If there is to be another phase, I believe it will have to be a well defined offering - where the vendor knows what they are selling and are bold enough to not allow clients to get outside that box (while still interesting them in the offering). This needs to be combined with a 1:many model so that the vendor can provide the functionality sought by the clients but also be able to spread that cost over many and have much smaller incremental cost.

I also believe that HRO vendors need to stop playing in non-value added spaces - which includes areas like recruiting, perf mgmt, learning, and others. These industries are highly fragmented with no clear leader, these vendors do much of what the larger outsourcer does, and the outsourcer adds very little value. The fact of the matter is that it is these ‘other’ domains that are killing the vendors and the clients. The core is much clearer, crisper, and valuable.

Most HR leads do not want to handle the tactical work - too much risk, with too much politics, with too little to gain. Pass that off to outsourcer - even with minimal cost reduction - and refocus energy on other areas like handling M&A work or talent management.

Lastly, and most importantly, the HR industry has to get out of just doing what they have done in past. The world is changing, the new gerenation workforce is used to things like vritual work arrangements, social networking, streaming media and the such. The HR industry has to adapt - and then (and only then) will they actually be valuable to their companies. Handling general HR questions, creating pretty reports, and handling payroll are table stakes. It is what you do above that which will make you a great HR leader.

In my opinion, the risks and complexity of managing an outsourcing vendor cannot be justified by $100/employee/year. HR outsourcing just doesn’t make financial sense for large companies.

With that said, small companies can make significant improvement in their HR operations costs. However, Mark point’s out, HR’s budget is a pretty small fraction of the overall cost of employment, which ought to be the true focus of HR.

According to The Hackett Group’s latest benchmarking data, an average HR department spends approximately $1,864 per employee per year (i.e., their budgetary spend). In contrast, World Class organizations spend approximately $1,614 per employee per year, largely due to operational efficiencies, shared services offerings and lower HR personnel costs/ratios through the application of self-service technologies and/or outsourcing.

Although these costs are significant, they pale in comparison to the overlay cost of employer sponsored healthcare. A comparable study by Towers Perrin shows an average health care spend of $9,300 per employee per year, with World Class spend at roughly $7,800 per employee per year. So, if HRO vendors are only attacking the HR budget, we need to see an increased investment in innovation and net-new product offerings that dramatically lower the 5x multiple of employer health care costs. There are some limited examples of this associated with absence management, HRAs and associated interventions, but we really have yet to see the HRO providers step into the limelight to strategically remove a block from the health care Jenga without toppling the system.

Happy New Year.

Furthermore, I love your “mess for less” comment! It seems like outsourcing clients continue to hand their headaches to vendors, which in turn struggle to handle the mess. I think HR needs revamping, so much so, that I wonder whether it’s worth the hassle and risk of outsourcing.

With that said, and after a bit of reflection, I due believe that HR outsourcing is a great deal for mid-sized companies, because it allows those companies to divert energy to other areas. Large companies, on the other hand, will have such specialized processes, that I doubt that vendors can provide economical solutions given that large companies already have economies of scale.

However, it gets to the core of outsourcing opportunities: mid-sized companies should actively seek outsourcing opportunities because they do not have the capital, skill, or time to manage certain non-core functions. In turn, the same mid-sized companies should look to become “outsourcers” in their own way, building specialization that integrates and replaces some of their smaller customers’ operations.

The reason why I described the role of HR as one of “facilitating and driving sound HR practice across the organization” is because I believe HR is a pervasive skill and business practice which needs to be instilled into company managers across all business functions. Whereas yesterday’s manager may have been good at training sales people, or a shrewd fiscal manager, he / she should also become adept at optimizing the performance of their talent. Yes, the role of HR is to manage, monitor and optimize the cost and performance of human capital (i.e. “sound HR practices”), but rather than HR trying to deliver this directly into the organization as a standalone business function, I believe it needs to operate more at the management level to align business functions and units with the corporate goals. Basically, if HR executives can help their key corporate leaders deploy sound HR practice into their own areas - and work with the HRO service providers where necessary to help facilitate this, they are fulfilling their role more effectively.