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Outsourcing gaining acceptance

The barriers that have kept Internet outsourcing from exploding as predicted only last year are not likely to disappear overnight, but signs of a gradual shift are becoming visible

In February this year, Long King Company, a small trading company in Tsimshatsui, decided to get rid of some of its 10-year-old computers and programs that handled its human resources and payroll.

But it did not buy new ones. Instead, Long King turned to the Internet, signing with an applications service provider that transferred the company's data to its Web site.

By contrast, many companies in Hong Kong are turning their accounting operations over to bricks-and-mortar outsiders, such as PricewaterhouseCoopers, to cut costs through the economies of scale that such giants can apply.

This is the current state of Internet outsourcing, a tool that has neither lived up to the expectations of a year ago nor gone away and died.

Outsourcing basic administrative functions, such as payroll, has been common for the past three decades. But firms are increasingly starting to look to turn over their support functions to people who specialise in those areas to allow them to focus their energy and resources on developing their business.

"We help companies operate more effectively, by showing them a different way of doing things," Joseph Mo, sales director for ADP Employer Services, a payroll and HR solutions provider, said. "And the way we do that is by taking away their no-profit activities - taxes, monthly salary, etc. - to let them concentrate more on making money."

Founded in the United States in the 1950s, the company set up a Hong Kong office three years ago. Mr Mo said his firm can offer Web-based or offline outsourcing services.

"It really depends on the terms of the service level of the agreement. Each case is tailor made," he said.

The Harvard Business Review described outsourcing as "one of the most important management ideas and practices of the past 75 years." But for the most part, these services are still on the fringe of corporate Hong Kong.

According to Dataquest Inc, a unit of Gartner Group Inc, the worldwide finance and accounting outsourcing market is projected to grow from US$12 billion in 1999 to US$37.7 billion by 2004. And while there are many opportunities in finance and accounting outsourcing, Gartner Dataquest analysts believe many companies are still hesitant to outsource these crucial duties.

"Despite some high-profile contracts in the past few years, many potential customers still regard finance and accounting processes as too strategically important to their business to be entrusted to outsourcing vendors. Awareness of the potential benefits of finance and accounting outsourcing is still not well developed in many industries and geographies," said Rebecca Scholl, senior analyst for Gartner Dataquest's IT services worldwide group. "Vendors need both to educate potential customers regarding the benefits of outsourcing and to develop realistic expectations and concrete performance evaluation criteria."

A New Century Research Report predicts that the professional services sector in Hong Kong will grow to US$1.1 billion in 2002, and outsourcing will be lead that growth.

While it may not be a big bang kind of thing, signs of a gradual shift are visible. The barriers that have kept Internet outsourcing from exploding as predicted only last year are not likely to disappear overnight.

ADP's Mr Ho said that based on his experience, multinational companies are more likely to outsource their payroll and HR administrative functions. Many Asian companies, by contrast, especially SMEs, don't seem to think they can derive any benefit from outsourcing, he said.

Some companies also fear that by outsourcing they will "lose control" or confidential information somehow will be nabbed by their competitors.

They worry, too - with plenty of recent failures in the case of Internet contractors - that new companies with money-saving ideas and the latest programs may not be around two years down the road.

Analysts feel that even though a sizeable percentage of new companies whose business is Internet outsourcing are being acquired or going out of business, it is not because they don't have the right idea, but simply because supply is ahead of demand.

Mr Ho said such fears are unfounded, and that companies should use the sound business sense they employ when entering into any contract.

"We are doing a very traditional kind of business. We were established about 50 years ago in the United States and are listed on U.S. Stock Exchange. We've been doing payroll for 25 years in Australia, and have been present in Hong Kong for about three years," he said. "So we've a very long history."

With more education and as human resources responsibilities at many companies becoming increasingly complex, outsourcing will become a necessity, he predicts.

"Obviously the MPF has added to the complexity of payroll administration, so this has certainly aroused interest in outsourcing payroll," he said.

Human Resources

HR has two types of major responsibilities. The first set centres around the design of the organisation and culture, and the second is related to the acquisition, management, and development of human talent within the organisation.

According to Marc Pramuk, senior analyst for IDC's eHuman Resources research programme, "HR departments are working to shed themselves of the tactical, transactional activities they handle so they'll have more time to focus on strategic, value-add activities and to better align the department with the goals and objectives of the organisation."

When deciding which of its activities to outsource, companies need to consider how human resources can create and deliver the greatest value to the organisation.

"The activities that are more transactional in nature or that tend to be consistently handled from one company to another are most easily outsourced," Mr Pramuk said. "Activities related to reinforcing the culture and the values of the organisation are usually kept in-house."

One size fits all

Some Internet outsourcing is reliable, the analysts say, but still unappealing because it is not tailored to customers' needs.

Even for companies willing to outsource something as straightforward as payroll, going on to more complicated operations that would be even more financially rewarding is often considered to be a leap into the abyss.

"It's really easy to outsource something like the payroll, which is easily understood and just a pain in the neck and nobody wants to do," said Christine Ferrusi Ross, an analyst at Forrester. "But start talking about an Internet-based connection to a trading partner. Well, you hear, what does that cost? And how should it work? And what kinds of things should I expect? There are a lot of psychological barriers because companies don't understand these things. They are afraid to go out and ask questions for fear of being mistreated. Or that they'll ultimately get something they don't understand. So they just don't do it."

IT outsourcing

Unlike payroll and HR outsourcing, which are being driven by realisation of greater effieciency and cost savings, IT outsourcing is growing by the sheer necessity to find the right skills to get the work done.

In a HKGCC survey conducted earlier this year, 90 per cent of members polled said they have vacancies for IT personnel, while 25 per cent of companies said that they could not find the right IT and e-business people to fulfil their needs.

Around 40 per cent of companies surveyed said they outsourced Internet and related technology projects, while 60 per cent of companies said they were interested in outsourcing to Mainland firms.

The survey's results explain why interest in HKGCC's project with China International Intellectech Corporation (CIIC), a Mainland IT solutions provider, has been so high. In October last year, HKGCC signed an MOU with CIIC to find third-party solutions to members' IT needs.

To date, 30 companies have expressed interest in utilising the service.

Stephen Yiu, general manager of Multilingual Translation Services, a Central-based SME specialising in translation and related services, said that, given the size of his business, outsourcing his IT needs seemed to make more sense than hiring an in-house IT team.

"We are looking for a tailor-made accounting system that will also cover invoicing as well as applications to handle daily routines such as mailing, management of client records and so on. We think outsourcing offers us more flexibility and will be more cost-effective," he said.

While the advantages are clear-cut, Mr Yiu is aware of the common concerns when it comes to outsourcing: losing control of certain operations and the leaking of confidential company records. However, he also knows that measures to combat this can, and should, be taken.

William Poon, general manager for Greater China, Hewlett-Packard HK Ltd, which has expressed interest in providing IT outsourcing services, said companies often worry about sensitive information finding its way into competitors' hands. But he pointed out that such worries were a part of a company's day-to-day operations regardless of whether or not they outsource.

"These concerns can be dealt with by taking the necessary precautions when signing a service contract," he said. "Also, it is the vendor's responsibility to convince the client of their reliability in terms of confidentiality, damage rights, liability and IT rights."

Mr Poon dismisses claims that a company will lose control of projects outsourced, and points out that in-house projects can even fall beyond the control of managers.

By outsourcing IT to a third-party, the company has better control of a project because it can focus on maintaining the service level of the vendor, rather than focusing on controlling its IT employees, which is tedious and not very cost effective, he said.

When considering outsourcing, companies should plan what and why they are outsourcing. Such a plan serves as a basis for the vendor to assist the client to form their IT development strategy, he said.

Both Mr Yiu and Mr Poon believe IT outsourcing will become an important business tool for Hong Kong companies that will allow them to reduce costs, increase efficiency and upgrade capabilities.

"They will be able to focus on their core business, allocate the company's resources more effectively, and attain their business targets more effectively and efficiently," Mr Poon said. "Besides, with special skills and expertise, the service vendor can help these companies better attain their business objectives."

Reinforcing the advantages of IT outsourcing to a third party, Di Fuping, chief representative of CIIC, believes that more and more Hong Kong companies will use IT support services provided by Mainland firms.

"We provide quality service at low cost, and the possible disclosure of a company's confidential information is not a concern. CIIC is also a registered company in Hong Kong and must abide by the business rules and regulations of the SAR," she said. "Once companies have tried one or two projects with CIIC, I'm confident they will expand their outsourcing projects with us."