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Human resources outsourcing (HRO) is on track to continue record growth in the United States, according to an April 2005 study by Hewitt Associates. That's because most of the 129 survey participants reported they planned to expand their HR outsourcing into new areas by 2008.

The study, entitled "HR Outsourcing: Trends & Insights 2005," found 89 percent of the respondents are satisfied with their outsourcing arrangements. Eighty-five percent said they achieved their hoped-for benefits while an additional 20 percent realized unexpected benefits, a bonus.

Jim Konieczny, Hewitt's Global Operations Leader for Outsourcing, says these high satisfaction numbers are forming the basis for expanding the scope of HRO engagements. "Their past experience is proof of concept to the organization. These successes are convincing the leadership to add additional activities," he continues.

Today, the most commonly outsourced HR functions include:

1. Outplacement services: 91 percent
2. Employee assistance programs: 89 percent
3. Defined contribution or 401 (k) programs: 83 percent
4. COBRA administration: 77 percent
5. Defined benefit plans: 68 percent.

The Hewitt study found its survey participants plan to expand their HRO into the following areas:

• Leave management
• Learning and development
• Payroll
• Recruiting
• Health and welfare
• Global mobility

The survey found companies outsource for four major reasons, with cost savings coming in last. Companies outsource HR to:

1. Gain access to outside expertise: 93 percent
2. Improve service quality: 85 percent
3. Focus on their core business: 73 percent
4. Save money: 72 percent

Lessons for Suppliers

The study had many telling lessons for HRO suppliers. The respondents told Hewitt the most important criteria for selecting a supplier was proven HR process expertise (95 percent) and a track record (93 percent). "Buyers can find outsourcers who can do it cheaper, but it's so much more than that. Content counts," says Konieczny.

Also, buyers demanded suppliers deliver on their commitments. The study clearly found that the buyers who had unsatisfactory HRO experiences worked with suppliers who didn't follow through.

While no companies brought their entire outsourcing back in-house, 23 percent did bring one or two functions home. The study found 62 percent did so because of poor service, while 38 percent acted because they did not achieve the anticipated cost savings. Konieczny says 25 percent of the respondents outsourced to one supplier.

On the other hand, the study discovered relationships that became "trusted partnerships" produced the best results for both parties. "Outsourcing works best when it's a win-win situation," notes Konieczny.

Suppliers also achieved outstanding outsourcing results when they clearly understood their clients' value proposition. This is tricky, because each buyer faces a distinct set of challenges. "Cost doesn't always rank No. 1," says the Hewitt executive.

Finally, the findings showed HRO "is a good business to be in" for established providers.

What Buyers Are Worried About

Just over half the respondents indicated there are still barriers to outsourcing HR functions in their organizations. Concerns about losing control of key processes, adverse employee reactions, and building a business case were the three most common obstacles.

Konieczny says the best way to combat the fear of losing control is to contractually establish key performance indicators. A strong governance structure and scheduled stewardship meetings go a long way in mitigating these fears, in his experience.

Another way to assuage these concerns is for suppliers to "promote the buyers' brand, not yours." Konieczny says buyers often tell him they are afraid their employees "will forget who we are."

Buyers told Hewitt their biggest lesson learned was to be more diligent in the decision-making and contract negotiation process. Most said they didn't do enough reference checking. They also wished they had looked more broadly at their future needs to avoid outgrowing the capabilities of their chosen partner.

Finally, nearly half (46 percent) used a sourcing advisor like Everest for their outsourcing decisions. Forty-eight percent plan to use an advisor in the future.

How the study was done: Hewitt conducted the survey in the fourth quarter of 2004 and the first quarter of 2005. Researchers interviewed 129 employers representing almost two million employees. One-third had populations under 5,000; one-third had populations ranging from 5,000-9,999 employees, and the final third had populations in excess of 10,000. The average annual revenues were $6.1 billion. Participants represented 17 different industries.

You can download the executive summary of this report here.

Publish Date: July 2005

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Copyright © 2005 - Everest Partners, L.P.

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