How to succeed at HR outsourcing -- by really trying

Although not a new concept, human resources outsourcing has risen to new levels in recent years.

In the past, many companies preferred to outsource one or two HR functions such as payroll or employee benefits. Now, in the interests of saving money and streamlining business so they can focus on what they do best, companies are more often bundling all HR processes under one business process outsourcing (BPO) contract, said Mark Hodges, managing partner for BPO at TPI Inc., an outsourcing advisory services firm in The Woodlands, Texas.

Speaking at an HR outsourcing conference here this week, Hodges said that while transactional HR functions are being outsourced, companies continue to manage the strategic and policy functions of their HR departments in-house.

To prepare for negotiating the best possible outsourcing contract, each company must decide the scope of its needs and understand how its HR department operates, said Hodges. That way, the company can better evaluate HR outsourcing contractors and their BPO offerings. He also said executives should talk to their peers in companies that have already outsourced HR operations.

Among the companies that have recently outsourced HR functions is AT&T Corp., which in May outsourced its human resources, payroll and other administrative services to Chicago-based Aon Corp. Financial terms of the seven-year agreement weren't disclosed, although AT&T said the move will save it millions of dollars.

"AT&T made the decision early on to move forward with this project," said Christine Morena, vice president of HR at AT&T. "Our directive was to save money on Day 1, so ... in choosing an [outsourcing] partner, we wanted one that was committed to the telecom industry and one that would make a sustained investment in technology."

Diana Robinson, executive vice president of Aon's HR outsourcing group, agreed, saying businesses should choose contractors with a desire to improve their IT systems.

Another entity that has outsourced HR functions is the state of Florida's Department of Management Services (DMS), which last August signed a seven-year, US$280 million contract with Cincinnati-based Convergys Corp. The contract hands off some of the state's personnel work, including benefits and payroll, recruiting and training, to Convergys.

At the time, agency officials said the deal would save state government between $65 million and $90 million that otherwise would have been spent to replace the agency's outdated computer system. Overall, the DMS said, the state could save as much as $173 million over the full length of the contract.

Speakers at the conference said that with those kinds of agreements in mind, organizations should determine ahead of time how their business processes are delivered and assess those processes through certain filters: What are the costs of keeping HR functions in-house and what are the legal, financial and other risks associated with third-party delivery of a service.

After a self-assessment, companies must next look at what different service providers have to offer.

With that in mind, one of the main reasons Florida selected Convergys was its commitment to build a new operations center in Tallahassee, said Cynthia Henderson, the former secretary of the DMS. Morena said AT&T chose Aon, in part, because of its willingness to offer jobs to all of its HR employees.

Conference speakers also said companies should be sure to put in place service-level agreements that hold service providers to a very tight set of metrics and management teams to oversee the transition to an outsourced HR. It's especially important to communicate information about the change to employees, because they will often wind up working for the new service provider.