How Much Does HR Outsourcing Reduce the Cost of HR?

Don’t always count on achieving 30-percent savings when outsourcing, but look for other gains too.

by Paul Davies

Nothing is ever as it seems, or so one would think when an outsourcing company offers to reduce the cost of HR by 30 percent. Nevertheless, the opportunity is too great to be dismissed without consideration, and the extent to which such claims can be realized is a critical question facing HR decision makers today.

I have little doubt that 30-percent cost reductions can be achieved by the end of an HRO contract. However, a reduction this considerable is dependent upon particular circumstances. The perfect storm for a service provider is a buyer with high-current costs, no technology preference, and a vision of HR service that is standard and extremely “low touch.”

A buyer’s current operations footprint and delivery model will affect the savings opportunity significantly. For example, if 90 percent of the buyer’s operations are in Poland or Mexico, or if the buyer already has an HR/employee ratio of, say, 1:200, the promise of 30-percent savings is more market hype than business reality.

The scope of the outsourced activities will also have an impact with some areas more prone to cost reduction.

The nature of the current procurement activity is another major factor. An outsourcing company can often procure services at a lower cost than the buyer because his purchase of HR services such as recruitment, for example, is still fragmented. Therefore, a provider can take over existing local contracts and realize savings by replacing them with a globally leveraged subcontract purchased at a preferential price. In instances in which the buyer tenders centrally and has already leveraged global scale, this opportunity is significantly reduced.

The buyer may also overlook its own technology preference’s impact on price. He can benefit from letting the provider operate in a technical “black box.” After all, why worry about technology if the service standards are being met? However, there may be an impact on the provider’s ability to offer savings as high as 30 percent in cases where it is important to avoid provider proprietary applications, or if particular infrastructure requirements are insisted upon, or if a global HR platform is stipulated.

Lastly, an HR service provider is unlikely to provide the services in the same way as the buyer and probably thrives on doing HR differently in several ways. Substantial savings are made by replacing waste, duplication, and unneeded local variation with efficient standard processes delivered from a central location. The kind man in payroll who calculated paychecks from the time when they didn’t exceed three digits is replaced by a pleasant young voice on the other end of the telephone who is still paid no more than three digits and services the department from another continent. The ad hoc e-mails or calls to the benefits administrator to get things done is now replaced by a standard form that must be completed accurately to the last digit. If not, it likely will be returned even if the only thing missing is the job code that the HR clerk always used to fill in.

In this respect, HR service providers are bringing discipline to organizations that know what should be done but struggle to combat management who conceal their own lack of discipline with their need for “flexible” HR services. However, while some companies thrive on
outsourcing “max,” others won’t be able to get their production facilities back to work for weeks after the kind man in payroll is replaced by the telephone. Clearly, one organization’s appetite for change can differ from another’s. So the buyer’s ability to embrace a radically different service model will affect the provider’s ability to reduce costs.

In my opinion, a buyer who works with a provider to determine what services can be shifted to an offshore
center versus what local support may be required—or figures out how to provide on-line self service to the 60 percent of its workforce that does not possess a computer—will get a more accurate estimate of eventual savings than one that relies on market hype. While a 30-percent cost reduction may be achievable in particular circumstances, it should not be relied upon and is not the only measure. The gains in data integrity, management productivity, process control, measurement, and quality assurance are also factors in the equation. Gains in these areas plus a 10- or 15-percent reduction in HR costs would still represent a powerful argument for a decision maker who considers outsourcing.

Posted November 10, 2005 in Contributors

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