What You Should Know About HR BPO

Human resource experts and practitioners help construct a comprehensive list of the five things you need to know about HR business-process outsourcing.

Tuesday, May 16, 2006
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These days, acronyms fall in and out of fashion as quickly as designer jeans. But while human resource business-process outsourcing got its start as a much-ballyhooed phenomenon, BPO has since demonstrated its staying power as a cost-effective and efficient service-delivery strategy.

With its promises of reduced costs and enhanced service levels, BPO has convinced companies as wide-ranging as the BMO Financial Group, Aramark, Prudential Financial,DuPont and Circuit City to place critical HR functions in the hands of third-party providers.

HR BPO is the practice of shifting the responsibility for three or more transactional processes, such as payroll, benefits administration and call centers, to a single vendor that's made its reputation in these areas, while freeing up HR specialists to concentrate on strategically important tasks such as succession planning and executive coaching. Enterprises around the country are considering it.

At first, many businesses opted to cautiously sample HR BPO by outsourcing a limited selection of HR functions. But that appears to be changing as companies increasingly adopt an all-encompassing approach to HR BPO. According to a recent survey by Hewitt Associates in Lincolnshire, Ill., 94 percent of 129 companies said they outsource at least one HR activity. However, by 2008, companies are expected to expand outsourcing from the more traditional arenas of payroll and health-and-welfare benefits to global mobility, headhunting and recruiting.

However, HR BPO also presents its fair share of pitfalls. 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. The reasons for dissatisfaction include failing to properly manage vendor relations, underestimating the complexity of outsourcing, and setting unrealistic cost-savings and service-delivery goals.

As the number of high-profile companies that are converting to HR BPO continues to rise, HR executives are more likely than ever to be approached by the CEO to express their thoughts on whether the practice might work for their organization. Having an informed opinion on the matter requires them to fully understand their HR department's strengths and weaknesses and have a good grasp of the benefits and drawbacks of HR BPO.

Based on interviews with industry analysts and HR leaders who've already gone down the HR BPO path, here are the five most important things to consider when assessing whether HR BPO is a smart move. 

For most companies, the primary objective for outsourcing is cutting HR service delivery costs. In fact, according to a recent Conference Board report, 77 percent of companies use hard-dollar cost savings as a metric to monitor the success of their outsourcing initiative. So far, results have been encouraging. A recent study by Stamford, Conn.-based Towers Perrin, HR Outsourcing: New Realities, New Expectations, reveals that 92 percent of companies reported success in achieving longer-term savings through HR BPO. 

But chipping away at your bottom line isn't as cut-and-dry as HR BPO vendors would have you believe. Factors ranging from the length of a BPO contract to a company's willingness to migrate services to low-cost locations such as India can greatly influence overall savings.

In order to achieve the most impressive results possible, Robert Brown, a research director at Gartner in Stamford, Conn., recommends getting a grip on in-house expenses before negotiating anticipated cost-savings with a third-party provider. For example, if a company wishes to reduce its call-center expenses via outsourcing, it should be well aware of what it is currently spending on call-center operators and technology before even entering negotiations.

"The greater handle the buyers can get on what their internal costs are puts them on a much better footing for negotiations with vendors and subsequently [helps them] realize those benefit gains through hard-dollar results," says Brown.

Another way to ensure cost cutting is to set realistic expectations, according to Ton Heijmen, senior adviser for outsourcing at the Conference Board in New York. While it's possible to save as much as 50 percent on processing costs, Heijmen says, overshooting can only lead to disappointment and poor vendor relations.

"A 25 percent to 40 percent savings is probably a much more attainable number than the 45 percent to 60 percent savings that people typically think they can get from outsourcing these activities," says Heijmen, adding that many companies prefer to experience piecemeal cost savings throughout the duration of a contract rather than receive all of the promised benefits up front.

Despite the hype surrounding HR BPO and vendors' bloated promises of enormous cost savings, Mark Hodges, founder of outsourcing consulting firm EquaTerra in New York, says companies often only have themselves to blame for missed financial targets. For example, he says, many companies factor in reduced head count when calculating potential cost savings but then change their minds when the time comes to actually following through with staff reductions. 

"Usually, the HR organization intends to reduce head count, but it rarely pulls the trigger," says Hodges. As a result, "a lot of the people who are retained are the ones with the most tenure in an HR organization and are the highest cost."

What's more, companies' unwillingness to execute painful policy changes, such as reducing the number of benefits plans available to employees or agreeing to pay workers on a monthly -- rather than bi-weekly -- basis, can also contribute to missed targets.

One of the biggest concerns surrounding HR BPO is whether or not a vendor can offer markedly improved service levels in areas such as speed of transactions and technology rollouts. In fact, a recent Towers Perrin report indicates 39 percent of respondents have yet to experience any improvements in service quality greater than what they could have achieved on their own.

There are ways, however, to ensure that vendors deliver the goods as promised. For starters, Hodges recommends setting realistic expectations.

"Not everybody needs a Ferrari," says Hodges. "You really need to know whether you need a gold-level service or if you can settle for bronze-level service."

The next step entails finding the necessary tools to measure performance on a monthly, quarterly or annual basis. Products such as Oblicore Guarantee by Oblicore Inc. and Hewlett-Packard's OpenView 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 benefits enrollment rates for a predefined month to the service levels specified in the SLA.

"Tools that have traditionally been able to manage service levels on the IT side are now starting to manage service levels on the service-delivery side," says Jason Corsello, a program manager at the Yankee Group in Boston.

Rose Patten knows all about the importance of hashing out the finer details of a service-level agreement. Patten, senior executive vice president of human resources at the Bank of Montreal (BMO) Financial Group in Toronto, turned to Hewitt Associates to outsource BMO's HR processing services three years ago. With its broad range of personal, commercial and institutional financial services across Canada and the United States -- many of which were obtained through acquisition -- BMO needed a quick and cost-effective means for consolidating its disparate HR services, systems and platforms.

Outsourcing processes such as payroll, benefits administration and pension management to Hewitt Associates proved to be the ideal answer. Before signing on the dotted line, however, BMO first established KPIs, or key performance indicators, indicating the minimal accepted levels that Hewitt had to meet or exceed. In this instance, KPIs include items such as payroll accuracy and call-center availability.

But that's not all. In addition to hiring Dallas-based consulting firm Everest Group to help establish reasonable service levels, Patten says, "we built in penalty clauses [stating] that if service dropped below an acceptable level, fees would come into play. There's a lot at stake for [Hewitt] in providing us with the guaranteed level of service."

Another "critical success factor" to achieving satisfactory service levels, according to Gartner's Brown, is placing an employee in the full-time, dedicated position of overseeing the health of vendor relations. Such an employee would be responsible for arranging monthly meetings with the vendor to analyze changes that are occurring within the company's or vendor's corporate environment, detect shifts in business objectives and make any necessary adjustments to service-level agreements.

In fact, in its report, Managing Outsourcing Relationships: Essential Practices for Buyers and Providers, Boston-based consulting firm Vantage Partners reveals that well over half of the respondents to four recent surveys agreed 30 percent of annual contract value is at stake simply based on how well (or how poorly) the vendor relationship is managed.

Just ask Diane Audette, director of benefits administration at Aramark, a Philadelphia-based provider of food services and facilities management. In early 2002, the company turned to Towers Perrin's outsourcing division (now known as ExcellerateHRO and jointly owned with EDS) to outsource its health-and-welfare benefits. Four years later, Audette says, "We still have a standing weekly meeting [with ExcellerateHRO] every single week and we meet more often if necessary, based on ongoing projects."

Despite its promises of cost savings and improved service levels, the mere mention of HR BPO can conjure nervousness and fear among in-house HR employees -- and for good reason. It's not uncommon for a company to terminate as much as 50 percent of its HR department upon inking an outsourcing agreement. But before issuing pink slips, companies should first "identify key personnel that need to be held back," says Brown.

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"These are usually the individuals who are strategic keys to ensuring that the outsourced processes knit together seamlessly with the retained processes," he says.

The first step should be to conduct talent assessments to determine which employees possess the competencies best suited for a revamped HR department, such as strong managerial skills, then establish retention bonuses to prevent unwanted attrition, says Brown.

As for those employees whose jobs inevitably end up on the chopping block, Corsello says layoffs are simply "a necessary evil, especially for larger global BPO engagements."

However, the news isn't all bad for HR managers uncomfortable with the prospect of a departmental overhaul. "Making the move toward outsourcing HR actually provides a great opportunity to leverage the existing staff -- to make them more useful, to make them more effective," says Corsello, adding that outsourcing often allows employees who once pushed papers to shift their focus to more challenging processes such as performance management.

In fact, outsourcing can sometimes prove to be a win-win situation for everyone involved. BMO Financial was able to reduce its North American HR staff by 250 as a result of outsourcing to Hewitt. In turn, as part of a carefully negotiated contract, Hewitt agreed to absorb the majority of these positions into its own operation to help service the contract and establish a base of its own in Canada.

As for BMO's remaining HR employees, Patten says, "their roles didn't change dramatically at the senior levels at all. Instead, they were freed up to worry less about the technology efficiencies and more about [employee] development."

Handing over employees to a third-party provider is one thing. Entrusting a vendor with confidential financial and employee records can be a daunting endeavor, especially in this age of identity theft and security attacks.

Although "any vendor worth their salt" should be able to provide a detailed overview of the methodologies they employ to guarantee data privacy and data protection, says Brown, that's still no excuse for assuming that a vendor has taken all the necessary precautions for safeguarding your data.

For this reason, analysts recommend that companies conduct quarterly audits of a vendor's systems and databases to ensure the highest security standards. Patten agrees. When it came time to enlist Hewitt, she says, she was confident of the vendor's ability to meet a financial institution's high expectations for data privacy and protection.

"The systems Hewitt Associates had in place for security management were of the best caliber you could imagine because they'd already been working with banks and insurance companies," Patten says.

Nevertheless, rather than simply check references, she also called upon BMO's in-house audit and risk management teams to assess Hewitt's safety standards and search for possible loopholes. In fact, Hodges adds, companies are often too quick to shirk responsibility for ensuring the safety of confidential data.

Frequently, he says, companies are to blame for security breaches and businesses would be wise to review their levels of compliance with legislative policies such as HIPAA and Sarbanes-Oxley before pointing a finger at a vendor.

"In at least 80 percent of the cases, the way the providers handle confidential data is better than [the methods used by] the client," says Hodges.

Even the best-laid outsourcing plans can lead to, or be overtaken by, disaster. But timely and complete communication can often minimize the damage.

"You've got to be up front with your employees," says Patten, who kept HR personnel apprised of BMO's plans to outsource select processes every step of the way. Failure to do so can only lead to low morale and high attrition.

Another risk-mitigating factor is ensuring a strong cultural fit: "BPO is definitely a relationship-based undertaking," says Brown.

"There is a contract, but a lot of success comes down to how the parties see eye-to-eye culturally." As a result, HR managers should pay frequent visits to a potential vendor's head office to get a feel for the company's corporate environment.

Equally important is evaluating the staying power of a particular vendor. Over the past few years, the BPO market has witnessed significant consolidation, including Hewitt's merger with Exult and Affiliated Computer Services' acquisition of the HR outsourcing arm of Mellon Financial. Such partnering is all the more reason for companies to imbue vendor contracts with clauses pertaining to mergers and acquisitions.

A well-thought-out succession plan can also prepare companies in the event that a vendor's account manager moves on to another employer. Although often overlooked, creating these types of contingency strategies is key to long-term-outsourcing success, says Brown.

In the end, though, it's up to companies to do their homework. As HR BPO continues to gain acceptance as a viable service-delivery strategy, businesses have a growing array of industry benchmarks, vendor track records and case studies to examine to ensure success.

"Talk to your peers," says Phil Fersht, vice president of research at Everest Group. "There are plenty of HRO user groups popping up now -- really find out what the pitfalls are."

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