Definitions: In-sourcing: foreign companies establish jobs in the United States; the process of retaining a business function internally Off-shoring: the relocation of business processes to a lower cost location, usually outside the company’s home country Co-sourcing: a business function is shared by mutually dependent internal staff and external resources with specialized knowledge of business function. Based on a long-term relationship with an emphasis on values traditionally associated more with &quot;partnering&quot; Geo-sourcing: the process of seeking expert skills in the best geographical location – whether internal or external – for each business function
BPO expenditure likely to grow worldwide by 10% a year – from $140 billion in 2005 to $200 billion by 2010 Source: LogicaCMG, August 2005 HRO is fastest growing sement of the BPO industry. (SHRM 2005 Research Quarterly – HR Outsourcing: Reaping Strategic Value for Your Organization by Leslie Weatherly) ¾ of US companies outsourced some or all of their IT activities in 2004 – that number is likely to increase for 2005 Source: Global Outsourcing Report, March 2005 Going forward, it is projected that HR will be among fastest growing outsourced services. (SHRM 2005 Research Quarterly – HR Outsourcing: Reaping Strategic Value for Your Organization by Leslie Weatherly)
SHRM Human Resource Outsourcing Survey Report: Almost 6 out of 10 organizations practice HR Outsourcing BUT 1/3 of organizations did not outsource any function ½ of organizations partially outsource an HR function (organization co-manages function with vendor) 2/3 of HR professionals predicted that level of outsourcing would remain same over next 5 years 1/3 expected organizations to increase level of HR Outsourcing Outousrcing favored in large-staff sized organizations – almost twice as many indicated increase in next 5 years
Professional Employer Organizations (PEO’s) – offer “coemployment” services where employees are paid under a PEO’s FEIN and are placed under the PEO’s benefits and worker’s compensation packages Administrative Service Organizations (ASO’s) – similar to PEO’s but do not include coemployment relationship
HR service delivery costs high and cannot be managed down Continuing investment in technology no longer feasible Strong desire to end administration of transactions and focus on strategic work Desire to improve quality of HR services through process redesign and access to self-service platforms Strong business case can be built Other business reasons – example:geographic setup – centered vs. spread
Is this function a core competency? Is is the best in its class? If not, it should be considered for outsourcing. Nothing is sacred. You also must have a strategic vision going into outsourcing, specified metrics to measure progress toward the vision, and real business outcomes planned to justify the outsourcing costs with benefits.
Specialization – HRO buyers want a provider that considers them “special” and every provider has a “specialty” Globalization – global is the new trend, with even small firms having global HRO needs; global HRO providers will find a thriving market Standardization – Not all processes are unique and not all jobs are custom jobs. Standardized process and performance metrics are becoming more common and will consequently lead to better service, lower costs, and buyers that are free to focus on core competencies Regionalization – aka “Hubbing Up”; creation of corporate hubs which are the center of all activity (ex: FedEx hubs is Nashville and all packages travel through Nashville on their way to final destination) Consortia Buying – buying groups are banding together to buy BPO services; as high volume groups, they receive highly standardized services which drives continuous cost reductions Mid-market Mania – The 500-1500 employee market will continue to grow more rapidly than the Fortune 500 (20%+ annually in North America and around world) Utility model Evolution – BPO provider use will become as common as utility (gas, water, electric) use. Just as most individuals do not drill own gas or water wells, so will companies look to BPO providers to manage their utilities. Consolidation and Partnering – Extremely large trend toward provider partnering (Ex: Aon HRO’s deal with CSC for IT and Ultimate Software for mid-market payroll)
Trends that are expected to gain momentum within next 2-5 years. Continued growth-maturation of HR Outsourcing – organizations increasingly use outsourcing as strategic business model in order to remain competitive Increasing weight of noncost factors as decision drivers – reasons behind outsourcing are strategic; companies outsource in order to gain expertise not simply to save money Continued “commodization” of many HR functions – HR services are “commoditized” and susceptible to marketplace competition s; companies engage in HRO in order lower costs/remain competitive Development of new roles for internal HR departments – HRO has changed amount and types of activities handled internally; opportunity for HR to become strategic participant within executive suite Emphasis on new career opportunities for HR professionals – more opportunities for HR to play strategic role and there are increased external HR career opportunities
6. Expansion of small/mid-sized HR outsourcing markets – as outsourcing market grows, costs go down and outsourcing may becomes financially viable for small and mid-sized companies; meanwhile, large organizations find a total solution in outsourcing 7. Increasing appeal of outsourcing due to demographic changes – labor recruitment and selection more difficult as labor market changes (baby boomers’ retirement and predicted low birth rates) and benefits of outsourcing recruitment and selection increase 8. Reliance on improved HR outsourcing metrics – HR activities are being standardized and quantified; organizations can benchmark and compare performance again other organizations 9. Reshaping of industry by consolidation and competition – consolidation provides broader range of services, more competitive offerings, and specialized services; HR outsourcing firms expand scope and quality of their services
HR Executives that stick with status quo and maintain transactional focus will soon become obsolete. Meanwhile, HR Professionals that meet the need for strategic expertise (in human capital management and organizational effectiveness) will contribute value that far exceeds past contributions to the HR function and in process will become indispensible to the organization
Transition process – communication and project management are key Plan to jointly review all project plans, services, equipment and staff who will be in transition Ensure responsibilties for transfer are defined and confirmed in advancej A successful transition should be transparent to the organization Culture of the company is a factor to be considered
Who manages Relationship with Vendor? 85% HR Department 10% Other 2% Vendor Management Group 1% Legal Department 1% Procurement Department Source: BNA, (2004), HR department benchmarks and analysis 2004. Washington, D.C.: Author.
Incorporate multiple time periods – reflect investments today that yield payoff in future periods
Selective path toward HRO – explore individual sourcing strategies for different HR functions rather than total outsourcing strategy Multiple vendor relationships – choose vendor that is right for each function rather than focusing on vendor consolidation Combination of internal and external strategies – ex: shared services - internal and vendor (external) ** Special thanks to Watson Wyatt for the use of their 2005 HR Tech Trends Survey
Maintain heat of competition during negotiation – clearly articulate that if for any reason contract negotiations should fail to produce mutually agreeable document within specified time frame, you will move to runner-up vendor
Hold-Harmless Statement – protects vendor, holding them unaccountable for anything short of gross negligence; can be a deal breaker; if your company has own hold-harmless clause disclose it in RFI/RFP to avoid later problems Fees – indicate level of billing detail and any reconciliation process you need to satisfy treasury or internal audit; negotiate general and administrative percentage and fees at risk for nonperformance Data Security – ask IT to underwrite these provisions Communication Review – stipulate that you have right to review communications sent directly to your employees before they go out; define process for reporting emergencies Contingency Plans – anticipate disasters and their impact upon vendor’s ability to provide service Audits – specify details of audits now to avoid fees and misunderstandings later Final Contract Review – now that HR has developed contract, have other departments review and sign off on their sections
HR Outsourcing (HRO): Its Impact on Your Company, Your Career, and the HR Profession Presented by Tom Darrow 2006/2007 SHRM-Atlanta President Principal, Talent Connections Copyright 2005 Talent Connections. All Rights Reserved.