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The Middle Piece

A large number of mid-sized companies are realizing that HR business-process outsourcing isn't just for large organizations anymore.

Thursday, March 9, 2006
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The market for HR business-process outsourcing is being embraced by more and more mid-sized companies. Indeed, experts say, it is these companies that may be best poised to take advantage of what HR BPO has to offer.

The mid-market (which includes companies ranging from 100 employees to 2,500 or so) still represents only a small portion of current HR BPO customers, according to BPO research firm NelsonHall in McLean, Va. It estimates that only 1 percent of mid-market companies have engaged in multiprocess HR BPO contracts (which encompass the outsourcing of a variety of HR functions to a single vendor).

However, these employers are being targeted by more and more outsourcing firms, says Mark Hodges, chairman of Houston-based EquaTerra, a BPO consulting firm.

"Mid-market buyers have a lot more choices than they did before," Hodges says, adding that even the firms that focus on large companies are reaching out to the mid-market because they sense opportunities.

These smaller companies are a natural fit for outsourcing non-core functions, due largely to a culture that views outsourcing as an expected business move, says Hodges.

"[Mid-market companies] think of having third parties perform certain functions for them as very normal," he says, adding that these companies routinely outsource functions such as logistics management and retirement-plan administration, so outsourcing most or all of their HR functions is a natural next step.

These companies tend to differ from larger companies in their expectations of HR BPO. Hodges notes that the top three items on mid-market companies' wish lists are "speed, capability and a way to professionalize their HR function." In fact, the most important benefit of outsourcing for this sector may be the company's ability to continue growing without having to simultaneously grow its in-house HR functionality, he says, adding that mid-market companies often have to hire continuously as they grow larger, but may lack the capacity or knowledge to handle the process effectively.

"These companies may also have compliance gaps, such as an incomplete understanding of the demands of Sarbanes-Oxley, that could expose them to legal liability," says Hodges. Hiring a vendor with expertise in this and other laws affecting corporate governance and financial disclosure would help a small to mid-sized firm ensure that it's in full compliance without hiring an array of in-house lawyers, he says.

HR BPO is often an efficiency move for mid-market companies. Lisa Rowan, program manager for human resources and talent-management services at Framingham, Mass.-based IDC, says these companies see outsourcing as a natural solution for providing certain services, rather than creating in-house services. "There is a limited number of people you can hire, but you can outsource an entire department," she says.

Compliance Concerns

Major events, such as divestiture or a series of acquisitions, often serve as triggers for HR outsourcing in this market because they can lead a company to realize it's ready for some help with its HR operations, says Rowan. "There are a number of drivers for HR BPO," she says.

Such was the case at Helly Hansen (U.S.) Inc, the sales subsidiary of outdoor-apparel company Helly Hansen ASA, based in Moss, Norway. The U.S. subsidiary, which is based in Bellevue, Wash., and is on the smaller end of the mid-market (with about 100 employees), chose HR outsourcing as a way to help it stay in compliance with U.S. laws.

"The company had gone from being privately owned to being owned by a U.K. bank," says Scott Sutherland, the firm's chief financial officer, who also has responsibility for HR. "The upper management was not familiar with U.S. law, [and the company had] part-time employees doing payroll and benefits."

Helly Hansen outsourced all of its HR functions to HR Novations, an outsourcing firm also based in Bellevue that specializes in serving smaller companies. The move has led to "a great reduction in worry for no increase in costs," says Sutherland. 

The $100,000 annual fee the company pays to HR Novations to perform payroll processing and support, benefits administration and HR consulting represents a "break-even point" compared with what it would have cost the company to add those functions in-house, says Sutherland. The subjective benefits, however, are clear: "It's a worry-free $100,000 right now," he says.

A representative from HR Novations comes to Helly Hansen once a week to be available for employee questions and to brief Sutherland. HR Novations also examines employee feedback to assess training needs and other issues and negotiates better rates from Helly Hansen's benefits providers. "In most cases, [they get] rates I couldn't get on my own," says Sutherland.

Thus far, the expertise that HR Novations has brought to Helly Hansen has relieved Sutherland of some of the day-to-day worries of managing human resources.

 "[Outsourcing] makes it so much easier to focus on what's important to our business, and that is growing our business," Sutherland says. "I feel much more in touch with the future of the company."

The Arkema Group, a 2,600-employee chemical firm based in Philadelphia that's currently part of a Paris-based conglomerate of the same name, is also using a major company event as the catalyst for its move to HR BPO. In this case, Arkema's upcoming spin-off from its parent company, slated for this May, is the impetus for change.

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When Arkema was notified about the spin-off in late 2004, its HR leaders realized they would need to examine the company's entire HR operation to see what functions should be performed in-house and which could be outsourced. Arkema contracted with Philadelphia-based Mercer to help with this process.

"Given the size of the company, did it make sense to bring health and wellness benefits back in-house? We had some doubts," says Eric Tilles, the company's assistant general counsel. This decision was a critical first step before the spin-off, to avoid what Tilles calls "legal complications." Ultimately, Arkema decided to outsource health and welfare to Mercer, which assisted in sending request-for-proposals to different service providers and setting up a centralized call center that employees can contact with questions about their health benefits.

However, Arkema did not adopt an overarching philosophy toward outsourcing all HR functions. For example, the company initially outsourced its payroll function, only to bring it back in-house when it became clear that Arkema itself could best handle the complexity of managing the various pay practices at its 15 sites across eight states.

"People tend to be pretty sensitive about getting their paychecks accurately and on time," says Chris Giangrasso, vice president of human resources and communications.

Currently, Arkema is considering whether outsourcing its retirement plan is a good idea. When the spin-off occurs, the parent company will take on responsibility for some 10,000 currently-retired employees in its defined-benefit plan, leaving Arkema with responsibility for about 50 retirees. The company is considering whether this number, and future demand, will warrant dedicating a full-time employee to the task.

HR outsourcing for mid-market companies has come a long way from simple payroll administration. Hodges likens the growth of this field to retail banking and automated-teller machines: Initially, a customer could only use the ATM at his or her branch bank for a limited number of functions, but now a customer can use any ATM at virtually any bank worldwide to perform a variety of transactions.

This change took about two decades. Likewise, Hodges predicts a gradual shift to HR BPO as more mid-market companies begin to implement employee self-service tools in areas such as benefits and training, and look to outsourcers to manage the implementation and maintenance of these applications in order to keep costs in line. Such opportunities can only make HR BPO more attractive to mid-market companies, he says.

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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