by Mark Hodges

Any activity that raises the stock price is considered core Business. and New hard data shows that HRO improves profitability.

HR organizations and their leaders are often criticized for not explicitly contributing more to the creation of shareholder value. HR Outsourcing (HRO) holds the potential to put HR leaders squarely in the path of shareholder value creation, potentially changing the current perception of HR by the businesses in a fundamental and dramatic fashion.

Geoffrey Moore, author of Crossing the Chasm and Living on the Fault Line, claims, "Any behavior that raises your stock price is core-everything else is context." I have always believed that public equity markets, Wall Street and the City (London) in particular, often reward companies who avoid investing their scarce capital, talent, and management attention in noncore, "contextual" activities. Happily, there is recent empirical evidence that business process outsourcing (BPO), of which HRO is the most significant component, creates shareholder value by increasing share price and improving profitability. HRO is a proven method that HR organizations can use to shed contextual activities and create value for the corporation and its shareholders.

However, separating core from context is difficult, because it compels companies to reconsider familiar practices and longstanding-sometimes unstated and unrecognized-assumptions. The premise is simple: If the function neither creates competitive advantage nor differentiates the company in the marketplace, the process is contextual. Contextual processes include not only the obvious examples-such as the cafeteria-which are noncore and noncritical, but critical noncore services-such as HR administrative and transactional activities. In publicly traded companies, processes defined as both core and critical deserve the lion's share of capital, talent, and management attention.

Where is the evidence that shows outsourcing has a discernible positive impact on share price? The first definitive study that answered this question was performed in 2000 by Stern Stern Stewart & Company, the consultancy renowned for developing economic value add analysis (EVA). Stern Stuart's research focused on 27 outsourcing deals, in the United States as well as in the United Kingdom, France, Japan, New Zealand, and South Africa. The size of the contracts ranged from a low of $325 million up to $5 billion. Their analysis proved that large, comprehensive outsourcing relationships have a discernible positive impact on share prices of +5.7%, over and above the general market trend. This means that for a company with equity capitalization of $7 billion (the median for the 27 companies studied) the average increase in value was $400 million.

Other important evidence of the positive link between BPO (including HRO) and share price is a recent June 2002 study by the research organization MORI. MORI interviewed over 100 leading equity analysts-50 in the United States (Wall Street analysts) and 50 in the United Kingdom (City analysts). The most notable MORI findings are:

• 78% of U.S. and 60% of U.K. analysts say that BPO can positively impact on company share prices.
• 68% of U.S. and 60% of U.K. analysts say that BPO initiatives can positively impact on company's profitability.
• 66% of U.S. and 62% of U.K. analysts say that companies undertaking BPO have benefited through having an improved focus on their core business.
• 60% of U.S. and 70% of U.K. analysts say that companies undertaking BPO have benefited from an ability to reduce their cost base.
• 100% of U.S. and 94% of U.K. analysts say that capability to improve shareholder value is the most important factor to look for when analyzing companies for investment.
• 92% of U.S. and U.K. analysts say that a focus on core business is the second most important factor to look for when analyzing companies for investment.

Equity analysts want to be convinced that a company is doing all it can to deliver shareholder value-and so should HR leaders.

Holding on to contextual HR activities, such as technology, transactions, and administration, inevitably leads to a slow and inexorable decline in stock price as more of the total assets of the company get tied up in HR processes that cannot produce a competitive advantage in the marketplace and thus cannot improve the company's prospects for increasing future earnings. Yet the opportunity to generate additional shareholder value and operate its function like a business should prompt senior HR leaders to seek contextual HR activities that are candidates for outsourcing.