HR Outsourcing Trends

Human Resources outsourcing appears to be increasing more each passing year.

Now this is truly a trend that is near and dear to our heart at Braun Consulting. According to sourcing advisory firm Technology Partners International human resources is the fastest-growing segment of the business process-outsourcing sector.

Research by the Yankee Group predicts that the domestic market for HR outsourcing, which involves outsourcing at least three human resources functions, will reach $42 billion by 2008. You may recall that it took a billion minutes for history to advance from the time of Christ to current time. A billion is a lot of money!

While the number of companies outsourcing their HR functions has increased, so has the number of those who are actively shopping around.

The advisory firm Everest Group estimates that the average per-employee, per-year price for firms with less than 25,000 employees fell to an average of $540 in 2004, compared with prices averaging $1082 per employee/year from 1998 through 2003.

Market consolidation is another developing trend in the industry. This consolidation of suppliers of HR outsourcing has been driven in part by the fact that suppliers often need to buy niche expertise that they lack and are unable to provide.

For example, last year Hewitt Associates bought Exult and this year Electronic Data Systems paid $420 million for the human resources outsourcing division of Towers Perrin. Affiliated Computer Services bought Mellon Financial Corp.'s human resources consulting and outsourcing businesses for $405 million as well.

According to Michel Janssen, president of the supplier solutions division at Everest Group, "Yesterday the industry was made up of tons of suppliers, today the trend is to consolidate those into one main contractor."

Top Reasons Companies Outsource

The prospect of cutting costs and saving money is one of the primary motivators that companies begin with when considering outsourcing.

Some analysts say that employers often begin to focus on business metrics like productivity, profitability and employee satisfaction. In the end though savings seems to drive about half of companies into HR outsourcing, while the other half don't rate savings as the main motivator.

This is born out by Hewitt Associates survey of 129 companies where they found that 45 percent didn't rate cost savings as a top goal for their human resources outsourcing.

The top three reasons employees gave were:
1) gaining outside expertise,
2) improving service quality, and
3) focusing on their core business.

Bob Crow, a senior consultant for Watson Wyatt Worldwide's strategic sourcing practice puts it this way, "The benefits of outsourcing to me are around structure, standardization, efficiency, technology, compliance and risk mitigation. The yet-to-be-proven are radically improved service levels and cost reduction on an ongoing basis."

The "comprehensive" types of outsourcing deals are not necessarily appropriate for all employers.

Some use a mix of in-house resources and outsourcing. In doing so they often have lower budgets and fewer HR staff members per full-time employee than firms that either primarily handle human resources internally or primarily outsource HR functions.

Measuring HR Outsourcing Results

UPS's method of outsourcing demonstrates the "multiple vendors" approach to HR outsourcing. ChoicePoint provides background checks. PricewaterhouseCoopers manages UPS' expatriates program. CitiStreet manages UPS' 401(k) program. Hewitt Associates administers health care. Talx, a business software and services provider, handles employment verifications. And Mellon Securities manages a bonus stock program for UPS managers.

Despite large companies like Bank of America, Prudential Financial and Motorola signing comprehensive human resources outsourcing deals, most companies outsource incrementally, according to a study released in May by Watson Wyatt Worldwide.

Again, Bob Crow from Watson Wyatt Worldwide says that, "The value of the unbundled approach is that you're getting the best services from those companies that specialize in those services. I'm pretty much a fan of the unbundled model because a lot of companies don't like to have all of their eggs in one basket, and it gives them leverage to negotiate if they keep it broken up."

However, some companies want "a single face" for their vendor or hope to use one human resources information system. They consider it easier to manage and they too can get a better deal by adding volume to their supplier relationship.

Even if the vendor contracts out some aspect of the outsourcing agreement the client still has only one vender to deal with. According to a survey by Hewitt Associates employers seem to feel that this approach leads to less employee confusion, better integration and easier coordination of services, as well as less time dedicated to vendor management and more buying power.

In general, it seems that large companies like to go with one vendor and smaller companies will often piecemeal out their outsourcing to various "unbundled" vendors.

Single Vs Multiple Vendors

When companies do HR outsourcing it is recommended that they link outsourced services to specific definable objectives.

They may want to improve their technology and efficiency so might include metrics to evaluate actual results. By doing this they can know if their processes are actually more efficient, if they are they saving money, and if their technology is really better than it was before.

The HR services should be linked to recognizable an measurable outcomes. "Based on whatever reasons you decide to outsource, you should mutually develop measures and metrics with your vendor to ensure that those objectives are being met and achieved on a regular basis," says Bob Crow.

The type of data companies can look for include service levels, cost per person, timeliness, accuracy of work, and customer satisfaction.

They can also look for the correlation between recruitment sources and recent-hire performance results, or performance rankings to training investments. Another example might be to tie in employee exit data with total rewards programs.

Some Outsourcing Examples

  Pepsico: Signed a 10 year deal with Hewitt Associates

  Delta Airlines: Signed a deal with Affiliated Computer Services for 7 years, valued at $120 million. This will save them an estimated $50 million on updating human resources technology. As part of the deal a governance team will monitor 50 metrics in hope of ensuring that all expectations are met.

  Duke Energy: Has a 7 1/2-year contract with Hewitt Associates to handle payroll, performance management, and other HR back-office administrative services,

  AT&T: Has a 7 year deal with Aon Human Capital Services to provide end-to-end human resources administration, signed in 2002. After aligning the deal's structure, expectations and its 45 metrics, they have seen "double digit" savings.

  UPS: Now outsourcing 401(k) management, health care administration, the hiring process, employment verifications, relocation services, new-hire compliance data, administration of retirement plans, and its bonus stock program.

  Others examples include Bank of America, Prudential Financial, and Motorola signing comprehensive human resources outsourcing deals.

Now that we have listed all the big names we want to remind all our loyal readers that BRAUN Consulting Group has based its business on providing the wisdom you need to leverage your human resources through experienced management practices and procedures.

We not only offer the high quality outside diverse expertise of many decades but most importantly we provide the wisdom of how best to use the resources available.

For more information, please contact us at Braun Consulting Group.