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The enlightened approach to HR administration? Get it out of house -- but keep it under one roof.
Russ Banham, CFO.com | US
November 1, 2002
Two years ago, BP America's human resources department was like nearly every other corporate HR department: waist-high in an avalanche of paper. Indeed, BP's human resources department was so inundated by clerical tasks there was little time to do anything but push paper. Recalls Don Packham, senior vice president of HR in the Chicago office of BP America: "We were bogged down, big time."
These days, you'll be hard-pressed to find towering stacks of paper or manila folders in Packham's department. BP America, the North American arm of integrated oil and gas giant BP PLC, now outsources more than a dozen HR functions to several outsourcing service providers. Ultimately, the company plans to outsource every HR function (except strategy) to a single service provider.
The soup-to-nuts approach is already paying dividends. BP America's HR departmental headcount has been reduced from 200 to 35 in the last two years. The slimming down has freed human resources executives, enabling them to focus on workforce productivity and recruitment issues. Packham says the outsourcing has also pared some $50 million from the company's bottom line.
While BP has signed deals with several HR outsourcers (including Hewitt Associates and Fidelity Employer Services), the bulk of the work has gone to Irvine, California-based Exult. In fact, the $600 million service agreement between Exult and BP was a landmark: the first large-scale, multi-function HR outsourcing partnership.
Exult recently inked a similar deal, a $1.1 billion service contract with Bank of America that covers more than 150,000 U.S.-based employees. "Historically HR has been very fragmented," asserts James C. Madden V, CEO of Exult, "There's lots of payroll cycles, training vendors, recruiting and staffing solutions. We integrate all these services through a single point of contact."
BP America and Bank of America are early adopters of what's now being called "end-to-end HR outsourcing." Only 14 end-to-end programs are currently in place. But many industry watchers believe these mega-deals represent the future of business process outsourcing (BPO), particularly for human resources. Mark Hodges, managing partner of BPO at TPI, a Houston-based outsourcing advisory firm, says the 14 end-to-end HR programs represent a cumulative $8 billion in total contract value and cover some 1.2 million active employees worldwide.
Predicts Hodges: "We're still in the early stages of what will be a huge market."
While end-to-end HR business process outsourcing is just starting to catch on, the shopping out of discrete HR functions is business as usual at many large U.S. corporations. A recent survey by Gartner ranks HR outsourcing as the number one BPO activity among U.S. companies that outsource at least one function. Finance and accounting were next on the list.
Gartner's annual survey of outsourcing indicates that more than 75 percent of companies now let somebody else handle various parts of their corporate HR functions. In the consultancy's previous survey, that figure was more like 50 percent. "Overall, demand for HR outsourcing has boomed in the past year," says Rebecca Scholl, a senior analyst at the Stamford, Connecticut-based technology research firm.
According to the study, the most commonly outsourced HR process is payroll. About half of the respondents said they outsource the function entirely, while another 30 percent indicated they outsource payroll partially. In addition, close to half of the respondents said they outsource some of their benefits administration.
Interestingly, the majority of the respondents in the Gartner survey indicated they plan to increase the slice of their budgets dedicated to HR outsourcing in 2003. "By far, HR is the one business process at companies that has made the deepest penetration into the outsourcing market," Scholl notes.
This raises the question: Why is that? "There are two things driving HR outsourcing," asserts Tony Martin, senior vice president at Mellon HR Solutions, a Fort Lee, New Jersey-based BPO provider. "Technology and the move toward enterprise resource planning."
Certainly, scut work that once was done manually by HR staffers is better handled electronically. And with the Internet, human resources tasks like payroll and benefits administration can be done remotely.
Industry watchers also point out that senior executives at many companies are taking an enterprisewide picture approach to managing their specific corporate functions. In the same vein, they want their human resource executives focusing on big picture items, not FICA deductions. Says Exult's Madden: "Companies want senior HR management to be a business partner not worrying about running payroll or benefits."
Gartner's Scholl agrees. "Managers were becoming more and more involved in administrative tasks and couldn't do their jobs," she points out. "They're not clerics by profession — they're highly-educated experts in human relations."
While a la carte HR outsourcing has its advantages, consultants say it doesn't provide the wallop of soup-to-nuts HR outsourcing. (For example, shopping out all or most of the 22 HR functions undertaken by companies. See "What Does HR Actually Do?" at the end of this article.) "When you outsource most HR functions to a single vendor," says Scholl, "there are tremendous synergies and cost savings."
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."
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.
Under such a setup, a corporation farms out its various administrative HR tasks to a host of outsourcing service providers (vendors like EDS, Exult, Convergys, and Adecco Group). The idea: Let the outsourcers wrestle with payroll, employee benefits, recruitment, and travel-expense reimbursement — labor-intensive tasks that can bury whole HR departments.
Roy Krause knows all about it. Krause, executive vice president and CFO at Spherion, a Fort Lauderdale-based temporary staffing company, says the company gets flooded with more than 500,000 W-2s a year. The cause of the paper jam? The growing corporate reliance on temporary workers, which in turn, has led to an increase in the number of temps tramping in and out of Spherion's offices.
In fact, according to the Conference Board, 90 percent of U.S. companies used temp workers last year. "You can imagine all the phone calls we get from employees about lost W-2s," says Krause.
That's nothing compared to the thousands of phone calls Spherion's HR department used to make to verify employment information. "We had dozens of people here whose only job was to do employment verification work," Krause laments. He says it was not uncommon for the company to do 30,000 verifications in a single year. "Needless to say, the idea of finding out if 'Joe' worked for us for two months in 1997 is not our core competency."
So Krause decided to transfer the burden to TALX, a St. Louis-based business process outsource provider. "We provide employment and income verification services, meaning we'll answer any request for that type of information on behalf of our customers," says Mike Smith, TALX vice president of market development. "If someone needs a W-2 reissued, we help them get it via our 24-hour automated call center or automated voice response phone system."
TALX also handles unemployment claims for Spherion, no small feat when you consider that temps work…well…temporarily. "They weed out exaggerated claims and help us defend claims that are speculative," the CFO says, estimating this service alone last year saved Spherion $2 million. "It's a major administrative issue for companies in this business," he explains.
With the TALX deal, most administrative nuisances no longer burden Spherion's HR staff. "I want my HR people working on employee succession problems, compensation issues and looking for top executive talent," says Krause, "Not processing transactions."
What Does HR Actually Do?
Judging by this list, a whole lot.
Human resources is the archetypal back-office department. Typically, corporate HR departments are responsible for administrating some 22 separate functions in five separate categories. They are:
Compensation, Benefits, and Rewards
Organizational and People Development
Employee Data Management
Workforce Planning and Deployment
Human Capital Services