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Beware of Cost Savings that Add up to less than 10 Percent

Recent survey of buyers shows that cost savings of 10 to 15 percent are the most common result. Discrete outsourcing may double the rate.

by Robert H. Brown

In a recent survey among buyers of HR BPO in North America, nearly half of respondents indicated less than 10 percent cost savings as a result of having outsourced one or more HR functions. This is bad news for buyers, who typically cite cost reduction as the key driver for HRO pursuit.

It is also worrisome to vendors, who realize that a short-term emphasis on cost reduction risks exposing them to scrutiny among buyers looking for process improvement, ability to focus on their core business, and also hard-dollar results. Significantly for buyers, if your overriding motivation for outsourcing is cost reduction, anything less than a 10-percent cost reduction seriously questions the need for outsourcing, especially when you “add back” the overhead.

During the third quarter of 2006, we polled 320 respondents in North America involved in evaluating, planning, or deciding whether to outsource one or more business processes in the coming 12 months, including F&A, HR, sales, marketing and customer care, procurement, and payment services. Of this sample, 63 respondents now outsource one or more HR processes.

When asked to estimate the savings achieved from currently outsourced HR processes, the resulting data resembles the classic bell curve, with the biggest number obtaining savings of 10 to 15 percent (Fig. 1).

Typically, Gartner counsels that in discrete HRO deals, buyers allocate 5 to 11 percent of the total deal cost for management oversight of the vendor and outsourced HR functions. Discrete HRO contracts tend to be more mature; there are often more standardized SLAs that are market-accepted and can be included in contracts. Typically, these contracts tend to be managed by HR managers and internal and external relationship managers other than by C-level executives. This brings the total overall cost of BPO management down.

However, it is important to understand that even in these situations, occasional, formal interaction with enterprise executives is required to ensure that ongoing alignment of business processes remains in line with the overall strategic direction of the enterprise. An example is a BPO relationship created initially to lower costs, but the enterprise moves to an acquisitive direction. If those acquisitions are going to impact the outsourced business processes, it is prudent to review the contract T&Cs and associated management processes to see if adjustments are necessary.

For comprehensive, end-to-end HRO contracts, our guidelines for management oversight are in the range of 8 to 15 percent, or the higher end of the spectrum

if HR is bundled with other functions such as F&A in a multi-domain BPO contract. These deals involve much more attention with increased costs. It is imperative that in these deals both parties understand that as business conditions change, the overall nature of the contract may also need to change.

Generally, at least a 10- to 15-percent cost reduction should be expected; 20 to 30 percent is typical, especially for discrete HRO services such as payroll or benefits administration. To be sure, not all buyers are looking for cost reduction, as attested in the diversity of responses in the HRO drivers analysis.

Vendors should stress that to achieve maximum cost reduction, buyers need to prioritize around the following seven variables, ranked in order, of their likely effects on cost: degree of HR consolidation required, leverage of standardized platform, amount of global delivery applicable, transfer of HR personnel to the vendor, scope of HR services included, length of the HR outsourcing contract, and degree of complexity required for HR outsourcing key performance indicators.

Tags: Consultants & Advisors, HRO Today Global, Multi-Processed HR, Professional Contribution, Sourcing

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