HRO or FAO
Human Resource Outsourcing (HRO) is the transfer of one or more HR processes to an
external service provider that owns, administers, and manages these processes. Likewise,
Financial & Accounting Outsourcing (FAO) is the transfer of one or more FAO processes to
an external service provider that owns, administers, and manages these processes. Both
HRO and FAO markets have continued to grow each year. See Everest Group’s 2011
predictions for HRO and FAO.
Historically, Human Resource Outsourcing was limited to targeted HR activities such as
payroll administration. The market for large-scale, transformational human resource
outsourcing (HRO) accelerated in 1999 with the creation of two pioneering firms, Xchanging
and Exult (now AonHewitt). These HRO providers had the idea that the bulk of a large
client’s decentralized HR transactional services could be outsourced in order to radically
reduce costs and improve services. The client’s HR is transformed through the provider’s
transformation levers: creation of shared services from clients’ disparate HR departments,
headcount reduction for redundant and low performing employees, retraining and
empowerment for retained employees, process redesign and standardization, and significant
technology enablement. These providers took over a myriad of their client’s HR activities,
including HR information systems, benefits administration, compensation (salary
administration and job descriptions), recruitment, training, career development, and
regulatory compliance. Clients typically kept HR strategy (budgets, policies, workforce
planning, organizational design), employee performance (assessment, counseling, career
paths), and liaison roles in-house. This type of transformational HRO injected the HRO
market with new vitality.
Financial and Accounting Outsourcing has seen similar growth. Clients may outsource
discrete F&A services like tax services, or large sets of processes like procure-to-pay, orderto-cash, and record-to-report. Some FAO deals are huge—like Microsoft’s global FAO deal
with Accenture that provides FAO services for 95 countries or BP’s FAO deal, also with
Accenture. See CASE STUDY PAPERS:


Lacity, M., and Willcocks, L. (2012), “Mastering High-Performance: The Case of Microsoft’s
OneFinance”
Willcocks, L. and Lacity, M. (2012), “Mastering High-Performance: Strategic F&A Partnering at
BP”
The task for your group is to help general managers understand the promises, pitfalls,
and best practices associated with either HRO or FAO.
Your presentation may begin by answering these questions:
Did you choose to study HRO or FAO? Why?
How big is the phenomenon today and how big is projected to be?
Which types of processes are most frequently outsourced?
What are the real risks to a client company as opposed to perceived risks in
outsourcing HR or FA?
Who are the top outsourcing providers in this space?
Who are some of the major customers in this space? (Client firms who signed
megadeals).
Your presentation should proceed with one to three case studies of organizations' with HRO
or FAO. One of these case studies may be about a company that examined outsourcing HR
or FA but decided against outsourcing.
Case studies should include the Company Background:
Size of company in terms of sales and profits & number of employees
Major products the company sells
The main part of the case should be a retelling of the HRO or FAO story at each company.
(See questions to ask interviewees below).
The group should end the presentation by comparing the cases and providing some best
practices or important lessons for general managers. Your group should also cover HRO or
FAO trends.
If you have other creative ideas, please feel free to discuss them with me.
Potential questions for interviewees:
Please tell us a little bit about your current job and the role you play or played in outsourcing:
 Job title
 Length of time in current position
 Role in HRO/FAO decision, implementation, and/or management
Please tell us your HRO/FAO story—when and why did your organization decide to look at
outsourcing?
Who were the senior leaders in charge of the decision?
What was the scope of work initially?
Functionality
Number of workers
Contract value
Contract duration
TRANSITION PHASE:
How was work initially moved to HRO/FAO provider(s)?
Were any in-house employees transferred to HRO/FAO provider(s)?
What were the two to three things you did well to successfully transition work to the HRO/FAO
provider(s)?
What were the two to three things you could have done better in transitioning work?
What were the two to three things the HRO/FAO provider(s) did well initially?
What were the two to three things the HRO/FAO provider(s) could have done better initially?
DELIVERY PHASE:
Since the initial transition period, what has changed in terms of:
Scope of work
Quality of deliverables
Processes used to assign, review, and accept work from internal clients to HRO/FAO
provider(s)
People assigned as liaisons or contacts
How does your organization resolve conflicts or misunderstandings between internal clients
and HRO/FAO provider(s)?
Please describe your governance process including performance metrics, service level
agreements, chargeback mechanisms, etc.
OUTCOMES OVERALL:
Overall, to what extent is your organization getting the cost savings from HRO/FAO it expected
to get?
Overall, to what extent is your organization getting the quality of work from HRO/FAO it
expected to get?
LESSONS LEARNED:
What advice would you give to another company interested in outsourcing HR/FA?
What are the three critical success factors in outsourcing HR/FA?
There are many academic references on HRO/FAO.
Here are a few on HRO:
Lacity, M., Feeny, D., and Willcocks, L. (2003), “Transforming a back-office function: Lessons from BAE
Systems' Experience With an Enterprise Partnership,” MIS Quarterly Executive, Vol, 2, 2, pp.86-103.
Braun, I., Pull, K., Alewell, D., Stőrmer, S., and Thommes, K. (2011), “HR Outsourcing and Service
Quality: Theoretical Framework and Empirical Evidence,” Personnel Review, Vol. 40, 3, pp. 364-382.
Shih, H., Chiang, Y., and Hsu, C. (2005), “Exploring HR Outsourcing and Its Perceived Effectiveness,”
International Journal of Business Performance Management, Vol. 7, 4, pp. 464-482.
Weeks, M., Thomason, S. (2011), “An Exploratory Assessment of the Linkages Between HRM
Practices, Absorptive Capacity, and Innovation in Outsourcing Relationships, International Journal of
Innovation Management, Vol. 15, 2, pp. 303-334.
Shih, H., and Chiang, Y. (2011), “Exploring the Effectiveness of Outsourcing Recruiting and Training
Activities and the Prospector Strategy’s Moderating effect,” International Journal of Human Resource
Management, Vol. 22, 1, pp. 163-180.
Wahrenburg, M., Hackethal, A., Friedrich, L., and Gellrich, T. (2006), “Strategic Decisions Regarding the
Vertical Integration of Human Resource Organizations,” International Journal of Human Resource
Management, Vol. 17, 10, pp. 17726-1771.
McIvor, R., Humphreys, P. and McKittrick, A. (2010), “Integrating the Critical Success Factor Method
into the Business Process Outsourcing Decision,” Technology Analysis & Strategic Management, Vol.
22, 3, pp. 339-360.
Gilley, K., Greer, C., and Rasheed, A. (2004), “Human Resource Outsourcing and Organizational
Performance in Manufacturing Firms,” Journal of Business Research, Vol. 57, pp. 232-240.
Delmotte, J., and Sels, L. (2008), “HR Outsourcing: Threat or Opportunity,” Personnel Review, Vol. 37,
5, pp. 543-563.
Klaas, B., McClendon, J., and Gainey, T. (2001), “Outsourcing HR: The Impact of Organizational
Characteristics,” Human Resource Management, Vol. 40, 2, pp. 125-138
Gospel , H. and Sako, M. (2010), “The Unbundling of Corporate Functions,” The Evolution of Shared
Services and Outsourcing in Human Resource Management,” Industrial and Corporate Change, pp. 130.
Klaas, B., McClendon, J., and Gainey, T. (2001), “Outsourcing HR: The Impact of Organizational
Characteristics,” Human Resource Management, Vol. 40, 2, pp. 125-138
Here are a few on FAO:
Dunbar, A. and Phillips, J. (2001), “The Outsourcing of Corporate Tax Function Activities,” The Journal
of the American Taxation Association, Vol. 23, 2, pp. 35-49.
Carey, P., Subramanian, N., and Ching, K. (2006), “Internal Audit Outsourcing in Australia,” Accounting
and Finance, Vol. 46, pp. 11-30.
Bandyopadhyay, J. and Hall, L. (2009), “Off-shoring of Tax Preparation Services by US Accounting
Firms: An Empirical Study,” Advances in Competitiveness Research, Vol. 17, (1&2), pp. 72-90.
Maelah, R., Aman, A., Hamzah, N., Amiruddin, R., and Auzair, S. (2010), “Accounting Outsourcing
Turnback: Process and Issues,” Strategic Outsourcing: An International Journal, Vol. 3, 3, pp. 226-245.
Kamyabi, Y., and Devi, S. (2011), “An Empirical Investigation of Accounting Outsourcing in Iranian
SMEs: Transaction Cost Economics and Resource-based Views,” International Journal of Business and
Management, Vol. 6, 3, pp. 81-94.
Desai, D., Gearard, G., and Tripathy, A. (2011), “Internal Audit Sourcing Arrangements and Reliance by
External Auditors,” Auditing: A Journal of Practice and Theory, Vol. 30, 1, pp. 149-171.