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Same Caller, New Message

Farming out HR has yet to yield the promised savings. So why haven't CFOs hung up on outsourcers?

The move to outsource human resources continues to accelerate, despite the fact that the jury is still out on the primary reason to outsource: cost savings.

“If you went to [HR] conferences a few years ago, the message was, ‘If you outsource, you’ll save lots and lots of money,’” recalls Robert Crow, a San Diego­ based senior consultant at Watson Wyatt Worldwide, an HR consulting firm based in Washington, D.C. Now, says Crow, HR outsourcing (HRO) service-plan vendors actually warn against making that assumption: “They’ve said, ‘Don’t make your decision to outsource based on cost alone.’”

Instead, providers are now promoting other advantages, such as greater efficiency, 24/7 employee customer service, the ability to offer more or better benefits, and access to state-of-the-art HR IT systems. They also contend that turning HR functions over to specialists frees companies to concentrate on their own core competencies. “The central argument for outsourcing is that successful companies excel [by] focusing on what they do best,” noted Diane Shelgren, COO for North America at service provider Accenture HR Services, in a December 2004 white paper on outsourcing.

Companies are listening to that argument. By year’s end, 85 percent of U.S. companies will have outsourced at least one component of HR services, according to research by Gartner Inc., a Stamford, Connecticut-based research and consulting firm. And the global market for HRO services—which now accounts for 30 percent of all outsourcing—is likely to reach $55 billion by 2006, up from about $32 billion in 2000, forecasts Gartner.

Of course, most companies still maintain some kind of internal HR presence. But thanks to HRO, many functions once overseen by the HR office down the hall are now administered from across the country or, increasingly, across the world. The most popular outsourced HR functions include administration of medical and disability insurance, pensions, 401(k) plans, and employee-assistance programs.

Elusive Metrics

Despite the caveats about unrealistic expectations, companies haven’t given up hope of cutting expenditures by outsourcing these functions. In fact, HRO generally does deliver some savings, if not as much as early adopters hoped, says David Rhodes, a principal and expert in HR strategy at Towers Perrin, a Stamford, Connecticut-based consulting firm. In 2004, his organization surveyed 32 companies that had undertaken large-scale HRO contracts in the previous four years. The findings: more than three-quarters reported short-term savings.

The problem is, these savings are not easily quantified. In a July 2004 survey, the Bureau of National Affairs Inc. (BNA) asked 940 HR executives to rate their companies’ outsourcing-related savings. Nearly half of those that outsourced responded with “undetermined,” the Washington, D.C.-based research organization reported. And long-term savings are even more elusive. More than half of those surveyed by Towers Perrin said it was too soon to say whether the arrangements would result in long-term cost reductions. “This is the case even among HR departments that were in the original group of pioneers and have two to three years under their belts,” says Rhodes.

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