Human resources business process outsourcing (HR BPO) continues to be a major component of the overall worldwide BPO market, as worldwide HR BPO is expected to reach US$24.6 billion in 2006, an increase of 4.7 percent from $23.5 billion in 2005, according to Gartner.
The overall worldwide BPO market is expected to reach $134.7 billion in 2006, an increase of 8.3 percent over 2005. However, the HR BPO market has reached a crossroads in 2006, as some vendors struggle with profitability, and are retrenching to improve their bottom-line results. This will exert a drag on the market, especially in the growth of the U.S. segment through 2007.
HR BPO is the biggest component of the overall worldwide BPO market at 18.7 percent of the market. Payroll services and benefits administration services comprise the largest segment of the total worldwide HR BPO, together comprising nearly three-fourths of the market in 2006. The remainder of the market is composed of education and training, hiring and recruiting, and personnel administration services.
In Western Europe HR BPO revenues are expected to reach $4 billion in 2006, an increase of 6,5 percent from 2005, according to Gartner. The slightly higher growth in the European HRO market is helping to offset, at a global level, some of the headwinds currently experienced by the U.S. market.
"HR has long been identified as a key area for outsourcing, usually in the areas of payroll and benefits administration services," says Robert Brown, research director for Gartner. "As a back-office function, aspects of HR are often deemed critical, yet non-core functions for outsourcing and are usually most companies' first stop on the sourcing journey for BPO."
Gartner said that more companies are looking to leverage HR outsourcing as a way to drive increased amounts of automation to achieve reduced costs and improved service levels. Many organizations that consider using HR BPO have created shared-service centers, where they have already standardized many processes. Benefits administration, payroll and basic HR call center functions are good candidates for process standardization in internal-shared service centers.
However, many companies often seek an outsourcer that can provide the next level of leverage to lower cost and continue to innovate on service delivery. Profitability concerns will lead many of the largest vendors to try to consolidate, rationalize, standardize and leverage their current HR BPO assets to drive up the profitability of the BPO portfolio.
"Currently, there is much scrutiny by investors of HR BPO vendors' profitability on their larger, strategy-complex BPO contracts. In the drive to top-line market share and revenue growth in the first half of the 2000s, many of the largest, most comprehensive end-to-end deals were highly customized in nature, with very little leverage built into the delivery model," says Brown.
The internal staff is the biggest competitor to external HR BPO providers. Fear of losing control is a major obstacle to BPO adoption, so Gartner analysts recommend that organizations carefully weigh strategies to displace internal functions and staff.
"Fears surrounding the loss of internal expertise often include the loss of 'tacit' knowledge (undocumented process knowledge carried intuitively by workers). Loss-of-control fears can also encompass dread that, once a process is outsourced, it will be difficult to ever re-insource, and users want to know how to transfer a process back if needed," says Brown.