Focus In to Farm Out

Effective HR outsourcing requires strategically selecting tasks

By Eric Krell Jul 1, 2011
April Cover

Cost savings drove the human resources outsourcing (HRO) gold rush of the early 2000s. Today, as many agreements come up for renewal, saving time trumps saving money for leading practitioners.

“Saving money is not necessarily the primary objective at this point,” notes Ron Gier, vice president of human capital planning and employee relations for Sprint in Overland Park, Kan. Outsourcing “is about concentrating where you are going to put your energy, where you are going to build competency as a company and where you can use a partner to perform activities that are not core to your business.”

Cost remains a key consideration, but it should take a back seat to organizational strategy, according to Gier and other HR practitioners. These HR professionals, along with HRO advisors and researchers, describe a maturing market that is becoming better suited to delivering on buyers’ desire to focus their decision-making squarely on value.

“You generally decide to outsource for one of two reasons,” says Lou Cimini, vice president of human resources, the Americas, for Mansfield, Mass.-based Samsonite Corp.—either “to increase the value of your function and maintain costs” or “to reduce costs and protect your value.”

Cimini says outsourcing HR administrative and data management functions allowed him “to free up my high-value team members to focus more time and energy on addressing strategic organizational issues.” For example, Cimini could support the development of new customer programs and products during open benefits enrollment season—formerly “a brutal time for HR.” HR previously was not involved in such innovation.

Zeroing In

One of Sprint’s top strategic objectives is to provide excellent customer service. A related HR function objective is to train and develop top-notch service representatives in the call centers “as quickly as possible,” Gier says.

To meet that goal, Gier and his colleagues realized that they needed more time to focus on training, developing and retaining call center representatives. About three years ago, this need led to the outsourcing of most, but not all, recruiting, interviewing and onboarding processes for call center representatives. Gier and his HR colleagues continue to conduct some call center recruiting to understand this part of the onboarding cycle. By partnering with a recruiting company, Gier notes, “We are now able to focus much more diligently and effectively on how we can take our new hires and make them productive.”

Sprint’s approach illustrates one facet of the maturation of HR outsourcing.

“We see more companies moving toward a ‘right-sourcing’ model, in which they focus on finding the best providers—not the best provider—for each HR domain area they are considering outsourcing and then determining if they can find a provider who fits their needs,” reports Glenn Nevill, the Dallas-based North American practice leader for Towers Watson’s HR service delivery practice. HR professionals “then want to make some strategic decisions around how they source. They are not automatically looking to bundle all of their HR functions with a vendor who can give them a good price.”

Lessons learned during multiprocess, multiyear relationships drive the evolution of this market. Most contracts are five, seven or 10 years in duration. Peter Ackerson, SPHR, a specialist leader in Deloitte Consulting’s HR service delivery practice, points out that large HRO providers have learned numerous lessons from clients and from smaller, single-process providers. These insights include the following:

  • Service cost, while important, is “just the price of admission.”
  • Clients want higher-quality service and continuous improvement backed by measurable commitments.
  • Buyers want precise yet flexible contracts that support high service levels and quick responses when their needs change.

Single-process outsourcing arrangements tend to be more easily monitored, Ackerson notes, particularly in their approaches to customization and expansion of services.

Nevill says vendors define their offerings and services better than they did five years ago, simplifying buyers’ decisions and selection activities. “If you are a large organization and you’re looking at outsourcing multiple processes, there are no more than four or five vendors that you’re really going to look at,” he notes. “Six to eight years ago, before a lot of consolidation occurred, there were more than 10 options.”

Rajesh Ranjan, New Delhi-based research director for outsourcing advisory and research firm Everest Group in Dallas, has observed a rise in the “componentized approach.” Buyers first outsource a few highly transactional processes, such as payroll, and then outsource more “judgment-intensive” processes such as recruiting or training and development. This is not to say that large, multiprocess contracts are a relic of the 2000s. Globally, multiprocess HRO activity—agreements involving three or more HR processes covering 3,000 or more employees—is projected to increase by 8 percent to 10 percent this year over the 46 new large deals that were signed in 2010, according to a recent Everest Group study.

More Face Time

Not all agreements in the past decade produced mutually beneficial partnerships. This helps explain why “HR buyers are becoming more aggressive in researching their options when it’s time to renew their outsourcing agreements,” according to Diane Youden, Dallas-based HR transformation leader with PricewaterhouseCoopers. Applying greater rigor to decision-making and selection, she adds, helps ensure that vendors are providing the value and services that buyers need.

Youden says buyers are focusing on what she describes as “partnership capacity”—the potential for the two organizations to work together to achieve mutual benefits and address problems and changes. Some buyers run through scenarios with potential partners in a workshop setting before making final selections.

Before Samsonite’s Cimini decided to outsource employee self-service to ADP Inc. in 2010, he took two actions that he says bolstered his decision-making. First, Samsonite’s HR department worked to improve employee relations and benefits processes that had been disrupted as a result of a previous enterprise software implementation. “Once we had our processes under control, I could map our performance gaps and I could justify any differences in cost in hiring an outsourcing provider to handle the processes.”

Second, Cimini visited ADP’s Augusta, Ga., service center. The purpose of the one-day meeting was to “get to know the people on the team and who would be answering the phones,” Cimini explains. “I also wanted to make sure that they had a learning environment down there. If one person on their team asked us a question or escalated an issue to me, I wanted to make sure that everybody on their team would learn from it.”

The face time helped lay the groundwork for a partnership. “You want to treat your outsourcing group as a partner, and you cannot run away from your responsibilities in that partnership,” Cimini says.

Cost and Time Savings

More HR professionals could achieve HRO happiness by focusing more on value and less on cost, notes Charlotte Anderson, SPHR, GPHR, managing director of Amethyst and Iris, a consulting firm in Hillsborough, N.J.

“Within companies that view HR service delivery as a commodity,” Anderson observes, “HR outsourcing decisions are almost entirely related to costs.”

In the past, Gier agrees, “HR outsourcing was really all about finding an activity that existed within your group that you could give to somebody else and get a cost savings.” Today, Sprint’s HR leaders prefer to “decide where we want to go from a strategy perspective and then seek out partnerships if they can help us get there,” Gier says. “This is where a lot of companies got caught up—somebody comes in and portrays a significant savings that you can’t ignore, but you really have not figured out how it is going to help you accomplish your core objectives.”

He emphasizes that Sprint’s agreements are made in conjunction with the company’s supply chain and contract management functions. Their input helps ensure that most partnerships generate a positive financial return, Gier says. In other words, cost savings mark a secondary outcome.

“Besides the basic dollars and cents, how will the organization benefit?” asks Richard Oyen, SPHR, vice president of human resources for SumTotal Systems in Mountain View, Calif. If an outsourcing agency does your recruiting, “will they understand the business needs and manager preferences enough to continually send good candidates?” When outsourcing HR operations and information systems data, “will a call center give your employees the ‘touch’ your employees need to feel that their issues and questions are being properly addressed?”

These types of strategic questions are factors that Youden says HR executives should weigh in decision-making. Specifically, she suggests that HR leaders determine whether outsourcing can help “ensure that the HR function is better positioned to provide the business with the organizational capabilities it will need to deliver against its strategic initiatives.”

Buyers want precise yet flexible contracts that support high service levels and quick responses when their needs change.

That approach defines how Sprint tackled another strategic objective: improving employee wellness to hike overall business performance and reduce employee medical costs. HR leaders decided that the best use of resources would not involve running a wellness facility, but understanding, identifying and nurturing strong links between specific wellness programs and bottom-line measures such as medical costs, employee engagement and employee productivity. They decided to outsource the staffing of a new on-site health care facility and the administration of wellness programs.

“We did not want to hire doctors, nurses and pharmacists,” Gier explains. “We really wanted to concentrate on how [wellness programs] improve the health of our people [and] the performance of our organization, and reduce time away from work. That’s where we put our energy.”

The author is a business writer based in Austin,Texas, who covers human resource and finance issues.

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