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HR Outsourcing (HRO): Its Impact on Your Company, Your Career, and the HR Profession
Presented by Tom Darrow2005 SHRM-Atlanta President ElectPrincipal, Talent ConnectionsOctober 17, 2005
Agenda
HR Outsourcing Overview Impact on Companies Impact on HR Profession Impact on Your Career Selecting, Managing, and Measuring
Outsourcing Providers Helpful Resources
What is Outsourcing?
The performance by outside parties, on a recurring basis, of tasks that would otherwise be performed in-house.
Other Definitions
In-sourcing Off-shoring Co-sourcing Geo-sourcing Outplacement
Types of Outsourcing1
Business Process Outsourcing Information Technology - 28% Human Resources – 16% Sales & Marketing – 15% Finance – 11% Administrative – 9% All Others – 22%
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
0
10
20
30
40
50
60
70
80
90
100
companies thatoutsource some HR
function
companies with $1 billion+ annual revenuesconsidering HRO
HRO growth from secondhalf of 2004 to first half
of 2005
companies that outsource some HRfunction
companies with $1 billion + annualrevenues considering HRO
HRO growth from second half of 2004to first half of 2005
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
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%
0 10 20 30 40 50 60 70 80
Healthcare BenefitsAdministration
COBRA
FSA Administration
Employee Assistance /Counseling
Background Checks
Series1
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%
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
Least Commonly Outsourced Functions7
Performance Management 3% Strategic Business Planning – 4% Policy Development/Implementation –
4% Employee Communication Plans – 10%
0 2 4 6 8 10
Employee CommunicationPlans
PolicyDevelopment/Implementation
Strategic Business Planning
Performance Management
Series1
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?
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
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”
Risks
Over promise and under deliver Nonperformance of key function Cost Loss of institutional knowledge Difficulty managing vendor
relationship Change in provider’s business or
financial stability Lack of fit with company culture Organizational resistance or
unreadiness
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
Considerations
Core Competency? Best in Class?
1. What is your vision for your HRM business?
2. What metrics will measure progress toward vision?
3. What business outcomes are needed from the HRM aspects of the business?
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
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
Trends in HR Outsourcing Market
Specialization Globalization Standardization Regionalization
Consortia Buying Mid-market
Mania Utility Model
Evolution Consolidation
and Partnering
The Future of HRO
1. Growth-Maturation of HRO market2. Increasing weight of non-cost
drivers3. “Commodization” of HR functions4. New roles for internal HR
departments5. New career opportunities for HR
professionals
The Future of HRO (cont’d)
6. Expansion of small/mid-sized HRO markets
7. Demographic changes8. Improved HRO metrics9. Reshaping of industry
Impact on Companies
Employee reactions HR executives taking part in
operational and strategic decisions Elimination of bureaucracy Customer service improvements
Impact on Companies (cont’d)
Growth of self-service platform Slimming down staff Cost savings Model will serve to guide other
organizational functions (IT, accounting)
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
Impact on HR Profession (cont’d)
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
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
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
Online Resources
Better Management.com – www.bettermanagement.com
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
Online Resources (cont’d)
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
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 )
Books (cont’d)
Outsourcing: A Guide to Selecting the Correct Business Unit…Negotiating the Contract…Maintaining 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)
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/
QUESTIONS?
THANK YOU!
www.talentconnections.net
Selection Process
RFI – request for information RFP – request for proposal Site visit Create and use scoring tools Top 3 potential providers deliver
presentation
Selecting a Provider
Identify must have’s and nice to have’s
Discuss provider with consultant, competitors, former customers/employees
Perform reference checks Determine current state of provider’s
market share Consider local vs. remote
Selecting a Provider (cont’d)
Identify provider’s recent disappointments
Determine provider’s current weaknesses
Beware of off-the-shelf solutions from vendors
Determine provider’s current workload and capacity
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
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
Managing the Provider
Who should manage the provider? CFO Head of HR Other HR individuals
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
Managing the Provider (cont’d)
Where continuity is critical, establish long-term relationships with vendors
Review annual operating plans and major initiatives
Guidance for provider and buyer’s managers’ oversight
Require competitive bidding for outsourced service at regular intervals
Review contract terms and suggest changes as needed
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
Managing the Process (cont’d)
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
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
Measuring Success
Internal metrics: effectiveness, efficiency, quality, productivity
External metrics: revenues, expenses, market share, customer relations, quality productivity
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
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
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
0 20 40 60 80 100
achieved unexpectedbenefits
achieved hoped-forbenefits
satisfied
Series1
Best Practices
Selective path toward HRO Multiple vendor relationships Combination of internal and external
strategies
Overview of Process
Outsourcing Model – Greaver, 19991. Planning2. Exploring strategic initiatives3. Analyzing costs/performance4. Selecting providers5. Negotiating terms6. Transitioning resources7. Managing relationships
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
Planning (cont’d)
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?
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
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
Identifying a Provider
Referrals/Networking Newspapers and Magazines (HRO
Today) Internet Mailings Professional Association Lists
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
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
Specifications (cont’d)
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
Specifications (cont’d)
Hold-Harmless Statement Fees Data Security Communication Review Contingency Plans Audits Final Contract Review
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.
Footnotes
1. Offshore IT Outsourcing – www.offshoreitsourcing.com/Pages/outousrcing_statistics.asp
2. 2004 SHRM Human Resource Outsourcing Survey
3. Human Resource Outsourcing Association – citing the Yankee Group
4. 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
Footnotes – (cont’d)
6. Human Resources Outsourcing Association -Conference Board Report
7. According to the 2004 SHRM Human Resource Outsourcing Survey
8. “Outsourcing Comes to the Middle Market” by Bob Violino – SHRM HR Outsourcing Forum
9. Survey from Hewitt Associates Press Release April 18, 2005 “HR Outsourcing Continues to Boom as Organizations Gain Experience and Reap Benefits”
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.
Sources (cont’d)
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
Sources (cont’d)
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
Sources (cont’d)
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.