Mixed Signals

Is HR business-process outsourcing the wave of the future or simply overblown hype? HR BPO deal predictions for 2005 were not borne out.

Thursday, March 9, 2006
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For a while there, HR business-process outsourcing seemed to represent the promised land of HR efficiency -- a dramatic new concept that gave companies the power to cut costs, improve services and help their HR professionals shift their focus from pensions and payroll to business strategy by moving most or all of their basic HR processes to a single outside vendor.

In fact, any lingering doubts regarding HR BPO's potential were quickly dispelled with a string of rosy forecasts from top analysts. In its Human Resources BPO: Market Analysis, Forecast & Competitive Landscape 2003-2008 report, Boston-based research firm the Yankee Group predicted the worldwide HR outsourcing market would reach $80 billion by 2008, with the U.S. HR market accounting for more than half of the 2008 global total.

And, according to a study conducted by the Conference Board in New York, HR Outsourcing: Benefits, Challenges and Trends 2004, 71 percent of the HR outsourcing clients surveyed said they would extend or renegotiate contracts with their current outsourcing providers.

However, the optimistic predictions that persisted throughout 2003 and 2004 were quickly forgotten as stories of clients' dissatisfaction with service quality, unanticipated complexities and vendor weaknesses began to surface early last year. Calling a Change in the Outsourcing Market, a study of 25 large companies released by New York's Deloitte Consulting in April of last year, revealed that 70 percent of survey participants reported having significant negative experiences with outsourcing projects and now exercise greater caution in approaching such deals.

And, despite predictions that nearly 30 new HR BPO deals would be inked in 2005, Phil Fersht, vice president of global BPO research at NelsonHall in McLean, Va., says that, in the end, only 15 contracts were negotiated. 

Why the sudden reluctance to sign on the dotted line? According to a recent Towers Perrin study, HR Outsourcing: New Realities, New Expectations, while HR outsourcing typically delivers results from a cost perspective, other objectives remain elusive. For example, 39 percent of survey respondents have not yet experienced any improvements in service quality greater than what they could have achieved on their own.

"The cost issue becomes really important at the start but once that's addressed, then the whole conversation turns to service quality," says David Rhodes, a principal at Towers Perrin, a Stamford, Conn.-based management consulting firm. Towers Perrin is also an outsourcing vendor, having launched ExcellerateHRO, an HR BPO firm it co-owns with Plano, Texas-based EDS Corp. 

But that's not the only obstacle. A majority of Towers Perrin-study respondents reported little or no success in improving HR productivity through outsourcing. The study also revealed a growing realization among companies that outsourcing alone cannot transform the HR function, while many organizations are still struggling to find ways to effectively manage the vendor-client relationship.

The complaints don't end there. Some businesses have accused vendors of over-promising on features, functions and new technologies that were supposed to ease the HR outsourcing process but ultimately never materialized. 

Says Jason Corsello, a program manager at Boston-based research firm Yankee Group: "A lot of vendors either jumped too quickly in terms of providing services or capabilities that weren't ready and/or they promoted a lot of capabilities that just weren't there yet."

Ash Heap? Not Yet

Despite these legitimate criticisms, not everyone is convinced that HR BPO is headed for history's ash heap. In fact, most analysts agree 2005 marked a year of significant growing pains that have set the stage for a turnaround in 2006. The result is a growing confidence in -- and an enhanced understanding of -- HR BPO that will see HR outsourcing expenditures increase by 20 percent this year, according to data released by NelsonHall.

However, unlike yesteryear's hyperbolic forecasts, today's positive predictions for HR BPO hinge on a number of steps that must be taken by vendors and companies alike if this HRM delivery model is to have any lasting power. 

For starters, experts recommend that companies get realistic about the cost savings they expect to gain from HR BPO. Ton Heijmen, senior adviser for outsourcing at the Conference Board, warns that companies shouldn't overshoot their cost-saving goals, especially in the first few years of the outsourcing relationship.

"If you set your expectations at a well-defined and reasonable level, you will see cost-savings. But if you think you're going to save 55 percent or 60 percent, you're probably going to be disappointed," says Heijmen, noting that a recent Conference Board report found that 77 percent of companies use hard-dollar cost savings as a metric to monitor the success of their outsourcing undertaking. The other two most common metrics are service-level improvements (59 percent) and employee-satisfaction surveys (56 percent).

If HR BPO is to meet even the lowest expectations, however, a company must carefully review today's ever-evolving vendor landscape before selecting a partner -- or even renewing a contract. According to the Yankee Group, traditional vendors such as Hewitt, Ceridian, ADP and Aon are expanding their HR and technology services to compete for full-service HR BPO contracts.

In the meantime, major IT-service organizations such as IBM, ACS and Accenture have been developing their HR service capabilities to compete for projects on a global scale. Then there's the recent spate of strategic alliances, including the merger of Hewitt Associates and consulting firm Exult in 2004, as well as EDS and Towers Perrin's recently formed partnership in ExcellerateHRO. Not to mention those vendors struggling to decide whether they'll specialize in a single area, such as performance management, or try to be all things to all clients.

All of this vendor activity can be confusing for even the savviest HR professional. It's for this reason that experts suggest companies focus on finding a vendor with the right cultural credentials. "That cultural-fit aspect is often left to the 11th hour in doing deal prequalification of vendors," says Robert Brown, a research director at Gartner.

By asking a vendor questions such as, "What is your client communication style?" "How many of your representatives will be working on my account?" "What kind of access will I have to these representatives?" and "What level of involvement are my employees expected to have in the project?" a company can determine if a vendor is the right fit for its corporate culture and workflow style, he says.

What's more, Brown advises HR leaders to keep an eye out for vendors that have been too quick to jump on the HR BPO bandwagon without establishing a solid reputation. "There are some providers out in the marketplace that claim to be HR BPO providers but don't have a very long track record or are just now hanging out their shingle," he says.

It's for this reason that companies should seek out references from "clients who really share the good, the bad and the ugly" in terms of a particular vendor's capabilities, says Mark Hodges, chairman of Houston-based BPO consulting firm EquaTerra, adding that firms should take anywhere from three to six months before committing to an HR BPO partner.

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Who's Responsible

The work doesn't stop once a vendor is selected. When it comes to long-term success, an HR BPO deal requires a clear understanding between vendor and client as to their respective roles and responsibilities.

In years past, overseeing vendor relations was often "diffused throughout the organization," says Marc Solow, a senior manager at Deloitte Consulting in New York. "The companies that do [HR BPO] well have people dedicated to vendor relationships." These full-time vendor-management professionals are responsible for meeting with vendors, overseeing the change-management process within the HR team, mapping out conflict-resolution processes and spelling out the boundaries and expectations surrounding a project.

Many organizations are also turning to service-level-agreement software to better manage vendor relationships. Products such as Oblicore Guarantee by Oblicore Inc., used by vendors and clients alike, can automatically and continuously compare outsourcing agreements to actual service levels by analyzing data from operational systems.

For example, a company can use the software to compare HR data such as performance targets for a predefined month to the service levels agreed upon in a service-level agreement. Users can select from a wide array of data sources, from employee-performance metrics and business processes to Excel spreadsheets and underpinning contracts. This promised versus actual performance data is then delivered to executives via dashboards, on-demand reports and proactive alerts.

Unfortunately, a software package capable of managing the impact of an outsourcing arrangement on a company's in-house HR team has yet to surface. In fact, in a recent Towers Perrin study, roughly two-thirds of respondents acknowledged their HR generalists are not sufficiently skilled to handle their changing roles.

That's a dangerous predicament, warns Fersht of NelsonHall. In the wake of an outsourcing agreement, "[HR team members] are far more visible, far more measurable," he says. As a result, Fersht advises companies to take an honest inventory of their internal expertise to ensure that HR members are properly trained to tackle succession planning, employee retention and talent management -- activities that reach far beyond transactional processes.

As last year's growing pains slowly give way to newfound knowledge and understanding of HR BPO, analysts are spotting a renewed interest in the area.

"The market has been in a postponement phase, where companies have explored HR outsourcing opportunities but a good handful of them decided that the timing isn't right," says Corsello. "What we're seeing now is that many of these companies will go back to the drawing board and actually execute on some of these processes."

Gartner's Brown agrees. "The HR BPO market is here to stay; the debate seems to have been settled. HR BPO adoption hit a bit of a soft patch in the 2003-2004 timeframe, but in our discussions with vendors . . . the pipeline of deals that are in the works has never been stronger."

Is this simply more hype or is there a truly promising future for HR BPO? The answer, it turns out, depends on the willingness of vendors and companies alike to take the necessary steps to ensure long-term success.

Note: The published version of this article incorrectly identified Mark Hodges as vice president for corporate development at New York-based Veritage Inc. (a new BPO consulting firm formed by the recent merger of TPI and EquaTerra). That merger was called off after the magazine was published.

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