HR Outsourcing, Asia

There is Value for HR Outsourcing in Asia Pacific

By Jeff Lupinacci, Intel Technology

A few years ago, I resisted moving any of my processes to an outsource provider.  I believed my team was far more capable than anyone else.  However, when I was unable to secure enough IT resources for a new program, I was forced to reluctantly look to a HR outsource provider for help.  It was difficult to let go, yet once I did, I found it extremely freeing.  I now believe that companies should focus on their core competency.  In the case of HR Outsource providers, their core competency is HR.  Because of my positive first experience with HR Outsourcing, I am now a firm believer in the value that outsourcing can bring.  Saving system costs, simplifying processes by utilizing industry standard best known methods and reducing headcount are some of the benefits of outsourcing.  Unfortunately, I have faced some unique challenges to outsourcing in Asia that I didn’t face while in the US.   I will discuss the challenges of outsourcing here in Asia and strategies to obtain a positive return. I will also discuss the capability and future of the HR Outsourcing industry in Asia.

Challenges to Outsourcing

When I outsourced processes in the US, the big selling point was the ability to move the work to Asia.  Labor costs can be as much as 75% lower in Asia, than in the US.  Therefore, there is a substantial ROI for companies to move their work to outsource providers.  However, the labor cost is already low for processes currently being done in Asia.  Therefore, it is extremely difficult to get any real savings from labor arbitrage.  If you look solely at labor arbitrage, then the ROI of moving a process to an outsource provider is negative, especially when you consider start up costs.  There are, however, some opportunities across Asia.  As wages increase in certain cities and countries, the opportunities to obtain some labor arbitrage is expanded.  The key is to understand where the outsource provider is providing the service and to know if you can capture any savings.  For example if you are in places like Japan, Korea and Taiwan then you should be able to obtain labor arbitrage.  If you are in Philippines, Malaysia or India then it is neutral, at best.  Because of the wage differences across Asia, it is critical to look beyond labor arbitrage to obtain value.  One needs to focus on systems costs and consolidation of work.  

System costs can be difficult to fully obtain, however, in my experience this can be a significant savings when outsourcing.  The strategy is to ensure the end of life the current in-house system, thereby saving on a number of hidden costs, like server capacity, system upgrades, and IT support personnel.  How many times has your IT manager told you your current system has to be upgraded?  This is a necessary activity, but it diverts resources to perform the upgrade instead of working on the latest pet project. By outsourcing, you move this headache to the service provider.  It is really is nice not having to worry about what version I am on or when the next upgrade cycle is.   And it can become one of the largest line items when determining the value of outsourcing.

The other key to obtain value is to consolidate enough work to a single outsource provider.  The economies of scale should enable you to obtain a nice return on your investment.  My experience in Asia is that companies are fairly disbursed across countries, meaning they generally don’t have a significant concentration of employee base in any one country.  The strategy is to find an outsource provider that can cover multiple countries.  If you can aggregate work to a single provider, you will be able to obtain better pricing. You also get the benefit of reducing the cost of vendor governance if you can consolidate.  I have found this strategy to be the key differentiator when making the outsourcing decision.  The one issue, however, is there are still very few regional HR outsource providers, thus it is more difficult to consolidate to a single provider.  If you are not able to consolidate, you are not able to get better pricing, thus the return on investment remains neutral to negative.  This trend however is changing and we will see more regional and global providers entering the hot Asian market.

Future of HR Outsourcing in Asia

Even though there are a few things working against the HR outsource industry in Asia, I firmly believe we will continue to see it evolve and grow.  I can see the industry starting to be able to provide broad regional capabilities.  So as providers span Asia, they are able to offer the economies of scale to companies by being able to cover processes across multiple countries.  The other capability the regional players are focusing on is their system capabilities.  Many have strategies to use ERP systems like SAP or PeopleSoft.  This enables the providers to keep in compliance with the statutory requirements because of the support they get form the ERP companies.  

As the industry figures out how to deal with the issues, the time is right around the corner for broad based HR Outsourcing opportunities.  Because of the immense opportunities to grow the HR Outsourcing industry, the HR Outsourcing Association ( www.hroa-asiapacific.com) has recently established an Asia-Pacific chapter to help educate and promote outsourcing best practices.  This is a professional association which is promoting and developing the outsourcing capabilities around the world. HROA establishing an Asia-Pacific chapter shows the industry is on the verge of growth.  I believe there are huge opportunities here in Asia for HR outsourcing.  All that said, even though HR Outsourcing in Asia is lagging behind other regions, there has been good progress over the past few years. 

Two years ago there were not really any regional providers that could provide a quality level and reach of scope that companies could use.  The industry was fragmented by country and even within a country.  We have seen some consolidation and capabilities beginning to emerge, especially in Payroll, which I believe is the most mature HR outsourcing capability in Asia.  There is clearly a spectrum of provider capability and maturity.  On one end you have a number of capable providers which span multiple countries in Asia.  This enables you to consolidate processes onto a single provider.  You will have the best value because of this consolidation.  Payroll and Employee Reimbursements fits this category.  Some providers can cover multiple countries, but not all of them.  Therefore, you will have to manage multiple vendors to cover the region, causing your costs to be higher, having less economies of scale and needing more resources to manage your providers.  I would put processes like relocation, staffing services and immigration in this category.  At the other end are providers serving a country or even a single process within a country.  These vendors are the most difficult to manage.  Quality levels may not be where you want them and a lot of time needs to be spent on governance.  Benefits administration (social insurance, medical claims, retirement, loans) falls into this category.  It is extremely fragmented at a country level and will take the longest to deal with, but also the biggest opportunity. 

In Conclusion

Even though the HR Outsourcing industry in Asia is immature, there are ways to obtain value for your company.  Focusing on consolidating work, some labor arbitrage and eliminating internal systems are key ways to find benefits.  I am very optimistic that we will see additional creative value drivers in the near future.  The HR outsource providers will figure out how to create additional value for the Asian market, and then we will see a real breakthrough and a fast adoption.