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2005 Trends in HR

By Elizabeth Rice, SPHR

With 2005 fast approaching, we have identified and researched issues and trends that will affect companies and HR professionals in the coming year. These trends are driven by companies' continued focus on reducing costs, increasing their competitive advantages and preparing for a forecasted labor shortage.

Offshore outsourcing is on the rise.

The worldwide offshore outsourcing market is currently estimated at $10 billion. According to a recent study by analyst META Group, the market for offshore outsourcing is expected to grow 20 percent annually through 2008, with the greatest growth focused on application development and maintenance. Meta Group predicts that the average enterprise will offshore 60 percent of its application work by 2008 or 2009.1

IDC senior analyst Barry Mason indicates that this growth is driven by "the persistent need for customers to reduce costs, coupled with the proven capabilities of offshore players."2 The countries that will benefit the most from this growth will be India, the Philippines, China, and Central and Eastern Europe. IDC also sees this trend evolving, with offshore players building local market presence in the major onshore IT and business services markets, such as the US and western Europe.

HR outsourcing is becoming the most outsourced business process.

By 2005, analyst Gartner estimates that 85% of US enterprises will outsource at least one component of their HR functions.3 The most popular areas for outsourcing are non-core, back-office services such as payroll, benefits, and education and training. Gartner's forecast projects the HR business process outsourcing market will grow from $25 billion in 2002 to $38 billion in 2007 an 8.6 percent compound annual growth rate.

According to Glenn Davidson of Accenture HR Services, sectors that are most interested in HR outsourcing are telecommunications firms, retail companies and government organizations, since they are experiencing the greatest margin pressure.4 The Conference Board, a not-for-profit think tank, reports that national and state governments are rapidly joining the private sector in outsourcing key human resources and other functions since the financing of technology upgrades is too costly for many governmental organizations to undertake themselves.5

Rising healthcare costs are affecting companies' global competitiveness.

The rising cost of healthcare is affecting US companies' global competitiveness, since US companies compete with many overseas companies that do not offer employer-sponsored healthcare programs. According to the Department of Labor, although increases in wages and salaries continued to be moderate, benefit costs continued to rise more rapidly in 2004. Wages and salaries increased by about 2 percent over the last year while benefit costs increased by over 6 percent.

With the continued increase in healthcare benefits, the tradition of offering employer-sponsored healthcare programs is being challenged in an effort to control costs. Patrick Travis of Deloitte Consulting LLP's Human Capital Practice indicates that companies are looking into alternatives that would require employees to be a more active participant in the selection and financing of their healthcare benefits. Employees would bear the financial responsibility for inefficient healthcare purchasing decisions and would be rewarded or penalized for healthy or unhealthy personal behaviors.6

Companies need to take measured steps to prepare for future workforce shortage.

Government studies project workforce shortage of skilled labor may exceed 10 million by 2010 due to the aging workforce and reduced future labor supply. As the economy continues to pick-up and create employment opportunities, dissatisfied employees will start to look for better opportunities. This will cause instability for companies who don't take measured steps to improve employee retention. Some ways companies can improve retention are to provide relevant training and mentoring programs, encourage shared learning, and develop methods to motivate and reward employees.7

Companies are tying business goals to investments in training and development.

Workforce training and development has become more critical to maximizing potential organizational and company success. There is greater emphasis on relevant training that is tied to a company's business goals. Along with training to help employees perform well on the job, companies are also investing in training to develop interpersonal and leadership skills to maximize their employees' contributions. Companies who invest in training are increasingly analyzing its return on investment and its effect on overall business results.8

Electronic learning, or e-learning, has played a key role in training and development over the last five years, and is generally complemented with classroom training. The American Society of Training and Development estimates 15 percent of all learning takes place electronically. That figure is closer to 30 percent for the firms that invest the largest amounts in training.

HR professionals are looking for more sophisticated technologies to improve efficiencies.

Human resource departments are doing more now with less resources. Given this development, they need to explore tools that will improve efficiencies. According to Maria Schafer of the META Group, there is a trend to find systems and services to streamline HR administration, manage competencies, deal with performance and boost learning. Companies that deployed basic online employee self-service, recruiting software and benefits administration applications are now looking to more sophisticated tools which can analyze compensation, recruiting, retention and performance. The challenge is how to make all these systems and services work together.9

With these trends, the role of HR will become more strategic within an organization. HR will play a greater part in controlling a company's bottom line through effective and efficient workforce planning and management.

1 "Is offshore outsourcing worth the loss of IT jobs?", Karen Guglielmo, SearchCIO.com, October 19, 2004.
2 "Offshore outsourcing to reach $17bn by 2008", Robert Jacques, vnunet.com, October 19, 2004
3 "HR Outsourcing: Where it needs to go", John Harney, www.outsourcing-offshore.com, April 2004.
4 "Successful IT Outsourcing: Strategies, Tactics and Management Approaches for Effective Strategic Sourcing", Gartner Executive Report Series, 2003.
5 "National, State Governments Join Companies in Outsourcing HR and Other Functions", The Conference Board, www.hr.com.
6 "Controlling Increases in Healthcare Costs", Deloitte & Touche.
7 Department of Labor Employment Cost Index news release, October 29, 2004.
8 "Workforce technology: putting it all together", Samuel Greengard, Workforce Management, October 2004.
9 Ibid.

About IES

Ms. Elizabeth Rice, SPHR is the President of Innovative Employee Solutions® - a San Diego-based company specializing in payroll and HR administrative services for the contingent, non-core workforce. Ms. Rice has more than 20 years of experience in HR and executive management and is noted both regionally and nationally for her particular expertise in employee relations, women's workforce issues, and temporary employment. Ms. Rice can be contacted at erice@innovative-es.com.