By BLR Founder and CEO Bob Brady
Outsourcing need not be the menace to HR it’s often made out to be. Here are some facts and fictions about it.
Few topics have generated as much heat in recent years as HR outsourcing. A lot of it comes from the fact that “experts” have counseled employers to “fire HR” and outsource everything.
To hear them, HR is yet another “cost” that can be saved. Painful as it is to hear those words, we have an obligation to understand the issues so we can advise management. So to sort fact from fiction, we attended “HRO World,” part of the last HR Week in New York conference. “HRO,” stands for “Human Resources Outsourcing.” What we found was, in the end, reassuring:
Here are some facts about HR outsourcing:
FACT: Many things are better done by outside vendors.
FACT: Cost savings can be achieved, but there is no free lunch. The biggest savings go to companies whose HR staff-to-employee ratios are higher than average. (See the DuPont example below.)
FACT: HR outsourcing will not solve, and can actually make worse, your internal problems. If your systems are not up to snuff, an outside vendor will only add to the chaos.
And here are a few fictions…
FICTION: HR Outsourcing means the end of in-house HR staffs. Not so! Someone still has to manage the vendors. Also, many higher order people management tasks are being kept in-house.
FICTION: It is as easy to outsource HR as, say, outsourcing food service. Again, not so. We are dealing with people, a task far more complex than serving up lunch.
DuPont’s Experience
One of the conference’s keynote speakers was Earnest Lareau, director, HR & HRO for DuPont. He began by implying that DuPont has outsourced virtually all of its HR workload, but, as the discussion continued, it became clear that there is more—and less—to his story than first meets the eye.
The company has one HR professional to every 60 employees. DuPont started out with a 1:50 ratio, and is planning to reduce staff to get to a 1:300 figure. Why is this significant?
An oft-cited rule of thumb is one HR staffer per 100 employees, a 1:100 ratio. Against that standard, DuPont obviously has a significant opportunity for cost savings. Can they get to 1:300? There are skeptics, but even if they do, whatever savings they achieve will be offset by the cost of the outsourcing itself.
Does this then mean that if you don’t share DuPont’s situation, outsourcing shouldn’t be considered? Not at all. Many functions should be outsourced (and have been for years). One example is payroll. Once it made sense to do this in-house, but the huge payroll processors can now do it far more efficiently.
What do people outsource?
The payroll example illustrates a clear trend. Outsourced functions tend to be “low touch” activities that are easy to automate for an organization with the right facilities to do it.
Deveri Ray of Washington Mutual lets vendors handle employment verification, health and welfare benefits, relocation, W-2 issuance, transit subsidy, and unemployment cost management.
None of these are part of WaMu’s core business, Ray noted, and there is a high cost to maintaining systems that do these tasks that would be hard to justify. What she didn’t say—but clearly implied—is that outsourcing these functions allows the company’s HR efforts to concentrate on activities that leverage the talents of people to positively impact the company’s future. In this way, HR makes a greater strategic contribution.
The principal benefit is not cost reduction
The speakers were united in another theme: HR outsourcing can (and should) lower costs, but, in fact, its principal benefits are:
1) Lowering the risks of noncompliance, and
2) Increasing employee satisfaction by offering complete solutions otherwise not available.
These benefits are obvious when pointed out, but we suspect that most people—especially those outside of HR—still approach outsourcing with the idea that it will save money. While this is a valid objective, if it just saves money, or worse, if it does so to the detriment of employee satisfaction and morale, it is probably not moving the organization ahead enough to justify the savings.
What’s next for HRO?
Bob, I think you are right-on to state that, historically, organizations have looked to outsource HR functions due to the cost savings the model may present (staff reduction, capital cost avoidance).
As a general rule companies are looking to compete by focusing on their core competencies, yet at the same time they are forced to deal with recruiting, screening candidates, interviewing, background checks, drug testing, performance, compensation, on boarding, training, benefits, applications, vendors and much more.
In order to begin the effort of outsourcing non-core activities, organizations looked to quick fixes, and focused on the transactional areas including payroll, benefits administration, call center and HRIS. Although these areas helped organizations become more efficient in some areas, they still had to deal with re-engineering current internal processes, vendor management and overall HR strategy.
Today many of the more visionary HRO service providers are delivering solutions that address a majority of what clients are looking for; a robust-scalable technology platform, bundled best-of-breed self service applications that are available to front-line managers and employees in one click (from various vendors – managed by the HRO provider), a multi-tiered shared service center staffed with deep domain knowledge supported by comprehensive content management solutions and re-engineered processes that are owned by the provider. Done right, this model may deliver reduced overall costs, but more importantly gives your HR organization the opportunity to become more efficient and strategic while delivering better services to your employees.
The direction of HRO – As Bob points out, it is FICTION to believe that HRO means the “end of in-house HR staffs” but it does present a good question: “How much HR staff do you need?” Organizations have been leveraging vendors for years in the areas of recruiting, performance and compensation management. When looking at the overall HR budget it is probably safe to say that approximately 50% of the costs are resolved by current HRO providers, with the remaining half being addressed internally or through high-priced consultants.
It will interesting to see which HRO vendors begin to put even more focus on the “people” part of the “people/process/technology equation” by delivering comprehensive HR Generalist solutions, allowing HR senior managers to become more strategic in their roles, adding to their organization’s bottom line and improving overall company performance.
Dave Lewan
President, Centric Consulting Group
Outsoucing is a solution to many problems but that theory is similar to the belief that robots would at some point replace humans in the workforce some 40-50 years ago. HR not only provides specific services within an organization that efficiency methods better servicing a responsibility can replace, I have yet to see an HRO that can replace the strategic role HR plays within organizations. HROs are extremely impersonal and many of these impersonal concerns are what end up costing companies in the areas of compliance and can help companies deal with real-life business concerns that touch HR, including FLMA, Discrimination or other concerns. Many an employee lawsuit can be averted when committees, frequently including a familiar HR representative help play a part to ‘turn down the heat’ in matters that are frequently just business faux pas or missteps. HROs are process driven (otherwise even these organizations wouldn’t be as functional as they need to be to service many clients and support their own existence). Cheerleading tactics to get corporations to ‘try the newest mousetrap’ are what is putting HROs in the forefront. And, albeit some businesses that function either as smaller, independent business or large mammoth corporations may find that some of the services of these HROs are valuable service bureaus for their employees who rarely need to go to HR. However, the soul of the company are its people, and rarely employees, new or otherwise, get to touch the soul of an HRO since HROs really have no souls or culture. Just the very essence of their duty is to impersonalize the employer/employee relationship. And, in business, particularly in the face of companies like Enron, successful businesses these days need to be more in touch with their employees, take things more personally and have more of a soul, not less of one.
here’s an interesting video interview with the head of ATT HR talking about HR outsourcing:
http://www.scribemedia.org/2007/07/02/enterprise-hr-outsourcing/