4 Ways the HR Outsourcing Market Is Evolving

Many HR organizations have been tasked with three simultaneous goals: optimizing costs, transforming the manager and employee experience and moving the HR technology model forward. To these ends, organizations are exploring new HR delivery models, including HR outsourcing (HRO), to achieve these objectives.

HRO providers have responded to a hungry market with new capabilities, strategic approaches and commercial models. Below are four ways the HRO market is evolving.

1. The competitive HRO landscape has broadened. There is a more expansive set of HRO providers today than there used to be. These providers have built up their HR capabilities and are competing effectively in standalone HRO. For example, some of the IT outsourcing providers, such as Infosys, that included HRO as part of a broader end-to-end IT/BPO outsourced solution, have broadened their HRO client base. Genpact, whose heritage is in adjacent business process outsourcing (BPO) services, is competing in HRO. In addition, some of the current leading providers such as IBM have become more cost competitive with expanded presence in lower-cost locations and greater use of advanced technologies. The result is a broader set of strategic options across the mid- and large-market.
2. More intelligent outsourcing. Leading providers are leveraging AI for manager and employee inquiries, case management, HR transactions and insights. This year is expected to be the year when enterprises operationalize AI at scale, with AI applied across HR process domains and digital layers handling as much as 80 to 90% of HR requests. With this, we see a continued shift of the HRO value proposition away from traditional levers like labor arbitrage and more toward technology arbitrage. Innovation and AI should be built into every HRO agreement.
3. Faster speed to transformation. Many HR organizations have encountered stalled transformations. With cost reduction mandates, organizations are under pressure to speed up the pace of transformation. Providers that have proven accelerators, methodologies and client success stories are in a better position to meet those demands. A multi-phased approach that leverages current investments and prioritizes the most significant opportunities first will help achieve transformation goals. To accelerate client transformation, leading providers are focused not just on improving outsourced services but enabling effectiveness within the retained organization and enabling use of the AI/automation and other tools for internal teams as well.
4. Stronger focus on business outcomes. Leading providers are focused on outcome-based commercial models. Commitments to reduced cycle times, improved quality, increased employee adoption, and lower costs are common goals. With the further scaling of agentic and generative AI, organizations should expect to see notable cost savings in the outer years of their contract. Providers are also increasingly willing to financially engineer the model to recognize key savings goals earlier in the relationship. Demonstrating clear business impact and a willingness to commit to improved outcomes is critical in today’s market.

Whether you are a first-generation or multi-generation HRO client, it is well worth the time it takes to evaluate new models, providers and capabilities in the HRO market. ISG works with organizations to unify their cost optimization objectives with their HR technology transformation goals so they can meet the business demands ahead. Contact us to discuss how we can help you.