HR outsourcing – the new ‘brain gain’

Revenue-generating endeavors – creating a new ‘brain gain’ for their organizations. There are potentially big cost savings too: by shifting the responsibility for upgrading and maintaining HR information systems and delivering first-class employee care through an outsourcer, companies can cut capital expenditure and financial risk. Convergys’ Martin Stockton elaborates.

Outsourcing employee care is predicted to be the fastest-growing area of business process outsourcing (BPO). According to a July 2005 report from industry analysts Kennedy Information, the global HR BPO market is already worth US$32.7 billion and is growing fast. Comprehensive outsourcing of HR processes – where a single provider handles the majority of processes – is particularly taking off, and expected to grow at a compound annual rate of 25 percent through 2008.

Market activity would appear to support the view that HR outsourcing is on a steep upturn. In November 2005, DuPont, the global science-based innovation company, signed a US$1.1 billion, 13-year HR outsourcing deal with Convergys, covering 60,000 employees and 102,000 retirees worldwide. Whirlpool, the domestic appliance maker, made a similar move a few months earlier, signing a ten-year HR outsourcing deal. Petrochemicals giant BP and telecoms operator BT have also announced large HR BPO deals recently, and others are sure to follow suit.

However, employee care is a highly emotive issue: people’s salaries, training and benefits are all issues close to employees’ hearts and so HR outsourcing needs to be handled with care. Which areas of HR can be outsourced most successfully? And which are the ones to avoid? How can companies ensure it goes right? Are there true, long-term benefits from HR outsourcing? Or is it a passing fad?

An idea whose time has come?
While the concept of outsourcing has been in the public domain for 30 years or more, the market for HR outsourcing market is still in its infancy compared with other areas of business process outsourcing. Why is this?

One of the key reasons is that organizations are naturally sensitive about the way their people are managed. ‘Our people are our greatest asset’ is a truism among most organizations, and companies are keen to engage their employees and manage them appropriately. It is a risk to hand some of this over to an outsourcer. Job losses to outsourcers are bad publicity for any organization, and there are also concerns regarding the loss of HR knowledge and understanding. What’s more, there are a large number of data privacy issues relating to HR, which an outsourcing arrangement only complicates.

Finally, organizations are likely to have made significant investment in HR systems, so the people who made these investments are concerned to get the maximum return on them. However, by outsourcing the right areas of HR activity with the right approach, the benefits will outweigh the risks.

What can, or should, be outsourced?
A 2005 study by US HR industry consultants Everest Research Institute suggested that the areas most frequently included in an HR outsourcing deal are payroll (87 percent), employee data management and information systems (83 percent), benefits (81 percent) and regulatory compliance (67 percent), followed by compensation, resourcing, performance management and training/development. HR strategy is the least likely to be included (at 21 percent).

Perhaps the only areas of HR that are generally not appropriate for outsourcing are HR strategy, business alignment (including business partner teams), workforce engagement and specialist or sensitive areas (including management of grievances, discipline and conflict/harassment cases). However, the leading outsourcers do offer advisory services in these areas.

HR outsourcing is increasingly a multi-process activity: our experience is that approximately two-thirds of new HR outsourcing deals involve multiple processes, with the remaining third focusing on discrete or stand-alone processes (such as payroll, benefits and learning). A 2005 report from Nelson Hall estimates that multi-process HR outsourcing is growing at 33 percent CAGR (compound annual growth rate), against seven percent for single processes.

Multiple processes are included within HR outsourcing deals for two main reasons. First, there are economies of scale to be had from the outsourcing of multiple administrative activities (agents can work across processes, and drive up first touch resolution rates). Second, there are numerous interdependencies between HR processes – such as the administration of learning and performance management – so it makes sense that these are managed jointly.

The trend toward outsourcing is most prevalent among larger organizations (with more than 15,000 workers) that have both the demand and resources to provide a full range of employee benefits and services. Smaller organizations, which typically offer fewer HR benefits and services, have correspondingly fewer activities to outsource. As a result, smaller organizations attract HR outsourcing deals that work out at a higher cost per employee, and have shorter contract terms. But the economics are changing, and the benefits of HR outsourcing are trickling down through the mid-size sector towards the SMEs.

What are the benefits?
One of the key benefits of HR outsourcing is financial – arising from economic value optimization, reduction in both direct costs (such as payroll processing) and indirect costs (such as benefits costs), and reduction in (or avoidance of) capital costs. Convergys experience indicates that overall cost savings are typically between 20 percent and 40 percent.

Companies can use outsourcers to manage their HR activities using the latest technology and practices. Even today, many HR tasks are carried out manually, and ageing computerized systems often exist in islands, unable to provide a global picture of headcount or any other measure of employees.

Using a large outsourcer gives even smaller companies access to much larger capital funding and technology than would be possible for a ‘stand-alone’ buyer. Companies who outsource are able to rationalize legacy environments while gaining access to best-in-class technology and process excellence. This makes HR outsourcing especially attractive to mid-size companies who may be competing on a global scale, but can’t afford the big capital expenditure to bring their systems and processes in line with their larger competitors.

HR outsourcing offers the potential for improved self-service functionality, for both employees and managers. For example, the outsourcer can provide web-based, self-service dashboards for managers to use for tasks such as global headcounts and employee performance tracking.

Using an outsourcer ‘obliges’ companies to adopt standardized HR practices – standardized not only across the organization itself, but also across the wider market. By implementing standardized processes across the organization, companies can improve the quality of service they offer their employees, leading to an improvement in job satisfaction and engagement.

Traditionally, companies have had their own unique ways of hiring people, training and measuring performance, implementing health cover and handling payroll, for example. As such functions are outsourced to external providers – handling similar processes for a number of customers – the way they are handled will become increasingly standardized. This in turn will drive down costs, expedite skills transfer, streamline mergers and acquisitions, and make creating start-ups and spin-off companies easier.

The outsourcing of employee training and learning is becoming particularly beneficial to companies as the need for higher skill and knowledge levels – and uniform business practices – around the organization grows. Outsourcing to a specialist provider offers a more strategic and cost-effective way to close any skills gaps and meet the complex and growing needs of the global knowledge economy.

Last, but not least, HR outsourcing enables HR management to raise their sights above everyday administration functions and divert their energies to more strategic HR issues.

Keys to success
For an HR outsourcing contract to be successful, it is important for all stakeholders to be in agreement from the beginning. HR outsourcing has to be seen as an effective strategy for the business, aligned with wider business goals. Relationships, cultural alignment and shared awareness of mutual benefits between outsourcer and client are central to success.

It is also important that expectations in the HR and business teams are managed, and there is a realistic project scope and timeline. There is no point underestimating the transition and change management requirements. Once the engagement is under way, however, it is vital to transform processes and operations as early as possible.

Experience so far indicates that overall levels of satisfaction with HR outsourcing are high. In a 2004 study, the Bureau of National Affairs reported that 78 percent of respondents can readily identify an initiative that ‘exceeds expectations’, while only about 30 percent can cite one that ‘falls short of expectations’. Convergys has found similarly high levels of satisfaction with outsourced HR services among its own customers.

With organizations and their employees all benefiting from the ‘brain gain’ that outsourced HR offers, it looks as though it’s a trend that’s here to stay.

Martin Stockton is Managing Director of EMEA Operations at Convergys Corporation.