Managing Benefit Plans (IOMA), July 2005

Copyright 2005 IOMA
Managing Benefits Plans

July 2005

SECTION: Pg. 1
HEADLINE: OUTSOURCING Not for Broken HR Systems

BODY:
Like a parent sending children off to summer camp, employers outsourcing HR functions to a third-party vendor need to make sure that those functions will be well cared for and, hopefully, enhanced.
Outsourcing HR can help employers save on labor costs and streamline service, but companies need to select vendors carefully and ensure accountability before parceling out in-house services such as benefits, payroll, or recruiting, HR analysts recommend.
Among the benefits of outsourcing HR functions are improving quality of service, saving money and time, and freeing up HR to address core functions such as coaching managers and improving employee performance, said Geoffrey Dubiski, director of operations at Yoh HR Solutions, an HR outsourcing vendor in Philadelphia.
However, Dubiski noted, there are pitfalls to outsourcing as well. In some cases, he said, employers may actually wind up with a lower quality of service than they had in-house and suffer more employee complaints as a result.
"Most HR outsourcers provide satisfactory levels of service, but none of them provide exceptional service," Michael Cornetto, a senior consultant at Watson Wyatt Worldwide in Washington, D.C., noted.
A lot of HR managers lack the strong vendor management skills they need for selecting the correct outsourcing firm to take over benefits, payroll, or recruiting functions, added Patrick Wright, professor of human resource studies at Cornell University in Ithaca, N.Y.
Regardless of the pitfalls and concerns, a new survey indicates that HR outsourcing is an increasingly common practice, and in fact, is done by the vast majority of employers. The survey, released recently by Hewitt Associates (see the sidebar, "Employers Increasingly Outsource HR Activities"), found that 94% of 129 companies polled said they outsource at least one HR activity. And by 2008, companies are expected to expand outsourcing, traditionally limited to payroll and health and welfare benefits, to global mobility, headhunting, and recruiting, according to the Lincolnshire, Ill.-based consulting firm.
More services, lower costs. "Most companies that outsource do so because they can get more services, at a lower cost," note Bryan Doyle, president of Hewitt's HR Outsourcing Business.
Much of the savings come from "a head count reduction" of in-house HR personnel normally dedicated to payroll or benefits tasks, Dubiski said.
Statistics from a 2004 study on HR outsourcing conducted by the Society for Human Resource Management (SHRM) suggest that these are the benefits that employers are after. Of the 169 HR professionals surveyed, 56% said their companies made the decision to outsource HR functions to save money or reduce operating costs. Also, 41% of HR professionals stated that their organizations elected to outsource as a way to reduce the number of HR staff and related staff expenses.
"The expectation is that the quality of service gets better," Wright said. However, he added, "There's no quantitative data out there to support the actual outsourcing decision, saying that it is always cheaper and better to outsource."
Almost half of respondents to the 2004 SHRM survey stated that "gaining access to vendor talent and streamlining HR functions" were the primary goals of outsourcing. Because vendors typically use automation and new advanced software to handle payroll and benefits, "employees get more tools to manage their own benefits and HR professionals get more tools to manage pay and performance reviews," Doyle said.
Free to be strategic. Employers are not the only ones benefiting from HR outsourcing; HR itself can use it as an opportunity to focus on more strategic matters and hopefully get closer to getting that coveted seat at the senior executives' table.
Outsourcing functions that can be automated, such as payroll and benefits, leaves HR managers free to focus on core HR functions, including talent management, recruitment, succession planning, and performance management, according to Cornetto.
It also frees up the HR department to serve a more strategic role in designing the best benefits package, determining a retirement strategy, or otherwise strategically supporting the business, Doyle said.
Without having to constantly be on call to sort out employees' problems with their benefits, the HR manager can better focus on leadership development and talent management, according to Wright.
Dubiski said that outsourcing HR is a great way to show senior management the department's value. "Outsourcing helps managers learn precisely the true costs of human resource services," he said, explaining that when employers actually see the costs of each function, they are more likely to realize that they want their HR people focused on those services that truly add value to the organization.
Not for broken systems. What outsourcing should not be used for, experts agreed, is to repair a poorly working HR function.
It is a huge mistake for an employer to think that an outside firm can repair a malfunctioning benefits system, Wright said. "You have to fix your own processes within the company first, before outsourcing, or you will have a bigger headache on your hands than when you started," he said. "It normally takes a year or two to work all the bugs out of any new system," Wright added.
"Whatever you do, don't shift broken processes over to the vendor; fix it yourself first," Cornetto said. "As the company, you are much closer to getting to the bottom of any problems and correcting them, than is an outside vendor," he said.
Choosing what to outsource. Trying to decide which HR functions to outsource is one of the biggest challenges a company faces, according to Dubiski. Employers who want to go the outsourcing route first need to decide what can be done most efficiently by outside vendors and which tasks are best left to in-house personnel, he said. For outsourcing, he said, "You should choose functions that are definable, with measurable goals, because you will need accountability once you've chosen a vendor."
Prior to outsourcing, Dubiski recommends that employers take the following steps:
* Examine all functions that are being considered for outsourcing to make sure they are being done as efficiently as possible and are not in a state of disrepair. "You can't collect enough data about how you now handle benefits and such," Dubiski said.
* Put together a business case for outsourcing. Is it just a cost-saving strategy? If so, the employer should see if it can simply save money by doing things more efficiently in-house.
* Look for a vendor who is truly a partner, someone who is willing to work very closely with the employer and can agree on the level and type of service they will provide. "It's time consuming to change vendors if you make a mistake and choose the wrong one," Dubiski warned.
* Put incentive and penalty clauses into the contract with the vendor to make it more accountable. Find out important information, such as whether or not the vendor has a help desk, how late it stays open, and how quickly help-desk staff will answer employees' questions and resolve problems.
Employers now have "tons of choices" as to who should do the outsourcing, Dubiski remarked. The market for HR services and outsourcers has produced "mega providers" of services, who will handle any and all HR services, he said, while smaller firms specialize in specific services, such as recruiting or payroll.
Cornetto advocates "planning, planning, and more planning," long before a vendor is selected. "Take the time to define the scope of what you want outsourced," he said. Finally, like any good shopper, employers looking to outsource HR should compare vendor costs.
Vendor accountability. One of the biggest problems companies experience when outsourcing is ensuring and measuring vendor accountability, Wright said.
"Governance can be a problem," Doyle said. "If there are mismatched expectations about service levels, the outsourcer may not be as accountable as the buyer of the services would like," he said.
The SHRM survey showed that both employers and employees may fear that HR service could be negatively affected by outsourcing, while HR managers may have concerns about a loss of control of the HR functions being sent offsite. Fears about HR service delivery were voiced by 64% of respondents, while 51% of HR managers worried about a loss of control.
"When you outsource payroll services, it is incumbent upon the company to hold regular meetings with the vendor to be certain they have a help desk that will resolve problems as quickly as in-house personnel," Dubiski said.
An employer's contract with the vendor should specify that if the outsourcing firm makes more than a certain number of mistakes, the employer is entitled to a partial refund, Dubiski said.
Remedies like this are important, Wright said, because the HR department usually will be held accountable even when the outsourcing group makes mistakes or does not jibe with the company culture.
The employer and vendor "need to build a relationship, and it's important to get the levels of service nailed down," Cornetto said. He also stressed the importance of making sure that the cultures between the company and the vendor are aligned.
Finally, security issues must be addressed. Doyle stressed that employers need to take care that a vendor "has lots and
lots of control over who has access to employee data." He added, "As concerns about privacy and identity theft increase, we see more and more of our clients kicking the tires' on the confidentiality services we can provide when managing their employees' data."
Employers Increasingly Outsourcing HR Activities
Employers have increased the outsourcing of human resources activities and plan to outsource more types of HR services by 2008, a new outsourcing survey by Hewitt Associates has found.
Of 129 large companies surveyed, 94% indicated that they outsource at least one HR activity. The most common HR functions that are outsourced include outplacement services (91%), employee assistance programs (89%), defined contribution or 401(k) (83%), COBRA administration (77%), and defined benefit (pension) (68%). The survey suggests that by 2008, companies will expand outsourcing into areas such as health and welfare benefits, global mobility, learning and development, payroll, and recruiting.
"The growth of outsourcing will continue to gain momentum as organizations reap the benefits," Brian Doyle, president of Hewitt's HR outsourcing group, noted in a statement. "For most organizations, HR administration is not their area of expertise, so by turning it over to an HR expert, they can focus on critical business needs."
According to the survey, the top reasons companies outsource HR functions include:
* Access to outside HR expertise.
* Service quality.
* Ability to focus on core business.
* Cost savings.
* Relief from administrative burdens.
The most common requirements companies use to select an outsourcing provider range from demonstrated HR process expertise (95%) to prior experience or track record (93%). The majority of respondents (83%) indicated that service level agreements-pacts between the company and the outsource provider about data delivery, issue resolution, and transaction accuracy-also are valued.
"It's important to understand that HR is unique from other areas that companies typically outsource, so it's critical that [employers] conduct a thorough evaluation to ensure they select a provider with the HR expertise, experience, and capabilities needed to manage people issues and deliver the quality service and results they are looking for," Doyle said.
During the outsourcing transition, 81% of companies said it went smoothly, without any significant problems. To help prepare their HR function for outsourcing, the majority of employers typically defined new HR roles and responsibilities (70%), restructured HR (62%), developed and communicated a new HR strategy (55%), and provided training for employees in new roles (43%). Companies also prepared all of their employees for outsourcing by creating communication campaigns (88%) and providing training for managers and employees (56%).
Only 23% of companies have brought an outsourced function back in-house. Of those that did, 62% did so because of poor service while 38% did so because they did not achieve anticipated cost savings.
The survey also found that 77% of companies said the economy had no effect on their decision to outsource HR functions, and nearly half of the respondents (46%) said they used an outsourcing advisor.