Although large-market practitioners gain efficiencies through outsourcing engagements, they also aren’t getting the innovations they sought, survey finds.
By Cynthia DeFidelto
Our earlier articles in this series described the importance of creating a good, workable HRO governance model, managing a successful transition by focusing on the retained HR organization, and keeping affected employees fully engaged in their work throughout the outsourcing change process. In this final installment, we’ll report the most recent assessment of outsourcing effectiveness as provided by those closest to the deals—the clients themselves.
As part of its ongoing work with the HRO Buyers Group (see sidebar on p. 62), Towers Perrin routinely takes the pulse of companies involved in significant HRO deals to see what’s working, what’s not working yet, and what needs to happen if outsourcing is to deliver on its promise to free HR from day-to-day operational oversight so that it can focus its attention on more strategic organizational issues. Earlier this year, we surveyed several dozen companies involved in major outsourcing deals to see how companies gauge their progress and what, if anything, they are doing differently as a result of the current economic downturn.
On the Surface, HRO is Working
We know from our periodic reviews of the HRO industry during the past seven years (and from anecdotal feedback from clients and from Buyers Group members) that outsourcing has, in fact, significantly reduced the total numbers of employees involved in day-to-day HR processing activities. But absolute numbers can be deceiving. The truer test of HR efficiency is in the (relative) measure of HR employees per total employee population. The good news is that here, too, HR shows up as a more efficient operation (See figure 1).
In our recently completed 2009 HRO effectiveness survey, 71 percent of companies reported that prior to outsourcing, their employee-to-HR staff ratio averaged less than 100 to one. In 21 percent of the cases, the ratio was 50 or fewer employees for each member of HR—a labor-intensive, unprofitable, and unsustainable level of HR staffing. Barely one in four companies (28 percent) had an employee-to-staff ratio of 100 or more.
Following outsourcing, the number of companies with employee-to-HR ratios of less than 100 had dropped to just 43 percent, a decrease of 28 points. At the same time, the number of respondents with employee-to-HR ratios of 100 or more doubled, from 28 percent before outsourcing to 57 percent after outsourcing.
Employee headcount is just one of many metrics used to assess outsourcing effectiveness, but it is seen as a useful leading indicator of near-term savings and the promise of future manpower efficiencies. These kinds of improvements in HR productivity showcase HR’s very real contributions to organizations’ cost management efforts.
Savings a Key Goal
Our 2009 survey was fielded between March 2 and April 6, in the midst of the current economic downturn. It came as no surprise, then, that cost savings, a perennial key goal of HRO since the beginning, topped the list again in 2009.
Eliminating the distraction of administration and transactional HR work, another way for companies to reduce operating costs, joined cost savings at the top of the goals list. Seventy-three percent of respondents chose one or the other, or both, as their highest priority for engaging in HRO.
Roughly two-thirds of survey participants considered their cost savings efforts successful. But not nearly as many—just 50 percent—considered themselves successful at eliminating “administrivia” from their day-to-day activities, while one in five (20 percent) rated their efforts as unsuccessful, a disappointingly high percentage considering the amount of time, effort, and money that companies have invested in outsourcing up to this point.
Ironically, part of the problem may be HR’s own fault. In what has become an all-too-common circumstance, the full promise of HRO is sometimes stymied by HR’s own unwillingness or inability to relinquish oversight and control of HR processes to an outside vendor, even when its continued involvement is unnecessary or actually counter-productive.
In an earlier article in this series, we wrote of the seismic change that occurs when a company decides to outsource its HR services, and of the need for members of the retained HR organization to develop radically different skill sets to meet the challenges of the new organization. HR generalists continue to see a need for new competencies. In fact, the number of generalists indicating a need for new competencies to a great extent or very great extent following outsourcing actually increased in the past year, from 50 percent in our 2008 survey to 57 percent in 2009. Over the years, companies have introduced a variety of processes to ensure that retained HR staff have both the skills and training needed to maximize outsourcing effectiveness (See figure 2).
Click here to view Figures 1 and 2.
Some in the retained HR organization find comfort in continuing to manage the same labor-intensive processes after outsourcing that they did before—things that belong with the outsourcer in the new business model. To combat this tendency, many companies have reconfigured their HR systems to make it virtually impossible for retained HR staff to continue performing unnecessary transactional work. It continues to be the most effective approach by a wide margin for increasing outsourcing’s effectiveness. Other effective approaches include a combination of:
- Replacing staff with others from outside the organization who have skills and competencies more aligned with the new business model, and
- Introducing formal training programs to overcome retained employees’ skills gaps.
Staying the Same
Finally, companies continue to express frustration with their outsourcers’ unwillingness to look for better ways to get the job done or share (non-proprietary) knowledge and lessons learned from other outsourcing clients. This issue initially surfaced during some of Towers Perrin’s very first Buyers Group meetings six years ago and remains a major source of dissatisfaction.
Finally, companies continue to express frustration with delays getting their outsourcers to look for better ways to get the job done or share (non-proprietary) knowledge and lessons learned from other outsourcing clients. But vendors, who remain almost singularly focused on meeting their key performance indicators and wringing every ounce of profitability out of their client relationships, see this as extra work and a potentially expensive distraction and are reluctant to take time and attention away from delivering agreed-upon outsourcing services. And in fairness to vendors, clients remain disinclined to accept standard (one-to-many) processes, preferring customized solutions.
This is likely to remain a point of contention between clients and vendors until and unless clients begin to build innovation and continuous improvement clauses into their new or renegotiated outsourcing contracts. Companies need to work with vendors to develop mutually agreeable ways to tap into vendors’ vast experience but in ways that won’t penalize vendors for their initiative or jeopardize their ability to meet contractually mandated cost and service levels.
About the HRO Buyer’s Group
The HRO Buyers Group is an invitation-only collection of organizations involved in large-scale HRO relationships, defined as having six or more HR processes outsourced to the same vendor. Its mission is to provide a collective voice to influence the development of key aspects of the industry, such as establishing common service standards. Comprised of participants in Towers Perrin’s regular study of HRO effectiveness, the Buyers Group has emerged as an important force in evaluating and promoting the quality, effectiveness and success of outsourcing relationships and results. Members informally advocate improvements across all aspects of HRO, from governance to the role of the retained HR function, and play an active part in the development of this ever-changing industry. The group is chaired by LeAnne Andersen of Best Buy.
Cynthia DeFidelto is a principal in Towers Perrin’s HR Function Effectiveness practice. She leads HR transformation engagements for global organizations, and is the leader of Towers Perrin’s regular study of HR outsourcing effectiveness.
