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Farming out HR has yet to yield the promised savings. So why haven't CFOs hung up on outsourcers?
Anne Stuart, CFO Magazine
February 22, 2005
The move to outsource human resources continues to accelerate, despite the fact that the jury is still out on the primary reason to outsource: cost savings.
"If you went to [HR] conferences a few years ago, the message was, 'If you outsource, you'll save lots and lots of money,'" recalls Robert Crow, a San Diego based senior consultant at Watson Wyatt Worldwide, an HR consulting firm based in Washington, D.C. Now, says Crow, HR outsourcing (HRO) service-plan vendors actually warn against making that assumption: "They've said, 'Don't make your decision to outsource based on cost alone.'"
Instead, providers are now promoting other advantages, such as greater efficiency, 24/7 employee customer service, the ability to offer more or better benefits, and access to state-of-the-art HR IT systems. They also contend that turning HR functions over to specialists frees companies to concentrate on their own core competencies. "The central argument for outsourcing is that successful companies excel [by] focusing on what they do best," noted Diane Shelgren, COO for North America at service provider Accenture HR Services, in a December 2004 white paper on outsourcing.
Companies are listening to that argument. By year's end, 85 percent of U.S. companies will have outsourced at least one component of HR services, according to research by Gartner Inc., a Stamford, Connecticut-based research and consulting firm. And the global market for HRO services—which now accounts for 30 percent of all outsourcing—is likely to reach $55 billion by 2006, up from about $32 billion in 2000, forecasts Gartner.
Of course, most companies still maintain some kind of internal HR presence. But thanks to HRO, many functions once overseen by the HR office down the hall are now administered from across the country or, increasingly, across the world. The most popular outsourced HR functions include administration of medical and disability insurance, pensions, 401(k) plans, and employee-assistance programs.
Despite the caveats about unrealistic expectations, companies haven't given up hope of cutting expenditures by outsourcing these functions. In fact, HRO generally does deliver some savings, if not as much as early adopters hoped, says David Rhodes, a principal and expert in HR strategy at Towers Perrin, a Stamford, Connecticut-based consulting firm. In 2004, his organization surveyed 32 companies that had undertaken large-scale HRO contracts in the previous four years. The findings: more than three-quarters reported short-term savings.
The problem is, these savings are not easily quantified. In a July 2004 survey, the Bureau of National Affairs Inc. (BNA) asked 940 HR executives to rate their companies' outsourcing-related savings. Nearly half of those that outsourced responded with "undetermined," the Washington, D.C.-based research organization reported. And long-term savings are even more elusive. More than half of those surveyed by Towers Perrin said it was too soon to say whether the arrangements would result in long-term cost reductions. "This is the case even among HR departments that were in the original group of pioneers and have two to three years under their belts," says Rhodes.
Meanwhile, many companies still struggle with transitional issues: reinventing their internal HR operations, maintaining service quality, and training employees to, for example, use self-service HR Web portals (see "Any Storm in a Portal?").
Despite the lack of solid cost data, HRO keeps growing. For one thing, outsourcing deals are almost impossible to unravel. Fewer than 10 percent of the respondents surveyed by the BNA had ever reversed an HRO initiative, even when the results proved disappointing. The Conference Board and Accenture reported similar findings when they surveyed executives from 120 companies in North America and Europe about their HRO experiences and plans in 2004. Among the 76 percent currently outsourcing HRO functions, all planned to renew their contracts, renegotiate them, or put them up for another bid. Not one company expected to move its outsourced services back in-house.
So what's fueling the HRO parade? For starters, there's a larger field of potential customers. HRO—once strictly aimed at the largest corporations—has become more affordable for middle-market companies. Analysts say the highly competitive, fast-changing marketplace—most recently altered by the mid-2004 merger of HRO giants Hewitt Associates Inc. of Lincolnshire, Illinois, and Exult Inc. of Irvine, California—should continue to force prices down. The newly combined company is among the biggest HRO providers in a field that includes Accenture, ACS, ADP, Aon, Fidelity Investments, and Mellon Financial.
While vendors have largely shifted their outsourcing rationale from cost savings to the promise of a more strategically focused HR department, it would be easy to miss out on the latter as well. "Outsourcing creates the ability for HR to transform itself," says Rhodes of Towers Perrin. "But unless work gets done to determine what [those individuals] are going to do with the time saved by outsourcing, it tends not to effect any change." In other words, if HR staffers aren't specifically assigned to strategy-setting roles, they often simply seek new administrative tasks after outsourcing takes effect. In fact, says Rhodes, that tendency contributes to the lack of cost savings at many companies. "For a $100 million outsourcing deal, the question is whether you really got rid of that much work or whether it's still deeply embedded in the organization," he says.
Making that determination is relatively easy in centralized organizations because managers can identify exactly which HR staffers provide which services, says Rhodes. "It's much harder in highly decentralized companies, where there's no clear shared-services environment," he continues. In these organizations, administratively oriented "paper-pushers" can be harder to identify, even if the tasks they perform have been outsourced. "They have a much harder time getting the economic value that's promised out of these deals," Rhodes says.
Not surprisingly, successful HRO initiatives require extensive in-house change-management campaigns. But the messages must do more than simply reassure workers about benefits continuity, especially when—as is usually the case today—outsourcing involves a large dose of employee self-service. "The message at many companies is, 'We're going to change your world and ask you to spend 30 percent more time than you ever spent before on HR matters,'" says Rhodes. "Instead, it should be, 'We're going to help you reduce the time you spend on HR because you can do it more efficiently now.'"
Complicating matters is the fact that, to date, most companies have contracted with multiple vendors, each specializing in one piece of the benefits package. Managing that network has eaten into potential savings, but that, too, is changing. Eleven percent of the companies surveyed in The Conference Board's 2004 study indicated plans to consolidate HR outsourcing with a single provider—up from just 2 percent in 2002.
Almost All In
Among the companies taking that route is AT&T Corp. In May 2002, AT&T inked a seven-year agreement with Chicago-based Aon Corp., whose Aon Human Capital Services unit now oversees most of the telecom giant's benefits, employment, and payroll services for its domestic employees. "We started with the belief that we would outsource everything," says Christine Morena, AT&T's vice president for HR. "Then we required ourselves to justify everything we kept internally."
Ultimately, the company retained only two categories: HR policy and strategy. Everything else went to Aon.
The result was a virtually seamless transition. "If you asked anybody in the line organizations, most of them would not even know we had outsourced," says Morena. AT&T has met, and in some cases exceeded, its cost-cutting projections. Equally important, in Morena's view, is HR's ability to respond quickly to AT&T's changing needs. Aon and AT&T have a flexible contract that allows them to respond to shifts in demand, some of which were precipitated by a reduction in workforce. (AT&T has reduced head count by about 20 percent since early 2004.) Morena also claims that the deal has required no quality trade-offs: "Our service levels were either maintained or improved in every area."
In early 2004, Goodyear Tire & Rubber Co. also turned most of its HR functions over to one provider. The Akron-based company signed a 10-year contract with Dallas-based outsourcer ACS Inc. Donald Harper, Goodyear's vice president of HR for North American shared services, says the end-to-end agreement covers all of the company's Akron corporate campus "back-office" transactional HR work, including payroll, benefit processing and claims payment, pension management, staffing, and most of the field classroom training and E-learning processes. He expects the deal to save Goodyear at least $45 million during the life of the agreement.
It's a bit early to gauge whether the deal will hit that target; after all, Goodyear and ACS have barely marked their first anniversary together. But Harper cites one immediate—and significant—area of savings: using ACS's technology eliminated the need for Goodyear to make a multi-million-dollar investment in upgrading its outdated HR system. Goodyear's HR personnel are also among the early beneficiaries, says Harper. Some accepted new jobs with ACS, while others moved into strategic roles at Goodyear. "They do the higher-quality HR work rather than administrative back-office work," he says of the remaining staffers. "Even my own job is a lot more fun these days."
Anne Stuart is a freelance writer based in Boston.
|Most commonly outsourced HR functions|
|Health and welfare benefits, including medical and dental insurance, claims processing, wellness plans, and flexible spending accounts|
|Long- and short-term disability insurance|
|HR employee-service call centers|
|Information technology services|
|Retirement and savings plans|
|Most commonly kept in-house|
|Performance reviews and follow-up|
|HR-related regulatory compliance|
|Anything involving classified or highly confidential information|
|Sources: Bureau of National Affairs Inc., The Segal Co., Towers Perin, Watson Wyatt Worldwide, and The Conference Board/Accenture HR Services|