Should It Stay or Go?

Determining what should be done elsewhere and what should be kept in-house can be key to the success of HR outsourcing. Before the potential benefits can be determined, an organization has to conduct a detailed and frank evaluation of its processes.

Monday, May 16, 2005
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Shortly after Philadelphia-based chemical company FMC Corp. announced in October 2000 that it would spin off its machinery operations, it became clear to human resource executives in the organization that dramatic changes were ahead.

The pending split would create two independent publicly traded companies -- neither of which would be equipped to handle all the human resource responsibilities that had always been done in-house. The HR leadership team at FMC -- Kenneth R. Garrett, vice president of HR and communications, and John R. Thompson, director of employee benefits -- found themselves facing an increasingly familiar challenge: digging down to determine what functions should be outsourced and what shouldn't be. Beyond that, they needed to establish clear benchmarks to track and measure the success of the effort.

For FMC, there was little doubt that the company would pursue an aggressive outsourcing solution. From strategic, economic and logistical standpoints, it no longer made sense to keep most HR transactional functions in-house.

"We were looking for a provider that could handle as much as possible, and at the time, looking for a total outsourcing solution was a rarity," Thompson says. "We really didn't want to fragment. Accountability was the main issue for us."

The HR leaders at FMC had pressing reasons for pursuing an outsourcing strategy. But for other companies not facing such dramatic change, the potential benefit of outsourcing might not be as clear-cut. In those situations, the key first step an HR leader needs to take is to determine specific reasons why outsourcing is an option worth pursuing.

"You need to ask yourself, 'Do we have a valid reason or are we throwing the Hail Mary pass?' " says Don Packham, president and CEO of the Chicago-based consulting firm BridgeHRO and a former HR executive with British Petroleum, one of the first companies to outsource most of its HR department to a single provider (to Exult, now part of Hewitt Associates). "Sometimes, I find HR vice presidents or directors with the mind-set that 'Everyone is doing it, this must be a quick way to cost reduction, so let's throw the pass and maybe it gets caught and we win the game.' But it's not that simple."

Determining those "valid reasons" for outsourcing is where the real heavy lifting begins. Before the potential benefits can be determined, an organization has to conduct a detailed and frank evaluation of its processes for a whole array of HR functions.

Know Thyself

As HR leaders at FMC delved deeper into how the company's processes worked, an inside joke emerged -- that the C in FMC actually stood for "complexity." That wry observation grew out of the realization that, over the years, the processes had become more complicated -- and customized -- than anyone in the company had realized.

"One of the things we quickly found out was that because we had been doing things 10 years or more, the processes changed from how they were originally designed and those changes usually are not well-documented," says Garrett. "People know how to get things done, but don't necessarily write down the process for getting it done. When you move to an outsourcing vendor, they're relying on you for that transfer of knowledge -- it gets down to the detail level and a lot of what I call tribal knowledge. We had to understand ourselves -- and how we were doing things -- before we could transfer that to the vendor."

A key part of any outsourcing analysis involves an assessment of the costs for various functions being performed in-house -- and the potential savings that could be realized through outsourcing.

One way to assess that is to get a sense of how costs in your company compare to those of your peers. The Hackett Group, an outsourcing vendor and consulting firm based in Miami, provides a benchmarking system in which clients compare their costs to what Hackett Group calls "World-Class Organizations," or the top quarter percentile of a peer group when it comes to efficiency and effectiveness.

By comparing their own costs, companies can get a better sense of how efficient and effective their processes are -- and what savings might be realized through outsourcing. For example, Hackett's research indicates that world-class companies spend 27 percent less per employee on HR than their peers -- $1,390 per employee versus $1,892 per employee -- with 35 percent fewer HR staff than similar companies.

Hackett HR Practice Leader Steve Joyce stresses that the key to coming up with solid data on costs means careful analysis of current processes and staffing. That way, when the work is shifted to a vendor it can be streamlined, simplified and, ultimately, performed less expensively.

"If you don't take the time and effort to simplify the processes, you'll end up passing along time-consuming processes -- and paying for that," Joyce says. "We don't advocate outsourcing as a silver bullet. Often, the short-term goal of outsourcing is reducing costs, but if you don't understand how your processes work, there will be disappointment."

At FMC, HR leaders wanted to simplify their processes, but time pressures from the impending company split made that difficult, Garrett says.

"We had a pretty complex administrative system and we ended up transferring much more complex processes than we should have because we didn't have time to re-engineer them," Garrett says. "By and large, we threw them at the vendor with the same level of complexity built in."

Keeping the Core

Talk to any experienced HR leader about outsourcing and it's not long before the conversation turns to core competencies. They'll tell you that a key part of the outsourcing equation is determining what you don't want to outsource. After all, beyond the potential cost savings, one of the most attractive benefits of outsourcing is the freeing up of resources to focus on what the organization does best.

"I think you have to go back to the business and start there," says Packham. "What is it we do here and what are we really good at doing? You have got to do some kind of assessment of how HR is deployed and how much time and money are spent on things that are not core."

A good guide for determining core competencies is to isolate things that most directly contribute to the company's bottom line. When First American Corp., a publicly traded information provider in real estate, title and consumer information and services, started exploring outsourcing several years ago, it began with a detailed survey of 45 staffers directly involved with the in-house HR functions, including benefits administration and payroll processes.

The idea was to gather detailed information about how the processes worked and to help confirm which HR functions should be considered non-core and eligible for outsourcing, says Liz Brandon, vice president of workforce services for the Santa Ana, Calif.-based company. Her firm entered into a five-year agreement with Boston-based Fidelity Workplace Services to outsource its 401(k), pension management, health-and-welfare benefits and payroll. It also outsourced tax preparation, but did so under the careful guidance of a strong internal team working with the vendor. Because First American is in the real estate business, it views tax functions as closer to the core of its business than many other transactional processes, Brandon says.

Identifying core competencies helped make a compelling business case for outsourcing that went beyond cost savings, he says. Specifically, the analysis led to the conclusion that outsourcing would allow HR leaders and staffers the time and energy to focus more on serving in a consultative role for the company's business units.

After analyzing their processes and assessing the strategic needs of the company, FMC settled on the core HR functions that would remain in-house. Among them were executive compensation strategy and design, benefits strategy and design, employee and labor relations, staffing and compliance. The remaining, largely transactional, functions were outsourced. Those included payroll, the HRMS and benefits administration. After assessing a handful of vendors offering end-to-end outsourcing at the time, FMC chose Ceridian to administer everything except pension administration, which was given to Hewitt Associates.

Measuring Up

The final piece of the outsourcing puzzle is the measurement of outcomes. Working with Ceridian, FMC created benchmarks, or key performance indicators, to gauge the effectiveness of the outsourcing effort.

Some of the areas tracked with the new provider are the amount of time spent answering a question, the abandon rates on phone inquiries, payroll errors and tax-filing accuracy.

Those who've spearheaded outsourcing efforts say the benchmarks should be clearly established with the vendor when the agreement is reached so expectations are clear up front. As First American Corp.'s Brandon puts it, "you don't want to make assumptions of what the provider is going to do and you're going to do. When we went into it, we had a clear picture of what the provider's responsibilities were."

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Another KPI is employee satisfaction. In addition to getting executive buy-in, says Packham, it's critical to spend time on the change-management element required when outsourcing is introduced.

"Looking back [on the BP transition], it was a surprise to me how much effort goes into managing the change," Packham says. "You are changing roles within the company, changing expectations about service and changing the way the workforce interacts with benefits. I didn't spend nearly enough time managing those changes."

An example of the potential resistance to an outsourcing effort was a move by BP to require managers in the United Kingdom to play a more active role in processing pay changes or relocations of their employees. Managers balked.

"Our company culture didn't like that," says Packham. "The reaction was, 'Wait, you pushed clerical work onto me.' We had a real pushback and we basically ended up putting the work back on the HR people."

Brandon says regular employee communication was essential during First American's transition to an outsourcing model. The company started slowly, first with the 401(k) program, and gradually outsourced the wider range of payroll and benefit services.

The effort has been measured in dollars and cents. The company projects $12.3 million in savings over five years and estimates it has eliminated $5 million in hardware, software, telephony and other third-party services.

"We've been able to focus more on our strategic goals like retention and good recruitment," Brandon says.

The Value Proposition

Garrett and Thompson admit that FMC's transition to outsourcing proved more challenging than they expected.

"We had a rough beginning to the implementation and it created some anxiety," says Thompson. "We tried to meet the concerns immediately and work with Ceridian to find solutions."

Part of the problem was rooted in the need to better understand Ceridian's capabilities and the realization that, at that time, "on the vendor side, the supporting technology was not as robust as we expected," Garrett says.

Garrett says FMC assumed that when new information on an employee was entered into the new system, the data would flow through the entire system so that all records pertaining to the employee would be automatically updated. However, that proved not to be the case.

"What we expected was, when data was entered on an employee, it would kind of be like pushing a domino and they'd all fall down," says Garrett. "What we found was that data didn't always flow. It got trapped or fell into a black hole. It took Ceridian some time to get a workaround that addressed that."

Garrett stresses that he doesn't blame Ceridian. Rather, he attributes it to a communication breakdown and FMC's lack of experience working with an outsourcing vendor. Many of the early problems have since been resolved, he says.

Packham says it's not unusual for an outsourcing effort to get off to a shaky start because of the sheer complexity of making the handoff to a vendor. The key to reducing potential problems is to make sure the contract and expectations are discussed up front and in painstaking detail.

He also recommends establishing a plan for governance of the agreement before the outsourcing begins. BP, for instance, created a new role called Operations Manager for managing vendors and troubleshooting problems.

"It's trite to say, but the devil is in the details," Packham says. "It's true to say that time spent up front pays future dividends. Assumptions by either party lead to disappointments."

For FMC's part, Garrett says an even deeper analysis of its processes would have led to a smoother transition.

"In retrospect, we could have dug much deeper figuring out how our processes work," Garrett says. "Now we know how important that is to the final product."

He estimates FMC has reduced HR costs by 30 percent -- and he expects that figure to improve over time. And, now that FMC's HR leaders have the total solution they sought, they can focus their energy and resources on meeting the company's strategic goals.

"Handling [these HR functions] is the vendor's primary mission, so it can provide better services and improved delivery," Thompson says. "And we don't have the high fixed-cost structure we used to have."

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