Warts and all, HRO produces results for practitioners, new study concludes. An optimal amount of transformational work is required, data reveals.
If Robert Duvall had been an HR executive rather than a noted actor, he might have uttered this famous line instead: “I love the smell of data in the morning.” References to the movie Apocalypse Now aside, the battle HR executives face everyday in making their departments more strategic can only be fought when they are armed with data; making the case with anything else is simply anecdotal speculation.
That’s why when Towers Perrin recently released its 2008 Research for the Large Market HRO Buyers Group survey, the data compiled further justified HRO practitioners’ decisions to outsource, warts and all. Key finding in the survey—conducted among 38 employers with more than 10,000 workers and who outsource six or more processes—revealed that buyer satisfaction is increasing, the headcount in HR has declined as a result of HRO, and staff efficiency is increasing. Survey results clearly show that as a contract matures, satisfaction rises, but they also confirm ongoing problems in some process areas and that providers must continuously improve their service delivery to keep clients happy.
“The members of the Buyers Group would say it (outsourcing) is still a great idea, but the task is daunting. The members would say that just because something is difficult doesn’t mean it shouldn’t be looked at,” said Rob Lamson, a principal at Towers Perrin. Outsourcing is a difficult challenge, “but for some companies, it’s still the right thing to do. Both the vendors and their clients need to be smarter and wiser about getting it done.”
The fourth study of the group since Towers Perrin first began researching this topic in 2003, the latest data also revealed specific friction points buyers experience with their services, areas of improvements made since the last study, and at what stage of maturity many deals have reached. Because the group only represents the market’s largest buyers, the findings didn’t reflect the experience of buyers in the blossoming mid-market or large buyers who have only engaged outsourcing on a limited scope covering fewer than six processes.
According to Towers Perrin, the 38 that took part in the research were from a total of about 100 large employers who had signed multiprocess, comprehensive HRO deals.
Nevertheless, buyers were clear about where they are headed: continued engagement of outsourcing. Although they expressed concerns over some aspects of HRO, most buyers also said they would likely renegotiate or are in the midst of the process with their service providers. For the industry, this is encouraging news after years of buyer grumblings about the difficulties they faced in implementing their deals. In truth, a very minor percentage of contracts have been terminated because of service failure.
What are some of the indicators that satisfaction with HRO is growing among buyers? In one index that compiled satisfaction, buyers said they were the least pleased with their deals 18 months after contract signing. However, as the contract further matured, satisfaction levels began to rise again. In fact, buyers whose deals are now seven years old reported satisfaction rates comparable to those reported at the outset of the accord during the honeymoon stage (Fig. 1). Similarly, buyers who signed contracts more recently this decade reported a pattern of experiencing high satisfaction in the beginning of the deal, a bottoming of those good feelings 18 months into implementation, and then a rebound in satisfaction after three years.
According to Robert Zampetti, principal at Towers Perrin, the rebound effect may be the result of buyers going into a contract with unrealistic expectations. As they undertake implementation, satisfaction dips because those expectations are not met right away. But after three years, they have had time to work through some problems as well as adjust their expectations to reflect the realities of HRO delivery.
However, satisfaction levels also vary with different processes, the study found. Buyers generally were most satisfied with more mature processes such as defined contribution retirement administration, travel and entertainment expense administration, and merger and acquisition support. When it comes to services less developed in the HRO market, performance management services offered the least amount of satisfaction among buyers, followed by recruitment and learning and training administration. This was no surprising because the latter two have often been excluded from new comprehensive deals as well as taken out of scope from existing deals. It shows that many of the enterprise service providers are still struggling to master these areas and don’t have the competencies to deliver to client expectations.
According to Towers Perrin, because of past difficulties in these areas, buyers are now much more careful when considering which services to include within the scope of their deals; a few years ago, they were less diligent in addressing scope issues. However, after a few well-publicized rescoping of large deals and because of the improvements made by point-solution providers in their offerings, many buyers are finding they are better off outsourcing to multiple vendors.
Shifting Nature of Deals
However, this trend may also be due to the way in which companies undertook HRO as part of their HR transformation efforts. In the industry’s nascent days, the lift-and-shift model produced only cost savings but little additional value to HR organizations. As some employers looked to a transform-then-transfer model, they overhauled service delivery first before outsourcing, which led to more successful deals. But in its findings, Towers Perrin noted that too much transformational work can lead to higher dissatisfaction than performing an optimal amount. (The researchers separated the group by quintile, with those performing no transformational activities prior to outsourcing at the bottom and those performing six or seven activities in the top quintile.) Ironically, satisfaction peaked among those in the third quintile and not the top one. The lesson here: buyers should strive to achieve some transformational efforts prior to outsourcing but also leave some of that work to service providers.
Some of the satisfaction driven by outsourcing is clearly the result of improved efficiencies. The study showed that before outsourcing, a majority of buyers required at least one HR professional for every 100 employees; post outsourcing, a majority of HRO practitioners serviced more than 100 for each HR staff member (Fig. 2). Although such a shift is not unexpected—after all, much of the administrative work is now shifted to the service provider—what the data doesn’t reveal is that the retained staff is engaged in more strategic work.
As Towers Perrin continues to survey HRO buyers on an ongoing basis, it’s evident that the practice is producing both highly measurable value and hand-wrenching angst for practitioners. However, it’s also clear that leveraging the lessons learned from early adopters, new buyers can more quickly realize gains and avoid some of the pitfalls expressed by the industry’s veterans.