Human Resources: Executive Summary:Outsourcing Human Resources

Outsourcing HR is still a relatively new frontier in business practices - it's been less than 10 years since its debut - and it's still growing rapidly in the U.S. Most analysts predict that the growth will continue at least through 2008. Many companies currently outsourcing HR say that they intend to continue and expand outsourcing in the coming three years to include leave management, training and development, payroll, recruitment, health and wellness program administration, and global mobility.

HR consulting firm Hewitt Associates conducted a survey of 129 U.S. companies that employ a total of about two million workers and found that 94% outsourced at least one HR function in 2005. The most commonly outsourced functions are outplacement services, employee assistance programs, 401(k) programs and COBRA administration.

The primary driver behind outsourcing HR is cost savings, which helps companies remain competitive and fiscally healthy. The foundation of the movement toward outsourcing HR is the idea that eliminating functions that do not directly contribute to the bottom line will help companies conserve resources and position themselves more strategically. Some companies that have made the decision to outsource HR note that outsourcing business processing frees up HR personnel to focus on core functions, such as training and leadership development, thereby fostering the company's employee potential and improvement of the bottom line.

But that doesn't mean that outsourcing HR works for everyone. Some U.S. companies that ventured into outsourcing HR chose to take the functions back in-house during 2005, citing disappointing results, not enough actual cost savings, and dissatisfaction with contracts and vendors. Companies that decided to take outsourced HR functions back in-house include Conseco, Dell, Capital One and Lehman Brothers.

The hitch in some of these cases may be the relative newness of HR outsourcing and shortfalls in contractual agreements or contracts that did not suit companies once the outsourcing commenced. One sign that outsourcing may not be going as well as it could is the all-too-frequent need to renegotiate vendor agreements, according to Deloitte Consulting. Renegotiation of outsourcing agreements is so common at present that none of the 25 U.S. companies surveyed by Deloitte in 2005 - each with revenues of about $50 billion - reported that they had made it through an initial agreement to term without renegotiating. "What you're seeing is a shift. Clients are saying that traditional, megadeal outsourcing no longer makes sense," said Gordon Coburn, CFO of Cognizant Technology Solutions, a vendor of outsourcing services.

Two crucial factors that are key to a satisfactory outsourcing outcome are preparation and oversight. Companies must establish benchmarks and measurements and continuously monitor the progress of outsourcing agreements to ensure optimal outcomes.

The question of outsourcing some HR or all HR is a quandary for many U.S. companies pondering outsourcing today. And the question of using one vendor or multiple vendors is another dilemma. Some larger U.S. companies are reconsidering outsourcing everything to one provider, a major departure from the early megadeals.

The new shift in outsourcing human resources is toward selective outsourcing. Companies are becoming more comfortable with using multiple vendors and are not usually outsourcing all HR functions. Though using various vendors to manage different outsourced functions requires that companies develop internal expertise in contract management and become more diligent in overseeing the contracts, the benefits seem to outweigh the potential challenges.

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The Institute for Corporate Productivity (i4cp, inc.) improves corporate productivity through a combination of research, community, tools and technology focused on the management of human capital. With more than 100 leading organizations as members, including many of the best-known companies in the world, i4cp draws upon one of the industry’s largest and most-experienced research teams and Executives-in-Residence to produce more than 10,000 pages annually of rapid, reliable and respected research and analysis surrounding all facets of the management of people in organizations. Additionally, i4cp identifies and analyzes the upcoming major issues and future trends that are expected to influence workforce productivity and provides member clients with tools and technology to execute leading-edge strategies and "next" practices on these issues and trends. i4cp is a for-profit company with offices in St. Petersburg, Florida.