HR Outsourcing Continues to Boom, Survey Reveals

Most large companies farm out at least one human resources function and are looking to expand into new areas, Hewitt says

Most large companies farm out at least one human resources function and are looking to expand into new areas, Hewitt says

Lincolnshire, IL  April 18, 2005  Human resources outsourcing is on track to continue record growth in the United States, according to a new survey by Hewitt Associates, a global human resources services firm.

The survey of 129 large companies representing nearly 2 million employees found that organizations generally are satisfied with their HR outsourcing decisions and plan to outsource more HR services by 2008.

Currently, 94 percent of survey participants outsource at least one HR function or activity. The most commonly outsourced HR functions  either fully outsourced or almost fully outsourced  include outplacement services (91 percent); employee assistance programs (89 percent); defined contribution or 401(k) (83 percent); COBRA administration (77 percent); and defined benefit (pension) (68 percent).

Plans to Expand

The survey also showed that, by 2008, companies plan to expand outsourcing into the following areas (listed in order): leave management, learning and development, payroll, recruiting, health and welfare, and global mobility.

"The growth of HR outsourcing will continue to gain momentum as organizations reap the benefits, including significant cost savings, new capabilities and services for employees, and enabling HR to focus on more strategic work that is integral to the business," said Bryan Doyle, president of Hewitt's HR outsourcing group. "For most organizations, HR administration is not their core area of expertise, so by turning it over to an HR expert, they can focus on critical business needs."

According to the survey, companies' top reasons for outsourcing HR include access to outside HR expertise, service quality, ability to focus on core business, cost savings, opportunity for better data and relief from administrative burdens.

Challenges Remain

Even when organizations decide to pursue HR outsourcing, some face challenges. Survey participants ranked their top concerns about HR outsourcing as (1) losing control of key processes, (2) employee reactions to an external service provider, and (3) difficulty in building a business case.

In selecting an outsourcing provider, companies say the following requirements are most important: demonstrated HR process expertise (95 percent), prior experience/track record (93 percent), service level agreements in contracts (83 percent), cost savings guarantees in contracts (65 percent), and leading-edge technology (65 percent).

"It's important to understand that HR is unique from other areas that companies typically outsource, so it's critical that they conduct a thorough evaluation to ensure they select a provider with the HR expertise, experience and capabilities needed to manage people issues and deliver the quality service and results they are looking for," said Doyle.

Making the Transition

Overall, the majority of survey participants (89 percent) are satisfied with their outsourcing arrangement. Eighty-five percent said they achieved hoped-for benefits, and an additional 20 percent realized some unexpected benefits. When asked about achieving cost saving objectives, nearly half (45 percent) responded yes, while 45 percent said that cost saving was not an objective in their decision to outsource.

During the outsourcing transition, 81 percent of companies said it went smoothly, without any significant problems. To help prepare their HR function for outsourcing, the majority of employers typically defined new HR roles and responsibilities (70 percent), restructured HR (62 percent), developed and communicated a new HR strategy (55 percent) and provided training for employees in new roles (43 percent).

Companies also prepared their employees for outsourcing by creating communication campaigns (88 percent) and providing training for managers and employees (56 percent).

One-quarter Go Back In-house

Only 23 percent of companies have brought an outsourced function back in-house. Of those that did, 62 percent did so because of poor service, while 38 percent did so because they did not achieve anticipated cost savings.

Other key survey findings:

  • More than three-quarters (77 percent) of companies surveyed said that the economy did not impact their HR outsourcing decisions.

  • The most common service-level agreements include transaction accuracy (75 percent), data delivery (66 percent), system availability (62 percent), issue resolution (59 percent) and employee/participant satisfaction (45 percent).

  • Nearly half (46 percent) of companies used a sourcing advisor for HR outsourcing decisions, while 48 percent plan to use one in the future.

  • Six in 10 survey participants do not have a companywide outsourcing strategy.

  • Only 9 percent of organizations measure vendor performance with Six Sigma techniques.

Additional Articles of Interest

For more information on procurement business process outsourcing (BPO), see the following articles: