Outsourcing HR applications growing up

There’s more to human resources application 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.

Big deals

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 a current 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 current 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 up-front investment, he says.

If companies decide to go that route, there should be a range of senior executives in on the decision – including the CIO. Suppliers should be evaluated not just for their HR expertise but also technology savvy, experts say.

There’s a lot of IT work that goes along with the business aspects of an HR outsourcing deal, says Leigh Richardson, vice president of service delivery at Accenture HR Services. For example, security is a key concern as companies prepare to hand over sensitive data, such as payroll and personnel files, to a third-party services provider.

“The proper security has to be put in place,” Richardson says. “It’s very important that a client’s IT team understand all the aspects of how we’re going to deal with that data and how we’re going to exchange data with that enterprise in a secure fashion.”

IT considerations span applications, infrastructure, security and regulatory compliance issues, adds Hewitt’s Unterberger. On the application front, the service provider will typically plan to supplement or replace client systems with its own technology.

With respect to network infrastructure, there needs to be close connectivity between client and supplier systems, Unterberger says. In general, companies that do business with external partners are familiar with the requisite security and connectivity issues that arise when systems extend beyond corporate firewalls. However, the sensitive nature of data that’s swapped in an HR outsourcing arrangement can raise the stakes, he says.

“Some extra consideration to infrastructure needs to be given because of the privacy-related issues that may not have existed when these things were operating wholly within a client’s networks,” Unterberger says.

Dollar driven

As the size and scope of HR outsourcing deals has grown, one thing about the market that hasn’t changed is its cost-cutting appeal.

ACS says its agreement with Delta will reduce the airline’s HR and payroll services costs by more than 25% over the life of the contract. When Goodyear Tire & Rubber Company last year announced it signed a 10-year agreement with ACS for human resources services – including payroll, medical benefits administration, call center, training, recruiting and staffing systems – the tire company said it expects to save about $45 million over the duration of the contract.

These savings opportunities are not isolated, analysts say. The Yankee Group found a 10,000-employee company can wipe 20% from its total HR costs. The larger the company, the greater the financial impact: A 20,000-employee company could reduce workforce costs by 15%, increase revenue by 5%, and yield a $1 billion-plus financial gain if it manages the HR outsourcing process well, according to the research firm.

In general, the average running cost for HR business process outsourcing providers is between $1,500 and $2,000 per supported employee per year, depending on the type of HR functions managed, according to Philip Fersht, lead software and services analyst at The Yankee Group. “This is a significant savings when many companies spend upward of $5,000 per employee per year in total HR costs – both on internal administration and some discrete third-party services such as payroll and benefits,” Fersht wrote in a recent report.

The potential for cost savings, such as these, is a key driver of HR services growth. Outsourcing advisory firm EquaTerra polled 589 HR and executive managers and found corporate cost-cutting and process-improvement directives are driving companies to consider outsourcing.

Vendor management also is a driver, Richardson says. Companies can consolidate management of formerly discrete outsourcing deals with payroll and benefits vendors, for example, as well as hand over related software and hardware procurement and maintenance responsibilities, he says.

In some cases, integration is the goal. “When a company does one of these big end-to-end HR outsourcing deals, there may be very little that they’re outsourcing that wasn’t outsourced before. But they’re bundling it together and creating a single, integrated place for employees to get HR services,” Stanger says.

One advantage of an integrated delivery mechanism is the potential for broader, more useful analysis than executives can glean from isolated HR application silos, Stanger says. “You can take a look at who has taken training and how it has impacted their careers. You can look at managers all over the world and see whose people are advancing and whose aren’t,” he says. “You can get amazing information about staff all over the world that enables you to make the kinds of intelligent decisions about people that never would have been possible in fragmented HR delivery system.”