Outsourcing is a major business trend which is rapidly reshaping global businesses. HR is the most outsourced business function,  representing almost 40% of all outsourcing contracts and is still the fastest growing at nearly 20% in 2004.

Most managers feel that capital resources should be directed to processes most closely connected to revenue generation. Combine this with the fact that human resource systems and functions are standard across many industry sectors, and you have the formula for the growth of HRO.

HRO enables businesses to focus their time on core business processes while relying on a valued partner for some or all HR issues. HRO combines HR consulting and Transaction processing to achieve maximum benefits for companies. Rather than dealing with a range or HR providers, HR management is simplified with a single, expert point of contact.

Just as in other types of outsourcing, the true value of HRO will be realized not strictly through savings, but in transformation of HR processes. HRO covers “everything from:

» in-sourcing (internal administration using state of the art software packages)
» third-party administration or co-sourcing (hiring out administration of certain HR services, but reserving employee contact to the employer)
» selective outsourcing (complete outsourcing of certain key administrative functions, including employee interaction)
» end-to-end HRO

Although HRO has been more focused in large organizations, the reasons for engaging in HRO are even more compelling for small to medium sized businesses. Independent U.S. research conducted by The Outsourcing Institute, Morgan Stanley Dean Witter and Hewitt Associates which reveals five key reasons for outsourcing HR functions :

(1) focus on the core business
(2) achievement of world-class delivery process and service
(3) access to leading-edge technology
(4) access to critical expertise
(5) control over operating costs

HRO offers unique opportunities to leverage new technology, streamline and rationalize HR practices.

Human resource management comprises two main functions: the design of the organization and human capital management. Tasks like benefits, pension and payroll administration are administrative in nature and can, in many cases, be completed cost effectively and with greater efficiency outside of the organization. HRO enables shifting the focus of HR resources from administrative to strategic functions.

Human resource functions, all candidates for HRO, can be divided into the following six service areas:

» Payroll & HRIS
» Health benefits
» Wealth benefits
» Staffing and recruiting
» Training and development

Human resource management has changed considerably over the past two decades and so have human resource services in terms of scope and complexity of services in the systems and processes used.

Vendors provide three very different types of services to assist in fulfilling human resource functions: consulting, processing and outsourcing. Outsourcing tends to be a blend of consulting and processing, providing organizations with a solution for parts of an HR process or an entire HR function.