CHAPTER 1

INTRODUCTION

TO

HUMAN RESOURCE OUTSOURCING:

FIRST IMPRESSION

1.0 INTRODUCTION

In the modern global marketplace, outsourcing is becoming increasingly popular as a

way to operate cheaply and efficiently. This chapter introduces the concept of
outsourcing, and why it appeals to so many companies. Outsourcing has seen a lot of
press over the years. Some look to outsourcing as the saviour of their company, while
others see outsourcing as an evil, job-killing management tactic.

Before we start to evaluate an outsourcing and HR outsourcing, we should have

comprehensive understanding about it. Outsourcing is the contracting out of any task,
operation, job or process that was originally performed by employees within the
company to a third party for a significant period of time. These outsourced functions
can be performed by the third party on-site or off-site. Hiring a temporary employee
while a secretary is on maternity leave is not outsourcing.

The most common story of outsourcing in the news today involves jobs that are sent
overseas to countries like India or China—often manufacturing jobs, but outsourcing
is not limited to this sector. This is more commonly called offshoring. Examples
include customer service and tech support call center jobs, as well as computer
programming jobs. Examples of jobs that are generally safe from being moved
overseas are janitorial services and security services, though completely outsourcing a

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department or division of a company may remove the need for these jobs in that
location, so they can be eliminated.

Outsourcing, or sending off a job outside the company, may seem like more recent
phenomena which started after the internet boom in mid 1990s, but the fact that
outsourcing history is very old. During the early years of America, the manufacturing
of clippers ships sails was sent to Scotland, and the raw material came from India.
India was also an outsourcing destination for British textile industry during the 1800s,
but eventually the British become more efficient and o utsourced job came back to
Britain.

In more recent times, during 1970s computer companies used to outsource their
payroll processing. The job was sent to company in another state or city, not overseas.
Unlike today offshore outsourcing was not common in those days. Late 1980s saw
emergence of offshore outsourcing when companies started sending off their
manufacturing jobs overseas. This trend got boost from the increasing technical
advancement and the 1986-94 Uruguay Round of talks which lead to the creatio n of
WTO. Kodak and American standard were among the first companies to outsource.

1.1 WHAT IS OUTSOURCING?

No matter which industry it is that your business is under, you would have
encountered the term outsourcing at one point or another. For many entrepreneurs
who would like to save on labour costs without sacrificing the efficiency of work
done, outsourcing has become a viable alternative for running certain aspects of their
business. However, before deciding whether outsourcing is the right option for you or
not, it‘s good to have a deeper understanding of what this business practice is all
about in the first place.

Outsourcing: A Definition

Simply put, outsourcing is the process of subcontracting to a third-party. Whenever

there‘s a task, operation, job or process that could be performed by employees within
your company – but is instead contracted to a third party service provider that is when
outsourcing occurs. If your secretary goes on maternity leave, for example, you will
need to hire a temporary replacement until she is ready to go back to work. This is not

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a case of outsourcing. Instead, you will be outsourcing the secretarial services when
you hire a virtual assistant who is working in another country. There are cases,
however, when outsourcers work within your company‘s site. The only difference is
that you are outsourcing when they are not there to perform the task on a full-time
basis, but on a per-project term instead.

Why It Pays to Outsource?

When you visit websites like www.vietnamoutsourcing.org, you will see just how
popular outsourcing has become to Southeast Asian countries. This is especially true
when it comes to Information Technology-related tasks, projects, jobs and services.

If you need a web developer for an additional site that you would like to build, for
instance, why does it pay to outsource the project or task to a Vietnam software
development company? First, you will save a lot of time, effort and money. Rather
than spending company resources and hiring a web developer who might not have a
full-time job in your company later on, it‘s a more practical option to hire someone
from a Vietnam software outsourcing company.

Second, you can rest assured that the professional to whom you will outsource the job
to, is someone who is knowledgeable with the IT-related task that you want finished.
Third, outsourcing gives you better flexibility because you can hire personnel on a
per-project or temporary basis – without having to worry about providing the
employee with benefits.

Although outsourcing may not be a business model suited for every type of company,
there are instances when this is a more cost-effective option than hiring an employee
full-time. Before deciding to take this path, weigh the pros and cons of going with an
outsourcing company and go for it if the advantages far outweigh the disadvantages.

Outsourcing involves the transfer of the management and/or day-to-day execution of

an entire business function to an external service provider. According to McIvor
(2005, p. 7), ―Outsourcing involves the sourcing of goods and services previously
produced internally within the sourcing organization from external suppliers.‖

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The client organization and the supplier enter into a contractual agreement that
defines the transferred services. Under the agreement the supplier acquires the means
of production in the form of a transfer of people, assets and other resources from the
client.

The client agrees to procure the services from the supplier for the term of the contract.
Business segments typically outsourced include information technology, human
resources, facilities, real estate management, and accounting. Many companies also
outsource customer support and call center functions like telemarketing, cad drafting,
customer service, market research, manufacturing, human resource, designing, web
development, content writing, ghost-writing and engineering.

Strategic outsourcing is the organizing arrangement that emerges when firms rely on
intermediate markets to provide specialized capabilities that supplement existing
capabilities deployed along a firm‘s value chain.

Such an arrangement produces value within firms‘ supply chains beyond those
benefits achieved through cost economies. Intermediate markets that provide
specialized capabilities emerge as different industry conditions intensify the
partitioning of production. As a result of greater information standardization and
simplified coordination, clear administrative demarcations emerge along a value
chain. Partitioning of intermediate markets occurs as the coordination of production
across a value chain is simplified and as information becomes standardized, making it
easier to transfer activities across boundaries.

Outsourcing is a strategic decision to give a task or activity to an independ ent

contractor who determines how best to do the task or activity. The firm and the
independent contractor become partners and may establish a long-term relationship.
Examples of outsourced activities: IT, HR, Legal services, Manufacturing, R&D.

1.2 OUTSOURCING ADVANTAGES

Here are some points in short description that holds the outsourcing edge:

Cost savings: The lowering of the overall cost of the service to the business. This will
involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-

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structuring. Access to lower cost economies through off shoring called "labour
arbitrage" generated by the wage gap between industrialized and developing nations.

Cost restructuring: Operating leverage is a measure that compares fixed costs to

variable costs. Outsourcing changes the balance of this ratio by offering a move from
variable to fixed cost and also by making variable costs more predictable.

Improve quality: Achieve a step change in quality through contracting out the service
with a new service level agreement.

Knowledge: Access to intellectual property and wider experience and knowledge.

Contract: Services will be provided to a legally binding contract with financial

penalties and legal redress. This is not the case with internal services.

Operational expertise: Access to operational best practice that would be too difficult
or time consuming to develop in- house.

Staffing issues: Access to a larger talent pool and a sustainable source of skills.

Capacity management: An improved method of capacity management of services and

technology where the risk in providing the excess capacity is borne by the supplier.

Catalyst for change: An organization can use an outsourcing agreement as a catalyst

for major step change that cannot be achieved alone. The outsourcer becomes a
Change agent in the process.

Reduce time to market: The acceleration of the development or production of a

product through the additional capability brought by the supplier.

Risk management: An approach to risk manageme nt for some types of risks is to

partner with an outsourcer who is better able to provide the mitigation.

1.3 OUTSOURCING DISADVANTAGES

Against many advantages there are equal drawbacks outsourcing possesses, to make it
more clear, more than short description given in below mentioned points:

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Public opinion: There is a strong public opinion regarding outsourcing (especially
when combined with off shoring) that outsourcing damages a local labour market.
Outsourcing is the transfer of the delivery of services which affects both jobs and
individuals. It is difficult to dispute that outsourcing has a detrimental effect on
individuals who face job disruption and employment insecurity; however, its
supporters believe that outsourcing should bring down prices, pro viding greater
economic benefit to all.

There are legal protections in the European Union regulations called the Transfer of
Undertakings (Protection of Employment). Labour laws in the United States are not as
protective as those in the European Union. A study has attempted to show that public
controversies about outsourcing in the U.S. have much more to do with class and
ethnic tensions within the U.S. itself, than with actual impacts of outsourcing.

Failure to realize business value: The main business criticism of outsourcing is that it
fails to realize the business value that the outsourcer promised the client citation
needed.

Language skills: In the area of call centres end-user-experience is deemed to be of

lower quality when a service is outsourced. This is exacerbated when outsourcing is
combined with off-shoring to regions where the first language and culture are
different. The questionable quality is particularly evident when call centres that
service the public are outsourced and off shored. There are a number of the public
who find the linguistics features such as accents, word use and phraseology different
which may make call center agents difficult to understand. The visual clues that are
present in face-to-face encounters are missing from the call center interactions and
this also may lead to misunderstandings and difficulties.

Social responsibility: Outsourcing sends jobs to the lower- income areas where work is
being outsourced to, which provides jobs in these areas and has a net equalizing effect
on the overall distribution of wealth. Some argue that the outsourcing of jobs
(particularly off-shore) exploits the lower paid workers. A contrary view is that more
people are employed and benefit from paid work.

On the issue of high-skilled labour, such as computer programming, some argue that
it is unfair to both the local and off-shore programmers to outsource the work simply

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because the foreign pay rate is lower. On the other hand, one can argue that paying the
higher-rate for local programmers is wasteful, or charity, or simply overpayment. If
the end goal of buyers is to pay less for what they buy, and for sellers it is to get a
higher price for what they sell, there is nothing automatically unethical about
choosing the cheaper of two products, services, or employees.

Quality of service: Quality of service is measured through a service level agreement

(SLA) in the outsourcing contract. In poorly defined contracts there is no measure of
quality or SLA defined. Even when an SLA exists it may not be to the same level as
previously enjoyed. This may be due to the process of implementing proper objective
measurement and reporting which is being done for the first time. It may also be
lower quality through design to match the lower price.

There are a number of stakeholders who are affected and there is no single view of
quality. The CEO may view the lower quality acceptable to meet the business needs at
the right price. The retained management team may view quality as slipping
compared to what they previously achieved. The end consumer of the service may
also receive a change in service that is within agreed SLAs but is still perceived as
inadequate. The supplier may view quality in purely meeting the defined SLAs
regardless of perception or ability to do better.

Quality in terms of end-user-experience is best measured through customer

satisfaction questionnaires which are professionally designed to capture an unbiased
view of quality. Surveys can be one of research. This allows quality to be tracked over
time and also for corrective action to be identified and taken.

Staff turnover: The staff turnover of employee who originally transferred to the
outsourcer is a concern for many companies. Turnover is higher under an outsourcer
and key company skills may be lost with retention outside of the control of the
company.

In outsourcing offshore there is an issue of staff turnover in the outsourcer companies

call centres. It is quite normal for such companies to replace its entire workforce each
year in a call center. This inhibits the build-up of employee knowledge and keeps
quality at a low level.

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Company knowledge: Outsourcing could lead to communication problems with
transferred employees. For example, before transfer staff have access to broadcast
company e- mail informing them of new products, procedures etc. Once in the
outsourcing organization the same access may not be available. Also to reduce costs,
some outsource employees may not have access to e-mail, but any information which
is new is delivered in team meetings.

Qualifications of outsourcers: The outsourcer may replace staff with less qualified
people or with people with different non-equivalent qualifications.

In the engineering discipline there has been a debate about the number of engineers
being produced by the major economies of the United States, India and China. The
argument centres on the definition of an engineering graduate and also disputed
numbers.

When we look at both sides i.e. positive and negative, there is little ambiguity to make
decision regarding to go with outsourcing or not but if we look at the trends in India
regarding outsourcing, our country is becoming prime destination for most of
outsourcing activities.

1.4 WHAT IS HUMAN RESOURCE OUTSOURCING?

HR Outsourcing is a process in which the human resource activities of an

organization are outsourced so as to focus on the organization`s core competencies.
Often HR functions are complex and time consuming that it will create difficulty in
managing other important thrust areas.

Human resource outsourcing (HRO) occurs when a business instructs an external

supplier to take responsibility (and risk) for HR functions and perform these tasks for
the business. Payroll outsourcing is commonly outsourced for two reasons: it‘s a time-
consuming administrative task for employers, and there are many specialist
companies with the technology and knowledge to run it efficiently and compliantly.
Some businesses will outsource their entire HR department while others will just
outsource time-consuming administrative tasks, which allow their internal resource to
focus on the strategic level.

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HRO (Human Resource Outsourcing) has emerged as a flexible and dominant
substitute that corporate leaders can practice to accomplish an inclusive growth and
strategic goals.

Human Resource (HR) Outsourcing is a momentous strategic HR initiative. It helps

organization to focus on internal resources towards doing what they do best and
simultaneously helps to control the bottom lines.

The HRO market is in transition. Until recently, the market followed a relatively
predictable path, with the majority of HR outsourcing engagements conforming to
conventional transaction- focused, single-process business arrangements with
individual third-party providers (e.g., payroll services, health care and pension plan
administrators, temporary staffing agencies, etc.). However, it is now clear that the
HRO market has achieved a degree of maturity on the business life-cycle continuum.
A second-generation market has emerged, the HRO multi-process market.

As the HRO vendors have begun to partner with and acquire other firms, they are
broadening their service capabilities to include organizational and people
development, employee data management, workforce planning and deployment, and
human capital services. In other words, in terms of projected growth, the multi-
process component of the HRO market is expected to be appreciably more robust in
terms of projected growth than the market for those organizations electing to
outsource the HR function in its entirety.

1.5 WHY HUMAN RESOURCE OUTSOURCING?

HR is an essential partner in developing and executing organizational strategy as is

evident HR is something that is really critical to an organizations functioning. Human
Resources (HR) responsibilities includes all the related functions that work towards
employee well-being in the organization including payroll, benefits, hiring, firing, and
keeping up to date with state and federal tax laws.

The recent competitive challenges of the global marketplace are creating demand for
Expert human resource outsourcing HRO providers in order to manage non-value
adding administrative business function of their businesses thereby facilitating the
businesses can concentrate on their core competencies.

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So, Creation of Strategic and Competitive Advantage is at the center stage and man
reason behind outsourcing human resource activities.

1.6 HOW DOES HR OUTSOURCING HELP?

Human Resources Outsourcing helps in boosting organizational performance with

many strategic benefits like eliminating the redundant non-core HR functions,
increasing cost competitiveness effectiveness and helps in maintaining strategic HR
focus.

HR outsourcing can,

 Help in structural reduction of the Human Resource Management (HRM) cost

base, by identifying the non-value adding activities and eliminate the hidden
HR operations costs.

 Help in identifying the inefficient Human Resources (HR) Administration

processes and HR practices.

 Helps organization to focus on human resource performance.

 Help organizations to serve their employees better.

1.7 HR OUTSOURCING SERVICES

The role of human resource outsourcing services in an organization differs with the
extent of outsourced functions. Some services go with the "all-or- nothing" approach,
requiring that they handle all your HR functions or none at all. Others offer their
services "a la carte," meaning you can pick and choose from the HR outsourcing
services they offer.

1.7.1 Comprehensive HR outsourcing services

 Maintenance of personnel records

 Annual review and revision of employee handbook

 Audit of HR strategies, policies and procedures

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  Implementation of employment/termination procedures

 Job description process

 Exit interviews

 Employee development program

 Performance management process

 On-site support

 Employee retention programs

 Long term incentive/equity stock option programs

 Employee Morale Building

 Compensation plan review

1.7.2 Recruiting services

 Retained Search

 Job Description Development Strategy

 Ad Placement

 Applicant Screening

 Reference and Background Check

 Candidate Interviews and Recommendations

 Development and Coordination of Offer

 Integration of New Hire

1.7.3 HR manage ment services

 Compensation plan review and analysis

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  Culture development

 Due diligence/Acquisition planning

 Incentive and retention programs

 Executive Coaching

 Succession Planning

1.7.4 Benefits administration

 Brokerage Services

 Custom Benefit Plan Strategies and Design

 Benefit analysis, cost control and reduction recommendations

 Development of Employee Communications

 Eligibility and Enrolment Services

 Employee claims resolution

 Monthly invoice audit and reconciliation

 On-line employee access to benefits information

1.7.5 Payroll services

 Employee self- service features

 Payroll processing and reporting

 Payroll tax reporting

 Time off tracking

 Online benefits enrolment

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1.7.6 Online HR Outsourcing Services

Online services tend to be limited in their offerings, but provide added options like
Web access, which allows companies to view information (like benefits packages)
and even make changes to such information online. Most HR Outsourcing companies
will be able to provide employer and employees access to view their benefits plans,
enrol in benefits, read policies, and make changes to current data.

Human resource outsourcing services portfolio includes Payroll Administration,

Employee Benefits, and HR Management & Risk Management. These services help
organizations to define a definitive role of a HR outsourcing company's functions and
responsibilities.

1.8 BENEFITS OF OUTSOURCING HR ACTIVITIES

Low cost of service, higher level of service, time saving & controlling of hassle
factors are main benefits of outsourcing HR services.

Low Cost of service: One of the most crucial factors that can't be ignored while
making outsourcing HR decision is cost - both operating cost & cost avoidance. Any
outsourcing HR company has to provide some level of savings. This cost is reflected
in operating cost and cost avoidance, such as having to put in new technology and
keeping it current.

Expected higher level of service: There‘s a perceived higher level of service

associated with HR outsourcing Companies. They specialize in providing efficient
and cost effective services. With their highly skilled team of consultants; emplo yers
can expect a better career path for employees, and the ability to better retain them for
a specified job.

Time saving: Senior HR people are more interested in the business of their company
than the business of human resource that is they are more concerned with well-being
as well as growth of the business in the long run. They would like to become more
strategic, and the only way they can have the time to do so is to get rid of the time
that's committed to some of the administrative functions by outsourcing them.

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Controlling the Hassle factors: There are loads of "hassle factors" like keeping track
of all people, managing technology budgets, managing service level agreements etc.
all these core competencies of business are really required, but these fac tors can easily
be taken care by outsourcing HR company, to give employers ease from managing
such complex functionalities.

1.9 OPERATIONAL MODELS OF HR OUTSOURCING

There are various operational models of HR outsourcing for providing various

services. Mainly there are five models operating in India which are Professional
Employer Organization, Business Process Outsourcing, Knowledge Process
Outsourcing, Application Service Provider and E-services. Here is brief overview of
all operational models.

1.9.1 PEO: Professional Employer Organization

A Professional Employer Organization (PEO) assumes full legal responsibility of a

company's Human Resources. The PEO and business owner work as associates,
where PEO handles the human resource aspects and the owner hand les core business.

A professional employer organization (PEO) provides outsourcing of payroll,

workers' compensation, human resources and employee benefits administration. It
does this by hiring a client company‘s employees, thus becoming their employer of
record. It then leases them back under contract to the original employer. This practice
is known as co-employment, employee leasing, or staff leasing.

Several variations on the PEO model exist, differing in the nature of the relationship
formed between PEO and Client Company.

Administrative services organizations (ASO) are PEOs that provide outsourcing of

human resources tasks but do not create a co-employment relationship. Employees
remain solely under the control of the client company. Tax and insurance filings are
done by the PEO, but under the client company‘s Employer Identification Number.

Pass-through agencies are staffing firms that act as the employer of record for
independent contractors, but do not obtain work for them. Like umbrella companies in
the UK, the contractors do not become employees of the client.

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Financial intermediaries, also called fiscal intermediaries, act as an employer of
record for home healthcare workers who serve disabled persons. This streamlines the
process of hiring such workers, because neither the household hiring them nor
government units that provide funding need to take on the duties of an employer.

1.9.2 BPO: Business Process Outsourcing

Business Process Outsourcing refers to outsourcing in all fields for overall process
improvements, not just outsourcing human resource functions. HR based BPO
function ensures that organization is compatible with latest HR automation and
technologies.

Business process outsourcing (BPO) contains the transmission of processes along

with the associated operational activities and responsibilities, to a third party with at
least a guaranteed equal service level and where the client contains a firm grip over
the (activities of the) vendor for mutual long term success. BPO is positively related
to the search for more efficient organizational designs: cost reduction, productivity
growth and innovative capabilities. Hence, source of strategic advantage.

Traditionally, BPO is undertaken by manufacturing firms. For instance, Coca Cola,

where almost the entire supply chain is outsourced and the company is essentially
becoming a marketing organization. However, BPO is nowadays rapidly conquering
the service oriented firms as well. A well-known example is provided by the Bank of
America, who outsourced their entire HR function to Exult, one of the leading Human
Resources BPO vendors.

BPO is often divided into two categories: back office outsourcing, which includes
internal business functions such as billing or purchasing, and front office outsourcing,
which includes customer-related services such as marketing or tech support. The
endless opportunities IT provides, stimulates (cross-border) BPO activities. BPO that
is contracted outside a company's own country is sometimes called offshore
outsourcing. BPO that is contracted to a company's neighbouring country is
sometimes called near shore outsourcing.

Use of a BPO as opposed to an application service provider (ASP) usually also means
that a certain amount of risk is transferred to the company that is running the process

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elements on behalf of the outsourcer. BPO includes the software, the process
management, and the people to operate the service, while a typical ASP model
includes only the provision of access to functionalities and features provided or
'served up' through the use of software, usually via web browser to the customer. BPO
is a part of the outsourcing industry. It is dependent on information technology; hence
it is also referred to as information technology enabled services or ITES. Knowledge
process outsourcing and legal process outsourcing are some of the subsets of business
process outsourcing.

Recruitment Process Outsourcing (RPO) is a form of business process outsourcing

(BPO) where an employer outsources or transfers all or part of its recr uitment
activities to an external service provider.

To quote the Recruitment Process Outsourcing Association, "Recruitment Process

Outsourcing is when a provider acts as a company's internal recruitment function for a
portion or all of its jobs. RPO providers manage the entire recruiting/hiring process
from job profiling through the on-boarding of the new hire, including staff,
technology, and method and reporting. A properly managed RPO will improve a
company's time to hire, increase the quality of the candidate pool, provide verifiable
metrics, reduce cost and improve governmental compliance."

On the other hand, occasional recruitment support, for example a temporary,

contingency and executive search service is more analogous to out-tasking, co-
sourcing or just sourcing. In this example the service provider is "a" source for certain
types of recruitment activity. The biggest distinction between RPO and other types of
staffing is Process. In RPO the service provider assumes ownership of the process,
while in other types of staffing the service provider is part of a process controlled by
the organization buying their services.

1.9.3 KPO: Knowledge Processing Outsourcing

Knowledge Processing Outsourcing (popularly known as a KPO), calls for the

application of specialized domain pertinent knowledge of a high level. The KPO
typically involves a component of Business Processing Outsourcing (BPO), Research
Process Outsourcing (RPO) and Analysis Proves Outsourcing (APO). KPO business
entities provide typical domain-based processes, advanced analytical skills and

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business expertise, rather than just process expertise. KPO Industry is handling more
amount of high skilled work other than the BPO Industry. While KPO derives its
strength from the depth of knowledge, experience and judgment factor; BPO in
contrast is more about size, volume and efficiency.

It is being claimed that KPO is one step extension of Business Processing

Outsourcing (BPO) because BPO Industry is shaping into Knowledge Process
Outsourcing because of its favourable advantageous and future scope. But, let us not
treat it only a 'B' replaced by a 'K'. In fact, Knowledge process can be defined as high
added value processes chain where the achievement of objectives is highly dependent
on the skills, domain knowledge and experience of the people carrying out the
activity. And when this activity gets outsourced a new business activity emerges,
which is generally known as Knowledge Process Outsourcing.

Knowledge Processing Outsourcing (popularly known as a KPO), calls for the

application of specialized domain pertinent knowledge of a high level. The KPO
typically involves a component of Business Processing Outsourcing (BPO), Research
Process Outsourcing (RPO) and Analysis Proves Outsourcing (APO). KPO business
entities provide typical domain-based processes, advanced analytical skills and
business expertise, rather than just process expertise. KPO Industry is handling more
amount of high skilled work other than the BPO Industry. While KPO derives its
strength from the depth of knowledge, experience and judgment factor; BPO in
contrast is more about size, volume and efficiency.

In fact, it is the evolution and maturity of the Indian BPO sector that has given rise to
yet another wave in the global outsourcing scenario: KPO or Knowledge Process
Outsourcing. The success achieved by many overseas companies in outsourcing
business process operations to India has encouraged many of the said companies to
start outsourcing their high-end knowledge work as well. Cost savings, operational
efficiencies, availability of and access to a highly skilled and talented workforce and
improved quality are all underlying expectations in outsourcing high-end processes to
India

The future of KPO has a high potential as it is not restricted to only Information
Technology (IT) or Information Technology Enabled Services (ITES) sectors and

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includes other sectors like Legal Processes, Intellectual Property and Patent related
services, Engineering Services, Web Development application, CAD/CAM
Applications, Business Research and Analytics, Legal Research, Clinical Research,
Publishing, Market Research (Market research KPO) etc.

In today's competitive environment, focus is to concentrate on core specialization and

core-competency areas and outsource the rest of the activities. Many companies and
organizations have come to realize that by outsourcing non-core activities, not only
cost are minimized and efficiencies improved but the total business improves because
the focus shifts to the key growth areas of the business activity.

Knowledge Process Outsourcing (KPO) Services:

 Website Design

 Search Engine

 Financial Services

 2D Animation & Design

1.9.4 ASP: Application Service Provider

Application Service Provider (ASP) offers HRIS support via latest HR software and
web based HR solutions. An application service provider (ASP) is a business that
provides computer-based services to customers over a network. Software offered
using an ASP model is also sometimes called On-demand software or software as a
service (SaaS). The most limited sense of this business is that of providing access to a
particular application program (such as medical billing) using a standard protocol
such as HTTP.

The need for ASPs has evolved from the increasing costs of specialized so ftware that
have far exceeded the price range of small to medium sized businesses. As well, the
growing complexities of software have led to huge costs in distributing the software
to end-users. Through ASPs, the complexities and costs of such software can be cut
down. In addition, the issues of upgrading have been eliminated from the end-firm by
placing the onus on the ASP to maintain up-to-date services, 24 x 7 technical support,

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physical and electronic security and in-built support for business continuity and
flexible working.

There are several forms of ASP business. These are:

 A specialist or functional ASP delivers a single application, such as credit card

payment processing or timesheet services;

 A vertical market ASP delivers a solution package for a specific customer

type, such as a dental practice;

 An enterprise ASP delivers broad spectrum solutions;

 A local ASP delivers small business services within a limited area.

Some analysts identify a volume ASP as a fifth type. This is basically a specialist ASP
that offers a low cost packaged solution via their own website. PayPal was an instance
of this type, and their volume was one way to lower the unit cost of each transaction.
In addition to these types, some large multi- line companies (such as IBM), use ASP
concepts as a particular business model that supports some specific customers.

1.9.5 E-Services

E-services, outsourcing electronic HR services is a means to procure web aware

online utilities for the organizational HR process improvement. The E-HR service
providers offer value added web based applications to cater to the need of the
employers.

E-Services or "e-Services" is a highly general/generic term usually referring to the

provision of services via the Internet (the prefix 'e' standing for "electro nic", as it does
in many other uses). It is true Web jargon, meaning just about anything done online.

It can cause confusion when used in conjunction with "Support," as who knows the
difference between "e-Services" and online Support. It is often best to be avoided for
this reason, especially in Website navigation.

E-Services include "e-commerce", although they may also include non-commercial

services. Non-ecommerce e-services include (at least some) "government" services.

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1.10 TYPES OF HR OUTSOURCING

In the past, HR outsourcing was thought of as hiring a vendor to provide a service.

With the new focus on outsourcing, there is more of an opportunity to partner with the
vendor to provide the service on a longer term basis rather than just a one-time vendor
contract. HR outsourcing can include:

1. Discrete services: In this instance, one element of a business process or a single set
of high- volume repetitive functions is outsourced to a third-party administrator.
Examples of discrete services could include the annual open enrolment process,
flexible spending accounts or employee background checks.

2. Multi-process services: The complete outsourcing of one or more functional

human resource processes would be an example of multi-process outsourcing (also
called blended services). As such, the outsourcing of either health and welfare
benefits administration or defined retirement plan n to a third-party administrator
would be an example of multi-process or blended services outsourcing.

3. Total HR outsourcing: Total HR outsourcing represents the transfer of the majority

of HR services to a third party, to include recruitment, payroll, HRIS, benefits,
compensation and communications, as well as the transition of HR management and
staff. However, HR executive management would normally remain in place within the
organization, along with strategic planning related to people management and other
key HR functions at the discretion of management.

1.11 SHOULD ORGANIZATIONS OUTSOURCE THEIR HR FUNCTION?

Successful HR outsourcing means quality service. The recent decision by Unilever to

outsource its HR activities to Accenture appears to be in the right direction. For over
two decades now, much of the literature on the role of the HR function has tended to
emphasize the fact that HR departments in organizations are seen as administration
departments. They do very little value addition in the realm of human potential and
capital management. What Unilever has outsourced, based on media reports, is the
transaction part. In most organizations, pay-roll administration, applicant tracking,
training and development record- keeping, performance appraisal follow-up, human
resource policy clarification are all transaction activities. These are people and effort-

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intensive activities but are routine in nature. Such activities, repetitive and routine in
nature, ought to be automated or outsourced.

Outsourcing rests on the premise that activities which are core and central to the
organization need to be performed effectively within the organization. Most
successful outsourcing relationships offer cost-savings, standardization of processes,
increased speed and quality of service. Effective delivery of transaction is the first
step in the journey of the HR department towards becoming a strategic partner. It is
quite apparent by now that success in transaction offers the HR function the
credibility to engage in transformation.

Outsourcing of HR function has to be a part of an integrated business strategy for it to

succeed. The key, however, is for the senior management team and HR professionals
to identify the core HR processes, and the non-core processes that can be outsourced.
It is increasingly being recognized that human resources are a source of competitive
advantage for organizations, particularly in the information and knowledge sectors.
Various stakeholders in the organization such as the line managers, CEOs and
employees have urged the HR department to play the role of a strategic partner. The
core aspects of HR function related to transformation consist of attracting and
retaining talent, building people capability in the organization, developing a
leadership pipeline and creating a learning organization.

The transformation role envisaged for the HR function in organizations would require
them to contribute in different spheres. Dave Ulrich, in the 1990s, proposed multiple
roles for HR professionals which are extremely relevant in the globalize context. HR
professionals have to play the role of an employee advocate. Advocacy involves both
a discussion and representation of employee concerns. They need to ensure that
employees are treated fairly and that the culture within is one of mutual respect,
dignity and trust.

The role of a functional expert demands specialization. It would entail a n

understanding of the various HR systems and processes to solve routine and complex
problems. The role of a strategic partner is to understand the business and work with
line managers to create design and deliver high performance work systems which will
ensure that the organization is competitive on an on-going basis. This would require

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the HR function to look at a fit between business strategy and HR strategy and also
between HR strategy and the various HR processes and practices in organizations.

What set of HR activities can be outsourced and what cannot? In my opinion,

recruitment or the process of attracting talent can be outsourced, but selection of
candidates to join the organization cannot be outsourced. Selection is the culture
building process in an organization. While a large part of performance management
has been automated, the task of ensuring that goal setting, feedback, counselling and
mentoring happens is the role of HR.

Similarly, training delivery can be technology enabled, but ensuring that there is an
ongoing development process which builds internal technical management and
leadership capability is an in- house function. Building an organizational culture that
enables innovation, learning and adaptation is the role of the HR function in an
organization. These core and transformational activities of the HR function are the
drivers of value in an organization.

1.12 MEASURES OF SUCCESSFUL OUTSOURCING

The HR department traditionally has been a cost-consuming function, but is now

slowly contributing significantly to a company's bottom line. This has led to
outsourcing tasks like payroll, benefits, education/training, recruiting, personnel
administration, organizational development and workforce management. The
outsourcing market is beginning to see HR as a preferred choice.

A Gartner Focus Report (Outsourcing: Time to Deliver Results) echoes that thought:
"Only those companies ready to address the necessary transformation of their HR
processes will find that outsourcing will bring access to world-class processes,
competitive advantage, and increased shareholder value." Technology compatibility,
confidentiality and cost are other challenges that both sides must work on. Mutual
trust is critical, as it's a long haul commitment. It is imperative that senior
management is involved right from the beginning and also drives the initiative. In
addition, a clear understanding of requirements and expectations from both sides is an
important platform in building the relationship. Compatibility in culture and values
along with an open and flexible approach go a long way in ensuring that the
outsourcing venture is a successful one.

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A few measures that would help the outsourcing relationship remain contemporary
and relevant are:

 Saving process time and cost

 Levels of satisfaction

 Updates on mandatory practices

 Effective implementation of workflow and policy changes

 Continuous feedback mechanisms

1.13 HUMAN RESOURCE OUTSOURCING PROCESS

Any organization making a significant commitment to HRO is making a decision with

far-reaching implications- not just for HR, but for the entire organization. For this
reason, it is crucial that all stakeholders involved in the HRO process be involved
from the outset and that there is clarity in relation to the goals and ob jectives that the
organization expects to achieve.

As a starting point, a multi-departmental steering team, consisting of representatives

of all potential users of the service provider, should be formed and convened. Ideally,
HR will either lead the decision- making process or be crucial to it. Other key
members of the steering team should include high- level managers and executives with
a vested interest in all aspects of human capital asset management and its return on
investment, including operations, information systems technology, finance,
accounting and logistics. The goals and expectations of the outsourcing process
should be developed and defined in a detailed project plan.

Stage: 1 Developing a Detailed Project Plan

The multi-departmental steering team should work together throughout the

outsourcing process. The following steps are offered as a resource in this effort. This
tool can be tailored to meet the particular needs of the organization.

1. Map internal processes and assess baseline costs.

2. Select processes for outsourcing.

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 3. Define vendor requirements and selection criteria.

4. Draft Request for Information (RFI)/Request for Proposal (RFP).

5. Identify potential vendors and pre-qualify.

6. Distribute RFI/RFP.

7. Implement review steps.

8. Select vendor and backup vendor(s).

9. Determine service level requirements.

10. Determine vendor review points.

11. Negotiate contract.

12. Develop transition plan.

13. Determine impact on current staff and need for job transition
arrangements.

14. Monitor vendor performance/key performance indicators (KPIs).

15. Initiate corrective action in accordance with contract terms, if needed.

Stage: 2 Helping Ensure a Successful Solicitation Process

It takes time and effort to ensure a successful solicitation effort. Suggestions to help
guarantee a favourable outcome for the organization are summarized below.

Independent third-party advisor—an organization new to HRO may wish to seek the
services of an independent third-party advisor specializing in HRO to guide it through
the initial outsourcing process. This firm should have no vested interest in the
outcome of the final HRO contract.

Soliciting vendor input—In addition to a formal RFP, it is recommended that a formal

RFI be issued first. This document serves as a first- level screen for qualified,
interested vendors. It also serves to outline the basics of the project and asks for

24
vendor capabilities and background. The reason that this is important is that the
organization will be able to use the RFI as a prequalification tool to help identify the
most qualified vendors to participate in the RFP.

RFP format—The RFP - request for proposal, should include an introduction and
background of the company, an overview of the project, including submission
information, due date, scope, requirements, selection criteria and objectives. The RFP
should also include a proposal outline or main content points in relation to approach,
company structure, resources, anticipated project timeline, references and related
previous experience. A non-disclosure agreement or confidentiality agreement should
be included to protect the proprietary interests of the organization.

Assessing vendors— a structured approach should be used; the RFP is frequently

formatted in a way that allows weighted points to be assigned for each criterion.
Multiple ratters are encouraged in this process. Vendor presentations are normally
first made to the steering team for phase-one eliminations, with the top finalists going
forward with presentations to senior management.

Due diligence—Care should be exercised in checking vendor references; an effort

should be made to make site visits, if possible. Both current and former clients should
be interviewed (i.e., be sure to ask why former clients elected not to renew
outsourcing contracts). Develop a structured interview questionnaire to ensure that the
same questions are asked of all clients for the sake of consistency and the references
are documented for the benefit of the steering team. Be sure that services are
consistent with past experience, especially if industry experience is important. Obtain
bios for all staff assigned to the project and check the personal references of these
individuals. Interview the people who will be responsible for working with the client
company, not just the sales team. If possible, get a commitment that any change in
team members will be coordinated with the company first. The financial stability of
the vendor should also be assessed, and all required business licenses should be
checked to ensure they are current.

Contract—the contract should be developed and reviewed by legal counsel. There will
normally be a master services agreement or a service level agreement, or both. These
documents set specific service levels, document all project requirements and

25
expectations and establish fees and invoicing, the duration of the contract, stipulations
of vendor ownership changes, cancellation provisions, parties to the contract, services,
performance standards, contract termination provisions, the confidentiality/non-
disclosure agreement, fees (i.e., invoicing, payment terms, resolving differences,
incentives and penalties), and audit proceedings.

Transition process—this is a team effort. The company and the vendor are equally
responsible for ensuring a smooth transition. Communication and project ma nagement
are the key watchwords during this phase of the project. Plan to jointly review all
project plans, services, equipment and staff who will be in transition. Ensure that
responsibilities for the transfer have been defined well in advance and confirmed. A
successful transition should be transparent to the organization. This means that the
culture of the company must be considered. For example, if there is a high-touch
culture where people expect lots of personal service and insight from HR, consider
how to integrate the outsourcing vendor. Include the vendor as a resource in the
internal company directory, have assimilation meetings to ensure that the staff from
the outsourcing partner are properly introduced to the in- house management staff, etc.

Implementation—Implement HRO as a change management initiative for the entire

organization. Decide who needs to be involved in the planning, communicate the
compelling business case for the change and discuss how potential resistance in the
organization can/will be managed, how people will be rewarded, as well as what
needs to be communicated and when.

Vendor management—it should come as no surprise that a few matters may fall
through the cracks during the implementation phase. HRO is a massive undertaking,
and the planning and implementation process is intensive for both the vendor and the
client organization.

The internal senior HR staff is normally responsible for the day-to-day management
of the vendor relationship, tracking work performed against defined service levels and
continuing service levels for HR operations not outsourced.

A regular meeting schedule should be established with the vendor at the outset to
review status and vendor reports, service levels, routine contingency planning and
disaster recovery, process improvement plans, rewards/incentives for performance,

26
etc. If and when problems should develop, contingency plans will need to be
implemented, so consideration should be given to some of the more common
problems that may surface during HRO operations.

Typical problems for which remedial action may be required are: service levels do not
meet expectations, turnover of employees at vendor, difficulties managing the vendor,
hidden and escalating costs, employee resistance, and cultural differences in the way
business is conducted.

Using good judgment in relation to contract terms can help avoid some of these
problems in advance. For example, in an attempt to head off/avoid problems with
employee turnover, the client company can specify in the contract which vendor staff
members must be assigned to the contract.

To address potential cost escalation, the company may negotiate limits to fee
increases and/or fee additions to the contract for new services. The best time to
negotiate these contingencies is before the initial contract is signed.

1.14 IMPACT OF HUMAN RESOURCE OUTSOURCING

In the competitive business environments that entrepreneurs and business leaders

must operate, every advantage must be identified and exploited to stay ahead of
market rivals. Many companies are seeking to achieve greater economies by reducing
the impact on their human resources departments by outsourcing some HR functions
and tasks. Human resources outsourcing evolved from hiring payroll processing
companies in the 1990s to delegating tasks previously performed by human resources
assistants and specialists, such as recruiting, coordinating benefits and handling
unemployment claims. Some small businesses outsource entire human resources
departmental functions; however, many companies outsource singular processes. Here
is overview of impact of HR Outsourcing on companies, HR Profession and on
careers of HR professionals.

1.14.1 Impact on Companies

 Employee reactions

 HR executives taking part in operational and strategic dec isions

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  Elimination of bureaucracy

 Customer service improvements

 Growth of self-service platform

 Slimming down staff

 Cost savings

 Model will serve to guide other organizational functions

1.14.2 Impact on HR Profession

 Internal HR at significant disadvantage in cost per transaction

 Loss of control of key processes

 Enhanced credibility

 Strategic focus

 Decentralized structure

 Internal politics – HR as business partner

 Move to customer service culture

 Management and Organizational Development

 New roles – consultant and HR strategist

 Develop competencies to remain valuable

 HR is exposed and more visible as organizational function

 HR is far more measurable

 Align HR strategy with corporate goals

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1.14.3 Impact on Career of HR professionals

 Transformation – from transactional administrator to business partner that sets

strategy

 Develop competencies to negotiate and manage vendor relationships

 Demonstrate ability to provide business solutions for customer prob.

 Change bureaucratic culture

 Develop strategic expertise necessary to manage human capital

 Deliver exceptional customer service

 Sharpen your skills

 Build/Develop your network

 Stay on top of trends and their implications

 Utilize vendors now so that they can help you later

1.15 REFERENCES FOR THE CHAPTER:1

McIvor, R. (2005). The outsourcing process: Strategies for evaluation and

management. Cambridge; New York: Cambridge University Press.

Thomas James Norman (2009) Outsourcing Human Resource Activities: Measuring

the Hidden Costs and Benefits.

http://www.peoi.org/Courses/Coursesen/outsrc/fram1.html

http://ijimt.org/papers/118-M514.pdf

https://core.ac.uk/download/files/343/11233514.pdf

http://cgr.umt.edu.pk/icobm2013/papers/Papers/IC3-Dec-2012-042.pdf

www.informit.com › Articles › Business & Management › Global Business

www.affilorama.com › Affiliate Marketing Lessons › Affiliate Outsourcing

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www.vietnamoutsourcing.org/outsourcing- guide/introduction-to-outsourcing/

operationstech.about.com › ... › Outsourcing Operations and Office Functions

www.hrzone.com/hr-glossary/what- is-human-resource-outsourcing- hro

www.mbaskool.com › Concepts › Human Resource (HR)

www.jobscience.com/blog/6-top-reasons- for-outsourcing- human-resources- functions/

www.forbes.com/sites/meghanbiro/2013/12/01/top-5-reasons-hr-is-on-the- move/

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