A long-time initiative by the U.S. Office of Personnel Management may finally provide a path for HRO service providers to win lucrative contracts. In light of this, HR transformation may be reaching the Nation’s Capital.
For an industry that has so far failed to convince its potentially biggest buyer to embrace outsourcing, HRO in the U.S. may be headed for some huge contracts in the near future from a behemoth of a customer: the federal government.
Until now, the federal government has taken on the role of a new car buyer: plenty of tire-kicking but not much in the way of large, end-to-end HRO engagements. With a consolidated workforce many times larger than the likes GM or even Walmart—one study released in 2006 estimated the federal government workforce including contractors, the military, postal workers, and others at 14.6 million—the federal government could potentially sign contracts much larger than the ones executed so far in the industry. And according to sourcing advisory firm EquaTerra, an aggressive push is on to move HR services to either shared-services centers operated by federal agencies or outsource them to the commercial market. As a result, HRO providers are now scrambling to develop appropriate solutions.
“I look at the federal government, and it reminds me of where the commercial market was 10 years ago, when the service providers were pitching to clients to handle their HR. But they were not very sophisticated in their solutions then,” said Glenn Davidson, managing director of the public sector practice at EquaTerra.
Davidson, who recently authored a report and survey on HRO in the federal government, noted that although federal agencies have been slow to adopt outsourcing in the past, that’s changing now that the U.S. Office of Personnel Management (OPM) is moving closer to transforming HR at the federal level. Among its initiatives is the creation of the HR Line of Business (HR LOB), which will enable HR executives at federal agencies to outsource its HR services to either one of five captive shared-services centers or eventually to commercial providers. Although details of how this will be done remain sketchy and the timing is yet to be determined—the HR LOB initiative was started in 2004—2008 could mark the start of some contracts being put out to bid.
Davidson—pointing out that a number of providers are developing HR solutions aimed specifically at public sector buyers but have not reached the level of sophistication seen on the commercial side today—lamented the slow pace of development. However, he said he believed there are significant reasons for agencies to contract private providers to deliver HR services such as payroll, benefits administration, and others.
A Historical View
OPM’s initiative is perhaps the most significant effort by the federal government yet to privatize HR services. While the program has been slow to develop, its eventual goal is to reflect the broader trend of HR transformation unfolding in the private sector. By establishing the HR LOB, OPM said on its web site that it hopes agencies will accomplish the following:
- Improved management of human capital;
- Increase operational efficiencies;
- Reduced costs and redundancy; and
- Improved customer service.
According to Joe Campbell, acting director, HR LOB at OPM, the initiative is entering a critical stage following the achievement of several milestones. These were critical in establishing a path for privatizing HR services and mark the starting point of involving commercial service providers in the process Although he said the effort is progressing, he also conceded that it’s a mammoth project without precedence.
“The first thing we have learned is that it’s a huge undertaking, and some of it has not been accomplished before,” he said. “You have to have close collaboration with your partners. They provide guidance and resources to develop the standards put in place. The scale is very large, and we also took a phased approach, so we had to define the standards first.
Indeed, OPM is taking a measured, if not sloth-like, approach to service outsourcing. While many private-sector companies typically decide on a shared-services or outsourcing model with a two-year timeframe, OPM is unlikely to establish a broad foundation for HRO before the five-year anniversary of project’s launch. But Campbell said this is expected, given the size of the government, the number of employees and agencies involved, the disparate systems and processes in place, and the unfamiliar water in which OPM is charting.
Eventually, he added, agencies will be able to outsource many non-core functions and use their retained resources to focus on activities that improve service to customers.
Private vs. Public
Once a list of qualified vendors and shared-services providers is finalized, they will compete for contracts to be awarded by federal agencies. However, it’s not yet clear how the agencies will source their services. While OPM’s efforts are to provide agencies with a path to outsourced services, these departments are not mandated to seek services from either the federal shared-services centers or a commercial provider. Furthermore, it’s not clear that even among those that want to outsource, how broadly they will take on these engagements.
Campbell said these decisions will be at the discretion of the agencies themselves. Some may choose to adopt an end-to-end model while others may seek out a point solution; agency HR leaders will have to decide which solutions are best for their organizations.
Whatever the outcome, it’s likely that commercial providers will be the big winners when the program is finally in place. That’s because they have an advantage over federal shared-services centers, which currently provide HR services through five existing facilities. Until now, with a few exceptions, most agencies could source their HR services from one of the five centers, but with the eventual completion of the HR LOB program, they will be able to seek the services of commercial vendors. And while many providers are just now developing their public-sector offerings, they have a distinct advantage over the shared-services competitors, according to EquaTerra’s Davidson.
He explained that unlike the private sector, the shared-services centers can only charge client agencies for the cost of services, so they are unable to maintain a profit margin—a necessity in the private sector. While this might sound like a cost advantage for the centers, it’s actually a handicap, Davidson pointed out. The reason, he said, is the centers are unable to build capital funding for HR infrastructure, so investments in technology, processes, and other improvements aren’t forthcoming. Industry, on the other hand, is able to reinvest profits and gain a competitive advantage. “There is a significant fear among the shared-services center operators that they can disappear over time. Many of them don’t view themselves as being able to compete with the commercial operators,” he said.
But without the ability to invest in technology, these centers face an uphill battle. According to Davidson, the biggest desire among HR leaders at many agencies is for better technology. Like the shared-services centers, these organizations have not had the budget to invest in their HR infrastructure and, as a result, have fallen woefully behind mainstream industry capabilities.
This imperative means commercial providers who have robust IT platforms and processes will likely win at least some of the big contracts expected. Although the HR LOB initiative is not the first time that commercial HRO service providers will be contracted on a large scale by the federal government, it does signal a huge shift in how most federal agencies will source their services in the future.
