Gartner Says Even As HR BPO Growth Slows, the Overall Worldwide BPO Market is Forecast to Grow 8 Percent in 2006

STAMFORD, Conn., August 31, 2006 — Human resources business process outsourcing (HR BPO) continues to be a major component of the overall worldwide BPO market, as worldwide HR BPO is expected to reach $24.6 billion in 2006, an increase of 4.7 percent from $23.5 billion in 2005, according to Gartner, Inc. The overall worldwide BPO market is expected to reach $134.7 billion in 2006, an increase of 8.3 percent over 2005. However, the HR BPO market has reached a crossroad in 2006, as some vendors struggle with profitability and retrench to improve their bottom-line results. This will exert a drag on the market especially on the growth of the U.S. segment through 2007.

HR BPO is the biggest component of the overall worldwide BPO market at 18.7 percent of the market. Payroll services and benefits administration services comprise the largest segment of the total worldwide HR BPO, together comprising nearly three-fourths of the market in 2006. The remainder of the market is composed of education and training, hiring and recruiting, and personnel administration services.

“HR has long been identified as a key area for outsourcing, usually in the areas of payroll and benefits administration services,” said Robert Brown, research director for Gartner. “As a back-office function, aspects of HR are often deemed critical, yet non-core functions for outsourcing and are usually most companies’ first stop on the sourcing journey for BPO. Payroll outsourcing is also a key area for consideration among small and midsize businesses that are often underserved by larger, more-strategic forms of BPO.”

Gartner said that more companies are looking to leverage HR outsourcing as a way to drive increased amounts of automation to achieve reduced costs and improved service levels. Many organizations that consider using HR BPO have created shared-service centers, where they have already standardized many processes. Benefits administration, payroll and basic HR call center functions are good candidates for process standardization in internal-shared service centers. However, many companies often seek an outsourcer that can provide the next level of leverage to lower cost and continue to innovate on service delivery.

Profitability concerns will lead many of the largest vendors to try to consolidate, rationalize, standardize and leverage their current HR BPO assets to drive up the profitability of the BPO portfolio. “Currently, there is much scrutiny by investors of HR BPO vendors’ profitability on their larger, strategy-complex BPO contracts. In the drive to top-line market share and revenue growth in the first half of the 2000s, many of the largest, most comprehensive end-to-end deals were highly customized in nature, with very little leverage built into the delivery model,” said Mr. Brown.

The internal staff is the biggest competitor to external HR BPO providers. Fear of losing control is a major obstacle to BPO adoption, so Gartner analysts recommend that organizations carefully weigh strategies to displace internal functions and staff. “Fears surrounding the loss of internal expertise often include the loss of ‘tacit’ knowledge (undocumented process knowledge carried intuitively by workers). Loss-of-control fears can also encompass dread that, once a process is outsourced, it will be difficult to ever reinsource, and users want to know how to transfer a process back if needed,” said Mr. Brown.

While payroll BPO is generally mature, Gartner analysts said there is still room for growth and evolution in niche areas. For traditional payroll outsourcing, most buyers service single-country operations. Multinational/global payroll outsourcing in multiple countries to a single provider isn’t yet mainstream and has little customer adoption making it a potential key growth area in the years to come.

Gartner Dataquest's Business Process Outsourcing Worldwide program provides history and five-year forecasts for BPO by service line, by region and country. BPO segments include demand management, enterprise services, operations, and supply management. To subscribe to this program, please call 408-468-8000. Additional information on Gartner Dataquest programs can be found on Gartner’s Web site atwww.gartner.com/it/products/research/dataquest.jsp.

 

Contact:


Christy Pettey
Gartner
+1 408 468 8312
christy.pettey@gartner.com


About Gartner:
Gartner, Inc. (NYSE: IT) is the world's leading information technology research and advisory company. Gartner delivers the technology-related insight necessary for its clients to make the right decisions, every day. From CIOs and senior IT leaders in corporations and government agencies, to business leaders in high-tech and telecom enterprises and professional services firms, to technology investors, Gartner is the indispensable partner to 60,000 clients in 10,000 distinct organizations. Through the resources of Gartner Research, Gartner Consulting and Gartner Events, Gartner works with every client to research, analyze and interpret the business of IT within the context of their individual role. Founded in 1979, Gartner is headquartered in Stamford, Connecticut, U.S.A., and has 4,000 associates, including 1,200 research analysts and consultants in 80 countries. For more information, visit www.gartner.com.