Measuring the True Benefit of Human Resources Outsourcing

By Henneman, Todd | Workforce Management, July 2005 | Go to article overview

Measuring the True Benefit of Human Resources Outsourcing


Henneman, Todd, Workforce Management


Experts say it's not all about upfront cost savings; smart companies will also consider factors like organizational performance and worker satisfaction

WHEN DELTA AIR LINES signed an agreement this year for end-to-end human resources outsourcing, it had a key goal: to cut costs.

The No. 3 airline in terms of U.S. traffic anticipates that the deal, valued at $120 million, will save it 25 percent, or $42 million, over its seven-year term. Outsourcing also averts the need for Delta to spend $50 million on updating human resources technology.

Saving money is vital to the struggling carrier, which posted a first-quarter loss of $1.07 billion. So a governance team will monitor 50 metrics in hope of ensuring that the deal with Affiliated Computer Services delivers on its promises.

"We understand that promised benefits are only delivered if you actually measure and track them," says Robert Kight, Delta's vice president of compensation and benefits.

Human resources outsourcing is booming this year. In April, Pepsico signed a 10-year agreement with Hewitt Associates. In May, Duke Energy announced a 7 ½-year contract for Hewitt to handle payroll, performance management and other HR back-office administrative services. So perhaps it isn't surprising that human resources is the fastest-growing segment of the business process outsourcing sector, according to sourcing advisory firm Technology Partners International.

But as Delta, Pepsico and others mark another swell of HR outsourcing, experts say the first wave of pacts shows the importance of firms understanding why they're outsourcing, and matching metrics to those goals.

"What didn't go so well in the first generation was setting expectations," says Phil Fersht, vice president of BPO research for the Yankee Group, a technology consulting firm. "There were too many organizations rushing in. We saw initial contracts that weren't scoped out so well. Buyers were getting pissed off with their vendors in 15 minutes."

Companies need to look beyond initial cost savings, Fersht says, and track how outsourcing affects employee satisfaction and organizational performance.

Outsourcing is also supposed to free a company's HR executives to focus on more important matters, says Arthur Mazor, vice president of business development for ACS.

"Strategic measures such as those which link various inputs to outcomes are far more critical to the business," Mazor says.

For example, a company's HR team can look for the link between recruitment sources and recent-hire performance results. They can connect performance rankings to training investments. They can compare employee exit data with their total rewards programs. All of those give a company a better basis for evaluating its organizational programs, Mazor says.

The domestic market for HR outsourcing, which involves outsourcing at least three human resources functions, will reach $42 billion by 2008, according to the Yankee Group.

FINDING BASELINES

Before companies seek bids, they should quantify their current service levels and costs, says Robert Brown, a principal analyst with research and advisory firm Gartner Inc.

Employers won't know if they're setting the bar too high or too low, or if outsourcing is right for them, if they don't know their starting point.

If they lack in-house resources to determine baselines, they should consult an impartial third party, Brown says.

"One of the things that we advise Gartner clients to do is to really take a hard and long look at their motivations for outsourcing and come up with metrics that govern the relationship around those," he says. "The last thing you want to do is abdicate the setting of metrics to your outsourcer. It would be like the fox guarding the henhouse."

When BPO deals disappoint, the failure often is caused by not setting expectations upfront and instead concentrating solely on service levels that govern the contract, Brown writes in a recently issued report. …

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