Achieving post-outsourcing success.

Mark Oshima, HR Outsourcing Change Solution Leader, Tina Kao & Jennifer Tower, Talent and Organization Consultants, Hewitt Associates

Many companies fail to realize the full financial and strategic benefits of outsourcing because in their enthusiasm for "what goes" they devote insufficient attention to "what stays." HR leaders need to understand that outsourcing success means having the courage to transform the make up, organizational design, and strategic priorities of HR. For the retained HR, this represents a once-in-a-lifetime opportunity to enhance its value to the business.

According to a recent survey by Hewitt Associates (Hewitt Research Study, 2004), more than 60 percent of companies outsource part or all of HR administration. By contracting out technology maintenance, data management, HR customer service, and other HR processes, companies aim to reduce costs, improve service levels, and free up time for their HR leaders to focus on critical business issues. As the HR outsourcing industry matures and brand name companies such as Prudential, Sony Electronics, Proctor and Gamble, and

Sun Microsystems sign multiyear HR business process outsourcing (HRBPO) agreements, more companies are exploring broad-based HR outsourcing.

The focus now is on the new HR function in the post-outsourcing world. Many companies fail to realize the full financial and strategic benefits of outsourcing because in their enthusiasm for "what goes" they devote insufficient attention to "what stays." HR leaders need to understand that outsourcing success means having the courage to transform the make up, organizational design, and strategic priorities of HR. For the retained HR, this represents a once-in-a-lifetime opportunity to enhance its value to the business.

Why Companies Outsource HR

Outsourcing is increasingly part of business strategy, particularly at high-growth firms. Cost savings is an important part of the equation, but in a recent survey at least half of executive respondents said that a "better focus on core competency" and "improved business processes" were among their top three reasons for outsourcing (Hewitt Research Study, 2004). The most common reasons for outsourcing, whether it is benefits, payroll, employee data management, or all HR administration, include:

1. Focus on the core business. Companies that outsource can free up staff from HR administration to focus on more strategic work: activities that are integral and differentiating to the business.

2. Drive cost savings and efficiency. By outsourcing, companies can reduce operating costs and minimize the need for additional capital expenditures such as technology purchases and upgrades. According to a recent report by the Yankee Group (Fersht, 2005), companies with more than 10,000 employees can expect a savings of 20 percent from HR outsourcing.

3. Improve service experience. Outsourcing HR enables companies to provide new capabilities and services for employees, such as 24/7 access to their benefits via the Internet, decision support tools, and improved customer service. Also, in broad-scope HR outsourcing, processes can be seamlessly integrated across multiple HR areas (hiring, compensation, benefits, learning, etc.) to match how managers and employees access HR information and to eliminate the silos that are common in many HR organizations.

4. Build flexibility and responsiveness to business needs. Outsourcing can help a company be more flexible and responsive to changing business needs by providing additional capability, capacity, and unit cost predictability. For example, highly acquisitive companies have found outsourcing an invaluable way to scale their organization while providing unit cost predictability for HR costs tied to supporting the acquired populations. This is critical in helping the business ensure that integration costs are anticipated and managed rigorously.

Sony Electronics Inc. is one company that moved to outsourcing HR administration for a number of reasons, not solely to reduce costs. An outdated technology infrastructure, inefficient HR processes, and nonstandardized HR tools across businesses and locations were all drivers behind the decision. According to Patricia Boggi-Gibbons, VP of e-HR and Benefits, "managing HR operations detracted from our true role as people and talent strategists, and many other companies are coming to the same conclusion. We became convinced that the HR outsourcing model was the wave of the future."

What HRBPO Means for the HR Organization

HRBPO gives companies the opportunity to transfer all administrative, customer service, and technology infrastructure work to an outside partner, so that they can devote energy to strategy, design, and consulting to the business. Based on Hewitt's research (HR Analyzer database), the typical pre-HRBPO company devotes between 40 and 50 percent of its HR FTEs to routine transaction processing, data entry, and responding to employee and manager questions (Lawler, 2004). When that work shifts to the outsourcing provider, HR needs to make smart decisions about overall HR headcount, the role of the retained HR organization, and the critical skills and competencies needed.

What Goes to HRBPO

In HRBPO, the vendor provides centralized HR administration and customer service, maintains the employee portal and supporting technology infrastructure, and coordinates internal and external interfaces. Currently, total or partial outsourcing is most common in benefits and payroll, gaining ground in staffing, training/development, compensation and HRIT, and emerging as new service offerings in areas such as performance management and communications planning. Using four HRBPO pioneers (Lawler, et al., 2004)--British Petroleum, Bank of America, Prudential Financial, and International Paper--as examples, Exhibit I shows that the scope of services delivered via HRBPO expand beyond the basics to include staffing/recruiting, compensation, training administration, and emerging areas such as HRMS and expatriate administration (HR Analyzer database).

What Stays in MR

The role of HR, and the opportunity to contribute to business strategy, is enhanced by HRBPO. The core responsibilities that stay in HR are:

1. HR strategy: Determine actions HR must take to drive results for the business.

2. HR program design: Design of HR programs and practices for benefits, compensation, talent programs, staffing, and other talent management areas.

3. Executive coaching and organizational consulting: Direct support for senior leadership in improving their individual effectiveness and the effectiveness of the organizations with which they work.

4. Work force analysis and planning: Interpretation and action planning based on workforce data and external trends, including staffing and talent strategies.

5. Problem solving and manager support: Assist managers in HR and other related issues including definition of staffing needs, compensation decisions, and complex employee relations issues.

6. Change management: Support in strategy and execution of firm-wide change initiatives, often in the context of major restructuring (e.g., merger, divestiture).

7. Budget management: Management of the HR budget.

8. Vendor management: Management of relationship with BPO provider; establishing and monitoring service levels.

One of the most common, and desired, results of HRBPO is that HR business partners or HR generalists increase in visibility and impact, as they enhance their role as business advisors and HR content experts. Freed up from a role of "jack of all trades," they are able to focus on creating solutions to business problems--not on transactional support. Recent Hewitt (Exhibit 2) data found that companies that implement HR shared services (internal or outsourced) more than double the reach of the HR generalist from a 231:1 ratio (employee to HR generalist role) to a 553:1 ratio. (Editor's Note: In the Hewitt data, the broader comparison of employee to HR overall is 86:1, a number closer to the traditional 100:1 ratio.)

Four Steps for Achieving Post-Outsourcing Success

To maximize the value from HRBPO, HR needs a clear perspective on how this dramatic change fits into the overall HR strategic vision. Smart decisions need to be made about how the retained HR organization will function in the new environment. At the outset of an HRBPO transformation, HR leaders must:

1. Anchor HR outsourcing in the business strategy.

2. Designate a "champion" for the outsourcing initiative.

3. Develop a vision and strategy for retained HR.

4. Get the right people with the right skills and the right mindset.

Anchor HR Outsourcing in the Business Strategy

HRBPO should fit with the business strategy, in its expected outcomes and the road to getting there. HR leaders in the organization need to understand and articulate outsourcing's impact on the business, showing how HRBPO not only benefits the HR function, but also how it affects the enterprise as a whole. This is critical to creating the right buy-in and establishing the appropriate expectations from business leaders throughout the organization.