HR Outsourcing (HRO): Its Impact on Your Company,

HR Outsourcing (HRO): Its Impact on Your Company,

HR Outsourcing (HRO): Its Impact on Your Company, Your Career, and the HR Profession Presented by Tom Darrow 2005 SHRM-Atlanta President Elect Principal, Talent Connections October 17, 2005 Agenda HR Outsourcing Overview Impact on Companies Impact on HR Profession Impact on Your Career Selecting, Managing, and Measuring Outsourcing Providers

Helpful Resources What is Outsourcing? The performance by outside parties, on a recurring basis, of tasks that would otherwise be

performed in-house. Other Definitions In-sourcing Off-shoring Co-sourcing Geo-sourcing

Outplacement Types of Outsourcing1 Business Process Outsourcing Information Technology - 28% Human Resources 16%

Sales & Marketing 15% Finance 11% Administrative 9% All Others 22% How Common is HRO? 58% of companies outsource some HR function2 91% of companies with $1 billion+ annual revenues are now considering HRO3 HRO grew 28% from second half of 2004 to first half of 20054 100

90 80 70 60 companies that outsource some HR function companies with $1 billion + annual revenues considering HRO HRO growth from second half of 2004 to first half of 2005 50 40

30 20 10 0 companies that outsource some HR function companies with $1 billion HRO growth from second + annual revenues half of 2004 to first half considering HRO of 2005

The HRO Market In next 5 years, global spending on HRO will double from $40 billion to $80 billion5 From 2002 to 2004, 14% increase in large firms that would consider HRO6 5 Most Commonly Outsourced HR Services7 1. 2. 3. 4. 5.

Background Checks 73% Employee Assistance/Counseling 66% FSA Administration 67% COBRA 55% Healthcare Benefits Administration 60% Background Checks Employee Assistance / Counseling FSA Administration

Series1 COBRA Healthcare Benefits Administration 0 10 20 30

40 50 60 70 80 Other Types of HR Outsourcing7 Pension Benefits Administration 55%

Temporary Staffing 54% Retirement Benefits Administration 47% Payroll & Software Services 48% Recruiting, Staffing & Search Non-executives - 30% Executives - 29% Other Types of HR Outsourcing7

Employee Relocation 29% Training and Development 21% Incentives 19% HRIS & Web-based Services 15% Reference Checks PEOs and ASOs Sourcing Consultants & Legal Services Screening & Workplace Security

Process, Project, and Systems Management Least Commonly Outsourced Functions7 Performance Management 3% Strategic Business Planning 4% Policy Development/Implementation 4% Employee Communication Plans 10% Performance Management Strategic Business Planning Series1

Policy Development/Implementation Employee Communication Plans 0 2 4 6

8 10 Audience Survey How many of you outsource part of your HR function? Payroll Benefits Recruiting, Staffing, & Search Training HRIS & Web-based services How many of you outsource all of your HR function?

What led to the decision to consider outsourcing? Why Outsource? Allow HR to focus on core competencies Creates strategic opportunities for HR professionals Improve quality, efficiency, and effectiveness Relief from administrative burdens Reduce operating costs Other Benefits to HRO

Access to outside HR expertise Greater diversity of HR services Leverage vendor investments in technology rarely available to HR organization Limit fiduciary, audit, and litigation risks and liabilities Upgrade level of customer service Ease time pressure demands Better, faster, cheaper Risks Over promise and under deliver Nonperformance of key function

Cost Loss of institutional knowledge Difficulty managing vendor relationship Change in providers business or financial stability Lack of fit with company culture Organizational resistance or unreadiness

When to Outsource High HR service delivery costs No further investment in technology End administration of transactions and focus on strategic work Improve quality of HR services Strong business case Other business reasons Considerations Core Competency? Best in Class? 1. What is your vision for your HRM

business? 2. What metrics will measure progress toward vision? 3. What business outcomes are needed from the HRM aspects of the business? Poor Reasons to Outsource Do not outsource just because you are frustrated Do not outsource as a last resort, just because you have tried everything else

Outsourcing Myths Outsourcing is just a fad Outsourcing can be kept secret from employees Outsourcing is only for the largest companies Messes must be fixed before outsourcing Outsourcing is for everyone Trends in HR Outsourcing Market Specialization

Consortia Buying Globalization Mid-market Standardization Mania Utility Model Evolution Consolidation and Partnering

Regionalization The Future of HRO 1. Growth-Maturation of HRO market 2. Increasing weight of non-cost drivers 3. Commodization of HR functions 4. New roles for internal HR departments 5. New career opportunities for HR professionals The Future of HRO (contd)

6. Expansion of small/mid-sized HRO markets 7. Demographic changes 8. Improved HRO metrics 9. Reshaping of industry Impact on Companies Employee reactions HR executives taking part in operational and strategic decisions Elimination of bureaucracy Customer service improvements

Impact on Companies (contd) Growth of self-service platform Slimming down staff Cost savings Model will serve to guide other organizational functions (IT, accounting)

Impact on HR Profession Internal HR at significant disadvantage in cost per transaction Loss of control of key processes Enhanced credibility Strategic focus Decentralized structure Internal politics HR as business partner Move to customer service culture

Impact on HR Profession (contd) Management and Organizational Development big picture view New roles consultant and HR strategist Develop competencies to remain valuable HR is exposed and more visible as organizational function

HR is far more measurable Align HR strategy with corporate goals Impact on Your Career Transformation from transactional administrator to business partner that sets strategy Develop competencies to negotiate and manage vendor relationships Demonstrate ability to provide business solutions for employee and customer problems Change bureaucratic culture

Develop strategic expertise necessary to manage human capital Impact on Your Career Deliver exceptional customer service Sharpen your skills Build/Develop your network Stay on top of trends and their implications Utilize vendors now so that they can help you later

Online Resources Better EquaTerra Everest Group - HRO Today HR Executive Human Capital Magazine HR Outsourcing Gaining Traction Fast HRO2003.pdf Online Resources (contd) Nelson Hall Outsourcing Center Outsourcing Institute Outsourcing Suppliers The Outsourcing Management Zone

Books The HR Scorecard: Linking People, Strategy, and Performance by Becker, Huselid, and Ulrich (2001) Strategic Outsourcing: A Structured Approach to Outsourcing Decisions and Initiatives by Greaver (1999) Out of Site: An Inside Look at HR Outsourcing by Beaman (2004 ) Books (contd) Outsourcing: A Guide to Selecting the Correct Business UnitNegotiating the ContractMaintaining Control of

the Process by Bragg (1998) The Challenge of Outsourcing Human Resources by Vanson (2004) Outsourcing Human Resource Functions: Strategies for Providing Enhanced HR Services at Lower Costs by Cook (1999) Professional Organizations Human Resources Outsourcing Association International Association of HR Information

Shared Services & BPO Association SHRM National Outsourcing Forum QUESTION S? THANK YOU! Tom Darrow [email protected] net Selection Process RFI request for information RFP request for proposal Site visit Create and use scoring tools Top 3 potential providers deliver

presentation Selecting a Provider Identify must haves and nice to haves Discuss provider with consultant, competitors, former customers/employees Perform reference checks Determine current state of providers market share Consider local vs. remote Selecting a Provider

(contd) Identify providers recent disappointments Determine providers current weaknesses Beware of off-the-shelf solutions from vendors Determine providers current workload and capacity Selection Criteria Proven track record Cost of vendor services

Service level guarantees Flexible contract options Cost savings guarantees Recommendations from other companies Compatible corporate culture HR process expertise Leading technology

Transitioning Resources Launch period between selection and implementation Approximately 90 days Time of learning in order to gain mutual understanding of company and processes Communication and project management are key Slowly turn over control as you transition resources Cannot measure results until end of this period

Managing the Provider Who should manage the provider? CFO Head of HR Other HR individuals Managing the Provider Establish performance targets and set expectations up front Determine priorities and communicate them to vendor Establish reporting relationships up front

Provide forum and timing for discussion of issues Anticipate and plan for conflict resolution arbitrate when it occurs Ongoing ownership, involvement, supervision Managing the Provider (contd) Where continuity is critical, establish long-term relationships with vendors Review annual operating plans and major initiatives Guidance for provider and buyers

managers oversight Require competitive bidding for outsourced service at regular intervals Review contract terms and suggest changes as needed Managing the Process Look beyond initial cost savings and track affect on employee satisfaction and organizational performance Ensure senior management buy-in and involvement Reinforce/reward through incentives

Focus on quality first, cost second Test outsourcing with specific function before expanding Managing the Process (contd) Facilitate feedback from internal HR team Manage resistance from internal HR team and company at large (communication is key) Anticipate and manage culture change Develop staff members to effectively

manage vendor relationships Measuring Performance Insist on accurate and frequent status reporting by vendors Demand immediate notification when problems arise Metrics are key Quantitative terms Incorporate multiple time periods Measuring Success Internal metrics: effectiveness,

efficiency, quality, productivity External metrics: revenues, expenses, market share, customer relations, quality productivity Typical Problems Lack of measurement 88% of large business require metrics8 Only 41% of mid-sized companies stipulate metrics in contracts8 Rush into autonomy too soon Unrealistic expectations and goals Outsourcing for the wrong reasons

Overly focused on cost savings Lack of communication Difficulties managing vendor Employee resistance Success Factors Preparation is paramount Be a knowledgeable buyer Realistic goals and expectations Strategic vision Consider permanence of outsourcing costs involved in switching outsourcing vendors or ending HRO Find the right vendor

Satisfaction Recent survey of 129 large companies representing 2 million employees9: 89% satisfied with outsourcing arrangement 85% achieved hoped-for benefits Additional 20% achieved unexpected benefits satisfied

achieved hoped-for benefits Series1 achieved unexpected benefits 0 20 40

60 80 100 Best Practices Selective path toward HRO Multiple vendor relationships Combination of internal and external strategies Overview of Process

Outsourcing Model Greaver, 1999 1. Planning 2. Exploring strategic initiatives 3. Analyzing costs/performance 4. Selecting providers 5. Negotiating terms 6. Transitioning resources 7. Managing relationships Planning Prepare HR Develop and communicate new HR strategy Define new roles and

responsibilities Restructure HR Hire new employees to fill skill gaps Provide training for employees in new roles Planning (contd) Prepare Organization Develop HR strategy within overall organizational strategy Communication plan Resolve issue of whose payroll individuals

are now on Are HR employees actually employees of provider? Does head of HR work for company or provider? Exploring Strategic Initiatives Assessment Self examination SWOT of department Organizational scan Define opportunities and benefits

Build the business case consider all costs and impacts on organization All functions that are not core competencies should be considered for HRO nothing is sacred Consider the driver behind HRO decision Analyzing Cost/Performance Understand market trends and competitive position Identify goals and objectives Determine added value Gather baseline HR costs and metrics Compare current HR operations to

benchmarks Determine which processes have highest strategic importance and add most value Identifying a Provider Referrals/Networking Newspapers and Magazines (HRO Today) Internet Mailings Professional Association Lists Negotiating Terms

Good contracts make good partners Maintain heat of competition during negotiation Reasonable, but clearly established, expectations Well-documented deliverables regarding every aspect of deal Attorney involvement Specifications of Contract Contract Duration Exact beginning and ending dates Financial penalties for early termination

Parties to the Contract Allow for additions or deletions (in case of acquisitions or divestitures) Require vendor to name all subcontractors and give you right of approval for those introduced later Specifications (contd) Services Performed Specify all functions to be provided Outline all support services Ensure escalation process and dispute governance included Performance Standards

Tweak standard performance guarantees Reinforce performance guarantees through at-risk fees Specifications (contd)

Hold-Harmless Statement Fees Data Security Communication Review Contingency Plans Audits Final Contract Review Articles Adler, Paul S. 2003. The HR Outsourcing Decision. MIT/Sloan Management Review. Fall 2003 Gelman, Lisa & David Dell. 2002. HR Outsourcing Trends Study. New York:

The Conference Board. Goldsmith, Neal M. 2003. Outsourcing Trends. The Conference Board, July 2003. Holincheck, James. 2003. Deciding to Insource or Outsource Human Resources. Gartner Research, 28 February 2003. Footnotes 1. Offshore IT Outsourcing cs.asp 2. 2004 SHRM Human Resource Outsourcing Survey

3. Human Resource Outsourcing Association citing the Yankee Group 4. Fidelity Investments Fidelity Building Its Share in HR Outsourcing Market by Matt Ackermann; American Banker; July 19, 2005 5. Human Resources Outsourcing Association citing the Yankee Group Footnotes (contd) 6. Human Resources Outsourcing Association -Conference Board Report 7. According to the 2004 SHRM Human Resource Outsourcing Survey

8. Outsourcing Comes to the Middle Market by Bob Violino SHRM HR Outsourcing Forum 9. Survey from Hewitt Associates Press Release April 18, 2005 HR Outsourcing Continues to Boom as Organizations Gain Experience and Reap Benefits Sources Anonymous. HR Outsourcing: Success Steps to Observe for Your Company. HR Focus, September 2003. Anonymous. Planning to Outsource. HR Focus, May 2004.

Ackermann, Matt. Fidelity Building Its Share in HR Outsourcing Market. American Banker, July 19, 2005. Greer, C., Youngblood, S., & Gray, D. Human Resource Management Outsourcing: The Make or Buy Decision. Strategic Human Resource Management. Southwestern, 2002. Sources (contd) Grensing-Pophal, Lin. Outsourcing Performance Management: Is It Right for You? SHRM HR Outsourcing Forum, August 2005

Hewitt News and Information April 18, 2005 Press Release - HR Outsourcing Continues to Boom as Organizations Gain Experience and Reap Benefits Henneman, Todd. Measuring the True Benefit of Human Resources Outsourcing Workforce Management. July 2005 Sources (contd) HRO Today Magazine July 2005/August 2005, May 2005, January/February 2005, December 2004, October 2004 Human Resources Outsourcing Association

Certification Course - Outsourcing as an HR Strategy Landberg, Steven. Effectively Utilizing Recruitment Outsourcing: Lessons Learned From Early Users. SHRM White Paper, August 2005 Miller, Stephen. SHRM 2005 Conference & Exposition: HR Outsourcing: All the Way? June 2005 Sources (contd) SHRM Special Expertise Panels 2005 Trends Report HR Consulting/Outsourcing

Violino, Bob. Outsourcing Comes to the Middle Market. SHRM HR Outsourcing Forum, August 2005 Watson Wyatt HR Outsourcing: Finding the Optimal Mix 2005 HR Technology Trends Survey. Weatherly, Leslie A. HR Outsourcing: Reaping Strategic Value for Your Organization. 2005 SHRM Research Quarterly.

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