HR Outsourcing (HRO): Its Impact on Your Company, Your Career, and the HR Profession

1
HR Outsourcing (HRO) Its Impact on Your
Company, Your Career, and the HR Profession

• Presented by Tom Darrow
• 2005 SHRM-Atlanta President Elect
• Principal, Talent Connections
• October 17, 2005

2
Agenda

• HR Outsourcing Overview
• Impact on Companies
• Impact on HR Profession
• Impact on Your Career
• Selecting, Managing, and Measuring Outsourcing
  Providers
• Helpful Resources

3
What is Outsourcing?

• The performance by outside parties, on a
  recurring basis, of tasks that would
  otherwise be performed in-house.

4
Other Definitions

• In-sourcing
• Off-shoring
• Co-sourcing
• Geo-sourcing
• Outplacement

5
Types of Outsourcing1

• Business Process Outsourcing
• Information Technology - 28
• Human Resources 16
• Sales Marketing 15
• Finance 11
• Administrative 9
• All Others 22

6
How Common is HRO?

• 58 of companies outsource some HR function2
• 91 of companies with 1 billion annual
  revenues are now considering HRO3
• HRO grew 28 from second half of 2004 to first
  half of 20054

7
The HRO Market

• In next 5 years, global spending on HRO will
  double from 40 billion to 80 billion5
• From 2002 to 2004, 14 increase in large firms
  that would consider HRO6

8
5 Most Commonly Outsourced HR Services7

1. Background Checks 73
2. Employee Assistance/Counseling 66
3. FSA Administration 67
4. COBRA 55
5. Healthcare Benefits Administration 60

9
Other Types of HR Outsourcing7

• Pension Benefits Administration 55
• Temporary Staffing 54
• Retirement Benefits Administration 47
• Payroll Software Services 48
• Recruiting, Staffing Search
• Non-executives - 30
• Executives - 29

10
Other Types of HR Outsourcing7

• Employee Relocation 29
• Training and Development 21
• Incentives 19
• HRIS Web-based Services 15
• Reference Checks
• PEOs and ASOs
• Sourcing Consultants Legal Services
• Screening Workplace Security
• Process, Project, and Systems Management

11
Least Commonly Outsourced Functions7

• Performance Management 3
• Strategic Business Planning 4
• Policy Development/Implementation 4
• Employee Communication Plans 10

12
Audience Survey

• How many of you outsource part of your HR
  function?
• Payroll
• Benefits
• Recruiting, Staffing, Search
• Training
• HRIS Web-based services
• How many of you outsource all of your HR
  function?
• What led to the decision to consider
  outsourcing?

13
Why Outsource?

• Allow HR to focus on core competencies
• Creates strategic opportunities for HR
  professionals
• Improve quality, efficiency, and effectiveness
• Relief from administrative burdens
• Reduce operating costs

14
Other Benefits to HRO

• Access to outside HR expertise
• Greater diversity of HR services
• Leverage vendor investments in technology
  rarely available to HR organization
• Limit fiduciary, audit, and litigation risks
  and liabilities
• Upgrade level of customer service
• Ease time pressure demands
• Better, faster, cheaper

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Risks

• Over promise and under deliver
• Nonperformance of key function
• Cost
• Loss of institutional knowledge
• Difficulty managing vendor relationship
• Change in providers business or financial
  stability
• Lack of fit with company culture
• Organizational resistance or unreadiness

16
When to Outsource

• High HR service delivery costs
• No further investment in technology
• End administration of transactions and focus on
  strategic work
• Improve quality of HR services
• Strong business case
• Other business reasons

17
Considerations

• Core Competency?
• Best in Class?
• What is your vision for your HRM business?
• What metrics will measure progress toward vision?
• What business outcomes are needed from the HRM
  aspects of the business?

18
Poor Reasons to Outsource

• Do not outsource just because you are
  frustrated
• Do not outsource as a last resort, just because
  you have tried everything else

19
Outsourcing Myths

• Outsourcing is just a fad
• Outsourcing can be kept secret from employees
• Outsourcing is only for the largest companies
• Messes must be fixed before outsourcing
• Outsourcing is for everyone

20
Trends in HR Outsourcing Market

• Specialization
• Globalization
• Standardization
• Regionalization

• Consortia Buying
• Mid-market Mania
• Utility Model Evolution
• Consolidation and Partnering

21
The Future of HRO

• Growth-Maturation of HRO market
• Increasing weight of non-cost drivers
• Commodization of HR functions
• New roles for internal HR departments
• New career opportunities for HR professionals

22
The Future of HRO (contd)

• 6. Expansion of small/mid-sized HRO markets
• 7. Demographic changes
• 8. Improved HRO metrics
• 9. Reshaping of industry

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Impact on Companies

• Employee reactions
• HR executives taking part in operational and
  strategic decisions
• Elimination of bureaucracy
• Customer service improvements

24
Impact on Companies (contd)

• Growth of self-service platform
• Slimming down staff
• Cost savings
• Model will serve to guide other organizational
  functions (IT, accounting)

25
Impact on HR Profession

• Internal HR at significant disadvantage in cost
  per transaction
• Loss of control of key processes
• Enhanced credibility
• Strategic focus
• Decentralized structure
• Internal politics HR as business partner
• Move to customer service culture

26
Impact on HR Profession (contd)

• Management and Organizational Development big
  picture view
• New roles consultant and HR strategist
• Develop competencies to remain valuable
• HR is exposed and more visible as
  organizational function
• HR is far more measurable
• Align HR strategy with corporate goals

27
Impact on Your Career

• Transformation from transactional
  administrator to business partner that sets
  strategy
• Develop competencies to negotiate and manage
  vendor relationships
• Demonstrate ability to provide business
  solutions for employee and customer problems
• Change bureaucratic culture
• Develop strategic expertise necessary to manage
  human capital

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Impact on Your Career

• Deliver exceptional customer service
• Sharpen your skills
• Build/Develop your network
• Stay on top of trends and their implications
• Utilize vendors now so that they can help you
  later

29
Online Resources

• Better Management.com www.bettermanagement.co
  m
• EquaTerra www.equaterra.com
• Everest Group - www.everestgrp.com
• HRO Today www.hrotoday.com/org
• HR Executive www.hrexecutive.com
• Human Capital Magazine www.humancapitalmag.com
  
• HR Outsourcing Gaining Traction Fast
  www.rwbaird.com/docs/YourReports/HRO2003.pdf

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Online Resources (contd)

• Nelson Hall www.nelson-hall.com
• Outsourcing Center
• www.outsourcing-research.com
• Outsourcing Institute www.outsourcing.com
• Outsourcing Suppliers
• www.outsourcing-suppliers.com
• The Outsourcing Management Zone
  www.theoutsourcerzone.com/law.htm

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Books

• The HR Scorecard Linking People, Strategy, and
  Performance by Becker, Huselid, and Ulrich (2001)
• Strategic Outsourcing A Structured Approach
  to Outsourcing Decisions and Initiatives by
  Greaver (1999)
• Out of Site An Inside Look at HR Outsourcing
  by Beaman (2004 )

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Books (contd)

• Outsourcing A Guide to Selecting the Correct
  Business UnitNegotiating the ContractMaintaining
  Control of the Process by Bragg (1998)
• The Challenge of Outsourcing Human Resources by
  Vanson (2004)
• Outsourcing Human Resource Functions
  Strategies for Providing Enhanced HR Services at
  Lower Costs by Cook (1999)

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Professional Organizations

• Human Resources Outsourcing
  Association www.hroassociation.org
• HR.com www.hr.com
• International Association of HR Information
  www.ihrim.org
• Shared Services BPO Association
• www.sharedxpertise.org
• SHRM National www.shrm.org
• Outsourcing Forum www.shrm.org/outsourcing/

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QUESTIONS?
35
THANK YOU!Tom DarrowTomDarrow_at_talentconnections
.netwww.talentconnections.net
36
Selection Process

• RFI request for information
• RFP request for proposal
• Site visit
• Create and use scoring tools
• Top 3 potential providers deliver presentation

37
Selecting a Provider

• Identify must haves and nice to haves
• Discuss provider with consultant, competitors,
  former customers/employees
• Perform reference checks
• Determine current state of providers market
  share
• Consider local vs. remote

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Selecting a Provider (contd)

• Identify providers recent disappointments
• Determine providers current weaknesses
• Beware of off-the-shelf solutions from vendors
• Determine providers current workload and
  capacity

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Selection Criteria

• Proven track record
• Cost of vendor services
• Service level guarantees
• Flexible contract options
• Cost savings guarantees
• Recommendations from other companies
• Compatible corporate culture
• HR process expertise
• Leading technology

40
Transitioning Resources

• Launch period between selection and
  implementation
• Approximately 90 days
• Time of learning in order to gain mutual
  understanding of company and processes
• Communication and project management are key
• Slowly turn over control as you transition
  resources
• Cannot measure results until end of this period

41
Managing the Provider

• Who should manage the provider?
• CFO
• Head of HR
• Other HR individuals

42
Managing the Provider

• Establish performance targets and set
  expectations up front
• Determine priorities and communicate them to
  vendor
• Establish reporting relationships up front
• Provide forum and timing for discussion of
  issues
• Anticipate and plan for conflict resolution
  arbitrate when it occurs
• Ongoing ownership, involvement, supervision

43
Managing the Provider (contd)

• Where continuity is critical, establish
  long-term relationships with vendors
• Review annual operating plans and major
  initiatives
• Guidance for provider and buyers managers
  oversight
• Require competitive bidding for outsourced
  service at regular intervals
• Review contract terms and suggest changes as
  needed

44
Managing the Process

• Look beyond initial cost savings and track
  affect on employee satisfaction and
  organizational performance
• Ensure senior management buy-in and involvement
• Reinforce/reward through incentives
• Focus on quality first, cost second
• Test outsourcing with specific function before
  expanding

45
Managing the Process (contd)

• Facilitate feedback from internal HR team
• Manage resistance from internal HR team and
  company at large (communication is key)
• Anticipate and manage culture change
• Develop staff members to effectively manage
  vendor relationships

46
Measuring Performance

• Insist on accurate and frequent status
  reporting by vendors
• Demand immediate notification when problems
  arise
• Metrics are key
• Quantitative terms
• Incorporate multiple time periods

47
Measuring Success

• Internal metrics effectiveness, efficiency,
  quality, productivity
• External metrics revenues, expenses, market
  share, customer relations, quality productivity

48
Typical Problems

• Lack of measurement
• 88 of large business require metrics8
• Only 41 of mid-sized companies stipulate metrics
  in contracts8
• Rush into autonomy too soon
• Unrealistic expectations and goals
• Outsourcing for the wrong reasons
• Overly focused on cost savings
• Lack of communication
• Difficulties managing vendor
• Employee resistance

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Success Factors

• Preparation is paramount
• Be a knowledgeable buyer
• Realistic goals and expectations
• Strategic vision
• Consider permanence of outsourcing - costs
  involved in switching outsourcing vendors or
  ending HRO
• Find the right vendor

50
Satisfaction

• Recent survey of 129 large companies representing
  2 million employees9
• 89 satisfied with outsourcing arrangement
• 85 achieved hoped-for benefits
• Additional 20 achieved unexpected benefits

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Best Practices

• Selective path toward HRO
• Multiple vendor relationships
• Combination of internal and external strategies

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Overview of Process

• Outsourcing Model Greaver, 1999
• Planning
• Exploring strategic initiatives
• Analyzing costs/performance
• Selecting providers
• Negotiating terms
• Transitioning resources
• Managing relationships

53
Planning

• Prepare HR
• Develop and communicate new HR strategy
• Define new roles and responsibilities
• Restructure HR
• Hire new employees to fill skill gaps
• Provide training for employees in new roles

54
Planning (contd)

• Prepare Organization
• Develop HR strategy within overall organizational
  strategy
• Communication plan
• Resolve issue of whose payroll individuals are
  now on
• Are HR employees actually employees of provider?
• Does head of HR work for company or provider?

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Exploring Strategic Initiatives

• Assessment
• Self examination
• SWOT of department
• Organizational scan
• Define opportunities and benefits
• Build the business case consider all costs
  and impacts on organization
• All functions that are not core competencies
  should be considered for HRO nothing is sacred
• Consider the driver behind HRO decision

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Analyzing Cost/Performance

• Understand market trends and competitive
  position
• Identify goals and objectives
• Determine added value
• Gather baseline HR costs and metrics
• Compare current HR operations to benchmarks
• Determine which processes have highest
  strategic importance and add most value

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Identifying a Provider

• Referrals/Networking
• Newspapers and Magazines (HRO Today)
• Internet
• Mailings
• Professional Association Lists

58
Negotiating Terms

• Good contracts make good partners
• Maintain heat of competition during negotiation
• Reasonable, but clearly established,
  expectations
• Well-documented deliverables regarding every
  aspect of deal
• Attorney involvement

59
Specifications of Contract

• Contract Duration
• Exact beginning and ending dates
• Financial penalties for early termination
• Parties to the Contract
• Allow for additions or deletions (in case of
  acquisitions or divestitures)
• Require vendor to name all subcontractors and
  give you right of approval for those introduced
  later

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Specifications (contd)

• Services Performed
• Specify all functions to be provided
• Outline all support services
• Ensure escalation process and dispute governance
  included
• Performance Standards
• Tweak standard performance guarantees
• Reinforce performance guarantees through at-risk
  fees

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Specifications (contd)

• Hold-Harmless Statement
• Fees
• Data Security
• Communication Review
• Contingency Plans
• Audits
• Final Contract Review

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Articles

• Adler, Paul S. 2003. The HR Outsourcing
  Decision. MIT/Sloan Management Review. Fall 2003
• Gelman, Lisa David Dell. 2002. HR
  Outsourcing Trends Study. New York The
  Conference Board.
• Goldsmith, Neal M. 2003. Outsourcing Trends.
  The Conference Board, July 2003.
• Holincheck, James. 2003. Deciding to Insource
  or Outsource Human Resources. Gartner Research,
  28 February 2003.

63
Footnotes

• Offshore IT Outsourcing www.offshoreitsourcing.c
  om/Pages/outousrcing_statistics.asp
• 2004 SHRM Human Resource Outsourcing Survey
• Human Resource Outsourcing Association citing
  the Yankee Group
• Fidelity Investments Fidelity Building Its
  Share in HR Outsourcing Market by Matt
  Ackermann American Banker July 19, 2005
• 5. Human Resources Outsourcing Association
  citing the Yankee Group

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Footnotes (contd)

• 6. Human Resources Outsourcing Association
  -Conference Board Report
• According to the 2004 SHRM Human Resource
  Outsourcing Survey
• Outsourcing Comes to the Middle Market by Bob
  Violino SHRM HR Outsourcing Forum
• Survey from Hewitt Associates Press Release April
  18, 2005 HR Outsourcing Continues to Boom as
  Organizations Gain Experience and Reap Benefits

65
Sources

• Anonymous. HR Outsourcing Success Steps to
  Observe for Your Company. HR Focus, September
  2003.
• Anonymous. Planning to Outsource. HR Focus,
  May 2004.
• Ackermann, Matt. Fidelity Building Its Share
  in HR Outsourcing Market. American Banker, July
  19, 2005.
• Greer, C., Youngblood, S., Gray, D. Human
  Resource Management Outsourcing The Make or Buy
  Decision. Strategic Human Resource Management.
  Southwestern, 2002.

66
Sources (contd)

• Grensing-Pophal, Lin. Outsourcing Performance
  Management Is It Right for You? SHRM HR
  Outsourcing Forum, August 2005
• Hewitt News and Information April 18, 2005
  Press Release - HR Outsourcing Continues to Boom
  as Organizations Gain Experience and Reap
  Benefits
• Henneman, Todd. Measuring the True Benefit of
  Human Resources Outsourcing Workforce
  Management. July 2005

67
Sources (contd)

• HRO Today Magazine July 2005/August 2005,
  May 2005, January/February 2005, December 2004,
  October 2004
• Human Resources Outsourcing Association
  Certification Course - Outsourcing as an HR
  Strategy
• Landberg, Steven. Effectively Utilizing
  Recruitment Outsourcing Lessons Learned From
  Early Users. SHRM White Paper, August 2005
• Miller, Stephen. SHRM 2005 Conference
  Exposition HR Outsourcing All the Way? June
  2005

68
Sources (contd)

• SHRM Special Expertise Panels 2005 Trends
  Report HR Consulting/Outsourcing
• Violino, Bob. Outsourcing Comes to the Middle
  Market. SHRM HR Outsourcing Forum, August 2005
• Watson Wyatt HR Outsourcing Finding the
  Optimal Mix 2005 HR Technology Trends Survey.
• Weatherly, Leslie A. HR Outsourcing Reaping
  Strategic Value for Your Organization. 2005 SHRM
  Research Quarterly.