The human resource department is the business function that takes care of the organization’s key assets—its employees. The principal day-to-day activities in an organization that the HR deals with include:
- Payroll management
- Compensation & benefits
- Learning and development
- Recruitment/exit process
- HR strategy
The contribution of the HR department is considered significant as they have to deal with people who come from diverse geographies, education backgrounds and with different requirements. Hiring, retaining and engaging quality talent is another important area for the organization in this competitive environment, which the HR department is responsible for HR Outsourcing in India
In recent times, companies have been struggling to retain profit levels due to a slowdown in the economy. Rising employee costs, raw material costs and increasing competition to grab the market share are driving companies to cut down on costs and increase the efficiency of the various departments across the organization. Even the HR department is not untouched by these problems and there has been a growing concern among the organizations as to how to improve the efficiency of the HR department and streamline its operations.
One of the solutions to efficiently and effectively manage the HR department is outsourcing. Outsourcing in business terms means contracting a business process to another firm. HR outsourcing refers to outsourcing the functions of the human resource department to an external third-party organization. In recent years, many business organizations have transferred their HR functions partially or completely to a third-party vendor company.
Major reasons as cited by companies in India for outsourcing various HR functions include:
- Cost saving
- Increasing productivity
- Accommodating peak loads
- Getting specialized services
- Sharing risks
2. Major heads under HR Outsourcing
2.1 Payroll outsourcing
The Payroll department takes care of the payroll management of the firm. Being a non-strategic process, payroll processing is currently one of the most outsourced function within HR. Outsourcing the payroll function is much cheaper than handling them internally. Most of the firms outsource the payroll function to reduce costs, focus on their core competency and free up resources.
According to a report by Growth Praxis, the Indian payroll and compliance outsourcing services market is highly fragmented with more than 100 service providers across the country. Over 70% of the payroll and compliance market is dominated by small region-focused players. Some of the leading payroll outsourcing providers in India includes ADP, Aon Hewitt, People Strong and Allsec Technologies.
2.2 Recruitment process outsourcing
Recruitment of employees holds to be of utmost importance for an organization. A carefully selected employee is an asset to the organization and helps the organizations to grow by meeting critical deadlines for projects and doing the work more efficiently. Some of the important steps in recruitment planning are:
- Projecting the demand for future recruitments
- Planning recruitment based on growth prospects of the organization
- Estimate the size of employees if entering in new markets
According to a report by Growth Praxis, organizations can save up to 40% of their recruitment costs by outsourcing their recruitment process. Many of the Indian firms have started recruitment process outsourcing (RPO) to achieve some of the benefits associated like reducing costs and attracting better talent. The Indian market for end-to-end recruitment process outsourcing is estimated to be around $572 million in 2015 and is expected to grow at a CAGR of 32%.
There is an increasing demand for blended RPO models that combine permanent and contingent recruitment under one process. Some of the major companies offering RPO in India are Ma Foi, Accenture, Elixir, Team Lease and Manpower Services. These players are currently working with a profit margin ranging between 12 – 17%.
2.3 Temporary Staffing
Post-recession, in order to reduce costs, companies have shown more interest in hiring temporary staff. This can also help them reduce huge losses which are incurred in the form of severance pay if they decide to downsize workforce during the time of recession. The report estimated the Indian temporary staffing market at US$2.1 billion in 2015.
According to Growth Praxis, the temporary staffing industry in India is highly unstructured with only about 8.3 lakh employees being employed by organized players. Adecco, Team Lease, Mafoi Randstad and Kelly Services are the key players in this segment.
2.4 Learning and Development Outsourcing
The learning and development function under the HR department takes care of the training needs of the employees. Effective training is required for the development of the employee in an organization; training is conducted mainly for HR processes compliance, departmental training for in-house technology, and training for new and emerging technologies.
Some of the major players in this field are IBM, Logica, NIIT, Aptech, Skillsoft, Accenture and Expertus. The market for L&D in India is estimated to be at US$1.3 billion at the end of 2015.
3. Benefits of hr outsourcing
HR outsourcing can prove beneficial for all firms be it large or small. A large firm’s HR department grows too big and needs restructuring for faster processing and efficient management. For a small-sized firm, the problem can be related to a capital requirement for setting up and running the HR department. Small firms cannot afford costs associated with real estate. Outsourcing can help them in converting the fixed costs associated with the HR department to variable costs and will also help up freeing resources.
The firms which outsourced various HR functions among Indian firms showed tremendous overall satisfaction. Some of the major benefits associated with HR outsourcing are:
3.1 Cost reduction
HR outsourcing helps in reducing the capital needed for small organizations. Small firms can convert their initial fixed investment to variable costs by outsourcing their HR functions. Another major driver for cost reduction is the streamlining of HR processes; even larger firms can benefit by outsourcing.
3.2 Increased effectiveness and control
By outsourcing their HR functions, companies can exercise greater control on HR operations. As a company grows in size, the in-house HR functions become hierarchical and less responsive. In these cases, HR outsourcing can streamline the HR functions resulting in greater control and increased effectiveness.
3.3 Freeing up critical resources
Outsourcing of HR functions helps firms focus on innovation and strategy rather than looking into the day-to-day non-strategic issues. HR outsourcing frees up the time of critical resources that can now focus on more strategic issues such as employee engagement, process improvement, etc.
3.4 Well-organized training
Training which form an important part of human resource development can be organized in a better way by outsourcing the HR function. The third-party trainers are more unbiased towards evolving trends in technology and can form a better roadmap for future training requirements.
4. Future of hr outsourcing in India
The future of HR outsourcing in India looks bright. Companies are looking to cut costs and optimize their business processes; outsourcing will be a viable solution for them. Also, most companies want to focus on their core competencies and want to free up upper management resources which can be achieved by outsourcing various business processes.
Furthermore, as we have already seen, the CAGR for the discussed outsourcing functions are in excess of 30%, which is a very high growth rate. This growth rate will prompt many new players to enter the industry. The entry of new players will create more competition among rival firms and help in the business process optimization of outsourcing service providers, bringing down the cost of outsourcing drastically. This will, in turn, increase the penetration of outsourcing in the industry.
In contrast, some of the factors that are hampering the growth of the outsourcing industry are confidentiality and cost factors. The fear of losing control over confidential data, quality of vendors and ethics are some of the reasons why companies are reluctant to outsource their HR functions. Another major concern is quality and lack of benchmarks in the industry which leads to varied price for similar outsourcing solutions. Overall, we can say that if some of the above factors are controlled as the outsourcing industry evolves in India, the future looks promising.