Under One Roof

When Hughes Electronics Corp. began to outsource various human-resources functions several years ago, the goal was "cost avoidance, rather than a reduction in current costs," says Sandra L. Harrison, senior vice president for HR and administration.

The main cost the global communications company wanted to avoid with its "natural evolution" of HR outsourcing, as she calls it, was that of upgrading its legacy mainframe system to meet the growing HR service levels demanded by its 13,000 employees. Developing additional in-house administrative capabilities certainly wasn't the answer. And creating a new internal system "wasn't realistic." So a task force at the El Segundo, California, company conducted an eight-month study of options for both its DirecTV subsidiary and corporate headquarters — seeking a more "financially sound" HR process.

The choice soon came down to buying a product off the shelf or outsourcing, and ultimately the task force determined outsourcing to be significantly cheaper, says Harrison. Before long, Hughes began offloading its payroll, hiring procedures, compensation management, and other HR functions to Fidelity Employer Services Co. (FESCo), the unit of Boston-based Fidelity Investments that was already handling Hughes's 401(k), defined-benefit plan, and health and welfare administration. And recently, Harrison began talking to another subsidiary — Hughes Networks Systems — about joining the outsourcing network.

The advantages of outsourcing HR seem obvious to the company, a unit of General Motors Corp., which in April announced plans to sell its interest in Hughes to The News Corp. for $3.8 billion in cash and stock. For one, HR head count was drastically cut — in payroll's case, by 60 percent. That has freed remaining HR staffers for higher-priority tasks, says Harrison. And although productivity gains are hard to measure, she feels intuitively that the speedier HR data delivery allows "employees to be more focused" on their jobs.

Like Hughes, many companies are farming out more and more HR functions — and some are aggressively placing them with one provider through "end-to-end" outsourcing contracts. In the United States, in fact, HR ranks as the number-one outsourced business process among companies that outsource at least one function, according to Gartner. Meanwhile, 31 companies — including pioneers BP America and British Telecom — have signed end-to-end contracts totaling $11.2 billion and encompassing most of the more than 20 HR processes, according to Michel Janssen, president of the Supplier Solutions Practice at Dallas-based Everest Group, which advises companies on such deals.

Neither Will nor Bandwidth
Given the newness of the market and the delicacy of employee relations, it is not surprising that most companies are taking the piecemeal approach to outsourcing HR. What's clear, however, is that by outsourcing even part of HR — at least transaction-based HR — companies see an opportunity "to manage their overall investment in HR, gain overall cost savings, and hold someone else accountable," says Bryan Doyle, head of Hewitt Associates's outsourcing services. And if industry watchers are right, those benefits may soon ignite a move to total HR outsourcing — a trend similar to the mass shift that occurred when companies first let IT functions migrate outside. "In the late 1980s, Eastman Kodak was the first company to outsource IT — to IBM," notes Mark Hodges, co-founder and chairman of EquaTerra Inc., a Houston outsourcing advisory firm. By 1992, some 30 companies had done it, he says, and now, less than 15 years later, IT outsourcing is considered standard fare. With HR, he adds, "we are just at the end of the early adopter stage, and are now entering the growth stage."

IT, in fact, is partly driving the latest outsourcing trend. No company wants heavier-than-necessary capital investment in its enterprise resource planning systems, notes Tony Martin, managing director of Mellon HR Solutions in Fort Lee, New Jersey. "Most companies are facing some big nut right now," he says, "and they are finding it tough to make that investment themselves." Given the current economic conditions and the upgrades companies have made to address Y2K, he adds, many "have neither the will nor the bandwidth" to deliver certain HR systems themselves.

Jay Hurst, manager of HR information systems at BASF Corp., the U.S. division of the German chemical giant, agrees. "Every two years, you have to upgrade your software," and besides the cost, he says, the process "puts you in freeze mode for six to nine months." Avoiding that disruption was a major reason the Mount Olive, New Jersey, division systematically began outsourcing HR functions to Mellon, starting with 401(k) administration and recently adding payroll.

In payroll, IT headaches had been compounded because BASF partly outsourced the function to ADP while keeping some of it internal through an HR software system. "That simply wasn't working for us," says Hurst. Discrepancies — sometimes 40,000 a year — occurred in trying to "keep two databases in sync," he says. Now, by implementing Mellon's technology and creating self-service dashboards for employees and managers, such errors have been eliminated.

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