Insights on Outsourcing
HR outsourcing is constantly evolving and may be poised for significant changes as companies assess initial contract outcomes and prepare for future planning. One trend is already emerging – some companies are moving away from contracting with one vendor to handle all outsourced HR functions and are ramping up oversight of existing and future agreements.
The big contracts that have become the norm in recent years may not be the best way to go in the future. Yes, cost savings in the form of discounts offered by the bigger outsourcing contracts are tempting, but not if the end result is less than satisfactory. In retrospect, and after a few years of outsourcing experience under their belts, some organizations may find that incremental outsourcing with multiple vendors is a better way to go for now.
Despite the perennial business rhetoric about outsourcing HR wholesale, only 7% of 135 U.S. companies responding to a Watson Wyatt survey reported that they have totally outsourced their HR functions. The survey found that about two-thirds reported that their HR functions are partly or totally outsourced and that 29% of the respondents have a mix of insourced and outsourced HR functions. “We’re seeing most companies do a mixture of outsourcing and insourcing. It’s more of a best-of-breed approach,” said Cathy Tripp of Watson Wyatt (Anderson 2005).
A number of larger U.S. companies are beginning to reconsider outsourcing everything to one provider. “What you’re seeing is a shift. Clients are saying that traditional, mega-deal outsourcing no longer makes sense,” said Gordon Coburn, CFO of Cognizant Technology Solutions, a vendor of outsourcing services (Mello, 2005).
One sign that an outsourcing relationship may not be going as well as it should is the need to renegotiate vendor agreements. Renegotiation of outsourcing agreements is so common that none of the 25 U.S. companies Deloitte surveyed – each with revenues of about $50 billion – reported that they had made it through an initial agreement to term without renegotiating (Mello, 2005).
With experience comes heightened awareness and expectation. “Buyer unrest is causing a change in outsourcing transactions. They will morph from monolithic mega-deals into higher value deals with smaller components,” said Peter Bendor-Samuel (2005), CEO of the Everest Group. He predicts that in the future, companies will increasingly move away from consolidating their vendors and become more selective, choosing smaller vendors who specialize in particular areas of expertise.
Some U.S. companies – including Conseco, Dell, Capital One and Lehman Brothers – have backtracked on their outsourcing deals. Others are simply redefining their needs and expectations and approaching outsourcing differently (Mello, 2005).
A 2005 survey conducted by HRI in conjunction with the American Management Association found that a perceived loss of control was identified by the most companies (27%) as the biggest hurdle in moving into outsourcing, followed closely by change management and systems conversion (both 24%). Still, of the 63 organizations that participated in the survey, most companies said that they were satisfied with the outsourcing experiences and 53% said that they “definitely would” choose to outsource again.
The upside of outsourcing HR, in addition to the hoped-for cost savings, is the opportunity to get out from under the hassle of navigating through the complexities of regulatory compliance. Some firms find this so attractive that working through the details of contract negotiations and management are considered well worth it.
Most of the U.S. companies currently experiencing rapid growth – 83% – are outsourcing at least some of their HR functions, and they say they plan to continue to do so for at least the next two years (“Almost,” 2005).
Thorough assessment of current HR capabilities and functions, solid planning and effective contract management are all keys to positive outsourcing results, but the most critical of these is oversight. Companies need to develop systems and expertise in contract management in order to ensure optimal outcomes when outsourcing human resources. In fact, it’s likely that there will be a growing demand for HR professionals who have excellent contract management skills.
For a PDF version of Deloitte’s Calling a Change in the Outsourcing Market report, click here. For more on Deloitte, click here.
Documents used in the preparation of this TrendWatcher include:
“Almost All Fast-Growth Companies Outsourcing HR Functions.” Workspan, July 2005, p. 17.
Anderson, Tom. “Employers Prefer Incremental Approach to Outsourcing.” Employee Benefit News, July 2005, pp. 12, 50.
Bendor-Samuel, Peter. “Why Outsourcing Is Poised for a Sea Change.” Outsourcing Journal [www.outsourcingjournal.com]. November 2005.
Human Resource Institute, Inc. “HR Outsourcing Practitioner Consensus Survey.” HRI, 2005.
Mello, John P., Jr. “Reeling in Outsourcing Deals.” CFO, June 2005, p. 19.
The big contracts that have become the norm in recent years may not be the best way to go in the future. Yes, cost savings in the form of discounts offered by the bigger outsourcing contracts are tempting, but not if the end result is less than satisfactory. In retrospect, and after a few years of outsourcing experience under their belts, some organizations may find that incremental outsourcing with multiple vendors is a better way to go for now.
Despite the perennial business rhetoric about outsourcing HR wholesale, only 7% of 135 U.S. companies responding to a Watson Wyatt survey reported that they have totally outsourced their HR functions. The survey found that about two-thirds reported that their HR functions are partly or totally outsourced and that 29% of the respondents have a mix of insourced and outsourced HR functions. “We’re seeing most companies do a mixture of outsourcing and insourcing. It’s more of a best-of-breed approach,” said Cathy Tripp of Watson Wyatt (Anderson 2005).
A number of larger U.S. companies are beginning to reconsider outsourcing everything to one provider. “What you’re seeing is a shift. Clients are saying that traditional, mega-deal outsourcing no longer makes sense,” said Gordon Coburn, CFO of Cognizant Technology Solutions, a vendor of outsourcing services (Mello, 2005).
One sign that an outsourcing relationship may not be going as well as it should is the need to renegotiate vendor agreements. Renegotiation of outsourcing agreements is so common that none of the 25 U.S. companies Deloitte surveyed – each with revenues of about $50 billion – reported that they had made it through an initial agreement to term without renegotiating (Mello, 2005).
With experience comes heightened awareness and expectation. “Buyer unrest is causing a change in outsourcing transactions. They will morph from monolithic mega-deals into higher value deals with smaller components,” said Peter Bendor-Samuel (2005), CEO of the Everest Group. He predicts that in the future, companies will increasingly move away from consolidating their vendors and become more selective, choosing smaller vendors who specialize in particular areas of expertise.
Some U.S. companies – including Conseco, Dell, Capital One and Lehman Brothers – have backtracked on their outsourcing deals. Others are simply redefining their needs and expectations and approaching outsourcing differently (Mello, 2005).
A 2005 survey conducted by HRI in conjunction with the American Management Association found that a perceived loss of control was identified by the most companies (27%) as the biggest hurdle in moving into outsourcing, followed closely by change management and systems conversion (both 24%). Still, of the 63 organizations that participated in the survey, most companies said that they were satisfied with the outsourcing experiences and 53% said that they “definitely would” choose to outsource again.
The upside of outsourcing HR, in addition to the hoped-for cost savings, is the opportunity to get out from under the hassle of navigating through the complexities of regulatory compliance. Some firms find this so attractive that working through the details of contract negotiations and management are considered well worth it.
Most of the U.S. companies currently experiencing rapid growth – 83% – are outsourcing at least some of their HR functions, and they say they plan to continue to do so for at least the next two years (“Almost,” 2005).
Thorough assessment of current HR capabilities and functions, solid planning and effective contract management are all keys to positive outsourcing results, but the most critical of these is oversight. Companies need to develop systems and expertise in contract management in order to ensure optimal outcomes when outsourcing human resources. In fact, it’s likely that there will be a growing demand for HR professionals who have excellent contract management skills.
For a PDF version of Deloitte’s Calling a Change in the Outsourcing Market report, click here. For more on Deloitte, click here.
Documents used in the preparation of this TrendWatcher include:
“Almost All Fast-Growth Companies Outsourcing HR Functions.” Workspan, July 2005, p. 17.
Anderson, Tom. “Employers Prefer Incremental Approach to Outsourcing.” Employee Benefit News, July 2005, pp. 12, 50.
Bendor-Samuel, Peter. “Why Outsourcing Is Poised for a Sea Change.” Outsourcing Journal [www.outsourcingjournal.com]. November 2005.
Human Resource Institute, Inc. “HR Outsourcing Practitioner Consensus Survey.” HRI, 2005.
Mello, John P., Jr. “Reeling in Outsourcing Deals.” CFO, June 2005, p. 19.
Lorrie is i4cp's Vice President of Research. A thought leader, speaker, and researcher on the topic of gender equity, Lorrie has decades of experience in human capital research. Lorrie’s work has been featured in the New York Times, the Wall Street Journal, and other renowned publications.