Take the case of an employee who moves to a new addresses. Under more typical HR setups, that employee must work with human resources to update benefits records. The worker then goes through the exact same process updating payroll records. But with a single, Web-based service center, Scholl says "you make the change once and the system updates all other records."
Certainly, a prime appeal of end-to-end human resources outsourcing is financial: the opportunity to trim headcount. "The average company today doing HR on its own has a ratio of 1 HR employee to 100 employees," says Hodges. "A company following an end-to-end HR outsourcing strategy, on the other hand, can improve the ratio to 1 in 300."
Lockheed Martin, which unveiled an integrated HR outsourcing strategy this year, expects to reduce human resources headcount by 25 percent over the next three years. During that period, the company also expects to shave 25 percent in operating costs from its HR function, says Ed Taft, vice president of HR Services at the Bethesda, Maryland-based company.
Management at the aerospace and defense contractor recently hired Mellon HR Services to take on many of the company's human resources tasks. "We're outsourcing aspects of our benefits and payroll administration to them, things like group insurance, flex-care benefits, disability management, recruitment and personnel transactions," Taft notes. "And we're migrating toward outsourcing pension administration as well." Mellon HR also runs Lockheed Martin's HR call center, which answers questions either over the Web or via phone.
Until last year, Lockheed Martin outsourced only one HR function: 401(k) administration. But Taft says the contract with Mellon HR is all part of the company's revised approach to human resources. The company is also creating common HR systems and policies — and has already set up a shared services organization. "We've consolidated staffing, compensation, benefits and other functions to leverage economies of scale and remove redundancies," Taft points out.
Indeed, BP America's Packham says hiring a single provider to service HR processes makes the most sense. "Right now we're splitting some benefit provisions between Exult and Hewitt," he concedes. "But the idea is to have one integrated provider down the road."
Exult handles most of BP America's HR functions, including employee compensation, severance issues, expatriation, currency exchange, regulatory compliance and recruiting. The outsourcer also designed and deployed BP America's "My HR" Web portal.
Says Packham: "The great thing is that we can now take all these well-paid people in HR and get them to focus on the things that matter most to this business."
There's a Fly in My Soup
Backers of soup-to-nuts HR outsourcing say it not only saves money and liberates executives, it often improves the quality of service.
No less a light than Edward Lawler, distinguished professor of business at the Marshall School of Business at the University of Southern California, agrees with the assertion. Lawler says that, by outsourcing HR functions to a provider with world-class HR expertise, "a company that heretofore was below industry standards in its HR practices can ascend to best practices levels."
That, of course, assumes that the outsourcer is good at all aspects of HR administration — not always the case. "A single outsourcing service provider may be really good at 15 HR functions and just so-so at the rest," consultant Hodges says. "The alternative is to split up the functions among four to six providers considered best in class for the HR functions they service."
Splitting up the outsourcing work among a handful of service providers also reduces the risk that one of them may go out of business. But there are downsides to this strategy, as well. "For one thing, you've got to write up separate RFPs (requests for proposals) for each outsourced function, which takes both fortitude and persistence," Hodges argues. "Also, from a technology and process standpoint, there's little if any integration of systems and interfaces."
Still, Hodges believes the advantages of end-to-end HR outsourcing outweigh the disadvantages. He believes the market for soup-to-nuts HR outsourcing will take off like the IT outsourcing market, which skyrocketed in the '90s. "Eastman Kodak was the first company to outsource IT (to IBM in 1988)," he notes. "Now, IT outsourcing is a $100 billion market. Since HR is more inefficient at most companies than IT was back in 1988, the possibility of similar stunning market growth is likely."
Apparently, Madden is reading from the same tea leaves. "Our internal analysis indicates 300 potential clients for end-to-end HR outsourcing, each with an average of 60,000 workers and an average spend of $1,600 per employee," he says. "Add it up and that's a $29 billion market just for these 300 companies."
When will the end-to-end flurry begin? It already has. Large-cap companies like BASF, AT&T, and American Express have recently announced deals to outsource huge chunks of their HR functions. Says Madden: "I wouldn't be surprised if we see 100 end-to-end deals in the next five to ten years."
Slice-and-Dice Outsourcing
Why one company chose to outsource its employment verification function.
Admittedly, large, end-to-end HR outsourcing deals get a lot of media attention — mostly because of the jaw-dropping size of the contracts. But according to industry watchers, the outsourcing of discrete HR functions isn't going to disappear anytime soon.
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