HR Outsourcing (HRO): Its Impact on Your Company, Your Career, and the HR Profession

1. HR Outsourcing (HRO): Its Impact on Your Company, Your Career, and the HR Profession Presented by Tom Darrow 2005 SHRM-Atlanta President Elect Principal, Talent Connections October 17, 2005

2. Agenda : HR Outsourcing Overview : Impact on Companies : Impact on HR Profession : Impact on Your Career : Selecting, Managing, and Measuring Outsourcing Providers : Helpful Resources

3. What is Outsourcing? The performance by outside parties, on a recurring basis, of tasks that would otherwise be performed in-house.

4. Other Definitions : In-sourcing : Off-shoring : Co-sourcing : Geo-sourcing : Outplacement

5. Types of Outsourcing1 : Business Process Outsourcing : Information Technology - 28% : Human Resources – 16% : Sales & Marketing – 15% : Finance – 11% : Administrative – 9% : All Others – 22%

6. How Common is HRO? : 58% of companies outsource some HR function2 : 91% of companies with $1 billion+ annual revenues are now considering HRO3 : HRO grew 28% from second half of 2004 to first half of 20054

7. The HRO Market : In next 5 years, global spending on HRO will double – from $40 billion to $80 billion5 : From 2002 to 2004, 14% increase in large firms that would consider HRO6

8. 5 Most Commonly Outsourced HR Services7 • Background Checks – 73% • Employee Assistance/Counseling – 66% • FSA Administration – 67% • COBRA – 55% • Healthcare Benefits Administration – 60%

9. Other Types of HR Outsourcing7 : Pension Benefits Administration – 55% : Temporary Staffing – 54% : Retirement Benefits Administration – 47% : Payroll & Software Services – 48% : Recruiting, Staffing & Search • Non-executives - 30% • Executives - 29%

10. Other Types of HR Outsourcing7 : Employee Relocation – 29% : Training and Development – 21% : Incentives – 19% : HRIS & Web-based Services – 15% : Reference Checks : PEOs and ASOs : Sourcing Consultants & Legal Services : Screening & Workplace Security : Process, Project, and Systems Management

11. Least Commonly Outsourced Functions7 : Performance Management 3% : Strategic Business Planning – 4% : Policy Development/Implementation – 4% : Employee Communication Plans – 10%

12. Audience Survey : How many of you outsource part of your HR function? • Payroll • Benefits • Recruiting, Staffing, & Search • Training • HRIS & Web-based services : How many of you outsource all of your HR function? : What led to the decision to consider outsourcing?

13. Why Outsource? : Allow HR to focus on core competencies : Creates strategic opportunities for HR professionals : Improve quality, efficiency, and effectiveness : Relief from administrative burdens : Reduce operating costs

14. Other Benefits to HRO : Access to outside HR expertise : Greater diversity of HR services : Leverage vendor investments in technology rarely available to HR organization : Limit fiduciary, audit, and litigation risks and liabilities : Upgrade level of customer service : Ease time pressure demands :“Better, faster, cheaper”

15. Risks : Over promise and under deliver : Nonperformance of key function : Cost : Loss of institutional knowledge : Difficulty managing vendor relationship : Change in provider’s business or financial stability : Lack of fit with company culture : Organizational resistance or unreadiness

16. When to Outsource : High HR service delivery costs : No further investment in technology : End administration of transactions and focus on strategic work : Improve quality of HR services : Strong business case : Other business reasons

17. Considerations : Core Competency? : Best in Class? • What is your vision for your HRM business? • What metrics will measure progress toward vision? • What business outcomes are needed from the HRM aspects of the business?

18. Poor Reasons to Outsource : Do not outsource just because you are frustrated : Do not outsource as a last resort, just because you have tried everything else

19. Outsourcing Myths : Outsourcing is just a fad : Outsourcing can be kept secret from employees : Outsourcing is only for the largest companies : Messes must be fixed before outsourcing : Outsourcing is for everyone

20. :Specialization :Globalization :Standardization :Regionalization :Consortia Buying :Mid-market Mania :Utility Model Evolution :Consolidation and Partnering Trends in HR Outsourcing Market

21. The Future of HRO • Growth-Maturation of HRO market • Increasing weight of non-cost drivers • “Commodization” of HR functions • New roles for internal HR departments • New career opportunities for HR professionals

22. The Future of HRO (cont’d) 6. Expansion of small/mid-sized HRO markets 7. Demographic changes 8. Improved HRO metrics 9. Reshaping of industry

23. Impact on Companies : Employee reactions : HR executives taking part in operational and strategic decisions : Elimination of bureaucracy : Customer service improvements

24. Impact on Companies (cont’d) : Growth of self-service platform : Slimming down staff : Cost savings : Model will serve to guide other organizational functions (IT, accounting)

25. Impact on HR Profession : Internal HR at significant disadvantage in cost per transaction : Loss of control of key processes : Enhanced credibility : Strategic focus : Decentralized structure : Internal politics – HR as business partner : Move to customer service culture

26. Impact on HR Profession (cont’d) : Management and Organizational Development – big picture view : New roles – consultant and HR strategist : Develop competencies to remain valuable : HR is exposed and more visible as organizational function : HR is far more measurable : Align HR strategy with corporate goals

27. Impact on Your Career : Transformation – from transactional administrator to business partner that sets strategy : Develop competencies to negotiate and manage vendor relationships : Demonstrate ability to provide business solutions for employee and customer problems : Change bureaucratic culture : Develop strategic expertise necessary to manage human capital

28. Impact on Your Career : Deliver exceptional customer service : Sharpen your skills : Build/Develop your network : Stay on top of trends and their implications : Utilize vendors now so that they can help you later

29. Online Resources : Better Management.com – www.bettermanagement.com : EquaTerra – www.equaterra.com : Everest Group - www.everestgrp.com : HRO Today – www.hrotoday.com/org : HR Executive – www.hrexecutive.com : Human Capital Magazine – www.humancapitalmag.com :“HR Outsourcing Gaining Traction Fast” – www.rwbaird.com/docs/YourReports/HRO2003.pdf

30. Online Resources (cont’d) : Nelson Hall – www.nelson-hall.com : Outsourcing Center – www.outsourcing-research.com : Outsourcing Institute – www.outsourcing.com : Outsourcing Suppliers – www.outsourcing-suppliers.com : The Outsourcing Management Zone – www.theoutsourcerzone.com/law.htm

31. Books :The HR Scorecard: Linking People, Strategy, and Performance by Becker, Huselid, and Ulrich (2001) :Strategic Outsourcing: A Structured Approach to Outsourcing Decisions and Initiatives by Greaver (1999) :Out of Site: An Inside Look at HR Outsourcing by Beaman (2004 )

32. Books (cont’d) :Outsourcing: A Guide to Selecting the Correct Business Unit…Negotiating the Contract…Maintaining Control of the Process by Bragg (1998) :The Challenge of Outsourcing Human Resources by Vanson (2004) :Outsourcing Human Resource Functions: Strategies for Providing Enhanced HR Services at Lower Costs by Cook (1999)

33. Professional Organizations : Human Resources Outsourcing Association – www.hroassociation.org : HR.com – www.hr.com : International Association of HR Information – www.ihrim.org : Shared Services & BPO Association – www.sharedxpertise.org : SHRM National – www.shrm.org • Outsourcing Forum – www.shrm.org/outsourcing/

34. QUESTIONS?

35. THANK YOU!Tom DarrowTomDarrow@talentconnections.netwww.talentconnections.net

36. Selection Process : RFI – request for information : RFP – request for proposal : Site visit : Create and use scoring tools : Top 3 potential providers deliver presentation

37. Selecting a Provider : Identify must have’s and nice to have’s : Discuss provider with consultant, competitors, former customers/employees : Perform reference checks : Determine current state of provider’s market share : Consider local vs. remote

38. Selecting a Provider (cont’d) : Identify provider’s recent disappointments : Determine provider’s current weaknesses : Beware of off-the-shelf solutions from vendors : Determine provider’s current workload and capacity

39. Selection Criteria : Proven track record : Cost of vendor services : Service level guarantees : Flexible contract options : Cost savings guarantees : Recommendations from other companies : Compatible corporate culture : HR process expertise : Leading technology

40. Transitioning Resources : Launch period between selection and implementation : Approximately 90 days : Time of learning in order to gain mutual understanding of company and processes : Communication and project management are key : Slowly turn over control as you transition resources : Cannot measure results until end of this period

41. Managing the Provider Who should manage the provider? : CFO : Head of HR : Other HR individuals

42. Managing the Provider : Establish performance targets and set expectations up front : Determine priorities and communicate them to vendor : Establish reporting relationships up front : Provide forum and timing for discussion of issues : Anticipate and plan for conflict resolution – arbitrate when it occurs : Ongoing ownership, involvement, supervision

43. Managing the Provider (cont’d) : Where continuity is critical, establish long-term relationships with vendors : Review annual operating plans and major initiatives : Guidance for provider and buyer’s managers’ oversight : Require competitive bidding for outsourced service at regular intervals : Review contract terms and suggest changes as needed

44. Managing the Process : Look beyond initial cost savings and track affect on employee satisfaction and organizational performance : Ensure senior management buy-in and involvement : Reinforce/reward through incentives : Focus on quality first, cost second : Test outsourcing with specific function before expanding

45. Managing the Process (cont’d) : Facilitate feedback from internal HR team : Manage resistance from internal HR team and company at large (communication is key) : Anticipate and manage culture change : Develop staff members to effectively manage vendor relationships

46. Measuring Performance : Insist on accurate and frequent status reporting by vendors : Demand immediate notification when problems arise : Metrics are key • Quantitative terms • Incorporate multiple time periods

47. Measuring Success : Internal metrics: effectiveness, efficiency, quality, productivity : External metrics: revenues, expenses, market share, customer relations, quality productivity

48. Typical Problems : Lack of measurement • 88% of large business require metrics8 • Only 41% of mid-sized companies stipulate metrics in contracts8 : Rush into autonomy too soon : Unrealistic expectations and goals : Outsourcing for the wrong reasons : Overly focused on cost savings : Lack of communication : Difficulties managing vendor : Employee resistance

49. Success Factors : Preparation is paramount : Be a knowledgeable buyer : Realistic goals and expectations : Strategic vision : Consider permanence of outsourcing - costs involved in switching outsourcing vendors or ending HRO : Find the right vendor

50. Satisfaction Recent survey of 129 large companies representing 2 million employees9: : 89% satisfied with outsourcing arrangement : 85% achieved hoped-for benefits : Additional 20% achieved unexpected benefits