Looking out for HR solutions

Outsourcing has taken the human resources community by storm in the last few years, with an increasing number of HR departments looking to specialist vendors providing payroll and benefits administration services to help them reduce costs.

However, many organizations are now realizing that cost savings are just the tip of the iceberg, and that there are significant strategic advantages to be gained from outsourcing key HR business processes. HR Management asked Mercer’s Dave Carlson, ADP’s Greg Secord and ExcellerateHRO’s Steve Bohannon for their views on how firms can benefit from HR BPO.

Dave Carlson leads global strategy for Mercer’s HR Services business. He joined Mercer in 2004 when the company acquired Synhrgy HR Technologies, which Dave co-founded in 1996. He has 20 years’ experience in the HR industry, with specific expertise in business process outsourcing for benefits, human resource programs and information systems implementation. He has held a number of key positions, including principal and director of outsourcing at Hewitt Associates, where he developed and oversaw one of the firms outsourcing practices and national service center operations.

ExcellerateHRO CEO Steve Bohannon is also Vice President of EDS HR Services. Before joining EDS in 2003, Bohannon served as Chief Strategy Officer of Synhrgy HR Technologies, where he led the transformation of the benefits administration company into one focused on human resources operations, outsourcing, program management and decision support. Bohannon was instrumental in the development and competitive marketing of this new operating model. Under his leadership, the national sales team quadrupled the sales pipeline value and landed Synhrgy’s first competitive total HR outsourcing deal. Synhrgy’s revenue grew 35 percent in 2002.

Greg Secord is Vice President, Marketing and Business Development for ADP National Account Services, a proven leader in outsourced human resources, benefits and payroll. ADP National Account Services, a division of ADO Employer Services, provides advanced, flexible business solutions to match the needs of large employers and meet the challenges of a changing environment. ADP’s solution-oriented approach lets clients concentrate on core strategic initiatives, confident in the knowledge that they’ll be empowered with best-in-class outsourcing services.

How have you seen HR BPO trends change over the last few years and why? In which direction do you think HR BPO is now heading?

DC. The primary focus in the market right now for broad-based HR BPO is the ‘lift and shift’ model. This means the vendor usually acquires or takes over the existing HR infrastructure including people, process, and technology. While most of these vendors intend to move the client to the ‘transformation’ model, the process and its related costs are not recognized in the business case, making it tough for the vendor to successfully complete the transformation.

The transformation model moves all or almost all of the people, processes and technology into a shared environment. This means using pre-developed processes and technology across many clients. This is the true leverage point in HR BPO. It also means hiring some, but not all of the client’s employees, focusing primarily on hiring those with institutional knowledge and skills that are ‘translatable’ into a service/vendor environment.

I think the lift and shift model is still dominant in the market. The major influences in the market – sourcing firms, publications and others – continue to push this model in spite of limited evidence that it improves the value of HR outsourcing for the client.

SB. Enterprises that outsourced single functions such as payroll and benefits administration are now seeking to outsource multiple functions. As HR BPO matures, standardization of services will continue as it has successfully improved efficiency and lowered costs. Expect supplier consolidation to grow as competition in the market intensifies and buyers demand more types of services and higher quality delivery from their service providers.

Solutions that address the impending labor shortage will be in high demand – recruiting and staffing, learning and development, and satisfaction and retention. Retiring baby boomers will increase the workload on HR executives in these areas exponentially, and companies will need outsourcing providers to help manage these functions to ensure they have the right people in the right place at the right time. HRO solutions and the business intelligence they produce will enable HR professionals to make projections about workforce needs and strategic decisions about critical issues such as whether to retrain current employees, hire new people or use contract labor.

GS. Fully administered HR BPO is one of the most rapidly evolving outsourcing markets. As the HR BPO market has grown, best-in-class service providers have focused on adding additional value to their offerings to meet client expectations. Today, BPO partnerships include service and process expertise, best practices, cross-functional efficiencies and economies of scale.

In the early years of HR BPO, we witnessed a market trend toward big deals with large employers. Today, more mid-market firms are turning to HR BPO as a strategy to reduce costs and redundancies and to gain access to technology that was previously only available to larger organizations. Over the next five years, as HR BPO technology and practices continue to evolve and service offerings continue to expand, mid-market firms will find HR BPO an increasingly attractive and viable means for achieving their business goals.

What are the main reasons why companies choose to outsource HR processes and how does outsourcing help to drive company efficiency and productivity? Do you see these priorities changing in the near future?

SB. Companies have historically outsourced HR functions with three objectives in mind: to reduce HR costs, to improve services and to enable HR practitioners to become more strategic to the organization. To varying degrees, reducing HR costs has been accomplished by many of the early adopters. To a lesser degree, service delivery has been enhanced. Succeeding at enabling a more strategic HR organization is now a top priority.

Companies are beginning to see that reducing HR costs is only the tip of the iceberg. A priority for companies in the near future will be to realize the behemoth of savings that lie beneath the surface of top-line HR costs. This requires a stronger strategic and business orientation on behalf of HR. The desire for a more strategic HR organization is driving the demand for transparency of HR information – integrated data from the different HR departments that is easy to find and to use. For strategic planning and decision-making, HR practitioners need to be able to access and interpret this information, draw meaningful conclusions and make fact-based decisions. Using this business intelligence, HR executives can make the strategically sound decisions that can significantly reduce a company’s overall labor costs.

GS. Mid-market, or medium-sized, companies are finding that they can no longer afford to rely on their own internal organization to provide payroll, HR and benefit services when it is not one of their core competencies. By outsourcing, these companies gain access to decades of experience and proven processes and technology that helps drive down costs and delivers economies of scale.

Clients are continually looking to us to provide short- and long-term evidence of cost savings to help them justify their investment in HR BPO solutions. Additionally, clients are increasingly looking for proof of how their vendor/client relationship will add value and increase employee satisfaction. That is the key. ADP’s HR BPO solution, called Comprehensive Outsourcing Services (COS), can help companies reduce the cost of providing these services, at the same time that we help them to increase employee satisfaction.

We believe that large- and mid-market companies will increasingly turn to single-source HR BPO providers who can deliver a wide breadth of HR services and increased efficiencies. Clients are specifically asking to incorporate expanded employee self-service options, such as manager and practicing service modules, as well as enhanced reporting capabilities and tools for performance management and workforce optimization into their current multi-service solution.

DC. Today, the market is focused on cost reduction as the biggest driver in the outsourcing of HR processes. While that is a critical component of the change, I believe the long-term drivers of HR outsourcing will include user satisfaction and access to data to make better decisions; better program management (a vendor can save you US$2m by administering your health and benefits but if the vendor can change how your employees select and use those programs, they could have a much greater effect on cost); and workforce productivity.

The latter is the holy grail of HR transformation. How does an HR department become a business partner and fundamentally affect the productivity of the workforce? Outsourcing and technology alone do not solve this problem, but they can provide access to information as well as tools for managers and employees to become better at their jobs. This can be in the form of who is recruited, how they are trained and their performance managed, how are they compensated, and what career paths are available to them. I think workforce productivity is the largest opportunity to affect an organization’s financial results – improving productivity improves shareholder value.

What should companies be looking for in a supplier to make sure they are outsourcing to a successful and reliable third party?

GS. Clients have told us time and again that both industry experience and financial stability were a significant factor in their decision-making process. Companies want to partner with a service provider who has a significant track record of success and the financial stability to meet their requirements well into the future as their business needs change and their company expands.

It is also important for clients to partner with an organization that provides superior customer service. The HR BPO provider is often the face of the employer, and as such should reflect the values and commitment inherent to that organization.

DC. There are many items worth considering in selecting a provider. The first is commitment to the business. This is a capital-intensive business that is very dynamic. Is the organization committed to HR BPO? Is it a primary focus for the organization or is it being done ‘on the side’ because it looks like a hot area?

The second is track record. Have they done similar successful projects for other clients? Can they provide statistics to back up their performance? Did their current and former clients derive measurable business value from the engagement?

Finally, look for the right skill sets and DNA. Do they deliver an HR BPO solution that creates business value as well as possess the necessary HR, technology, and process management skills? For example, if the HR portion is missing, they may be able to do the transaction processing, cut costs and maybe improve service to the users, but they won’t be able to change the value around the HR programs or workforce productivity.

SB. There are a number of factors to consider in choosing an HR outsourcing provider. A company should evaluate: 1) the skill sets needed for the tasks they want to outsource, collaborating with their provider to ensure a clear understanding of the strategic capabilities that are needed; 2) the skills sets needed by the outsourcing provider to effectively deliver the outsourced services; and 3) the capabilities of the provider to ‘enable’ their retained HR organization to operate more strategically and deliver a greater business performance impact.

Companies need to be sure their provider's service framework and service delivery model are engineered to meet their service requirements, and it is essential to have a clear definition of the scope of services and defined service levels.

Companies should look for providers who have experience in global implementation and who are willing to be transparent both financially and managerially. It is also important to find an HR provider who is proactive in identifying and resolving problems and who will engage the client to resolve issues when needed.

Ensuring that there’s close alignment between the company's requirements and the provider's services and capabilities requires shared beliefs, a pragmatic business focus and a partnering mindset. Partnering with an HR outsourcing provider should be evaluated in much the same way as a merger or a joint venture. Due diligence should be done to ensure that company and an outsourcing partner are culturally compatible and share a common vision.

Are companies successfully addressing security and compliance issues? Where do you see a need for change or tougher measures?

GS. In our experience, the more companies outsource the more they look to their HR BPO provider for services such as tax filing and compliance-related solutions, such as flexible spending accounts (FSAs), new-hire services and wage garnishment. These components should factor into any HR BPO decision. Many of our HR BPO clients are seeking to expand the number of compliance-based services that they currently outsource.

With increased globalization and ever-changing technology, clients want a service provider with a track record of experience and success that can help minimize their risks relating to regulatory compliance. As a leading HR BPO provider, ADP’s compliance expertise helps keep companies up-to-date on today’s complex regulations.

SB. As new technologies have made employee data more accessible, data security has become more challenging. Employee data is accessible within the company through employee self-service (ESS) portals and outside the company by third parties who handle HR functions such as health benefits and investments. Each additional avenue that exposes data electronically raises the bar on the security measures that must be taken.

Companies address these issues by encrypting the data, by preventing data from being intercepted in transmission and by contractual agreement on appropriate security measures with third parties. Equally important in ensuring data security is training employees on proper use, storage and protection of information. Security measures range from relatively simple, common sense solutions to quite complex technology, but all are absolutely imperative and will only need to become more stringent.

Global regulatory compliance issues vary from country to country and even from region to region. It is a highly complex landscape to navigate and there is a need for standards. ExcellerateHRO has addressed compliance issues by founding solutions on Saratoga best practices for program delivery and administration. These processes satisfy rigorous standards of internal control required to support global financial reporting standards. Processes have been vetted for regulatory compliance in 64 countries by two globally recognized law firms.

DC. I think organizations are addressing security issues as they relate to technology and access to protected information. The area that is just beginning to be recognized is whether a vendor can affect compliance and mitigate legal risk around HR. Labor litigation has become a serious risk for many companies (whether it is legal issues relating to discrimination, harassment or something more common like the inconsistent delivery of HR policies). Litigators are beginning to see the HR field as a big opportunity as most organizations (even well managed ones) have inconsistencies and risks around these sensitive subjects. Litigation is even more of a concern for consumer product companies in which a well-publicized, legal proceeding can truly affect their reputation.

Once companies have outsourced their HR functions, how can they keep track of and measure performance to make sure they are getting the most valuable ROI?

SB. Before measuring performance, companies and outsourcing providers should be sure they are using the right standard; that is, their target should be the appropriate reduction in the total cost of labor. Measurement then starts by determining objectives (so companies know what they’re aiming for) and by establishing benchmarks (so they have a baseline to measure against). Once objectives and benchmarks are identified, a number of strategies can help ensure they are getting the most valuable ROI. First, performance measurement must be structured to track results, not just activity; activity isn’t meaningful unless it produces business impact. Second, measures should be aligned with objectives. Third, measurement should go beyond costs to include other factors inherent in enhancing productivity and performance. Finally, objectives of outsourcing should be translated into service level agreements so provider performance can be gauged against stated expectations.

GS. Companies that begin with the end in mind and set clear expectations and measurable objectives up front, are the companies who receive the most value from HR BPO services. These companies have the potential to realize the greatest ROI. Those interested in HR BPO should seek early agreement with their service provider on deliverables and hold the service provider accountable for ensuring that the agreed-upon objectives are met.

We also recommend that companies consider the importance of engaging internal employees from the bottom up and the top down during the implementation process to ensure that the people most impacted by the outsourcing decision will be fully engaged and invested in the short- and long-term success of the project and the relationship.

DC. The vendor should provide operational reports that show transactions processed, quality levels, etc., but it’s critical for the HR organization to set benchmarks before the transformation and then measure those benchmarks each year. A good example would be the cost to deliver HR services per employee. Another would be the HR staff to employee ratio. Or whether or not the number of employment disputes and litigation decreased after HR outsourcing.

What new technologies are making HR BPO easier and more efficient?

DC. The ability to integrate back-end record-keeping systems into a single portal and access point for employees and managers is one technological improvement that is making HR BPO easier for the users and more efficient for the vendors. I think the next wave in HR BPO technology is the creation of more sophisticated decision support tools for both the employee and manager. While HR departments and HR BPO firms have come a long way in providing information, there is still a long way to go. We still don’t give managers and employees enough information at their fingertips to make their most important HR decisions.

SB. HR’s goal is to provide employees with systems that are user friendly and intuitive to maximize their productivity and satisfaction. The combination of improved user interfaces, middleware, ERP and specialty HR applications are making HR BPO easier and more efficient. Thanks to the presentation layer, the complex underlying technologies (middleware, applications, hardware) are invisible to the end-user.

Technology should enable business processes – not impede them. For example, if an employee has a baby, the system should automatically prompt the employee to add the new dependent to their insurance as well as trigger a leave of absence. This is event driven HR. The need for an employee to access multiple HR systems to accommodate a single event will soon be eliminated.

In addition, networking technologies are enabling the global, secure and rapid transmission of data and the growth in wireless technologies and handheld devices is making access ubiquitous. As these consumer-driven technologies evolve, employer technology must follow rapidly. Outsourcing providers who get the foundational technology architecture right will be able to add functionality to keep pace with the ever growing demands of sophisticated users.

GS. Internet technology allows employers to provide easy-to-use self-service capabilities to their employee population that gives them greater control over their employee and personal data, while allowing them to manage internal HR processes more efficiently.

Companies will continue to look to self-service technology to manage an increasing number of data-driven processes and functions. In order to compete, service providers will continue to develop self-service technology to help employees become more efficient and enable them to spend less time on transactional duties and more time on core competencies.

Service providers who offer a one-stop-shop – allowing clients to turn to one source for their entire payroll, HR and benefit needs – will have a clear advantage in the marketplace by eliminating integration issues and minimizing the complexity and frustration surrounding the management of multiple HR service providers.