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Tips for Outsourcing HR Functions

Employee benefits programs are a primary corporate differentiator in recruiting and retaining a high-quality workforce. But administering these programs and other human resources (HR) functions is a costly and often inefficient, error-filled process. In cost-saving initiatives, many companies have implemented enterprise resource planning (ERP) systems or employee HR self-service platforms via a company intranet or the Internet. Few, however, report in surveys that they have attained the anticipated return on investment (ROI).

Companies that report the highest success rates in transforming their HR process have outsourced one or more of these functions. At Outsourcing Center, we’ve studied highly successful relationships, focusing on how they transitioned the work to a service provider and whether they moved beyond a focus on direct costs to capture more strategic value through outsourcing.

In this article, we highlight what transpired for four world-class companies outsourcing some of their HR functions to Hewitt Associates.

Sorting it Out

Royal Bank of Scotland (RBS), one of the largest financial services companies in Europe, focused its strategic initiatives on improving its ability to recruit and retain employees. The bank first implemented a flexible benefits scheme that would give more decision-making options to employees. They centralized all HR functions, sought to improve productivity levels and make better use of technology.

The Black & Decker Corporation outsourced its pension function to transform it from a fragmented, three-month manual process of determining someone’s pension calculation (and mis-explaining that data to employees) to calling an 800 number and accessing accurate, automated information in a matter of minutes.

Continental Airlines, with more than 55,000 employees, had endured two bankruptcies when it decided to outsource its health and welfare, defined contributions and defined benefits plans to Hewitt. To a degree, the strategy was focused on finding ways to do things more efficiently; management quickly targeted HR, which had almost 50 people – with no expertise in this area – handling just the health and welfare functions.

Their Internet platform and an interactive voice response (IVR) system, both allowing employees 24×7 access to change their HR data, have achieved high levels of increased efficiencies. This has been especially beneficial in access to data for the company’s complex 401(k) plan, which has more than 86. An unanticipated benefit achieved during the transition phase was that Continental grew to better understand the obligations of its defined benefits plan and the value of the plan.

But, more importantly, claims Lisa Donohoe, staff vice president of Benefits, Compensation and International HR for Continental, the airline outsourced to upgrade the services and delivery for its employees. The stringent, comprehensive service level specifications, she says, are based on Continental’s own model of performance for its airline customers. “Our employees are out there every day delivering excellent customer service to our airline passengers,” she says, “and we wanted that same level to be delivered to our own employees.”

Compaq Computer Corporation also had better service to its employees in mind as a strategic objective for outsourcing its HR process. During focus group assessments of employee satisfaction, the company found its decentralized HR model delivered very inconsistent results. “That was obviously of deep concern to us, because what we deliver to our own customers is service,” states Elaine Beddome, director, Compaq Benefits (before its merger with HP). “There is also a fiduciary responsibility that goes with benefits, and we were concerned about our people multitasking.” The fact that the computer giant’s employees were tech-savvy and had high expectations around technology in delivery of services was also an important factor.

The Compaq business model, she adds, uses defined measures of what determines success, high quality and delivery. Compaq, at the time, had 60,000 employees, almost 9,000 retirees, and 1,000 disabled employees with access to benefits. The question then was not whether to centralize, but whether to move that centralized process to an external service provider. They determined they would get a much better product and more value for their investment by outsourcing.

Blackberry Patches: Dealing with Unanticipated Problems

Just like reaching into a blackberry patch and finding chiggers, these companies found some unanticipated problems when they transitioned their work to the service provider.

Speed of implementation is high on the list of desired outsourcer characteristics. In banking and other industries beset with a high number of mergers/acquisitions, implementation of an outsourcing arrangement can be slowed by having to consolidate disparate benefits, payroll and other HR data – much of which is not automated before outsourcing.

The enormous scale of a merger/acquisition project is always a shock to the parties involved, often described as an unbelievably exhaustive administrative process. Buyer expectations often run far ahead of what can actually be implemented by a particular date. Transitioning the mammoth RBS/Nat West acquisition data to Hewitt, for instance, took 27 months, along with a lot of overtime and additional resources.

Vince Raimondi, director of Benefits-Americas for USB AG, an international investment bank, has outsourced its 401(k) and pension plans record-keeping and funding arrangements for all of its international operations to Hewitt. “We constantly buy and sell other companies (Paine Webber, for example). It requires very tight timeframes – lots of data manipulations and system manipulations and lots of interface hookups with other companies that have to be done within a couple of weeks,” explains Raimondi.

USB has 7,000 active employees and 11,000 retires and vesteds. The initial transition to Hewitt was accomplished in six months. During that time, Hewitt had to get up to speed on a number of old, small plans from prior acquisitions and grandfathered provisions. Raimondi comments that it couldn’t have happened in such a short timeframe if the bank’s payroll and data had not already been centralized on one system.

Similarly, Compaq found its programs were complex with heritage and grandfathered benefits plans from prior acquisitions. Because of this constraint, it sought a sophisticated service provider.

Black & Decker, having acquired a number of power tool companies, also was faced with a variety of poor data. With 12,000 employees, 11,000 retirees and 8,000 deferred vesteds, this was a gigantic problem. Ray Brusca, the company’s vice president of Employee Benefits, says he knew it would be impossible to “go from a sloppy, fragmented, manual process with lots of missing data to a completely automated system.” Someone who says going from one extreme to the other in a short timeframe can be done is merely giving a hollow promise, he adds.

In fact, transitioning the Black & Decker pension process to Hewitt took seven years and was accomplished in three phases. Because Black & Decker was also involved in an initiative to centralize and implement an ERP system to replace its 11 disparate payroll systems in the early 90s, its payroll data, which had to be accessed for pension calculations, was in a fluctuating state of accessibility and accuracy.

The first step in transitioning the work to the service provider was to move the actuarial work from a number of vendors to just one – Hewitt – with a guaranteed performance level of pension calculations in a two-week turnaround instead of three months. Hewitt still performed much of the work manually until the payroll data was cleaned up. Brusca recalls that all of the benefits representatives in all of the company’s factories had to manually search through all employee files and then find missing data (spouses’ names, birth dates, missing earnings history). In phase two, Hewitt automated the pension calculation process.

Phase three implemented an electronic interface to transfer employee data to Hewitt’s system and implement the 800 number for employees and retirees to access their data. The Hewitt system also electronically feeds direct deposit data for the retirees each month, which eliminated the manual interfaces the buyer’s staff had been performing.

Moreover, short lead times are often the scenario for outsourced benefits and other HR functions, where there is an annual enrollment. At Royal Bank of Scotland, for example, the new flexible benefits scheme had to be implemented in three months; two months later, it was enrollment time.

Donohoe, at Continental Airlines, advises companies to make sure the proposed timeline is achievable for both the buyer and the service provider. Buyers who want to get something done in three months, she says, should keep in mind that “it might be trash” if implemented in too short a timeframe. Moving the airline’s health and welfare process (transitioned in phases based on benefit plans) was accomplished in six months; the 401(k) plan took nine months. Transitioning from an electronic system to the provider’s electronic system takes less time.

But the defined benefits plan took 18 months to transition. “It was horrendous,” recalls Donohoe. “All the records for that plan were kept manually in five different sources that had to be combined and compiled. Then we had to ensure the integrity of the data before it was converted.”

Beyond Technology’s Bells and Whistles

Tony Williams, head of HR Delivery Services at Royal Bank of Scotland, believes a key benefit of outsourcing is having “the provider’s consulting world take a look at the buyer’s operational world.” That expert analysis can result in win-win-win innovative ideas; while they increase the buyer’s value proposition, they also create more revenue for the provider and improve employee satisfaction levels.

RBS, for example, decided to leverage synergies within the benefits of the outsourced call center. Discovering in an assessment that it had no standardized processes for employees going on maternity leave, the bank created an initiative designed to improve employee retention levels. Hewitt now performs an outbound call process and follows up by sending an informational packet to those employees, in order to keep them engaged while on maternity leave.

Then, recognizing there was a lot of valuable employee turnover data in the call center and the data warehouse, RBS and Hewitt designed two questionnaires. The employee exit questionnaire provides core information for the bank as to whether its exiting employees are high, low or average performers and whether a management problem is involved in retention levels. A questionnaire presented to new hires asks for their comments on their expectations versus the reality of what they encountered during their initial three months of employment. The bank uses these rich sources of data generated from outsourced HR functions to proactively plan for potential future performance issues.

Compaq is highly focused on thoughtful awareness of an employee’s feelings around particular life-changing events and instituted specialized training sessions for Hewitt representatives around communicating with employees experiencing such events as marriage or divorce, childbirth, death of a loved one, and impending retirement.

To support its employees at such times and let them know Compaq cares about them, Compaq designed “Life Matters” kits. Some components are Web-based, others are items mailed to employee homes. “Here are some things you might want to think about now that you are newly married (or thinking about retirement, etc.)” is the focus of the kit. With the “having a baby” kit, a baby blanket with “Compaq” stitched on it is mailed to the employee’s home. Hewitt is responsible for distributing the kits and has built into its call center technology the customized scripts for things employees should be thinking about at such life-event times.

Continental Airlines has leveraged its IT spend by adding layers of additional services on top of the core HR services originally outsourced. Hewitt now handles the company’s United Way campaign, working that contribution and collection process through its infrastructure at the same time as it’s handling annual enrollment for benefits. Hewitt also now administers through its call center the nomination and rewards selection processes for a sophisticated Continental employee incentive program for length of perfect attendance.

It’s Not a Touchy-Feely Process-But It’s Crucial

The fact is, HR is not just a back-office process, and the decision to outsource it should never be just an IT direct cost decision. HR plays an important strategic role in an organization. But, because it’s not a core competency, it’s crucial that the work be handled by experts. Sometimes (but not always) that expertise and access to world-class resources costs more than doing the work in house. Leading companies, however, recognize that the decision to outsource HR, after all, is a very strategic investment in the buyer organization’s employee satisfaction and retention levels.

Lessons from the Outsourcing Journal:

  • Even when manual, handholding HR functions become automated, outsourced and sometimes move to employee self-service platforms, leading companies clearly understand that success definitely depends on their choice of service provider. The HR service provider should be one whose processes and systems are flexible for ongoing changes to benefits plans and innovative value-added services; who will invest in technology to enhance the buyer’s long-range strategic plans; and one that is willing to understand and enhance the buyer’s core business philosophies and employee relationship strategies.
  • Because the benefits arena requires so much investment on the part of both the buyer and service provider to build the infrastructure and the business rules around the benefits plans, it behooves companies to sign a contract with a minimum term length of three to five years in order to realize the full value of their investments.
  • If benefits plans are large, complex or include heritage and grandfathered programs from prior merger/acquisition activity, it’s important to select a service provider with a strong implementation process and methodology.

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