Not a Member? Get access to HR news and resources that you can trust.
Make sure supervisors know these common justifications for harassment are unacceptable.
Is your employee handbook ready for the changing world of work? With SHRM’s Employee Handbook Builder get peace of mind that your handbook is up-to-date.
60+ new SHRM Seminar dates in 10 U.S. cities and virtually.
Expand your influence and learn how to become an effective leader -- Join us in Phoenix, AZ, October 2-4, 2017.
Service providers stay afloat—merge, get new owners and even change course—despite the economy.
The economic stimulus package Congress passed earlier this year included an extension of COBRA for laid-off workers. This was good news for workers but a headache for most HR departments. Not for the HR professional at Invision Industries Inc.
As the maker of DVD players for autos pruned its Celebration, Fla., workforce from 280 to 165, its payroll and benefits outsourcer managed the new COBRA rules. "We thought it would be a nightmare, but it was a seamless process," says HR Director James Crutchfield. "I have never been more grateful that they were there and I didn’t have to figure it out."
In interviews, several HR professionals report similar satisfaction with outsourcers’ performance during the recession. HR outsourcers had to adjust to smaller revenue streams because contracts are typically priced on transaction volume that declines after layoffs. But neither HR professionals nor analysts report service declines due to the downturn.
"We’d be hearing about it if there were any gross deterioration in service levels," says Lisa Rowan, director of HR learning and talent strategies for IDC Corp. in Framingham, Mass., a technology research company, who keeps her finger on the pulse of HR outsourcing.
Even smaller providers appear unaffected. Women’s & Children’s Alliance of Boise, Idaho, a nonprofit with 41 employees serving victims of abuse, uses several local outsourcers. "There has been no falloff in service during this bad economy," says HR Manager Susannah Arnim, SPHR.
"The economy doesn’t typically impact the meeting of service-level agreements," says Jason Geller, a principal in the human capital practice at Deloitte Consulting LLP in New York. "The economy does impact how much providers are willing to bend. We see more conservative pricing and tougher conversations."
Outsourcing in Trouble?
These anecdotal reports are reassuring in light of developments that might prompt other conclusions. The developments have emerged mainly in multi-process, multi-geography, multiyear contracts for HR business process outsourcing, or BPO, also called HRO. These multimillion-dollar deals made headlines when announced years ago by IBM, Accenture and other big providers. Yet earlier this year:
Convergys Corp. of Cincinnati, a BPO vendor for information technology, customer relationship management and HR, reported a net loss of $61 million on revenue of $683 million for the second quarter, compared with net income of $41 million on revenue of $690 million a year earlier. Key to the loss were charges of $121 million from delayed implementations of two HRO contracts with customers Convergys declines to name.
Hewlett-Packard Co. (HP) of Palo Alto, Calif., took full ownership of ExcellerateHRO Corp., a provider of health and pension outsourcing with one HRO contract. ExcellerateHRO was formerly a joint venture of EDS Inc. in Plano, Texas, a technology services company, and Towers, Perrin, Forster & Crosby Inc. of Stamford, Conn., an HR consulting company. In 2008, HP acquired EDS. This year, it bought Towers Perrin’s shares of Excellerate. EDS, renamed HP Enterprise Services, has two HRO contracts and several payroll clients. And HP employees conduct HR outsourcing activities under broader BPO contracts. HP has taken no steps to consolidate the HR work, fueling speculation among analysts: "Three HP businesses have their hands in HR," Rowan says. "To all indications, there is no move to merge those functions. I think HP will divest Excellerate."
In late June, Towers Perrin and HR consulting rival Watson Wyatt Worldwide Inc. of Arlington, Va., announced a merger. Watson provides benefits and pension administration outsourcing likely to account for 9 percent of the annual revenue of about $3.5 billion in the new company, according to Watson Chief Executive Officer John Haley. Haley, who will be CEO of the new entity, Towers Watson, expects the merger to be completed in early 2010.
Mercer LLC of New York and Fidelity Employer Services, a unit of Fidelity Investments in Boston, will not pursue new HRO contracts, according to several analysts, including Phil Fersht, research director for global business and outsourcing services at AMR Research Inc. in Boston.
Do these events spell trouble for HR outsourcing? Most likely not, analysts say. Convergys’ loss is mitigated by solid cash flow and a $58 million increase in cash reserves to $336 million. Analysts applaud the Towers Watson merger because it eliminates each company’s main competitor and does not affect outsourcing. They say difficulties with HRO at HP, Convergys, Fidelity and Mercer illustrate what has been clear for some time—the end of HRO mega-deals.
"The HR outsourcing market is healthy," concludes Stan LePeak, managing director for global research at Equaterra Inc. in Houston, a BPO consulting and research firm. "It looks different than it did, but HR still has the same problems and outsourcing is still viable."
A survey by Hewitt Associates LLC in Lincolnshire, Ill., an HR outsourcing and consulting company, supports that assertion. Among 104 organizations interviewed in February, 82 percent had achieved the benefits they expected from outsourcing and 71 percent planned to make no changes to outsourcing strategy due to the weak economy.
Steady During Tough Times
Providers have not been immune to the downturn, but they have trimmed sales and marketing staffs rather than lay off employees who meet customer needs. Some have avoided layoffs by reining in administrative costs. Financially, most large HR outsourcers appear to be holding steady. Some examples:
Clients are taking longer to make decisions, Weinstein adds. "We’ve added a tremendous number of customers. We just didn’t add them at the same rate as last year. There is still plenty of demand for payroll but also for our broader suite of services. During the recession, people are forced to do more with less. The work doesn’t go away when the people do."
At Invision, Crutchfield was only using ADP for payroll when the economy forced him to revise his strategy. "There was nothing in the budget for HR specialists. That was when I started to think about outsourcing" other administrative tasks. He now uses other ADP services. This allows Crutchfield to focus on employee communications, succession planning and other judgment-intensive processes. "Outsourcing has helped me have a world-class HR department with just one person," he says.
End of HRO As We Know It
Many HRO vendors are better off than a couple of years ago, LePeak says. Around 2006, most HRO providers stopped acquiring new business while they tried to make existing deals work at a profit. "The growth of the market slowed," LePeak says. Many vendors cut costs, putting themselves in a better position for the recession.
He expects more consolidation through mergers and acquisitions, but not due to the economy: "That’s natural as a market continues to grow," LePeak says.
Potential acquirers include India-based IT and BPO providers Wipro, Infosys and TCS—relative newcomers to HR outsourcing. "The Indian players may be in the acquisition mode at some point," Rowan predicts.
Many HRO mega-deals of the past six years are being scaled back at renewal. When renegotiating, many customers keep payroll, benefits and other core processes with one provider because they’re satisfied and the cost to bring these functions back in-house would be enormous. But customers consider bringing judgment-intensive processes—recruiting, performance management and so forth—back in-house, outsourcing them to specialty suppliers or adopting the software-as-a-service model. "They’re pulling out more pieces as contracts come up," LePeak explains.
In renegotiations, vendors argue that they must do less for the same money or the customer must pay more. The vendors are saying, "Here is how I’ll limit the costs," explains Mike Atwood, a managing director at Hackett Group Inc. in Atlanta, who advises large clients on outsourcing decisions.
Although the market for HRO mega-deals has shriveled, there’s demand for individual processes, according to Robert Brown, vice president of BPO at Gartner Inc. in Stamford, Conn., an IT research and advisory firm. "The economy is driving more outsourcing," he says. "We’re taking more inquiries on payroll. The vendor’s business model is better understood." Benefits administration outsourcing "is growing faster, compared to the rest of the HR marketplace," he adds. "But hiring and recruiting outsourcing are really down," a consequence of the recession.
If they’re outsourcing at all, Atwood says, his clients look for quick savings achievable via payroll or some other discrete transactional process. "Some want a 12-month or shorter payback."
Based on surveys he conducts, AMR’s Fersht estimates that 30 percent of U.S. companies with at least $1 billion in annual revenue use payroll outsourcing; in a recent survey, he found that another 10 percent of companies of that size anticipate outsourcing payroll in the next 12 months. This bodes well for payroll market leader ADP as well as Ceridian, Paychex and other competitors, he says.
Payroll appears to be the best bang for the outsourcing buck. Olshen’s Bottle Supply Co. in Portland, Ore., uses a payroll provider for its 100 workers. A year ago, Olshen’s parent company, Richardson Packaging Inc. in Toronto, was handling payroll for its 300 workers, says Eveline McCarty, Olshen’s HR operations manager. But in an internal audit last year, the parent found many more mistakes in its process than in the outsourcer’s process for Olshen’s. The parent has since outsourced payroll, she says.
Outsourcing Takes Two to Tango
With HR outsourcing, out of sight should not mean out of mind.
People assume that "when you get rid of the work you get rid of the responsibility," says Chris Collins, who, as managing director for HR service delivery at Delta Air Lines, is responsible for a multi-process human resources outsourcing contract with Affiliated Computer Services (ACS). "This is where we underestimated the importance of good oversight. Several of my colleagues in the industry also experienced this challenge in the early stages of their relationships."
In a seven-year contract that started in early 2005, Delta outsourced HR processes in 10 areas from payroll to benefits to recruiting. The initial business model was based on four people managing the outsourcing relationship, but Collins discovered he needed more: "Now we have a staff of nearly 20 who partner with ACS and many of our other third-party providers to make sure policies are clear and to make sure the service delivery model works. All this team does all day long is deal with ACS. We have a very aggressive hands-on governance model."
The relationship was not always smooth. "ACS initially sold us a book of business that was bigger than their portfolio," Collins says. "I think all the vendors did it."
This became clear late in the first contract year; by the second year, "the relationship was not in its best phase," Collins says. ACS could not meet Delta’s standards in a couple of areas until it acquired companies with the right expertise. "When ACS acquired organizations with this excellence, the relationship took a very different course," he recalls.
Recruiting, part of the original contract, was a different matter. With ACS officials in agreement, Delta pulled recruiting back in-house during 2006 and has now outsourced it to a recruiting specialty firm.
By 2008, Collins says, ACS’ "performance was pretty good." Good enough that Delta renegotiated the contract early to cover its acquisition of Northwest Airlines. This contract extends the Delta-ACS partnership until 2015.
Mark Squiers, ACS’ executive managing director for HR outsourcing, says regular dialogue is key to successful partnerships. "What you see with Delta is a journey. We’ve had bumps. We’ve had successes. There has been constant dialogue and willingness to change course."
HRO for Everyone Else
Even as big HRO customers reduce the scope of their contracts, mid-market customers are becoming more interested in the multi-process model. "We are seeing more offerings enter the mid-market and more interest there in HRO," says Katrina Menzigian, vice president of BPO research practice for Everest Research Group Inc. in Dallas.
LePeak and others say longtime providers, including ADP and Ceridian, have targeted this HRO mid-market and offer new services as well. They expect India-based providers will be active in this market, too.
There’s a big difference between HRO for large global companies and HRO for the mid-market. In many mega-deals, the vendor acquired the client’s technology, processes and staff—called "lift and shift." In others, there was heavy customization. The resulting lack of standards among clients continues to be one reason providers find it tough to achieve economies of scale and make money.
Mid-market offerings are standard, with little or no customization. This keeps costs low for the customers and makes money for the providers. The multi-process model appeals to smaller companies for at least two reasons: They only have one vendor to manage, and bundling processes with one provider costs less.
At the Boise women’s alliance, Arnim’s job would be easier if she had one provider to manage instead of seven. "As a solo practitioner, I’ve often wished that a third-party benefits administrator could follow the example of telephone companies that offer bundled billing and administration services," she says. "I’ve been told that the service can’t be offered because it would require extraordinary cooperative partnership agreements by a large variety of benefits providers."
In Crutchfield’s experience, bundling several processes in an HRO-style model has been the best deal in terms of cost savings.
But the more processes covered, the more governance required. "Many of my HR colleagues miss this concept. They don’t understand why outsourcing isn’t working, and only realize this years later," says Chris Collins, managing director for HR service delivery at Delta Air Lines in Atlanta, which has an HRO contract with ACS.
Not All Outsourcing Equal
To understand the value of any service delivery model, measure the number of employees served per each full-time-equivalent (FTE) HR person. Alexia Martin, director of research and analytics for CedarCrestone Inc. in Alpharetta, Ga., a consulting, technology and managed services firm, collects this information in a survey each year. This year’s survey of 1,009 organizations, each with at least 500 employees and most much larger, suggests that all outsourcing is not equal in value.
For the 30 responding organizations that outsource payroll, the average ratio of employees to payroll FTEs was 1,392-to-1; the 194 respondents that license software and run the process internally had an average ratio of 1,075-to-1. Outsourcing provided significantly more value in this sample.
HR recordkeeping and administration contracts offer a different story. Among the 10 responding organizations that outsource these functions, the average ratio of employees to HR FTEs was 587-to-1; the 229 respondents using the in-house model had an average ratio of 732-to-1. In this sample, the in-house model offered greater value.
Martin is not surprised that payroll outsourcing is more efficient. Providers have had decades to perfect the model. Outsourcing HR administration isn’t as mature. She urges HR professionals to benchmark internal processes and compare them with the results similar companies get with outsourcing. The findings may surprise them.
"The longer organizations keep systems and processes in-house, the better they get at it," she says. "Organizations that maintain their own HR administration systems have reached a relatively optimized and efficient service delivery structure not yet achieved with other models."
The author, technology contributing editor for HR Magazine, is a freelance writer based in Prunedale, Calif.
The Buying Services Game (HR Magazine)
Let’s Make a Deal (HR Magazine)
Commonly Outsourced Activities
Total Revenue from Deals
Number of New Deals
You have successfully saved this page as a bookmark.
Please confirm that you want to proceed with deleting bookmark.
You have successfully removed bookmark.
Please log in as a SHRM member before saving bookmarks.
Your session has expired. Please log in again before saving bookmarks.
Please purchase a SHRM membership before saving bookmarks.
An error has occurred
Recommended for you
CA Resources at Your Fingertips
SHRM’s HR Vendor Directory contains over 3,200 companies
[/_catalogs/masterpage/SHRMCore/Main.master][Title][SHRM Online - Society for Human Resource Management]