More and more mid-tier companies are leveraging the benefits of HR outsourcing and soon the smaller firms would take this up at a scale that would beat the HRO operations of large corporations having 15,000 or more employees.

This has been stated in a new study conducted by Everest Research Institute, which found that the mid-tier companies (with an employee strength of between 3,000 to 15,000) are adopting HRO because of a growing supplier base that continues to bring forward focused offerings that support cost reductions, access to up-to-date technology and standardized processes.

“For a long time, HRO suppliers were mostly focused on larger companies with 15,000 employees or more. Serving these companies involves more complexity, more customization requirements and much longer implementation timeframes than the mid-market would require,” says Monica Barron, Vice President, HRO Research.

“To take advantage of the barely penetrated mid-level market, suppliers have developed profitable offerings by leveraging economies of scale and standardized solutions. This is why we’re seeing a significant increase in HRO suppliers - including offshore suppliers - and offerings focused on the mid-market buyer. And this, in turn, is really good for the buyer because they now have more suppliers and offerings from which to choose. The issue now becomes how to choose wisely.”

Since mid-market buyers often lack an existing ERP and want access to better technology to support HR services, they are generally more open to adopting proprietary solutions as well as highly standardized offerings from the suppliers.

According to the study, while the mid-market segment currently comprises 51 percent in terms of HR outsourcing activity yet it constitutes only 16 percent of the total market in terms of annual contract value. However, in terms of market activity, the study highlights that the mid-market will grow at a faster rate than the large market in coming years. In terms of annualized revenues, the global HRO market is growing at a decelerated rate and reached US $2.8 billion in 2007.

Analyst Rajesh Ranjan says that “as of December 2007, 116 out of 229 HRO transactions were in the mid-market segment. Although the current HRO penetration levels are low in the mid-market, reflecting the relative immaturity of this segment, yet they indicate significant growth potential. Besides Americas and Europe which represent a huge market potential of 5450 and 6350 companies respectively, Asia Pacific too holds a huge HRO market potential with as many as 5050 companies. However, with just 3 HRO transactions in the Asia Pacific, the current penetration is a low 0.1%.”

Some of the leading suppliers who have focused offerings based on proprietary technology platforms for mid-market HRO include ADP, Ceridian, NorthgateArinso, Logica, Accenture, Capita (all have). Other than these, ACS, Fidelity and Infosys have also announced their plans to offer a focused solution. Although suppliers such as Hewitt, ExcellerateHRO, IBM, Xansa, and Xchanging have signed deals in the 3K-15K employees segment, they don’t have a focused / separate offering for the mid-market segment.