It seems Human Resources Outsourcing (HRO) has grown up and is finally delivering on its initial promises. For a maturing industry that’s shaking off a legacy of sometimes unrealised process improvements and cost savings, that’s good news.

In a recent survey of customers by IT research and advisory company Gartner, asking whether outsourcing HR functions to specialist providers had saved them cash, 78% of respondents said they had saved at least 10% by outsourcing in 2007. In 2006, only 32% of firms reported such savings. The rise is a strong indicator that clients and providers are learning from the mistakes some of them made when HRO was still a novel concept.

Robert Brown, Gartner’s research vice president, says outsourcing is increasingly demonstrating its ability to cut the overheads involved in running HR departments while helping to deliver services faster and better.

“Customers are generally more satisfied with what they are able to achieve in terms of cost savings,” he says. “Of course, the survey is just one set of data, but cost reductions are improving year on year. The disjunction so often seen in the past between customer expectations of cost reductions and the providers’ ability to deliver them does seem to be disappearing.”

For many firms, the big attraction of outsourcing lies in its potential to save them money – especially in these economically uncertain times, says Brown. “Cost reduction is consistently at or near the top of their list. Process improvement is important, but it is secondary to that.”

Even the public sector is moving towards HRO. In February, Dartford council became the first in the UK to outsource its entire HR and payroll functions to Northgate HR, a Hemel Hempstead-based HR service provider.

Financial directors looking for HR savings should beware, however. While there is obvious potential to cut costs and shed staff through outsourcing, it is dangerous to outsource for reasons of cost alone, says Brown.

“HRO can help companies slim down, but they need to be sure they do it right. There is a risk that we’ll see a lot of bad deals done for the wrong reasons. Achieving short-term cost savings at the expense of a bad long-term relationship with the wrong provider can be a recipe for disaster.” The ever heavier burden of regulation and compliance on HR departments is another powerful force driving firms towards outsourcing. New compliance rules and employment laws are creating a clear role for HRO specialists to step in and take away some of the pain, according to Marika Hall, HRO business manager at Northgate HR, a division of the software and outsourced solutions supplier Northgate Information Solutions. “It’s very time-consuming to even understand all this new legislation if you’re not a legal expert, let alone identify the implications for the organisation and then implement any policy changes in order to ensure the workforce is compliant,” she says.

The day-to-day effort required to keep up with compliance and legislation is taking HR managers’ attention away from strategic issues, managing talent and innovating, says Hall. “If HR directors are bogged down by details, their focus is not on people, their number one priority.” Increasingly, outside service providers are stepping into new areas to help harassed HR managers. Services such as health and safety training and compliance, remote legal help with hiring and firing via a computer desktop, tracking the recruitment process online, and even talent management services are becoming more popular.

Technology is playing an important role in almost all of these areas, says Malcolm Aldis, managing director of Northgate HR. Remote technology, for example, is starting to help employees with online training and is helping managers to cope with more onerous grievance and disciplinary procedures and with compliance with workplace health and safety legislation.

“We’re seeing technology develop that enables you to talk to a client remotely and help them fill out a form on screen, saving them the wasted time and hassle of a meeting with the HR department.”

Another advance, according to Doug Sawers, UK managing director of Ceridian, an HR service provider, is the option of “renting” information technology from a specialist, in the same way that one signs up for a phone service. Instead of building in-house IT systems that require hefty investments of capital, companies can opt for “software as a service”, as this facility is known. Sawers claims it offers several advantages.

“Software as a service is a huge step forward, enabling client companies to do a lot more for less money. It’s only offered by some providers, but the promise of improved efficiency, lower maintenance, faster implementation and easier upgrades and the need for fewer consultants to build and maintain your systems mean it will become mainstream.”

While an outside service provider’s ability to deploy new technology may be an important consideration, it’s vital that companies research their own HR needs fully before negotiating with service providers and appraising their promises.

Gartner’s Brown stresses that companies should be clear before they take the plunge about why they want to outsource certain HR functions, how much these functions cost in-house and how efficiently they are performed. “What are the error rates in running various processes? What are internal client satisfaction ratings like? What needs to be improved? Getting a solid measure of these things is going to be important in understanding clearly your motivations for outsourcing.”

It’s also important, says Sawers, to ensure that any outsourced functions reflect the firm’s strategic objectives. “How is your people plan aligned to your strategic objectives? What role will outsourcing and the service provider play in your growth plans?”

Once a company is ready to invite providers to tender for work, there are right ways and wrong ways to go about finding the right partner, says Brown. Forming a mutually profitable relationship should always be the goal. “Are you clear on exactly what is being contracted in the service level agreement? What penalties will the provider suffer if it fails? What incentives does it have to outperform?

“A common mistake among clients is underinvesting in the relationship,” he concludes. “The way companies manage the service provider they choose and the buy-in from senior management are important. Nobody wants to get into an adversarial relationship with their service provider, so it’s important to realise that your relationship with providers is a two-way street.”