Measuring the True Benefit of Human Resources Outsourcing

When Multi-national companies decided to outsource its Human Resources Operations, they had only one major goal in mind and that is cutting costs. They have decided to outsource end to end human resource operations to third party and today it has become the greatest of revelations.


One of the biggest airline companies in the world, which is the 3rd largest airlines in terms of U.S traffic has signed a deal with a company to outsource its human resource operations. The deal between the companies is valued at one hundered and twenty million dollars and the airline company is very confident of saving nearly 25% on its cost. That’s Human Resource Outsourcing today.

Like business processes being outsourced, Human Resources outsourcing has started to boom. The year 2005 saw many organizations outsource their human resource operations to a third party organization. Examples would be the soft drink giant, PepsiCo, which outsourced its operations to Hewitt Associates. They had signed a 10 year agreement with Hewitt for outsourcing their Human Resource Operations. Duke Energy also announced a 7.5 year contract with Hewitt to handle its payrolls and other administrative services. Human Resource outsourcing now is the fastest growing segment of the business process outsourcing sector.

Outsourcing operations happen for increasing the net profits of the companies as they find it cost effective very much in the long run by outsourcing their operations. However companies must look beyond initial cost saving and must analyze the impact of outsourcing on employee satisfaction and the overall organizational performance. Giants like PepsiCo and Duke Energy and other big companies have started outsourcing their Human Resource operations. This clearly shows the importance of firms understanding as to why the operations have been outsourced and matching metrics to those goals.

Generally Human Resource operations are outsourced to free an organizations HR personnel to concentrate on more important matters. The companies now concentrate more on strategies which link various inputs to outcomes which are far more critical to the business of the organization. There was a survey conducted by one of the leading research organization in the USA and it proved that the domestic market for Human Resource Outsourcing will reach nearly $42 billion by 2008. Such is the market for Human Resource Outsourcing and of course the firms outsourcing their operations are also able to focus more on their business and their strategies to increase their turnover by leaps and bounds.

By outsourcing, an organizations HR team can connect between recruitment sources and the performance of the recently hired employees. Trading investments and performance rankings can be connected. Employee exit data and their total reward programs can also be compared and connected. These things give an organization a better and an effective basis for evaluating its programs.

Finding baselines

Quantification of your current service levels and cost is very important before the company decides to seek bids. Employers have to know the standards they expect or the standards they want to set. Whether the expectations are too high or low or if outsourcing is the correct solution to cutting costs if they don’t realize their starting point.
When an outsourcing deal gives you disappointing results, it is mainly due to not setting the expectations level correctly. They instead are concentrating more on the service level agreements which governs the contracts of outsourcing. The deals companies enter into must be structured to match the company’s expectations. They must be setting upfront expectations and those expectations must be achievable.

If they lack in-house resources to determine baselines, they should consult an impartial third party. "One thing that should be done is to really take a hard and long look at company’s motivations for outsourcing and come up with metrics that govern the relationship around those. The last thing you want to do is abdicate the setting of metrics to your outsourcer. It would be like the fox guarding the hen house.

In the year 2002 a leading telecom and Internet Service provider in the united states signed an agreement with an organization to provide them with end to end human resource operations. A couple of years later the company that has outsourced agrees to the fact that the agreement has provided qualitative and quantitative service which has resulted in double digit savings which was the chief goal and the reason for this success is structuring the deal and expectations appropriately. Their expectations were modest. They were dealing with cost. They didn’t go in with the idea that we were going to change out a whole new generation of everything. From that point of view, they were very satisfied.

Though HR outsourcing vendors say savings can range from 15 percent to 25 percent, long-term data on net savings is scarce because of the infancy of the market. In 44 percent of the cases, net cost savings remain "undetermined," according to research by the Bureau of National Affairs. The prospect of cutting costs is often what motivates companies to consider outsourcing. Companies that use a mix of in-house resources and outsourcing appear to operate in a sweet spot.

Despite industry buzz, experience suggests that comprehensive outsourcing deals might not be the best route for everyone. They have relatively low budgets and have fewer HR staff members per full-time employee than their counterparts in firms that primarily handle human resources internally or primarily outsource. Another trend on the horizon: buyers wanting more per-unit pricing and cost data. Many of the pioneering comprehensive agreements guaranteed a certain percentage of savings compared with baseline costs.

Businesses face a choice in the way they structure and pursue HRO strategies: shallow or deep. Shallow Human Resource Outsourcing only addresses direct administrative spending. Deep Human Resource Outsourcing increases productivity from workforce investments, which dramatically improves strategic and sustainable competitive advantage, and allows employers to closely manage HR-related costs outside the boundaries of the HR department. It’s always advisable to transform your HR department from a cost center to a strategic resource. Use the tools and expertise that help remove the burden of managing back-office functions, such as payroll, benefits, administration, recruiting and training, so that HR executives can focus on leveraging employee performance and supporting strategic initiatives.


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