HR outsourcing takes on new life

There's more to human resources outsourcing than finding a service provider to manage a discrete chore such as payroll. These days companies are handing over broad sets of HR functions - from payroll and benefits processing to recruitment and employee management - to service providers that promise to trim costs, streamline processes and deliver integrated performance metrics in return. IT staff have a key role to play in ironing out network, security and application details, experts say.

"Outsourcing of HR functions on a point basis - meaning a single process area, such as payroll or parts of benefits - has been around for a long time," says Steve Unterberger, HR outsourcing technology leader at services firm Hewitt Associates. "What is relatively recent in the last six years is the grouping of lots of HR transactional and administrative processes into a business process outsourcing arrangement." Over the last two years, the transition from an early adopter market to more mainstream adoption has begun, he says.

In its most recent quarterly index of outsourcing deals, sourcing advisory firm TPI reported human resources outsourcing is the fastest growing and largest segment of the broader business process outsourcing market. Total contract value more than doubled from $545 million in the first quarter of 2004 to $1.7 billion in the first quarter of this year, TPI says.

Over the last few months, a number of brand-name companies have signed big HR outsourcing deals.

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There's more to human resources outsourcing than finding a service provider to manage a discrete chore such as payroll. These days companies are handing over broad sets of HR functions - from payroll and benefits processing to recruitment and employee management - to service providers that promise to trim costs, streamline processes and deliver integrated performance metrics in return. IT staff have a key role to play in ironing out network, security and application details, experts say.

"Outsourcing of HR functions on a point basis - meaning a single process area, such as payroll or parts of benefits - has been around for a long time," says Steve Unterberger, HR outsourcing technology leader at services firm Hewitt Associates. "What is relatively recent in the last six years is the grouping of lots of HR transactional and administrative processes into a business process outsourcing arrangement." Over the last two years, the transition from an early adopter market to more mainstream adoption has begun, he says.

In its most recent quarterly index of outsourcing deals, sourcing advisory firm TPI reported human resources outsourcing is the fastest growing and largest segment of the broader business process outsourcing market. Total contract value more than doubled from $545 million in the first quarter of 2004 to $1.7 billion in the first quarter of this year, TPI says.

Over the last few months, a number of brand-name companies have signed big HR outsourcing deals.

* PepsiCo chose Hewitt Associates for a 10-year deal focused on HR business process outsourcing services such as workforce and benefits administration, payroll and contact center support. The deal, announced in April, also includes HR application development and hosting services for 64,000 of the food and beverage giant's U.S. employees and 38,000 international employees.

* BT and Accenture inked a new $575 million, 10-year contract set to go into effect in August that expands on an existing five-year human resources outsourcing deal between the two companies and includes recruitment, pension administration, payroll and benefits administration, performance management administration, and HR advisory and information services.

* Delta Air Lines committed to a seven-year, $120 million outsourcing agreement with Affiliated Computer Services (ACS), which will provide compensation and benefits administration, relocation services, recruiting, learning, payroll, HR information services, and employee call center services.

The bundling of multiple HR-related functions into a single contract is what distinguishes these deals from traditional HR outsourcing deals. Clients expect service providers to not only fulfill existing HR responsibilities but also streamline and better integrate key business processes.

After a few years of lean budgets, a lot of HR departments face a backlog of requirements for implementing new systems and services models, says Richard Stanger, a vice president of business transformation outsourcing HR solutions at IBM. "They want to improve their processes, reduce costs and put in more self-service capabilities, but they can't afford to do that on their own." HR outsourcing provides a means to upgrade without requiring a huge upfront investment, he says.