourcing, Kris Lakshmikanth, founder
CEO & managing director of The Head Hunter, a recruiting firm in Bangalore, says,
"It 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."
"HR outsourcing can happen in areas such as payroll, employee benefits
administration, fixed assets administration, network, receivable and logistics
management, hardware maintenance, telemarketing, call centres and database
management. In India, the most common processes outsourced are related to training,
payroll processing, surveys, benchmark studies and statutory compliance," Mahajan
adds. Elaborating about the benefits of manpower outsourcing, Lakshmikanth says,
"Today, every organisation 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 organisation's core competencies and outsource non-critical business
activities. Therefore, routine administrative work, although important, can be
outsourced to third party vendors." Experts say the basic reasons hampering the
growth of HR outsourcing in India are confidentiality and cost factors. Besides the fear
of losing jobs, losing control over confidential data, ethics and quality of outsourcing
vendors, security breaches and overall confidence in the vendors deters many
organisations. Quality at times forms another roadblock.
According to Mahajan, “most companies are not sure about the end result, which they
will receive from the vendor. Also currently there are no standard benchmarks
available so pricing varies a lot from vendor to vendor for similar services. This gives
the customer the feeling that they are not getting best value for their money,” he adds.
But, as the Hewitt survey puts it ‘with economic slump showing signs of
improvement, many HR outsourcing vendors are optimistic that things will look up in
the near future.’
Experts also believe that in present times HR outsourcing is undergoing a transition
phase. "There has also been a transition on its user acceptance, where it is moving
from a corporate domain to public sector undertakings and the government sector.
However, it would still be sometime before we see increased levels of HR activities
being outsourced," they say.

Key Points we noted:

 HRO market is still in transition
 Vast difference exists between the state of HRO market in India and the global
scenario
 People not yet clear about HRO in India
 Public Sector hasn’t yet taken to outsourcing
 Cost/benefits and confidentiality are most important considerations in HRO
 More freelancers exist in the market than organized players
 Size of companies is also an important factor in HRO
  HRO is expected to gain momentum in the coming years

6. Objective of the research

The objective of this research is to formulate a picture of current trends in outsourcing
in HR services prevalent in Indian firms. The research aims to discern common factors
promoting or inhibiting the growth of HR outsourcing industry in India.
Also, the data collected will help in finding parameters which are most common in
terms of HR outsourcing. The research tries to determine patterns while comparing
organizations involved in HR outsourcing against those which are not.
7. Scope/Utility of the research:
The research can be very useful to the HR professionals to understand the current
trends in the market with regards to outsourcing of HR services. It will give them a
comparison of the firms outsourcing HR services with those that have completely in-
house HR functions. They will get to know about the perceived advantages and
disadvantages of HR outsourcing and also the important considerations to be kept in
mind.
Outsourcing Vendors can also find this research useful in understanding the needs of
their potential and existing clientele. The students can also benefit from this research
as they will become aware of the new trends in the field of HR and will be better
prepared for the challenges ahead of them when they join the industry as HR
professionals.
8. Research Methodology
Two methodologies were adopted while undertaking the research:
Secondary data collection: large amount of secondary data is available in the forms
of articles, journals, and previously conducted researches on the similar topics. This
data was collected and studied to determine some of the broad trends prevalent in HR
outsourcing across the world and the presence of HR outsourcing industry in India.
Also, the data thus gathered helped in identifying key parameters to examine through
further exploration and thus helped in defining the hypotheses for further study as well
as designing the questionnaire.

Primary data collection: Primary data was collected through the means of a sample
survey. For this purpose, a questionnaire was mailed to some of the HR managers and
executives in various organizations and their response was solicited. The data
collected through this survey was then analyzed to determine patterns and for testing
the validity of the hypotheses formulated.

8.1 Sampling technique:

The sampling technique used for the survey was non-probabilistic in nature.
Convenient sampling technique was used owing to limited number of resources for
carrying out the research. Also, the respondents chosen were from varying sectors and
thus provided a good estimate of the overall picture prevalent. Target group for
carrying out the survey was the HR departments of various organizations. The study
objective itself omitted the need to study small scale organizations as they generally
don’t have a separate HR division as such and hence were not considered for carrying
out the survey.

8.2 Data Collection:

A questionnaire was developed and administered via email to the respondents. The
questionnaire was accompanied by an introductory letter stating the purpose of the
research and promising confidentiality. Responses were then collected and
analyzed to arrive at certain conclusions.

9. Analysis of the Questionnaire:

10. CONCLUSION AND SUGGESTIONS
11. Limitations

The limitations of our research are:

 The sample which we took does not represent the whole population as the
numbers of respondents were very less
 We used convenience sampling technique owing to limited resources which is
not ideal for this kind of research
 Our limited experience was another constraint on the quality of the research
 We could not include the HRO vendors in our research to gain their
perspective
 Our respondents were from specific areas and did not cover the whole of India
 We missed out on some sectors in our research

****************** Thank You for Your

Time*******************

II- Introductory Letter

 Survey on current trends in HR Outsourcing

Hi,

As part of our academic curriculum, we, the students of

PGDM-HR at International Management Institute,
New Delhi are conducting a research on the topic
“Outsourcing trends in HR services”. We have
prepared a set of questionnaires as means of collecting
primary data for the same.
We are looking forward to your cooperation in carrying out
this survey. The survey will not take more than 10
minutes. Data being collected through these
questionnaires is purely for academic research and will be
kept strictly confidential.
Thank you for your willingness to assist us in this
important survey. We sincerely value your participation.

Regards,
Project Team,
PGDM-HR (2008-10)
IMI, New Delhi