Outsourcing of human resource functions – including the most commonly outsourced functions of payroll, benefits, employee data management, information systems, and contact centers -- is expected to increase in 2008 after remaining relatively flat since 2005, according to the Everest Research Institute. While all market segments present significant growth potential, the Institute’s annual Human Resources Outsourcing (HRO) market study predicts mid-sized, North American and European companies will spark the growth.

According to the Institute, the cumulative total contract value of human resources outsourcing transactions reached US $21.2 billion in 2006 and is expected to be US $25.4 billion by the end of this year. The Institute’s study, Human Resources Outsourcing (HRO) Annual Report: November 2007, attributes future HRO growth to existing suppliers that have decreased transition costs and timeframes and are promoting standardized offerings. With the current penetration level of HRO being low in all market segments and across geographies, suppliers are focusing on the largely underserved mid-market and are offering compelling price points. According to the study, North American buyers account for more than 70 percent of HRO transactions, but Europe has seen increased deal signings over the past three years. Manufacturing, financial services and high-tech and telecom are the leading buyers of HRO overall.

“Over the last three years, we’ve seen a flat market in terms of the number of global HRO deals made due to the limited capacity of suppliers; however, the share of regional transactions has increased, especially for mid-sized companies of 3,000 to 15,000 employees,” said Monica Barron, Vice President, Everest Research Institute. “Existing suppliers are building capability and new suppliers are entering the market, indicating continued market evolution and growth. We’ve seen a definitive move away from the ‘lift-shift’ model, where the supplier takes over the buyer’s existing staff, processes, and technologies largely ‘as-is’ to provide outsourcing services. Buyers are leveraging a transformation-transfer model in which standardized processes and technologies are implemented and provided by the supplier.”

Another growth driver is a ‘componentized’ HRO model where buyers uncomfortable with full-scope, large scale transformation are signing contracts with suppliers who break up the outsourcing engagement into components and outsource them in phases.

“As buyers are deciding to move toward a componentized route, either in terms of scope of process or geographic scope, suppliers must have flexible offerings and contract terms to meet their requirements,” said Rajesh Ranjan, an Everest Research Institute Senior Research Analyst and co-author of the report. “At the same time, suppliers will need to ensure that their offering is scalable so as to be the supplier of choice when buyers decide to expand their scope of outsourcing.”

The study notes that Accenture, Convergys and IBM have gained significant HRO market share in terms of total contract value while Hewitt remains the market leader in terms of annual contract value.

Other study findings include:

• Process Scope: Six to seven HR processes on average are included in an HRO transaction. Since 2004, the inclusion of training, recruitment and compensation in HRO deals have increased; however only data administrative services and technology have been outsourced in almost 50 percent of the cases. Inclusion of benefits administration in full scope HRO deals, on the other hand, has declined.
• Size and Term: The average transaction size of HRO deals remains less than US $100 million. There has been a steady increase in the number of smaller transactions (less than US $200 million). Average deal term remains around 6.5 years with 75 percent of the transactions having a deal duration between five to 10 years.
• Pricing: After declining considerably, the average price point is increasing for companies with more than 15,000 employees due to suppliers’ stronger definitions of their operational criteria, sole-source agreements with targeted industry clients and clear focus on attaining profitability.
• Offshore Adoption: Currently, only 46 percent of HRO transactions include an offshore component; however, 68 percent of HRO transactions in the over 15,000 employee segment have an offshore component and is on the rise as suppliers continue to leverage offshore delivery centers to reduce operational costs.
• Technology: In almost 85 percent of transactions, HR information systems were outsourced, signifying the key role of technology in HRO. Since 2004, the market penetration of proprietary solutions has increased.

The annual report is the first of a two-part study of the HRO market. The second part, the 2007 Global HRO Supplier Landscape, will be released in December.