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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?

Meanwhile, many companies still struggle with transitional issues: reinventing their internal HR operations, maintaining service quality, and training employees to, for example, use self-service HR Web portals (see “Any Storm in a Portal?”).

Despite the lack of solid cost data, HRO keeps growing. For one thing, outsourcing deals are almost impossible to unravel. Fewer than 10 percent of the respondents surveyed by the BNA had ever reversed an HRO initiative, even when the results proved disappointing. The Conference Board and Accenture reported similar findings when they surveyed executives from 120 companies in North America and Europe about their HRO experiences and plans in 2004. Among the 76 percent currently outsourcing HRO functions, all planned to renew their contracts, renegotiate them, or put them up for another bid. Not one company expected to move its outsourced services back in-house.

So what’s fueling the HRO parade? For starters, there’s a larger field of potential customers. HRO—once strictly aimed at the largest corporations—has become more affordable for middle-market companies. Analysts say the highly competitive, fast-changing marketplace—most recently altered by the mid-2004 merger of HRO giants Hewitt Associates Inc. of Lincolnshire, Illinois, and Exult Inc. of Irvine, California—should continue to force prices down. The newly combined company is among the biggest HRO providers in a field that includes Accenture, ACS, ADP, Aon, Fidelity Investments, and Mellon Financial.

Embedded Paper-Pushers

While vendors have largely shifted their outsourcing rationale from cost savings to the promise of a more strategically focused HR department, it would be easy to miss out on the latter as well. “Outsourcing creates the ability for HR to transform itself,” says Rhodes of Towers Perrin. “But unless work gets done to determine what [those individuals] are going to do with the time saved by outsourcing, it tends not to effect any change.” In other words, if HR staffers aren’t specifically assigned to strategy-setting roles, they often simply seek new administrative tasks after outsourcing takes effect. In fact, says Rhodes, that tendency contributes to the lack of cost savings at many companies. “For a $100 million outsourcing deal, the question is whether you really got rid of that much work or whether it’s still deeply embedded in the organization,” he says.

Making that determination is relatively easy in centralized organizations because managers can identify exactly which HR staffers provide which services, says Rhodes. “It’s much harder in highly decentralized companies, where there’s no clear shared-services environment,” he continues. In these organizations, administratively oriented “paper-pushers” can be harder to identify, even if the tasks they perform have been outsourced. “They have a much harder time getting the economic value that’s promised out of these deals,” Rhodes says.

Not surprisingly, successful HRO initiatives require extensive in-house change-management campaigns. But the messages must do more than simply reassure workers about benefits continuity, especially when—as is usually the case today—outsourcing involves a large dose of employee self-service. “The message at many companies is, ‘We’re going to change your world and ask you to spend 30 percent more time than you ever spent before on HR matters,’” says Rhodes. “Instead, it should be, ‘We’re going to help you reduce the time you spend on HR because you can do it more efficiently now.’”

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