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Trends in HR Outsourcing

By Elizabeth M. Rice, SPHR

A recent survey, conducted by The Economist Intelligence Unit, found that senior executives around the world rated their HR departments as the worst performing of all their business functions. Being bogged down with administrative tasks, HR executives don’t have time to look at the big picture and work toward the goals of the company. In light of these findings many HR professionals have been prompted to outsource administrative tasks, such as payroll and benefits administration, in order to assume a more strategic role in driving employee performance and corporate profitability. We interviewed Harry Feinberg, Founder, Chairman, and Chief Executive Officer of Outsourcing Today LLC (the company that publishes HRO Today magazine, HRO Europe magazine and FAO Today magazine) to gain insight into the trends and future of HR outsourcing.

“HR administration is one of the easiest items for a company to outsource since the functions are transactional in nature and aren’t core to the company’s business goals,” says Feinberg. For years payroll has been the most common function outsourced, however, companies are starting to realize the advantages of outsourcing other functions such as 401(k) programs, stock options administration and health benefits. With many outsourcers offering automated systems to allow employees to modify their information and manage benefits, companies and employees alike are benefiting from the convenience. What’s more, HR outsourcing provides organizations with access to better expertise, customer service, lower costs and greater value. When freed from time-consuming administration, HR is better able to realize its full potential and deliver greater strategic value to the organization.

Research by the Yankee Group predicts that the domestic market for HR outsourcing will reach $42 billion by 2008. According to Feinberg, the market for HR outsourcing is growing at 25-30% each year. A main driver for growth is attributed to the convergence of finance, accounting and HR functions. “Through this convergence, organizations are starting to realize cost savings and increased efficiency, creating a market demand for greater integration of HR and financial data,” says Feinberg. “Moreover, many mid market companies have similar service delivery requirements and systems to run items such as payroll, benefits administration, accounts receivable and accounts payable, driving HR outsourcing providers to consider bundling their services to meet the market demands.” Feinberg also pointed out that many organizations recognize that HR administration is best handled by outside experts specializing in payroll and benefits administration outsourcing, as it is their core competency.

“The trend of outsourcing HR administration is initially started in larger companies, however, mid market and smaller companies have found outsourcing to be critical in helping them grow,” says Feinberg. More and more business leaders understand that it is imperative that they stick to their companies’ business strengths and outsource non-core functions. According to Feinberg, the most sophisticated companies outsource and the most sophisticated outsourcing providers outsource as well.

The market is rapidly changing and with that executives are going to need the flexibility to adapt. “If you decide to outsource then you should find a provider that keeps to a service level agreement, is a cultural fit with your organization and that properly benchmarks program success,” suggests Feinberg. Personally, Feinberg has been outsourcing for 20 years and couldn’t imagine running his business otherwise.