Primary research conducted by Gantry Group in 2003 and 2004 concurs with conclusions drawn by Gartner Group (The HR BPO Market is Booming, July 2003) and Accenture (joint study with The Conference Board, SBPOA, September 2003) from their studies concerning the major drivers of the HR outsourcing trend:

• Cost reduction/gained efficiencies (both in benefits costs and internal HR cost savings)
• Improved quality of services to employees
• Improved level of consistency across the enterprise

A 2003 survey by World at Work and Krannert Business School (Purdue University) also adds increased access to technology to the list.

Although there is much talk about the expansion of BPO into core processes, significant value drivers for BPO remain in non-core processes within human resources. Today the most common applications for HR BPO are in pension and 401(k) benefits administration, health benefits management and payroll. There is evidence that once processes are outsourced they usually stay that way. In their study of Fortune 1000 companies, Accenture found that less than 1% of companies outsourcing HR processes have brought them back in-house, nor do they plan to. Clearly the outsourcing of popular HR business processes is effective for these organizations.

Cost benefits and savings aside, the mere enablement of HR staff to focus on strategic areas through non-core BPO better aligns HR functional tasks and objectives to those of the corporation. By relying on an outsource partner to offload routine employee inquiries and basic administrative tasks, HR members can focus on retaining and developing key talent, effecting change management, leadership development, succession planning and compensation management. The outcome of HR core processes now more consistently affects employee turnover, improves communication throughout the company, and reduces incidences of duplication and redundancy through goal-based performance management. In short, selective BPO can create business transformation within the HR function by shifting focus to the strategic needs of the company. In an economy emerging from recession, employees are still being called upon to do more with less, resulting in high pressure work environments. With reductions felt within all organization functions, employee morale is increasingly being pushed down to line managers, who look to the remaining HR personnel for strategic guidance.

Another strategic benefit that can be realized by HR BPO is the standardization on best practices across the enterprise. Especially for global companies with multiple locations geographically dispersed, the tendency toward inconsistent practices and tools is a recognized problem. With HR BPO, all business units use and receive the same tools and connect to the same processes regardless of location. The engagement of a best-in-class outsource partner can drive consistencies and level of quality as a direct result of enterprise adoption of the BPO provider's business processes.

Finally, the decision to outsource HR business processes can aid companies with compliance and increase process transparency required by Sarbanes-Oxley. "Sarbox" legislation - as it is often referred to – calls for public companies to ramp up systems to track detailed business transactions in support of complete financial disclosure. In many cases HR BPO is enabling process automation of a previously manual set of workflows which, as paper-based systems, are inherently difficult to track and have a high potential for errors. HR BPO memorializes all transactions for any process, providing easy access to important historical data required for audits and compliance reporting.

According to Gantry research of hundreds of HR managers and executives in the U.S., over 60% of respondents believe employee and manager self-service are important goals within the next two years. "Self-service" broadly refers to a range of transaction-based processes that leverage Web-based automation. Using Internet browsers, individuals throughout an enterprise can electronically enroll in health plans, view 401k and retirement transactions, and perform a variety of tasks that used to be accomplished manually by an HR employee. These benefit functions include items like entering life event changes, 401k benefits calculations, retirement contribution and transaction reports, claims transactions, reporting, and many more. Traditionally each time a company employee wanted to review their benefits, had a question about applicable benefits or needed advice, they would make a call to the HR department. Here an HR staff member would answer questions, research issues, retrieve information, enter life event changes and enroll employees in benefits as appropriate. HR employees could spend a majority of time just performing administrative tasks in support of employee benefits. It’s no surprise that companies look to streamline and automate these processes to reduce administrative costs and enable HR to perform more strategic, higher value work.

Before BPO employee self-service was only available through the implementation of an integrated ERP system or a vertical niche application integrated through a corporate Intranet. The IT systems required to support self-service are costly and often need custom development. Healthcare benefits enrollment, for example, requires integration with multiple health plan carriers - on average 21 different vendors (Gantry Group, "HR Automation Solutions: Annual Benefits Enrollment", 2004), each of which requires an IT interface for automated online enrollment. Enterprises who wanted this option for employee self-service paid dearly to implement and support the technology, and even then, without the proper employee communication and training, enterprise-wide adoption could not be assured. Other, smaller companies simply could not afford an automated solution. Enter - HR BPO solutions.

Today a wide range of outsourcing companies are offering to relieve enterprises of all the administrative tasks surrounding benefits management including healthcare, retirement, flexible spending plans, education benefits, and more. Through outsourcing relationships, companies can gain access to Web-based technology that enables self-services - quickly and without a major capital investment. In fact, some companies outsource only the self-service portion of a given benefit and manage the remaining administration in house. Why? The cost savings that result from self-service technology is certainly one advantage. But just as important are the ancillary support services offered by BPO vendors such as live call centers, 24x7 online web support and employee training. A comprehensive offering from a BPO vendor can improve the rates of employee adoption so critical to the success of self-service programs. Simply put, BPO can make self-service a reality - quickly and cost effectively.

While the benefits of comprehensive outsourcing may look appealing, most companies are approaching HR BPO in stages, outsourcing single business processes one at a time. Three areas of concern drive this cautionary approach:

• Actual costs and realized savings
• Control
• Best in class processes

While some enterprises manage these concerns by slowly outsourcing in stages, others enter into joint partnerships with an outsourcing vendor continuing to perform parts of certain business processes in-house, while outsourcing others. Accenture's 2003 study of Fortune 1000 companies showed some 78% of respondents adopting this shared services models for human resources processes. The trend however - particularly for larger companies - is toward integrated HR business process outsourcing. The mid-market, largely due to the few affordable BPO offerings, is slightly behind the big enterprises with respect to HR outsourcing, but this is rapidly changing as high end BPO providers are developing solutions that are more cost effective. According to USBX Advisory Services BPO Report (Volume 1, Issue 2, August 2003), the leading HR BPO providers - previously focused on financial services - are now increasingly targeting mid-sized businesses. This report cited a 2003 Gartner survey which showed BPO revenues from mid-sized companies at 36% in 2002, up 11% over the prior year.

Gartner projects the market for multi-process outsourcing (defined as more than three processes to a single vendor) will grow to $21 billion in 2005, representing 36% of the total HR outsourcing market at that time. Many companies, however, opt to outsource to multiple vendors, preferring to leverage best-in-class capabilities and suspicious that any one vendor can "do it all." According to Forrester Research's 2003 report "BPO's Fragmented Future", firms looking to outsource core business processes like human resources...to gain cost savings will not find a single vendor that can manage such complex offerings." However, while HR is certainly a "core" function, overall it is comprised by several non-core business processes many of which have been already mentioned. These non-core business processes are likely to be the first to be considered for outsourcing to a single outsourcing provider and represent the near-term opportunity for growth in end-to-end integrated outsourcing to a single provider.

Another trend in HR outsourcing that also addresses enterprises concerns, is pricing. While HR managers want to lock in a fixed rate, they also want to ensure they are getting their money's worth. This can be achieved by performance-based pricing or "fees at risk" now becoming popular. Companies work with their outsource vendors to come up with a set of performance metrics that track the quality of the delivered services. For example, call center pricing may be based on a sliding scale of call volume but these fees can be withheld if - say, the number of abandoned calls exceeds a certain threshold value. Other performance metrics include number of errors, accuracy of calculations, employee hold time, and time to resolve issues.

As businesses move toward multi-process outsourcing with single providers, the overall size of outsourcing contracts is increasing - but "bulk" pricing benefits the buyer. Often vendors reduce the fees on one service if they are already providing services for another business process for the same company. The larger BPO providers offer enterprises a price break if they outsource more than one service due to the economies of scale (from increased volumes) and shared use of data interfaces. Ultimately, the compelling business rationale for outsourcing integrated HR services to a single vendor will drive enterprises away from the alternative of using multiple providers for discrete business processes.

The key promise of BPO is greater agility to modify business processes in response to dynamic business conditions. But this promise will only be fulfilled if the real costs are actually less than the in-house alternatives and only if the quality of services is at least as good. Forrester Research (Thor Olavsrud, "Business Process Outsourcing Overhyped?" Internetnews.com, September 2, 2003) notes common problems include inflexible contracts, vendor management issues, and lack of performance metrics. Forrester Group director John C. McCarthy even stated that "Although some firms show BPO savings, vendors overstate their current offerings" (Internetnews.com, ibid).

Gantry Group has identified a set of attributes that characterize BPO relationships that have been successful. Those firms that have maximized the effectiveness of their BPO processes follow a set of best practices:

Clear contract with no fine print - The outsourcing contract should plainly state exactly what services and support are included in the pricing. This will avoid surprises later on when enterprises expect something for free, but are told it costs extra (see Customization below). Contracts with pricing scaled to volume or usage ranges provide better cost predictability.

Pre-set performance metrics - Before the contract begins, enterprise and provider should establish a set of performance metrics that are mutually acceptable and that can be measured accurately. Mechanisms for performance tracking should be put in place as part of the implementation, with tracking frequency to be set forth in the contract. Performance metrics are vital to achieving and maintaining predictable costs and consistent quality.

Well organized implementation with milestone tracking - Implementation is a key determinant for success. It is at the earliest stages that BPO optimization is decided and involves efforts by both the enterprise and the provider. Even before the implementation begins, enterprises and providers must work together to develop a configuration that best interfaces with those processes that will touch the services. This includes not only data feeds and applications but other people-based tasks as well. A clear mapping of how the outsourced services will integrate into various points in the enterprises is critically important to long term success.

Careful selection of areas for customization - A major potential area for unexpected expense is around customization. Too many companies make assumptions about the degree to which they will be able to have unique functions included in the recurring price. Custom reporting is a typical example where enterprises are used to certain data presentation and reporting periods. Often companies assume their current reporting requirements will automatically remain unchanged only to discover that extra fees are levied to accommodate them.

Close relationship with outsource provider - Companies who are happy with their BPO provider(s) feel that their provider is an extension of the HR department. Partly this is achieved through branding and customization of look and feel - even to the point of customer service operators answering with the corporate name. But just as important is the match of cultural compatibility and quality of staff members involved with the relationship. Communication is the most vital ingredient for outsourcing success and the regularity and quality of this communication sets the stage for success or failure.

Focus on adoption - Particularly for self-service business process outsourcing only works to the extent to which it is adopted. This means that all internal employees must receive adequate support and training to become comfortable with the use of self-service whether for benefits enrollment or to answer a retirement question. BPO breaks down when the load on HR administration is not reduced even though processing fees are being paid out. Gantry Group's recent study of benefits enrollment automation solution showed that workforce adoption is a key driver of ROI for these solutions. Study results are published in a Gantry Group ROI white paper titled HR Automation Solutions: Annual Benefits Enrollment (http://www.gantrygroup.com/publications/white_papers.htm). Enterprises who contract with BPO providers that include training and both live and online support to encourage wide spread adoption will enjoy increased returns.

So how do you decide whether to outsource HR business processes or keep them in-house? Or whether to automate by licensing an IT solution, outsourcing just the related IT application, or outsourcing the entire business process? The answer lies in comparing the ROI of each alternative.

Even though enterprises turn to BPO for reasons such as improved access to technology and domain expertise and greater competitive advantage, the driving justification is economic. Put simply, if BPO were not able to generate savings that exceed the associated costs, these processes would be brought back in-house. To track the ROI of BPO it is necessary to look at the net benefits that drop to the bottom line and compare them with the Total Cost of Outsourcing. The ROI value drivers will be unique to the particular business process you are planning to outsource. However, there are some common value drivers and cost drivers across all HR business processes.

Areas of Cost Savings

There are three primary drivers of tangible cost savings and avoided costs from HR BPO:

• Reduction of HR staffing
• Reduction in Benefits Costs
• Reduction of IT software and infrastructure

Staff reductions are a direct result of off-loading customer call centers, payroll, benefits administration or training to an outsourced services provider. In some cases enterprises arrange for employees involved in the staff reduction to be re-employed by the BPO provider. BMO Financial Group, for example, reduced its HR workforce by about 250 when it began outsourcing to Exult. To help service the contract, Exult hired some of these individuals (Philip Fersht, HROToday, "HR BPO is Driving the Market For HR Services", April 2004).

In addition to the reduction in internal costs, many enterprises opt for BPO for employee healthcare services expressly because of the savings in healthcare premiums. The bigger BPO providers have a larger number of covered lives in their base than any single customer company. As a result, the BPOs can negotiate better per employee healthcare premiums than the enterprise could on its own. For middle and large sized enterprises with 5,000 or more employees, these savings can be sizeable.

The savings of reduced or eliminated IT costs are also significant. In a 2003 study of 181 organizations, Price-Waterhouse Coopers found that the total cost of ownership of an internal payroll system - including tech support, maintenance and upgrades was $16 per check compared with $2-$3 per check for an outsourced payroll provider. On top of this, the same study showed the average cost for a human resources information system required to drive payroll and benefits administration amounted to $88/employee/year. These costs can all be either completely avoided or greatly reduced in an outsourcing scenario and can be added to the net benefits.

Other intangible savings derive from greater efficiency, fewer errors, increased productivity, and higher employee satisfaction relating to faster issue resolution, self-service and online support. These improvements in productivity are real however they drop to the bottom line either through staff reductions or the ability to expand the enterprise without hiring additional staff.

Total Cost of Outsourcing

Although many companies considering outsourcing look only at the recurring fees (usually charged per employee or per transaction), they fail to include all the real associated costs.

Implementation is a major component and can represent up to 30%-50% of the total annual recurring costs. Often implementation fees are charged with a portion upfront and the remainder over several years. Enterprises calculating ROI must include these costs in the investment side of the equation.

Other fees often not included are migration or switching costs (to move the business process from its current platform to the outsource provider's platform), and the costs of developing interfaces to various required data feeds (retirement benefits outsource providers, for example, need a payroll feed). Interfaces between the in-house applications that generate these data feeds and the outsource providers platform and technology can be a significant cost component - over and above implementation costs.

Training of both HR staff, which will interface with the process, and employees is vital. As mentioned previously, poor adoption can mean the difference between positive or negative ROI of a BPO initiative. The importance of training and ongoing education can't be overstated and should not be left out in an attempt to reduce costs. Most BPO providers include some amount of training and employee communication, but even paying an additional fee to meet your company's needs may ultimately improve your ROI.

Finally additional costs for custom development, ad hoc custom reporting or consulting services should also be accounted for. Even if you believe your needs are quite standard, err on the side of caution and include some costs for customization and consulting services. If you need them they will not be negligible and inevitable there is some special or unique aspect to your enterprise that will require custom work.

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