Outsourcing Trends & Practices
Outsourcing grew after the dot-com era crash as organizations rushed to find ways to provide services at lower costs
Jul 27, 2005
An overview of outsourcing and related processes in 2005 and beyond.
Despite the recent emphasis on outsourcing, it is not a new concept. In 1949, Automatic Data Processing (ADP) began providing payroll, tax, and benefit functions as a back-office service provider. For many years, ADP was the only major provider of outsourced services, especially those concerning business processes.
In 1962, Ross Perot founded Electronic Data Systems (EDS) on the concept that EDS could assume computer operations and data processing for large organizations. Perot believed that because organizations understood their core competencies best they should focus on their business and allow EDS to manage information technology its core competency.
"You are familiar with designing, manufacturing, and selling furniture," Perot said in his pitch to prospective clients. "We're familiar with managing information technology. We can sell you the information technology you need, and you pay us monthly for the service with a minimum commitment of two to ten."
Today, outsourcing is a component of every major organization’s strategic plans and there is no sign that it will diminish in importance anytime soon.
Offshoring has expanded the scope of outsourcing. For example, organizations that have their payroll administration processed by third parties may find those services located in countries such as China, Russia, India, and others.
The scope and delivery of outsourcing services have changed dramatically over the past decade. For years many payroll organizations have outsourced single processes or tasks (e.g., garnishments and tax reporting). But outsourcing has only recently expanded to include (but is not limited to):
Cost is not the only issue driving outsourcing. For most companies, the administrative part of HR, including payroll, is not a core competency. As senior HR and finance executives review business demands, they see they can add more value by focusing on those demands, rather than transactional and administrative processes.
Executives who come from other disciplines are not entrenched in the belief these HR processes must be done in-house. Thus, they tend to question the money and time spent managing these functions. Outsourcing becomes an attractive alternative to them, if the business case justifies it.
According to conventional wisdom and articles published by analysts from organizations such as the Meta Group, and Forrester, outsourcing will continue to expand in many areas, including BPO, through 2005 and 2006. Some key trends are discussed below.
Greg Secord, Vice President of Marketing and Business Development, ADP National Account Services, foresees that payroll outsourcing services will continue to move toward a bundled solution from a single provider.
"ADP has been providing payroll outsourcing services for more than 50 years," he said. "To accommodate the evolving needs of employers, ADP offers a tiered approach to outsourcing with services ranging from payroll processing to W-2 preparation and tax filing to our Comprehensive Outsourcing Services, ADP’s HR BPO offering. As we approach the next phase of outsourcing, ADP believes that organizations will increasingly seek payroll, HR, and benefits administration services from a single provider.
"Bundled services provide payroll and HR professionals and their employees with a single, unified experience and help organizations reduce costs by decreasing the total cost of ownership," Secord added. "In order to continue to be seen as a valued partner to organizations, outsourcers will need to progress beyond being a preferred provider to becoming a true strategic partner to their customers by playing an integrated role in their daily operations."
Overall, the market experts for BPO are forecasting continued growth in 2005 as process and technology standardization continues to evolve, with offshore suppliers taking a larger role in the market. Industry consolidation will continue as a number of providers chase fewer transactions.
The growth will also be driven by concerns with enterprise resource planning (ERP) systems since many customers have not achieved anticipated benefits, as well as uncertainty in the marketplace caused by mergers (e.g., Oracle’s purchase of PeopleSoft). Transactional services such as payroll processing will remain the primary outsourcing arrangement.
Customers will continue to depend on the outsourcer’s statements of collaboration, and funds will be allocated to SAS 70 audits to meet the requirements imposed by compliance mandates (e.g., the Sarbanes-Oxley Act of 2002, HIPAA, Basel II, and USA Patriot Act). Vendor management is likely to become a more strategic function with increased focus on IT/business alignment and business enhancement6 .
The 2004 U.S. elections highlighted the divisiveness of the issue. Presidential contender John Kerry acknowledged that outsourcing is here to stay after having earlier denounced U.S. companies that outsource to India and China.
Some states have considered legislation to stem the flow of outsourcing. California Governor Arnold Schwarzenegger killed a bill that would have kept state contractors or agencies from offshoring jobs to other countries. The reality of the U.S. marketplace is that only a small percentage of HR BPO is provided outside our shores, and most of that is tied to the technology components of the processes. Nevertheless, HR outsourcing has become confused with HR offshoring.
Although politics may continue to impact outsourcing in general, trends and forecasts from business leaders and analysts indicate that organizations will continue to strategically incorporate outsourcing into their business plans during the next few years. To participate in strategic discussions with corporate management, payroll leaders must understand the different types of outsourcing and future growth expectations, how each type might benefit or impact their organizations, and be able to define how to best utilize the services they offer.
Despite the recent emphasis on outsourcing, it is not a new concept. In 1949, Automatic Data Processing (ADP) began providing payroll, tax, and benefit functions as a back-office service provider. For many years, ADP was the only major provider of outsourced services, especially those concerning business processes.
In 1962, Ross Perot founded Electronic Data Systems (EDS) on the concept that EDS could assume computer operations and data processing for large organizations. Perot believed that because organizations understood their core competencies best they should focus on their business and allow EDS to manage information technology its core competency.
"You are familiar with designing, manufacturing, and selling furniture," Perot said in his pitch to prospective clients. "We're familiar with managing information technology. We can sell you the information technology you need, and you pay us monthly for the service with a minimum commitment of two to ten."
Today, outsourcing is a component of every major organization’s strategic plans and there is no sign that it will diminish in importance anytime soon.
Overview
Outsourcing grew after the dot-com era crash as organizations rushed to find ways to provide services at lower costs. This spurred the growth of offshoring, the practice of sending business services to developing countries with English-speaking populations where operating and labor costs are lower.Offshoring has expanded the scope of outsourcing. For example, organizations that have their payroll administration processed by third parties may find those services located in countries such as China, Russia, India, and others.
The scope and delivery of outsourcing services have changed dramatically over the past decade. For years many payroll organizations have outsourced single processes or tasks (e.g., garnishments and tax reporting). But outsourcing has only recently expanded to include (but is not limited to):
- Business process outsourcing (BPO) - Outsourcing of end-to-end business functions and processes, including required support services (e.g., payroll and benefits administration)
- Business transformation outsourcing (BTO) - Technical, application, and process optimization
- Application management outsourcing (AMO) - Integrating duplicate applications into a single architecture
Cost is not the only issue driving outsourcing. For most companies, the administrative part of HR, including payroll, is not a core competency. As senior HR and finance executives review business demands, they see they can add more value by focusing on those demands, rather than transactional and administrative processes.
Executives who come from other disciplines are not entrenched in the belief these HR processes must be done in-house. Thus, they tend to question the money and time spent managing these functions. Outsourcing becomes an attractive alternative to them, if the business case justifies it.
According to conventional wisdom and articles published by analysts from organizations such as the Meta Group, and Forrester, outsourcing will continue to expand in many areas, including BPO, through 2005 and 2006. Some key trends are discussed below.
Greg Secord, Vice President of Marketing and Business Development, ADP National Account Services, foresees that payroll outsourcing services will continue to move toward a bundled solution from a single provider.
"ADP has been providing payroll outsourcing services for more than 50 years," he said. "To accommodate the evolving needs of employers, ADP offers a tiered approach to outsourcing with services ranging from payroll processing to W-2 preparation and tax filing to our Comprehensive Outsourcing Services, ADP’s HR BPO offering. As we approach the next phase of outsourcing, ADP believes that organizations will increasingly seek payroll, HR, and benefits administration services from a single provider.
"Bundled services provide payroll and HR professionals and their employees with a single, unified experience and help organizations reduce costs by decreasing the total cost of ownership," Secord added. "In order to continue to be seen as a valued partner to organizations, outsourcers will need to progress beyond being a preferred provider to becoming a true strategic partner to their customers by playing an integrated role in their daily operations."
Overall, the market experts for BPO are forecasting continued growth in 2005 as process and technology standardization continues to evolve, with offshore suppliers taking a larger role in the market. Industry consolidation will continue as a number of providers chase fewer transactions.
The growth will also be driven by concerns with enterprise resource planning (ERP) systems since many customers have not achieved anticipated benefits, as well as uncertainty in the marketplace caused by mergers (e.g., Oracle’s purchase of PeopleSoft). Transactional services such as payroll processing will remain the primary outsourcing arrangement.
Business Transformation Outsourcing
Business transformation outsourcing (BTO) is still in the conceptual phase today, with deals that resemble BPO. This trend this will continue through 2005. Beyond 2005, the leading BTO providers will continue to grow their business process capabilities and expertise as BTO evolves over the next couple of years.Outsourcing Governance and Compliance
Regulatory compliance will expand beyond audit segments to include business and information technology (IT) services. Outsourcing providers should be capable of providing compliance through audits (SAS 70) in the next couple of years and will require strong consulting and systems integration capabilities to address these requirements.Customers will continue to depend on the outsourcer’s statements of collaboration, and funds will be allocated to SAS 70 audits to meet the requirements imposed by compliance mandates (e.g., the Sarbanes-Oxley Act of 2002, HIPAA, Basel II, and USA Patriot Act). Vendor management is likely to become a more strategic function with increased focus on IT/business alignment and business enhancement6 .
Application Maintenance Outsourcing
Application outsourcing services (e.g., hosting) will continue to be custom solutions rather than a standardized model. As application outsourcing evolves, vendors will begin offering better delivery models, including global approaches, methods, and pricing. Use of global resources will eventually drive application service pricing downward, and transformational services will be included with outsourcing solutions7.The Future of Outsourcing
Outsourcing will continue to be politically divisive. According to a recent Foreign Policy Association/Zogby International survey, the job market and economy continue to rank among the top concerns for most Americans, with 71% of likely voters saying that outsourcing jobs overseas hurts the U.S. economy.The 2004 U.S. elections highlighted the divisiveness of the issue. Presidential contender John Kerry acknowledged that outsourcing is here to stay after having earlier denounced U.S. companies that outsource to India and China.
Some states have considered legislation to stem the flow of outsourcing. California Governor Arnold Schwarzenegger killed a bill that would have kept state contractors or agencies from offshoring jobs to other countries. The reality of the U.S. marketplace is that only a small percentage of HR BPO is provided outside our shores, and most of that is tied to the technology components of the processes. Nevertheless, HR outsourcing has become confused with HR offshoring.
Although politics may continue to impact outsourcing in general, trends and forecasts from business leaders and analysts indicate that organizations will continue to strategically incorporate outsourcing into their business plans during the next few years. To participate in strategic discussions with corporate management, payroll leaders must understand the different types of outsourcing and future growth expectations, how each type might benefit or impact their organizations, and be able to define how to best utilize the services they offer.