Towers Perrin Study Finds Mixed Views of HR Outsourcing

Companies See Results in Cost Effectiveness, but Frustration With Service Quality Propels Some Dissatisfaction

STAMFORD, CT, OCTOBER 19, 2005   While HR outsourcing (HRO) is delivering results from a cost perspective, according to Towers Perrin’s second annual study of HRO effectiveness and satisfaction, success in meeting other key objectives remains elusive.  In particular, the study shows continuing frustration with service quality and a growing realization that outsourcing alone cannot transform the HR function.  Broadly, the study, which involved close to 80% of the companies with large-scale deals in place at the time of the study, indicates that more work is needed by both companies and vendors to achieve the full benefits of the relationship.

“There’s no doubt that outsourcing has moved beyond its ‘new phenomenon’ status to emerge as a popular and viable service delivery strategy for a rapidly growing number of organizations,” said Cary Sparrow, a Towers Perrin principal in the firm’s HR Services business specializing in HR function effectiveness.  “But it’s equally clear that initial high expectations are being tempered by a dose of reality.  The message we heard loud and clear from our participants is that vendors need to get the basics right. That’s where both parties need to focus for now, especially given the evidence we also have that outsourced services are increasingly moving farther and farther offshore, which brings added complexity.”

Clear Objectives and Mixed Results
This year, as in last year’s study, the vast majority (74%) of respondents focused on three key objectives for outsourcing: reducing their overall service delivery costs (37%), freeing HR to focus on more strategic issues (23%) and improving service quality (14%).  Cost was an even more important focus this year, as companies face continuing pressure to streamline their internal operations to improve bottom-line results.

How respondents did in achieving objectives is a different matter.  Cost remains the clear winner, with 88% feeling they’ve succeeded in meeting short-term cost-saving goals, and an even greater number  92%  reporting success in cost management over the longer term.  Improvements in service quality fall far short, with just 40% of those that have been outsourcing for a few years reporting improvements in this regard.  A majority of respondents also reported little or no success in improving productivity for HR and the line, and in speeding the transformation of the function from tactical to strategic.

“The absence of clear productivity improvements suggests that companies are not yet feeling the impact of a new service delivery approach where it matters most  in improving the speed and quality of managers’ and employees’ experience,” noted David Rhodes, a Towers Perrin principal specializing in HR function effectiveness. “Tasks may have moved outside to the vendor, but the technology solutions aren’t intuitive enough, and the quality delivered by service center staff (now increasingly offshore) is insufficient.  Too many companies are still relying on long-time internal processes, with both HR staff and managers involved in activities no longer necessary or value-added.  Sometimes, it’s a lack of trust in new processes.  Sometimes, it’s simply natural resistance to change.  This is part of an overall change management challenge we see all the time.

“Still, companies are getting savvier in their expectations,” Rhodes continued. “They now understand that outsourcing is a means to an end and that they themselves have to own the transformation process.  Outsourcing helps give them time and space to reinvent what they do and how they operate. It’s their job to use that time and space to rethink the role and function of the retained HR organization and build a function that can support the organization’s strategic business goals from a people perspective.  Our practical experience shows that companies that take that route are having the most success across the board.”  

Vendor Relationships Are Increasingly Important in Meeting HRO Goals
A key component to determining the success or failure of an HRO deal is the quality of the relationship between vendor and company.  Top goals that companies have for their vendors include:
·        Quickly meeting established service levels and expectations (cited by 34%)
·        Meeting the financial terms of the contract (cited by 22%)
·        Having an in-depth knowledge of the organization (cited by 14%)
·        Having good overall experience in providing HRO services (cited by 14%).

On the whole, respondents don’t feel vendors are delivering in these areas, other than in terms of cost.  For instance, 40% say their vendor doesn’t share best practices from its work with other clients, and 46% say their vendor doesn’t use its knowledge or access to the company’s data to help the company improve.  Slightly smaller numbers of respondents also express concern about relative churn in the composition of the team serving them and in the vendor’s use of the change process to generate additional revenue.
“There are some wonderful company-vendor relationships out there and some difficult ones, and the only real difference is in the quality of the relationship  the level of communication, trust, interdependency, and clarity of roles and expectations,” said Sparrow.  “Getting the relationship right is the top priority in achieving full value from HRO.”

Offshoring Remains an Effective Solution
Off-shoring remains a prevalent and proven solution to reap cost savings and is growing into other forms, namely “near offshoring.”  Fifty-eight percent of the respondents rely on some form of offshoring and about a third intend to move additional work offshore.  Only 10% plan to return work to their home country.

India, with its educated population and low cost of services, is far and away the favored far offshore location, followed by Malaysia. For near offshoring, Jamaica is the favored location, followed by Costa Rica and Canada.

One of the more interesting findings in this area is that companies that move operations far offshore appear to have better success than those using near offshore or home country locations.  For instance, 76% of those operating far offshore felt their implementation went smoothly, versus 44% of those in near offshore locations and 38% of those outsourcing in their home country.  A similar trend shows up across other results, including governance and better vendor relationships.

“This finding seems counterintuitive,” Rhodes noted, “until you consider that the demands of going far offshore require an intense level of planning and management.  Because there are special demands  language and culture barriers, greater change issues and the like  those companies put in the time and attention from the start  and reap the benefits in areas like better implementation, governance and vendor relations. By contrast, there’s less immediate incentive or need for those operating closer to home, or within home country borders to do the same  and their results appear to suffer accordingly.  The lesson here is that what you put into the effort shapes what you take out of it.  The more a company puts into making the arrangement work, regardless of where its operations are located, the better the result.  This is hardly earth-shattering, but it bears repeating, since few companies are currently putting in the time and attention required for full satisfaction and effectiveness.”

About This Survey
The HR Outsourcing Effectiveness Study was conducted in early 2005.  Towers Perrin combined a broad set of survey questions with face-to-face interviews to secure responses from 80% of the 60 companies that outsourced five or more of their HR processes at the time of the study.  Of the 47 organizations participating, 37 are Fortune 500 companies.  

About Towers Perrin and HR Services
Towers Perrin is a global professional services firm that helps organizations improve their performance through effective people, risk and financial management.  Through its HR Services business, Towers Perrin provides global human resource consulting that helps organizations effectively manage their investment in people.  Areas of focus include employee benefits, compensation, communication, change management, employee research and the delivery of HR services.  The firm’s other businesses are Reinsurance, which provides reinsurance intermediary services, and Tillinghast, which provides management and actuarial consulting to the financial services industry. Together, these businesses have offices and business partner locations in 25 countries. More information about HR Services is available at  


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