VideoLast year, Whirlpool Corp. found itself in a dilemma. The $13.2 billion home-appliance manufacturer hadn't invested enough over the years to keep its human-resources department functioning efficiently, and the cost of updating it was going to be daunting. The technology alone would have cost millions. So Whirlpool, with 82,000 employees and retirees, joined the growing ranks of companies outsourcing to a single vendor all the functions that at one time were considered a bastion of corporate responsibility: the care of human resources.
Whirlpool decided to farm out nonessential administrative work such as the management of pensions, benefits, and payroll to a single company — Convergys Corp., the third-largest outsourcing specialist in the United States — rather than cobble together a slew of best-of-breed service providers to handle individual HR functions. Whirlpool says the deal will save the company money while allowing it to concentrate on its core business. "Do we really want Whirlpool to be known to outsiders as the best payroll processor in the world?" says Rajeev Tandan, a director of human resources. Whirlpool also likes that Convergys is large enough to handle its global workforce.
Terms of the 10-year agreement weren't disclosed, but it is widely considered one of the bigger deals in recent years. (Convergys's $1.1 billion agreement to manage human resources for DuPont Co. until 2018 is regarded as the biggest deal of 2005.) For Whirlpool, headquartered in Benton Harbor, Michigan, Convergys will also oversee, among other things, a complex web of providers that offer health-care services to employees and retirees. "We were looking for a one-stop shop to manage our many relationships," Tandan says.
Hiring a single vendor to handle a variety of tasks is gaining popularity among companies and fueling rapid growth of the outsourcing industry, analysts say. And consolidation among large outsourcing providers, including Electronic Data Systems Corp.'s purchase of Towers Perrin's HR outsourcing division last year, makes one-stop shops a more viable option.
IDC, a market research firm based in Framingham, Massachusetts, says revenue in the U.S. human-resources business-process outsourcing industry topped $8.9 billion in 2005, up 14 percent from 2004. IDC predicts growth at a compound annual rate of 16.1 percent for the next five years.
2006: A Watershed Year
In fact, HR outsourcing is a fairly recent phenomenon. Of the 124 major outsourcing deals struck since 1997, more than half were inked in the past two years, according to Everest Research Institute, an outsourcing research firm in Dallas. Phil Fersht, an executive vice president at outsourcing research firm NelsonHall, predicts that "2006 will be a watershed year for HR outsourcing."
Many of the contracts now being negotiated are long-term agreements of up to a decade or even longer. (DuPont's deal with Convergys is for 13 years.) Both sides say they benefit from longer-term deals. Hiring an outsourcing firm is costly and time-consuming, and few clients want to undertake the process again after a few years. As for the outsourcers, nailing down multiyear contracts is critical in order to recoup the enormous sums of money they have to invest in software and other systems to manage the work. On most contracts, "outsourcers won't break even for three years," says Jay Whitehead, publisher of Roseland, New Jersey–based trade magazines including HRO Today.
Outsourcing HR functions actually dates to the 1940s, when companies began hiring outsiders to handle payroll. Soon, companies were reeling from the time, money, and technology necessary to administer other goodies such as medical and dental coverage, vacation time, tuition reimbursement, and 401(k)s.
Human-resources departments ballooned into mini-empires struggling to manage a typhoon of paperwork. Not only were they taking care of current employees, but they were also administering benefits to a number of former employees. Federal and state employment regulations grew stricter, requiring more paperwork from companies related to compliance with laws prohibiting race and sex discrimination, among other things.
Meanwhile, the costs of managing pensions and other benefits for older workers were swelling. The technology to handle all these tasks grew increasingly complex and expensive. Eventually, companies began to realize they could save money by outsourcing the work.
An Early Stumble
Some of the first efforts to outsource bordered on disastrous. In 1999, London-based global oil and gas giant BP PLC struck a landmark deal: a $600 million, seven-year agreement with an outsourcing start-up. According to reports, chaos reigned for the first 18 months. Web-based tools that were supposed to help employees manage their benefits were glitchy. BP's human-resources staff balked at sharing strategic information with the outsourcer, knowing their jobs were to be axed. Costs soared, at least at the outset. Though the rough edges have been smoothed, BP's fiasco is still cited as a cautionary tale among experienced HR managers.
That may explain why outsourcing has taken so long to penetrate the human-resources departments of Corporate America. According to Everest Research, payroll still remains at the top of the list of outsourced functions. Some 87 percent of all the contracts it analyzed over the past eight years included that function, while 83 percent of contracts included administration of human-resources information systems. Contracts covered other services, too: benefits (81 percent), regulatory compliance (67 percent), compensation (48 percent), recruiting and interviewing applicants (42 percent), performance assessment and management (36 percent), and training and development (32 percent).
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