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Can a vendor beat the costs and benefits of in-house recruiters?
If someone told you there was a better way to handle recruitment efficiently while still maintaining, even enhancing, the quality of hires and retention, you'd be doubtful. If that person said he or she could do it for significantly less than you're currently spending, you'd be more skeptical. Yet HR executives such as Shelley Zajic, vice president of human resources at the 56,000-employee Apollo Group Inc., say outsourcers can recruit for less—and do it well.
Zajic has firsthand experience with the challenges of delivering timely recruitment results with internal and external recruiting teams. She says she would never work for a company that doesn't outsource recruitment, adding that "It is so inefficient to try to run recruitment on your own."
Recruitment process outsourcing (RPO) is not just for big-volume employers. "No matter how small, if you have a consistent stream of hiring needs, an RPO [arrangement] might be a good fit. Numbers don't matter; it's all about flow," says Julie Meyer, senior talent acquisition manager at West Monroe Partners, a 325-person consulting company in Chicago. Meyer used Chicago-based Objective Paradigm for 133 hires last year and estimates the number will be similar in 2012.
RPO has been around for more than a decade, but after 2008, when the economy hit the skids and employers stopped hiring, the practice began to trend up. Recruitment personnel became a costly luxury, a fixed cost employers could not afford while waiting for better times. When the recovery began and hiring picked up, many in-house recruitment teams had been decimated. But employers were reluctant to commit new resources for recruiters, realizing that hiring might ebb and flow again.
The Provider—and You
Enter outsourcers. When you sign on, you shift some or all of your recruitment needs to the provider. You enter a contract lasting one to four years. During that period, the outsourcer receives a base monthly fee that increases depending on the number ofsearches and other services you require. You may ramp up and down.
The arrangement "allows us to be nimble, to respond quickly to the need for unpredictable volumes of staffing," says Nancy Craig, first vice president of talent acquisition at SunTrust Banks Inc. in Chattanooga, Tenn.
Recruitment represents the fastest-growing HR outsourcing service. Last year, global revenues reached $1.4 billion, 63 percent of which came from business in North America, says Rajesh Ranjan, research director at the Everest Group in Dallas. By 2017, worldwide revenues are estimated to reach $3.75 billion.
In the United States, the market grew by 23 percent in 2011 and is projected to increase by 20 percent this year, then grow 15 percent annually for the next five years, says Phil Fersht, chief executive officer of HfS Research in Boston.
In a study of 729 recruitment outsourcing contracts from 2008 to 2010 by Holland, Mich.-based technology services and staffing firm ISG, the average contract size across industries was for 1,100 hires annually. There were 15 deals with annual hiring volume of at least 10,000, two deals for 25,000 and one for 32,000.
Vendors may position themselves as recruitment outsourcers, but are they really? Contractors gravitate to the hot term, says Lisa Rowan, director of HR learning and talent strategies at the International Data Corp. in Framingham, Mass. But to be a true recruitment outsourcer, she says, "the supplier must have an ongoing contractual relationship and must administer some or all recruitment functions."
In selecting a vendor, the number of hires an outsourcer can make is less critical than the number of processes performed, adds Paul Harty, president of Seven Step, a Boston outsourcer that hires as many as 250 people a month for larger clients.
The more vendors do for you, the more you pay. Though they would like to cover all your recruiting needs, they're typically accommodating—willing to start small and build later. You can choose from among sourcing, screening, pre-employment testing, background checking and onboarding services. You can delegate responsibility for certain categories of hires—like experienced workers or all professionals below the C-suite—and retain others.
Gravitating to the RPO industry are major HR outsourcers; global, regional and boutique staffing agencies; and contract agencies. Harty estimates that there are 400 to 800 providers of all sizes. Large staffing firms include Manpower, Kelly Servicesand Adecco Group. Headhunters such as Korn/Ferry International also offer the services, as do consultants such as IBM and Accenture. Some smaller vendors have migrated from traditional recruiting agency or headhunter models.
Clients may spend 40 percent to 50 percent less in the first contract year.
The billing model varies, as some business leaders at small companies began resisting fees for each hire, says Kevin Krumm, managing partner at Objective Paradigm. Krumm realized he could serve clients and still make a profit by billing a monthly fee instead. Clients "get a dedicated recruiter and an array of recruitment management, services and technology they can order off a menu. Some outsource everything; others use us to augment their internal teams," he says.
Compelling Financial Case
The initial attraction of RPO is projected cost savings. It's not unusual for companies to spend 40 percent to 50 percent less in the first year of their contracts, with continuing savings.
Phil Stewart, president of Recruitment Solutions, a division of Kenexa in Wayne, Pa., explains the difference in price between a recruitment outsourcer and a traditional recruitment agency: "Assume you have 300 hires a year with an average salary of $60,000 and you pay a typical rate of 20 percent commission per hire. That comes to about $3.6 million. My price, in contrast, would come in at about $1 million."
In its first year using Kenexa, Whirlpool Corp. in Benton Harbor, Mich., saved about 40 percent and estimates savings will continue from that base line at about 15 percent yearly, according to Brian Schubmehl, director of talent acquisition.
How do outsourcers keep prices so low? Fersht says their profits come in part from "labor arbitrage," or hiring people at costs much lower than whatever the client would be paying directly.
Impact on Internal Staff
Outsourcing can help pare internal staff, and often it does. For example, with Kenexa as its provider, Zajic's Phoenix-based Apollo Group, owner of the University of Phoenix and other private education institutions, replaced 35 recruiters with four account managers—a significant savings.
WellPoint slashed recruiters from 80 to 45 when it signed with The RightThing. The vendor took on a few displaced employees—a practice called "rebadging"—and the rest were terminated, says Ann Odehnal, WellPoint's director of talent acquisition in Richmond, Va. In contrast, at SunTrust, Craig kept her 20-person team while the provider assumed responsibility for hiring 2,500 of 10,000 annual hires.
Similarly, no one was terminated at Whirlpool. "We're interested in using our staff more strategically," Schubmehl says. "By partnering, we're able to pass along transactional activities."
Quality for Less
The Everest Group reports that clients renew recruitment contracts 70 percent of the time. When they opt out, quality, rather than price, often leads to the divorce.
First-generation clients "are looking to achieve 30 percent to 40 percent cost savings, and they usually get it," says Albert Grimaldi, a director at the Information Services Group Inc. in Johns Creek, Ga. "Second-generation buyers have become more sophisticated. They realize cost savings is good but that it can lead to cutting corners. They're more into hiring manager and candidate satisfaction and quality of hire."
RPO decisions were financially driven early on, says Terry Terhark, president of The RightThing in Findlay, Ohio. His company was acquired by Automated Data Processing Inc. in October 2011. "Now, the focus is shifting to how to get better people," he says. Employers want to know how to build brands and be innovative in finding and hiring talent, for example.
"For us, quality trumped cost savings," Schubmehl notes. Whirlpool wanted to add capacity, and "quality of talent and the time of hire are unchanged."
SunTrust's HR professionals remain similarly pleased with Seven Step. "For many positions in our field, the talent pool is very sparse. [Seven Step has] done some very creative things to build the pool," Craig says.
Apollo Group's Zajic says of Kenexa's recruiters: "The ways they measure and calibrate their candidates are incredibly sophisticated and work to our advantage. There is no way I could do it better."
Selecting a Vendor
Ideally, your selection team should include procurement and HR staff. Some companies add sourcing advisors—outside consultants who help with needs analyses, negotiations and contract writing. Consider the following:
Size and scope. Do the recruiters have experience in your business or a closely related one?What volume of hires do they produce for other clients? Zajic says, "Eventually, our goal is to have them hire 10,000 a year, and we wanted to know if they'd done that."
Retention. Look at internal operations. How long do their employees stay? How effective are they in retaining business? The RPO industry's retention rate averages 70 percent. "Ours is in the high 90s," claims Terhark at The RightThing.
Relationships. Will they dedicate staff full time to your account? "I needed to know there would be one person 24/7 whom I could call and who would respond," Zajic says. "I got that tenfold."
Will workers be assigned to your sites, or will they work virtually?At SunTrust, even before the provider came in, recruitment was a virtual activity with recruiters serving business units from sites across the country. In teaming with the client, Seven Step recruiters follow a similar practice.
All work and supervision provided for WellPoint by The RightThing occurs off-site. The relationship is "seamless," with internal hiring managers unaware that the recruiters work foran outsourcer.
But "out of sight" may not always be the best arrangement, cautions Meyer at West Monroe Partners. "Initially, we liked the idea of having the recruiter off-site. We discovered that being off-site hindered the recruiter's ability to build relationships with our hiring managers and made an adjustment."
Kenexa has a program manager and team of five on-site that join seven other Kenexastaffers working remotely on the Whirlpool account. "They've become ingrained in our culture," Schubmehl says. "People think they're Whirlpool" employees.
Fit. Services offered are as important as costs; clients tend to choose providers on feel and fit. After narrowing its choices, the WellPoint hiring team visited finalists. The half-day site visit to The RightThing clinched the deal. "We recognized well-run processes," Odehnal says. The RightThing accounts for about 1,000 of WellPoint's 5,000 to 6,000 hires annually.
Metrics. The contract should include targets measured against your own and industrywide standards. Typically, incentives are built in for when performance expectations are met or exceeded.For example, a bonus might be paid when the time-to-fill rate for a position is 60 days and the provider does it in 40.
Key performance metrics at Whirlpool, for example, include time-to-fill, quality, diversity, and satisfaction of the hiring managers and HR business partners, Schubmehl says.
Although some companies jump in feet first—contracting for the totality of recruitment services—many start small and ramp up later. Apollo began two years ago with a beta test, and now expects 3,500 hires from its provider.
SunTrust's HR professionals began incrementally, watching and measuring. "We started with 100 positions to see how we would work together," Craig says. The relationship is flourishing, observes Harty at Seven Step. The provider began working with one department; now it handles recruitment for 12.
Ownership of the relationship varies. The owner "can be someone as senior as the CHRO or, in smaller companies, a director or manager. The biggest pitfall, companies and vendors agree, is lack of attention. Both sides require active management,"Zajic says.
When you weigh the opportunities to free staff from transactional activities, to hold down costs, and to maintain or enhance the effectiveness of recruitment services, partnering with a provider seems compelling.
Though outsourcers may appear to customers to be your employees, some staff may still find going outside for this critical function unsettling. Whirlpool's HR professionals have a simple solution: Instead of recruitment process outsourcing, they call it "recruitmentprocess optimization."
The author, a contributing editor of HR Magazine, is a lawyer and a professor of management studies at Marist College in Poughkeepsie, N.Y.
Do you outsource recruiting? Share your experiences with your peers. Describe the pluses and minuses of these services.
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