Wednesday, March 19, 2008

Human Resource Outsourcing - Road to Success

posted by ShyK at 21:16

HRO has seen its fare share of ups and downs. Here are my thoughts on why HRO may need some time before it becomes mainstream

Most global organizations tend to have 'utilities' rather than applications to service their HR processing needs outside of major countries (US, UK et al). Not only there is no existing global system, but also the systems that exist are not up-to-date, given that HR tends to be fairly low on priority for technology upgrade budgets. This seems to preclude a lift, shift & fix approach to HRO unlike FAO. Most organizations seek either a concurrent lift & fix approach or a 'Fix & lift' approach. The former has its challenges & risks resulting in expectation mismatches and the later requires upfront investments which customers expect providers to subsidize.

Given that a simultaneous IT & Process transformation will always have a far longer pay-back period than a mere process transitionl one way to make it more palatable is by addressing the low hanging fruits. This can either be done by taking a phased approach. One way is to do a more or less As-Is 'shifting' operations for certain countries while 'fixing' those at others. The other ways is to shift processes such as Work Force Administration support or Recruitment process support early on, since they can do with somewhat lesser or older technology.

That view is somewhat contradictory to the fact that payroll processing and benefits administration (primarily for US & UK markets) outsourcing has taken a lead and is more or less stable. I believe that this has been driven by upfront technology investments by the providers. This has its own payback related challenges for vendors. The only way for a quick payback in such cases is to scale up fast - winning and delivering a high number of customers. It seems that providers are finding it relatively easier to win customers but difficult to deliver to them - especially from low cost locations. The problem is the lack of availability of knowledgeable associates. The scarcity of resources has meant a huge churn of associates and hence an inability to deliver consistently & effectively.

Vendors thus need innovative models to recover their investments. Speculation abounds that in the case of payroll processing the profitability results are driven more by the cash management rather than by the transaction processing fees.

Furthermore, there is a lack of a single effective integrated platform. There is at least one ERP in the market which allows multi-tenant model and multiple providers are trying to build their platform offering around it. However, while most ERPs no doubt have all relevant functionality, each HR sub-process- whether its performance management, compensation management or resourcing - has its own 'best-of-breed' application. Customers & Vendors quite often complicate issues by trying to build a mash-up application.

All in all - I think HRO would be more successful if it continues to take baby steps for some more time before it attempts giant leaps. While customers should engage providers to deliver the whole span of HRO sub-processes, they need to break it down to process and geography specific SoWs and milestones to effectively pace the outsourcing.

This post inspired by Phil Fersht's write-up on Can HRO rediscover its froth despite a 97% success rate?

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