The Impact of HR Outsourcing on the HR Profession

1. The Impact of HR Outsourcing on the HR Profession Based on a Report from the SHRM Outsourcing/Consulting Panel

2. Definitions • Outsourcing—transferring of a business process to an external provider • Offshoring—outsourcing of an operation to a firm with principal base of operations outside the country • Insourcing—transfer of an outsourced activity to an internal department of a company to be run and managed by employees • Sole-sourcing—outsourcing all processes in the HR life cycle to a single provider • HRO—standard market term for the group HR related outsourced processes • BPO—standard market term for business processes outsourced be they HR or other business related • SLAs—contracted service level agreements outlining performance expected in terms of availability, cost and quality • Due diligence—the process of conveying the operational information to third parties and vice versa • Transition—moving from a current model to a new model • Transformation—transitioning from a current model with significant change in the new model, usually improved processes • Integrated outsourcing--combining vendors to achieve an outsourced solution using more than one vendor • RFI/RFP—request for information and request for proposal, first steps with vendors

3. HR Outsourcing manages the people, processes and systems for: Employee Life Cycle Administration Compliance Communications Recruiting And Selection Training Compensation Benefits Administration Stock Administration Safety Pension Payroll After outsourcing, companies typically retain “Strategic HR” duties inside HR policy Organization development Deployment of the right people to the right jobs Human capital decisions affecting financial results What is HR Outsourcing? Each HRO provider claims to offer cost savings & service improvements in delivering processes.

4. Continued Growth/Maturation of HR outsourcing Increasing Weight of Non-cost Factors as Decision Drivers “Commodization” of Many HR functions continues Development of New Roles for internal HR Departments Emphasis on New Career Opportunities for Professionals Small/Mid-Sized HR outsourcing markets will expand Demographic Changes will up Outsourcing’s appeal Demand for Improved HR metrics Consolidation, Competition, Sole Sourcing Reshape Industry Outsourcing Failures will cause Re-evaluation of Decisions Trends HRO is an accepted management practice and an opportunity to be embraced.

5. Developing use of third party providers as strategic business options Using the power of others as leverage for expanding expertise Chance to reorder focus and priorities Evolving accountabilities for growing human capital value Defining new jobs and job descriptions Building integrated business process solutions no matter size Fitting technology appropriate to the workforce skill base Learning to apply quantitative data as decision drivers Relying on performance of one to many providers Expanding the profile of risk management Career Implications HR has the opportunity to shape how they respond to the demands being received.

6. Running HR as a business, proving returns Selective decisions for service delivery modules, fragmented or integrated Protection and governance of company data and property Managing the performance of others Trend: Continued Growth/Maturation of HR OutsourcingImplies: Developing use of third parties as strategic business options HR Transactions--Moving to More Broad Base HR $80 billion: 50% of all HR work $8 billion 1998 2000 2002 2004 2006 2008 2010

7. Trend: Increasing Weight of Non-cost Factors as Decision DriversImplies: Using power of others as leverage for expanding expertise Conference Board Study 2004 • Building strategic drivers for actions aligning with core missions • Aligning HR key activities to products and services outcomes • Heightened focus on people management practices and workforce development • HR management challenge to sustain achievements and grow future options with providers

8. Transactional HR activities are unbundled into discrete components Information technology allows these components to be digitized Web-based HR applications enhance the processing of digitized content and allow multiple worksite collaboration As transactional HR activities become commoditized, product/service differentiation is increasingly based on price The organization’s reliance on and loyalty to its HR department weakens as activities are commoditized. HR must now compete with external sources and price becomes a critical decision making criteria. In this environment, transactional activities will increasingly go to the most efficient or least costly. In-house HR professionals will have to compete with vendors or concentrate on activities that are less likely to be commoditized Trend: “Commodization” of many HR functions continuesImplies: The more HR activities and tasks become a commodity, the greater emphasis on price and the more likely they will be outsourced

9. System System Supply chain management skills Change management and communications skills Project management skills Relationship Management internal and external Measuring performance of providers Trend: Development of New Roles for internal HR DepartmentsImplies: Evolving accountabilities for growing Human Capital Value “Total Value Accountabilities” New internal Staffing Models Economies of Scale Lower Administrative Cost Vendor Performance Optimal Use of Human Capital Strategic Value Add Effective Comp & Ben & Talent Management

10. Broader base of opportunities in providers to learn HR content Cross flow of employment between providers and companies Provider data and knowledge brought to fulfill strategic mission Opportunity for multi-client, multi industry base of knowledge Trend: Emphasis on New Career Opportunities for ProfessionalsImplies: Defining new Jobs and Job Descriptions Business Alignment Vendor Relations Sourcing Transformation Skill Building Knowledge Transfer Inside Outside Analytics Webmasters Discipline Expertise Process Solutions Best Practices Customer Responders

11. Effective use of technology drives efficiencies and value added services Cultural adaptations accepting low touch alternatives Partnerships for economies of scale Generalist small company HR role to significantly change Trend: Small/Mid-Sized HR outsourcing markets will expandImplies: Building integrated business process solutions no matter size • 2 Million Small Businesses: • Payroll, not HR • ADP, Ceridian, Paychex • 2,000 Mid Cap Companies: • Full HR • HR is stretched today • Underinvestment in HRIS • Clients ready to accept “normative solution” • Fortune 500: • Full HR • HR is good today • Hewitt, IBM, Accenture, Arinso, Fidelity, ACS, etc • Clients demand customized solutions

12. Trend: Demographic Changes will up Outsourcing’s appealImplies: Fitting technology appropriate to the workforce skill base • Recruiting is more strategic than ever and more difficult • Access to HR tools is as close as any computer • Less personal and low touch services become the norm • HROs are the largest recruiters for HR talent • Transition for retiring workforce • Facing the challenge with workers who are not IT connected in their jobs War For Talent

13. Service level agreements Return on investments analysis Value realization techniques Human Capital Value accounting Cash flow, capital investments, non-cash items accounting Moving from provider of services to accountability for business performance Trend: Demand for Improved HR metricsImplies: Learning to apply quantitative data as decision drivers HR, Operating Leaders, Project Teams Source Data Global Data Base Remote Data Mgmt

14. ACS buys Mellon EDS joint venture with Towers Perrin Hewitt buys Exult IBM sells HR services units to Fidelity Oracle buys PeopleSoft Managing redundant systems Contingency Planning Crisis Management Supply Chain disruptions Optimization decisions on number and scope of services Monitoring financial and ongoing viability of vendors Health-check on work climate at providers Trend: Consolidation, Competition, Sole Sourcing Reshape IndustryImplies: Relying on performance of one to many providers “Between January 1993 and October 2003, a total of 509 HR Outsourcing transactions were recorded with 30% of those disclosing value that aggregate to a total of $14.4 billion.” (Mergers & Acquisitions Group, Robert W. Baird & Co.)

15. Trend: Outsourcing Failures will cause Re-evaluation of DecisionsImplies: Expanding the profile of Risk Management Project Mgmt. Change Mgmt. Performance Mgmt. • HR Managers as Risk Managers • Risk Factors* • Loss of Institutional knowledge • Lack of internal staff/capability • Difficulty managing vendor relationships • Mismatch of cultures • Security of databases with providers • Lack of vendor knowledge of industry • Sarbanes-Oxley Compliance • Financial stability of chosen vendor • Organizational resistance • Security of transaction in multi-client env. • Unpredictable costs • Cost/benefits not realized What Failed and Why? Contracting Negotiation ROI Analysis How Much $$$$? Source: Adapted from Bajpai, N., J., Arora, R., & Khurana, H. (2004, June). Global services sourcing: Issues of cost and quality [CGSD Working Paper No.16}, 2005 SHRM Research Quarterly 3rd Quarter, page 6.

16. Building Blocks of the Future • Strategic Sourcing--Integrate HR Operations between supply partners and technology solutions • Effective Technology--Build the infrastructure with efficient fit for purpose technology • Access to Data--Create innovative reporting and strategic advice linked with business performance metrics • HR Excellence--Grow competencies and capabilities of HR team

17. Learning from the Journey • Can’t wait for everyone to be “happy” • We are problem solvers for the organization • Lots of people have advice but go with those who deliver • From challenge and debate comes progress • Details and data are the foundation of good execution • It’s broken so we better start fixing • There is a war for the best HR people • Successful performance is proportional to the amount of change • Belief in death is self-fulfilling • Align and support the business leaders who are creating success • Have the commitment and passion to put your job on the line

18. Our Future ADD VALUE KNOWLEDGE TRANSFER AND RELATONSHIPS STRATEGIC ALIGNMENT PERFORMANCE AND REWARDS CHANGE PROJECTS OPERATING WITH SKILLS OUTSIDE DIFFERENT HR COMPETENCIES