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Why HRO Is Still Growing and What Needs Fixing

“Outsourcing is the way the United States and Canada do human resources (HR).” So says David Dell, who headed a Conference Board study of human resources outsourcing (HRO) released in April. The study found that only 9% of the 122 companies surveyed did not plan to outsource at least one HR function.

Dell, who now heads his own research and consulting firm, says these statistics indicate that growth of HRO “has not yet hit its high-water mark.” Even though HRO is the most mature BPO process, he predicts it will continue to grow. “No one said to us, ‘We’ve done all the HR outsourcing we’re going to do. The momentum is still there,'” he reports.

HR executives told the interviewers they had to consider outsourcing because they wanted to “shift resources from the routine, transactional part of HR work to the value-added activities that help HR become a strategic contributor to the enterprise.”

The Conference Board’s new research, entitled, “HR Outsourcing: Benefits, Challenges, and Trends,” is actually the follow-up to a similar study it completed two years ago. The new report tracks trends and changes in the last 24 months. Accenture sponsored both studies.

HRO Buyers Are Satisfied with Their Outcomes

Another key finding was that companies are happy with their HRO. Ninety-one percent said outsourcing achieved their HR objectives. Eighty percent of the respondents told researchers they would outsource again based on their current experience.

The “most compelling” indicator of satisfaction, according to the study, was none of the companies who outsourced their HR functions plan to take the process back in house when their contracts end. This was true across all industries.

A New Move to a Single Supplier

Today, the report says HR represents a blend of in-house staff assigned to more strategic tasks and transactional work outsourced to multiple suppliers. The Conference Board study discovered a change in approach over the last two years. Almost one-quarter (23%) of the respondents told researchers they have moved or intend to move to a single provider in the next three years. Companies believe a single provider will be a better choice because they have discovered multiple suppliers are “harder to manage and frequently do not work well together.” Glenn Davidson, chief of market strategy for Accenture, adds buyers enjoy greater economies of scale in a full service, end-to-end HRO transaction.

The research included the case study of a large manufacturer who shifted its HRO from 15 different providers to one. After one year, the manufacturer improved capability; reduced benefit administration costs by 20% and HR administrative tasks by 60%; and eliminated losses from inaccurately processed claims.

The appearance of suppliers who can handle a full-service transaction is another reason this trend is emerging. Two years ago buyers had far fewer options if they wanted an end-to-end transaction.

The study quantified national differences. Currently, HRO has the greatest acceptance in the US; 87% of the respondents outsource. Canada has a 71% acceptance rate, with Europe only approaching 57%. Davidson explains it is easier to outsource in the US and Canada because there is greater commonality among states and localities in the US than there is among sovereign nations in Europe. Davidson says currently no HR supplier is able to provide payroll services to every country in Europe. “We’ll see significant growth when someone develops a platform that can handle every country’s requirements,” he predicts.

The Growth of Governance

The growth of governance structures within HRO is also a growing trend. Outsourcing relationships are maturing, so buyers have experience with the importance of maintaining the right relationship with their suppliers. Sixty percent of the respondents have created or are creating a core competency for managing HR providers. The goal of governance is not only to determine that the supplier is meeting service level agreements (SLAs) and cost savings requirements; another goal is to “create an association that allows parties to work together productively.” Davidson says most companies look at HRO for cost savings. When they start looking for a supplier, they discover everyone provides cost savings. “SLAs provide the distinguishing factor,” he points out.

The current regulatory environment often forces a company’s internal audit department to work with its partner for “outside help to continuously audit the relationship,” according to the study.

Growth of HRO: Problems with Outsourcing

The study says respondents painted a “mostly positive picture” of HR outsourcing. But there were some problems. They categorized the major difficulties as “growing pains.” These included:

  • Failure to realize cost savings because of hidden or escalating costs
  • Poor service or lack of responsiveness by the supplier
  • Supplier management difficulties, especially when there are multiple suppliers to oversee
  • Financial instability of the supplier

Buyers also told the Conference Board there were other areas where they believe they could have done better. These include:

  • Initial preparation: Knowing what they wanted, cleaning up their act, and lining up the appropriate support
  • Supplier selection: Looking wide and drilling deep; keeping options open; and getting all the help they could
  • Change management: Taking the time to prepare, being ready for the effort; getting management commitment; and then doing it fast
  • Technology: Remembering technology is complicated and must be tested; understanding all interfaces; and anticipating the costs of upgrades and change
  • Quality assurance: Drafting detailed SLAs with penalties, tracking performance and cost savings; and reacting fast
  • Governance: Assigning the right person to have responsibility and having a clearly understood model.

Summing up, Davidson says “Companies have evaluated the benefits and challenges and have determined HRO adds strategic value to their business.”

Lessons from the Outsourcing Journal:

  • The growth of HRO is still in progress even though it is the most mature BPO process.
  • Currently a multi-supplier environment is standard. But almost one-quarter of the respondents are moving to a single provider. This makes the process easier to manage and provides greater economies of scale.
  • HRO buyers are satisfied with their outsourcing initiatives. None of the survey respondents plan to bring the process back in house at the end of their contracts.
  • An important role of governance is to create a good working environment between the two parties. The emergence of governance competencies within HRO supports the rationale behind the growth of HRO.
  • Buyers have to be aware of the problems with HRO, including financial instability of the supplier, difficulties in managing more than one supplier, failure to achieve cost savings due to hidden costs, and poor service.

How the study was done: The Conference Board conducted the original HR study in 2002 by surveying 120 companies with revenues over $1 billion. The current study included 122 companies with revenues over $1 billion. Seventy-six percent were from North America; the remainder were headquartered in Europe. It followed up with a new study this year. The Conference Board sent the survey primarily to senior HR executives that were members of the Conference Board. Follow up interviews were conducted with respondents and selected others known to have experience with outsourcing.

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