When it comes to outsourcing, the federal government is holding back while state and local levels show signs of moving forward with interest and contracts.
By Debbie Bolla
This year has shed new light on the meaning of budget crunches and stress levels within every global organization, and the public sector is not exempt. “The economic circumstance has definitely changed the approach and behavior at every level of government,” said Glenn Davidson, managing director of the public sector practice at sourcing advisory firm EquaTerra.
Indeed, the economy as well as the changing political landscape have both helped and hindered the penetration of HRO services into government at all levels. While outsourcing has gained broad acceptance in the commercial sector through enterprise, multi-process engagements and one-off point solutions, the practice still lags in the public sector in the U.S., whereas HRO has become commom practice in the U.K. In fact, governments at all levels there have enthusiastically embraced HRO and have helped to eliminate the stigma that remains wrapped around outsourcing in the U.S.
Here at the federal level, the Obama administration has made moves to decrease the use of independent contractors. As Davidson explained, in the past the federal government worked with staff augmentation firms to bypass certain employment rules and regulations to obtain independent contractors in specific areas of expertise to get highly specialized jobs accomplished. “The federal government is now going to insource those jobs to regain institutional memory of the goals and objectives of the organization,” Davidson explained.
In April, U.S. Defense Secretary Robert Gates announced a pending budget with plans to replace some 11,000 contractors with 9,000 in-house professionals by 2015. This in effect means that the use of outsourced labor for these positions has been suspended, and the big question is whether this is a temporary or permanent move.
Despite an unfavorable environment toward outsourcing these days, the federal government is facing a pending labor crisis. With the average age of the executive branch workforce at more than 45 years old and the average retirement age at 58 (according to 2006 OPM statistics, the latest year for which data are available), the fact is that a growing percentage of these federal workers is nearing retirement. As Davidson said,
“Who’s going to run the legacy system? People are nearing retirement, and there’ll be the need to find someone to run the function. Outsourcing for a new system could be an effective option.”
State and local government, however, are already reaping the benefits of outsourcing certain functions. “These markets have been on fire,” said Davidson.
Recently, Texas moved forward with an extension of its contract with Convergys, while Florida remains in negotiations. However EquaTerra has recommended to the Sunshine State that it renew its contract with the same provider because it would pose the least risk and could potentially result in savings of $31.2 million.
Through Florida’s People First platform, the state has invested more than $250 million, and EquaTerra found that renewing with Convergys could reduce annual operating costs. The study also noted that this option requires only a modest upfront investment, and that the state currently pays a fair price per employee per year (PEPY) of approximately $290—a price that compares favorably with many commercial engagements. If Florida opts for renewal, the process would take six months to a year to complete, creating a smooth transition into a new contract in fiscal year 2010, just prior to expiration of the current accord in 2011. Contract terms could be 5 to 7 years. At press time, Florida officials said they were still evaluating the recommendations and declined to comment further.
Another public sector outsourcing proponent is the U.S. Postal Service. The second-largest employer in the nation opted for a selective HRO approach to help manage HR services for its 800,000 employees.
“Driving best practices and lowering costs is at the heart of an organization,” said Michael E. Smith, senior vice president of marketing development for TALX, a service provider. “There’s a maturity about HR outsourcing, and selective outsourcing allows and organization to leverage it’s own strength.”
When Anthony J. Vegliante joined the U.S. Postal Service as chief human resources officer and executive vice president, he brought with him 10 years of corporate outsourcing experience. He had a clear understanding of its benefits and advantages.
He recently said, “My background is in outsourcing so it was very natural for me to look it as a solution. We were very paper-centric and it was becoming a burden we couldn’t bear. Selective outsourcing brought back quality.”
Velgiante sought an outsourcing solution for the U.S. Postal Service for several reasons. At the time, administrative costs were growing; transactional work became too time consuming; and there was an underlying need to reduce costs while improving quality and productivity. Third-party vendors managed unemployment claims, and a SAP platform was implemented for more than 200 HR functions. Both processes produced huge cost savings (more than $120 million) in addition to an increased level of productivity for the U.S. Postal Service.
Another public sector organization that turned to outsourcing to grow and streamline its HR processes is the Metropolitan Pier and Exposition Authority (MPEA). The MPEA is a municipal corporation created by the Illinois legislature that owns and manages the McCormick Place complex and seeks to promote and operate conventions, fairs, and expositions in the Chicago area in an effort to strengthen the local economy. The organization has been a payroll client of ADP for more than a decade and is currently looking to integrate its HR system with ADP as its host.
“We have 500 employees, but when there’s a show or exhibition, our ranks swell to 1,000,” said CFO John Belcik of MPEA. “Adding 500 tradesmen to our payroll to get our show up and running hasn’t been a problem for ADP. They’ve always been flexible and timely with our payroll.”
Its successful engagement has the organization considering expanding its engagement with ADP. Currently, MPEA operates on another platform for HR administration, and Belcik said having two separate platforms is problematic because data exchange isn’t always seamless and effortless. To gain better control and make the process more streamlined, the MPEA is moving toward implementing an enterprise system with ADP, a project that is expected to be finalized in September.
“Our performance levels will go up with the change,” he said.
While there has been some resistance to move to the ADP platform, Belcik said he is prepared for it. He knows that internal clients are often resistant to change in any organization, especially in the private sector. He has spent 19 years of his career working with outsourcing deals in the commerical sector and is keenly aware of the subtle differences between the two sides.
“It’s just two ways of thinking,” he said. “There’s more governance and we can’t move as quickly. In the public sector, we’re a bigger ship to steer, so the process takes longer.”
That doesn’t mean that Belcik is less enthusiastic in recommending outsourcing to other public sector organizations. “Anything that isn’t a core competency, you have to take a look at it and ask whether you are the best person to do it,” he explained. “Our mission is to be an economic engine for the city, to provide jobs and a standard of living as a convention center. That’s what we need to spend our time focusing on. Outsourcing allows us to be more efficient, nimble and responsive. It’s ancillary to our business.”
And increasingly, the question of core competencies is being raised in the public sector, which could potentially help lay the foundation for widespread outsourcing among governmental and non-governmental organizations (NGOs). So when it comes to the sector, the future of outsourcing is always questioned. While the federal government has seemingly backed away from aggressively pursuing HRO deals under the Obama administration, the growth of state and local government practices hasn’t diminished. This may be one instance in which the Feds might learn from its provincial counterpart.
Growth and Resistance to HRO in the Public Sector
