Multi-process HRSourcing

HRO in the Public Sector

Under pressure to cut expenses, government agencies will have to operate more efficiently. Facing myriad challenges such as an aging workforce, limited ability to invest in technology, and bureaucratic resistance to internal transformation, these organizations will have to come up with solutions to their long-term needs. Can outsourcing serve as the savior of government HR?

by Andy Teng

Like many other types of outsourcing, HRO is being championed mostly in the private sector these days as companies look to cut costs, focus on core competencies, and reduce capital expenditure. Those same benefits also apply to the public sector, but government and not-for-profit buyers have been slower to embrace HRO than their commercial counterparts, in part because outsourcing is still seen as a politically touchy issue, especially if offshoring is factored into the equation.

While HRO continues to attract practitioners in the private sector, government buyers remain unabashedly behind the times, engaging in HRO in a limited fashion. Even when they do outsource, most of these deals—at least in the U.S.—remain on a federal level, with few state government and even fewer local authorities turning to outsourcing as a way of transforming HR. One plain truth is that despite election time rhetoric, bureaucratic transformation rarely ever occurs, and when they do they’re usually not in the HR departments of government agencies.

But some observers say it’s just a matter of time before public sector buyers, under pressure by taxpayers and other stakeholders, start turning to HRO for ways to cut costs. As HRO grows ever more mainstream, the practices of the private sector will seep into the public market, where IT outsourcing, for example, has become widely accepted. Furthermore, initiatives such as the E-Government program, launched by President George W. Bush in 2001, may eventually lead to outsourcing of functions such as payroll to commercial providers.

In some government quarters, it’s still impolite to bring up HR outsourcing. Industry observers point out that several barriers exist in the way of greater public-sector adoption. Although some of those barriers are being eroded, others are likely to be permanent roadblocks.

According to Bob White, the public sector industry leader for advisory firm TPI, adoption rate has been hampered by how public sector buyers view HRO as well as infrastructure. For instance, he pointed out, government agencies simply aren’t set up to engage in HRO as easily as private sector counterparts. As a result, making a decision to outsource typically takes longer among government agencies.

Furthermore, one of the cornerstones of HRO has been offshoring, and no bureaucrat or politician is willing to risk the wrath of the voters to marginally cut costs. White said offshoring remains the most contentious aspect of HRO, and it’s a sure way of bringing negative attention to outsourcing.

“It’s just one of those things in which the private sector has moved very aggressively, but the public sector just hasn’t,” said White, who pointed out that on average it takes a public-sector buyer 50 percent more time to commit to an HRO deal than a private-sector client.

HR outsourcing in the public sector is not unheard of; in fact, said Glenn Davidson, who heads up advisory firm EquaTerra’s public sector practice, many departments now outsource services such as payroll and benefits. Many larger deals are usually initiated by federal agencies in the U.S., while in the U.K. regional and local authorities have aggressively looked to outsource. Among non-profit organizations, groups such as the Catholic Health Initiatives, a national network of healthcare providers with 66,000 employees and more than $7 billion in revenues, are also turning to HRO to fulfill some of their HR needs.

What’s driving some government groups to embrace outsourcing? While costs are always factored into the decision to outsource, some observers point out that public-sector buyers are much more interested in shoring up gaps in service delivery and domain knowledge when it comes to outsourcing. Take the example of the Transportation Security Administration, which had to staff up from two employees to 60,000 in a matter of four month following 9/11. In this instance, the federal agency worked with Accenture and other recruitment specialists to quickly fill its ranks, and this case vividly underscores that sometimes needs outweigh costs.

“Access to best practices is clearly a driver. The federal government, on a per-transaction basis, is not all about costs,” said Seymour Adler, a senior vice president with provider Aon Corporation who works with a number of public-sector clients.

Aon has provided outsourced assessment services to several large agencies, including the IRS, Department of Homeland Security, the FBI, and others, and Adler insists that HRO is a good fit for government buyers because they often can’t make capital investments to enable internal capabilities. And even when they can, they are better off outsourcing because the needs for these competencies may fluctuate during the year. For instance, Aon may have to administer testing for a large number of potential new hires in one day. However, once a project is completed, Aon’s service may not be needed for several months. To build such internal capabilities within an agency would be a waste of tax dollars, Adler argued.

The U.S. federal government, however, is one employer with enough scale to justify building internal capabilities, but the use of inter-agency shared services has been limited in the past. More recently, however, the federal government is making a greater push to consolidate and standardized service, reflecting similar trends in the private sector.

Under the E-Government Act signed by President Bush in 2002, some 24 federal agencies participate in the the program, leveraging shared services managed by the Office of Personnel Management (OPM). As part of the initiative, Lines of Business (LOB) were identified and slated for transformation. For instance, the HR LOB includes consolidation efforts in payroll, a move that called for reducing the number of federal government payroll providers from 26 to four. The four selected to provide payroll services include:

• The Department of Agriculture’s National Finance Center(NFC);
• The Department of Defense’s Defense Finance and Accounting Service (DFAS);
• The Department of the Interior’s National Business Center (NBC); and
• The General Services Administration’s Heartland Finance Center (HFC).

According to the OPM, the consolidation results in significant savings by reducing overhead and redundancies. In addition, standardized systems ensure that the 24 “customers” of these providers have similar approaches.

But like many shared services these days, there is a move to consider outside providers, according to EquaTerra’s Davidson. He said the OPM is currently putting together a Request for Proposal (RFP) that may go out to HRO providers as early as February of next year. This potentially could lead to huge commercial contracts covering hundreds of thousands of federal employees.

He explained that one reason why the federal government may want to source externally is that internal providers can’t afford to make continuous capital expenditures to stay afoot with innovations in the private sector. It also follows the President’s original intention to ensure that agencies adopt competitive sourcing practices—whether that’s buying from internal or external vendors.

Another reason that he believes will help the HRO market is the aging government workforce, which is nearing a crisis point. With the average government worker 52 years old, retiring employees during the next decade could leave many agencies shorthanded and badly in need of outsourced services.

“There hasn’t been a mass exodus, but it’s only a matter of time,” he said, adding that the public sector will experience a difficult time competing with the private sector for talent because salaries and benefits are typically lower than in the private sector.

But with the political climate changing in Washington as a result of the November elections, will attitudes change towards the privatization of HR services within the agencies? Davidson said he doubted that a major shift will occur in the current sourcing philosophy.

“I don’t see where a change in political profile in Congress can or should have a major impact on this,” he added.

Even as the federal government looks to possibly adopt HRO on a broader scale, state and local authorities have been less enthusiastic about outsourcing, whether selectively or enterprise-wide. On the local level, it’s understandable. Many municipal employees— teachers, police officers, and sanitation workers—typically belong to unions, which don’t look favorably on outsourcing. In addition, the majority of municipalities employ a small number of workers, so enterprise HRO isn’t a good fit for these organizations.

On a state level, there has been more outsourcing activity. Landmark deals signed in Florida in 2002 and in Texas in 2004 blazed a trail for states to outsource, but none have entered into sizable deals since. In Florida, the state originally signed a seven-year, $280 million deal with Convergys; while in Texas, Convergys was again the provider by winning the deal two years later.

More recently, some states are engaging in outsourcing but on a limited basis. For instance, the state of Alaska signed a four-year contract with ACS for actuarial and consulting services in January. California engaged with BearingPoint in March for a new payroll/personnel system at a cost of $69 million. Still, none have embraced HRO in a way as expansive as those signed by Texas and Florida.

As the private sector continues to roll up one large HRO deal after another, it may be just a matter of time before the public sector gets the itch. Facing an aging workforce, a growing public mandate to cut costs, and an inability to continually invest in cutting-edge technology, many governments will simply have no choice but to adopt outsourcing for the long term.

Tags: Multi-process HR, Sourcing

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