Apparently what is good for the goose is good for the gander when it comes to human resources outsourcing (HRO). An August 2004 report by the Conference Board discovered national and state governments around the world are “rapidly joining the private sector” in outsourcing key HR functions. Accenture HR Services sponsored the study, entitled “HR Outsourcing in Government Organizations: Emerging Trends, Early Lessons.”
The Conference Board found four forces converged in the summer of 2004 to fuel the HRO movement among governments.
- IT systems are reaching the end of their life span. Some legacy systems are 25 years old! The report says many provinces/states are looking at “capital outlays of $80-$100 million–expenditures out of their reach.” Adds Glenn Davidson, Chief of Market Strategy and Corporate Development for Accenture HR Services, “No elected official wants to raise taxes to pay for a new HR system.”
- The global economic downturn of 2002 created “severe budget shortfalls.” Rising deficits threaten government’s ability to perform key services. “Outsourcing is a way to finance bulging government budgets,” says the report.
- A cadre of business-minded government bureaucrats has emerged. This group has embraced the private sector’s management precepts, which include outsourcing. “They want to transfer their know-how from the private sector to create efficiencies in the public sector,” says Davidson.
- Younger, technically-savvy employees are working for the government. “These employees are demanding Web-enabled HR services,” says Davidson.
Government’s Rationale to Outsource
The study asked a crucial question: “Is there a similar push in government organizations compared to private sector companies to liberate HR departments from their onerous, transactional processes so they can play a more strategic, value-added role? Were the same drivers–avoiding capital investment in technology and improving services–at work?”
The study found the rationale to outsource the HR function was the same in both the public and private sectors. The three basic financial drivers behind HRO are:
- Save money on on-going expenditures
- Avoid capital outlay
- Turn a fixed cost into a variable one.
The Conference Board report found avoiding capital outlay was the greatest concern for governments because many are still operating with decades-old legacy mainframe systems. Given the shrinkage in budgets, they can “scarcely afford routine software upgrades,” says the report.
“Many government organizations are working off of 25 year-old legacy computer systems that desperately need to be replaced. However, growing deficits, a reluctance to raise taxes, and the economic downturn in the “90s continue to exacerbate these severe budget shortfalls. Finding the money to replace these archaic systems is not easy,” says Davidson.
From a services standpoint, outsourcing allows governments to upgrade services that provide a better work environment for employees. The report says employees like the ability to download the medical benefits policy from home and check the status of a paycheck online. These services are important because they give governments the ability to attract and retain talented employees, especially because governments “generally cannot compete with the private sector’s pay packages.”
At the same time, outsourcing provides HR executives with tools to manage more effectively. That’s a “big plus for government organizations with their primarily unionized workforces and complicated payrolls,” says the study. For example, the report says an organization can easily have 10 different benefits packages, multiple workweek start dates, and dozens of categories of leave, which all must be accurately reflected in the employee databases. “Legacy IT systems that don’t interact make updating data more onerous and invariably result in costly errors,” says the report.
Outsourcing also puts previously unavailable data into HR professionals’ hands, “enabling them to analyze and prepare for the organization’s current and future needs five, even ten years down the line,” according to the Conference Board report.
Government’s “Unique Triggers”
The report discusses the particular constraints and obstacles public-sector organizations face in deciding whether to outsource HR. “Outmoded IT systems and Byzantine business processes common to government organizations are as much a function of leadership change as they are of insufficient capital,” states the report. Even though many public-sector administrators see the need for reform, it is near impossible for any government entity to reinvent itself. “Political pressures can prevent decisions that would be simple, uncontroversial, and cost-effective for private companies,” says the report.
Government’s position as a big employer–in some jurisdictions the primary one–creates another public pressure. If a sizeable number of employees lost their jobs because of outsourcing, they would find few employment opportunities locally. The state then ends up paying for them anyway in the form of unemployment insurance, food stamps, or public support. The government organization ends up not saving money, just spending it out of a different pocket. The study reports job loss hasn’t been the case so far because government HR departments have been “chronically understaffed.”
Raising legislative barriers is another obstacle. The report says 38 out of 50 states have introduced anti-outsourcing bills, most of them prohibiting offshoring activities. To date, lawmakers supporting outsourcing have killed every bill. But these attempts have exerted an “important impact.” The report says many of those 38 states now include provisions in their outsourcing contracts that require the supplier to outsource the work within its jurisdiction or somewhere in the US. The provision keeps tax revenues from the suppliers in local coffers, the report points out.
HRO Hot Spots
The Conference Board and Accenture study found HRO in the government sector has been slow to take root in the US. However, there are a few trailblazers, including the State of Florida, the Texas Health and Human Services Commission, Detroit Public Schools, and the U.S. Department of Homeland Security’s Transportation Security Administration. The report estimates another 15 states are “currently actively exploring HR outsourcing.”
The world leaders in public-sector HRO are government entities in Australia, the UK, and the European nations. The State of Victoria, Australia is a trailblazer; it began outsourcing payroll, HR policies, and HR information systems and reporting in 1996. Cost savings realized have reached 30 percent, according to the report.
“Government organizations have a lot of challenges — they have built-in cost restraints, limited technology budgets, and, similar to their private sector counterparts, have difficulties finding and retaining top talent. HR outsourcing is often the best way to get the best service for every tax dollar,” concludes Davidson.
About the Author: Ben Trowbridge is an accomplished Outsourcing Consultant with extensive experience in outsourcing and managed services. As a former EY Partner and CEO of Alsbridge, he built successful practices in Transformational Outsourcing, Managed services provider, strategic sourcing, BPO, Cybersecurity Managed Services, and IT Outsourcing. Throughout his career, Ben has advised a broad range of clients on outsourcing and global business services strategy and transactions. As the current CEO of the Outsourcing Center, he provides invaluable insights and guidance to buyers and managed services executives. Contact him at [email protected].