Measuring the benefits of outsourcing human resources
As HR management grows more complex and as events such as Oracle’s acquisition of PeopleSoft redraw the landscape, the value of HR outsourcing (HRO) becomes more apparent. A recent survey of 298 HR professionals by the Society for Human Resource Professionals showed that 58 percent of organizations outsource one or more HR functions. This trend is expected to burgeon as employers continue to pursue alternative arrangements for operating most efficiently and reducing their risks.
Consider the comments of Lowell Williams, HR practice leader at EquaTerra, in a recent issue of Human Resource Executive: “(The Oracle-PeopleSoft deal) is a wakeup call … to get out of the systems ownership business and instead make the decision to outsource.” Williams points to the plight of the HR executive who just convinced his CEO to spend $800,000 on a PeopleSoft upgrade, only to learn the next day that PeopleSoft is being acquired by Oracle and will be supported only for a while.
Fortunately for all types and sizes of employers considering HR outsourcing, well-equipped service providers are emerging to meet not only HR information system needs, but the full spectrum of requirements as well -- often more impressively than the employer could in house. Rockwell Automation, with 15,000 employees nationwide, recently signed a long-term HRO contract with Hewitt Associates. Other national consulting firms also offer HRO services, as do countless small to mid-size companies.
Hewitt Associates defines HR outsourcing as “the hiring of specialists to develop and maintain knowledge, processes and technology that are used to provide HR-related services for a company's employees, much (as) many companies do for their security or food service operations." HRO is not the same as offshoring, which has generated so much controversy. HR Magazine estimates that only 2 to 3 percent of HRO in the United States involves contracting with offshore vendors.
Outsourcing continues to gain favor as a strategic option because, when conducted well, HRO:
- Improves efficiency and controls headcount.
- Leverages economies of scale to control costs associated with technology, benefits, training and compliance.
- Provides access to best practices, technology and resources.
- Assumes accountability for compliance with complex labor laws.
In the best cases, outsourcing some responsibilities allows an organization’s HR professionals to redirect attention to strategic HR initiatives that contribute to the bottom line. In smaller companies, outsourcing can liberate senior managers to focus on core activities rather than divert time and energy to day-to-day HR matters. Outsourcing also allows a company to convert a fixed cost to a variable cost and, ideally, improves the quality of the organization’s offerings. Good HR outsourcing should generate benefits for employees as well as for the CEO and CFO.
Making a case for metrics
When evaluating the benefits of outsourcing all or part of the human resource function, it’s important to establish measures that quantify goals and accountability. An organization first must determine what it hopes to achieve with an outsourcing initiative. Commonly, objectives include reducing costs, and improving technology, internal HR resources, and services to employees.
Human-resource expert John Sullivan, professor of management at San Francisco State University, suggests using well-designed metrics that help ensure the proposed outsourcing will achieve its desired impact. Where HR results have traditionally been described using words, metrics quantify demonstrated outcomes. Metrics remove the guesswork and subjectivity about what has been planned and accomplished, and they provide a standard against which performance can be measured.
Sullivan notes the following advantages:
- Metrics outline expectations for vendors before and during the engagement, focusing all parties on important issues and key priorities.
- By allowing comparisons of results during different time periods, metrics encourage an organization to continuously improve.
- Metrics monitor internal customers’ satisfaction with the outsourcing program. Without such measurement, anecdotal evidence and assumptions may be given too much weight.
Choosing a vendor: Let the buyer beware
On the surface, vendors’ services may appear similar. However, any employer considering HRO should require the following of bidders:
- Proven delivery capability. Is HR outsourcing a core business of the vendor? If not, the vendor will not add much value. Ask for references and case studies that show success in helping clients achieve cost savings and strategic goals.
- Technical expertise and support. How extensive is the vendor’s team that will be supporting the client in its full spectrum of needs, including those services needed only occasionally? Specific competencies in compensation, benefits, employment law, training, technology, safety and compliance are essential elements of the value proposition that top-shelf HRO vendors provide. If the vendor’s team consists of just a few HR generalists and a limited scope of shared services, the expertise may be too thin.
- Liability insurance. Does the vendor carry coverage for employment practices liability and errors and omissions? If not, the client may be held liable if the consultant is accused of negligence.
Employers considering HRO should recognize, too, that a successful initiative will depend on developing a partnership between the vendor and senior management. As with any long-term relationship, initiating open and clear communications, with plenty of client feedback, is necessary to ensure everyone understands the others’ goals and expected outcomes.
Conclusion
Outsourcing is just one of the ways that today’s organizations can thrive by adapting the fluid concepts of “employee,” “vendor,” “partner” and “service provider” to their needs and budgets.
The appeal of outsourcing HR management and other functions is clear. Because it’s become so difficult for one person to keep current on all facets – equal employment opportunity, affirmative action, health and safety, benefits, employee relations, wage-and-hour issues and compensation – contracting out the HR function to a well-equipped vendor can reap a host of rewards.
But simply assuming that outsourcing will pay off does not guarantee success. Before the organization takes the leap to begin or expand an outsourcing program, clear goals -– and metrics for tracking progress toward them -– should be outlined. Vendor candidates should be screened thoroughly, and management must commit to communicating clearly and frequently regarding agreed-upon objectives. Only then will an organization realize the tremendous opportunities that well-thought-out outsourcing can offer, improving the quality of workplace life for employees and senior management alike.
