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Wednesday, May 08, 2002

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Payroll outsourcing pays

Vikram Mishra

HARVARD Business School has identified outsourcing as one of the most significant breakthroughs in the field of management in the 20th century.

It is defined as the strategy of identifying the core competence, turning the management's focus on it and simultaneously transferring the execution and delivery of non-core activities to a specialised service-provider on a continual basis.

C. K. Prahalad's management mantra on core competence has given a fillip to outsourcing. The global outsourcing market, which is currently worth $90 billion, is expected to rise to $150 billion by end-2002-03. Serco, Capita, Exult and ADP, the multibillion-dollar MNCs which got into the bandwagon early, are the industry leaders. The US-based ADP, a company into outsourcing for the past 50 years, has a turnover of $7 billion. More than 90 per cent of the American companies outsource at least one activity. Data reveal that more than 70 per cent of the Fortune 500 companies have their payroll outsourced.

Outsourcing in India

Post-liberalisation, India has emerged as a major destination for outsourcing ITES and software solutions; in fact, India is today the biggest supplier to the world market. Construing from this, the country can persevere to attain G-7 stature with "strategic thinking and implementation" (which is equally important) on part of the state and the corporate sector. Unfortunately, this has not been happening. The fire seems missing.

Payroll outsourcing

Payroll outsourcing, the concept of employing an external agency to do all the routine work related to the management of salary disbursement, and so on, has been operational in India since 1997. Those who have been a part of the system know how tedious it is to cut through the red tape and adhere to the myriad rules and regulations.

Ma Foi pioneered the concept for Citibank Indian Operations. Hugely successful, payroll outsourcing soon evolved itself into an industry. A large number of smaller players have emerged on the scene, but as the market forces organise the industry there would a shake-up — Porter's competitive forces come into play and control the dynamics.

The industry has recorded a CAGR of 15 per cent for the past five years. But the potential is much more. One wonders why Indians are slow in adopting modern management mantras.

Beneficiaries

The advantages of outsourcing are phenomenal. The main beneficiaries are the corporate sector, the service-providers and the economy as a whole. Outsourcing is a logical extension of Adam Smith's theory of "Comparative Economical Advantage". The advantages accruing to the corporates are: i) turning the management's focus to core competency, ii) confidentiality of the pay package offered, iii) freedom from red tape and adhering to strict rules and regulations, iv) pension fund management, v) a satisfied and, hence, highly productive employees, vi) state-of-the-art technology at no extra cost, and vii) increased market velocity.

For service-providers, the advantages that accrue are: i) enhanced skill set; ii) competency to provide world-class cost-effective service to MNCs; and iii) increased revenues.

And as for the economy, the productivity and efficiency of the economic system increases exponentially, pushing up, thereby, the GDP growth as well. With this also comes increased earning potential in the form of service exports.

(The author is a Chennai-based management consultant.)

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