The capital saved in such arrangements can be strategically redirected. For example, when Wherehouse Entertainment Inc. outsourced its HR, payroll, and payroll tax business processes to Pleasanton, California-based ProBusiness Services Inc., it was able to focus on higher-end employee-relations issues. Like many retail operations, Wherehouse, a Torrance, California-based music CD, video, and DVD retail chain with 550 stores in 34 states, faces a high rate of employee turnover, particularly after the holiday and summer seasons. The revolving-door workforce wrought havoc on the company's payroll staff, which processed between 15,000 and 18,000 W-2 forms last year, even though the company had only 8,000 employees.
"It was unbelievably labor-intensive," says Karen Cass, director of payroll. "We were required to stay on top of the payroll tax laws, which change every day in the 7,600 taxing jurisdictions in this country." Wage garnishments alone, for everything from unions and child support to motor-vehicle obligations, consumed countless hours. And with 30 separate fields to be filled out on each paycheck, Wherehouse was immersed in a clerical nightmare, while such issues as recruiting, benefits, and employee retention got short shrift. ProBusiness not only handles routine functions but also provides high-level data on what Matt Keller, ProBusiness's client support manager, dubs "the true cost of employees," which can help Wherehouse make better decisions on whom to hire and how to staff each store.
Outsourcers often provide a level of IT service that their clients can't match. For example, ProBusiness doesn't delete employee records, even if the employee leaves the firm. That comes in handy, Cass says, because "we've got a lot of employees who are students working during the summer. Their data is never purged from the system — we just update it."
Defining Your Core
Offloading tedious functions may enable a company to focus on more important things, but it's not always easy to determine what to outsource and what to keep. "Look at Ford," says Ross. "It now makes tons of money doing credit financing, and is saving vast sums by leveraging a network of global suppliers. Its core competency is shifting." Had it subcontracted those functions in order to focus on building cars, might it have missed key opportunities?
Casale says that determining core competency is "the biggest struggle in outsourcing. I've been in meetings with six or seven vice presidents in a session designed to facilitate an understanding of the company's core function. At the end of the day, each of those executives swears it's what they're doing — and they're all doing different things!"
HotJobs.com is one company that had no problem divining core competencies from noncore business processes. "We are an online employment exchange with more than 8,000 corporate members," and more than $100 million in revenues, explains Lowell Robinson, senior executive vice president and CFO of the New York--based company. "We aren't, for example, a printing company. Yet sometimes it felt like that."
HotJobs.com had already outsourced its payroll, receivables collections, investor relations, and cash management when it decided to let Servador Inc., a New York--based print outsourcing company, take over "anything and everything having to do with paper and print procurement," says Robinson. "Buying paper and printing stuff like direct-mail advertising just wasn't a core function, but it was taking up time and money," he explains. "As CFO, I'm always focused on the bottom line and ways to do things more simply. Servador convinced me they could do it better and more cost-effectively."
Printing is not a hot topic at corporate strategy sessions, but the $150 billion commercial printing market qualifies as the largest custom manufacturing business in the world, according to Servador CEO and founder Doug Evans. "This is an extremely complex product to buy because of the infinite variables involved, including different sizes of paper, colors, quantities, shipping requirements, special finishings and dyes, and so on," he says. "There are more than 65,000 commercial printers in North America. To source this thing properly, someone has to know what they're doing."
Servador is a one-stop print sourcing specialist. "Instead of having to deal with different printing companies and tracking everything, our clients make one call to us for what they need," says Evans. "We buy directly from suppliers and not salespeople on commission, saving companies at least 20 percent on cost. And since we're buying volume by aggregating all our clients for the spend, we get additional discounts."
Unisys Corp. knows the ins and outs of outsourcing, since it both provides such services and takes advantage of them. The Blue Bell, Pennsylvania-based provider of networking and systems integration services has, during the past three years, systematically outsourced a major part of its HR function.
"We tried to do everything in-house," says Thomas Penhale, the company's vice president of HR client services. "We then began to outsource, starting with our employees' savings plans and 401(k) retirement plans, stuff mostly in the benefits arena. Next we outsourced employee training, domestic relocation services, stock option administration, stock purchase plan administration, and so on."
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