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HR outsourcing decisions should not be based purely on cost-cutting
July 13, 2004
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Washington, D.C. -- While employers commonly assess costs when outsourcing HR functions, cost issues are not among the two top drivers of outsourcing decisions, according to a major survey released by BNA, Inc. (The Bureau of National Affairs, Inc.).

The annual survey of over 900 human resource executives finds that access to greater expertise (69 percent) and improvement in service quality (44 percent) are cited as the two most important reasons for outsourcing HR functions.  In contrast, just 28 percent of respondents include cost-cutting among their top tier reasons for choosing outside firms to handle flexible spending accounts, benefit plan administration, employee assistance counseling, and many other HR activities.

"Too much emphasis on the cost of administering programs can be short-sighted when choosing to outsource," says Joshua Joseph, Director of Research at BNA. "Thoughtful employers recognize that money saved by outsourcing at the HR department level means little if service problems end up costing them more elsewhere." 

The survey findings build on past HR studies by further clarifying the relationship between outsourcing and cost. Special attention to HR outsourcing is warranted because consequences often directly affect employees who in turn serve customers and other stakeholders.

Measuring net cost savings from outsourced HR activities remains a key challenge for employers, as 44 percent of those surveyed say cost savings are "undetermined." This finding partly reflects the fact that some activities (e.g., employee assistance counseling) have never been handled in-house by most employers, giving no baseline to compare costs.  However, lack of resources and insufficient evaluation expertise can also hamstring employers that do have comparative data available.

Adding significance to outsourcing decisions, the 2004 survey finds that fewer than one in 10 HR executives have ever brought an outsourced activity back in-house. This is the case whether such initiatives are viewed as successful or disappointing.  The fact that HR outsourcing is almost always a "one-way street" reinforces the need to thoroughly vet the credentials and suitability of outside vendors.

Overall, the survey results suggest that outsourcing is here to stay. Two-thirds of HR departments (67 percent) use outside vendors to handle at least one of their activities, compared with fewer than six in 10 in the late 1990s.  The trend toward outsourcing is most prevalent among larger organizations (those with more than 2,500 workers) that have both the demand and resources to provide a full range of employee benefits and services. Smaller organizations, which typically offer fewer HR benefits and services, have correspondingly fewer activities to outsource.

The top HR activities outsourced by employers in 2004 include employee assistance counseling (34 percent), flexible spending account administration (28 percent), pre-retirement counseling (25 percent), and outplacement services (22 percent).

In general, HR executives surveyed report high levels of satisfaction with outsourcing. Seventy-eight percent can readily identify an initiative that "exceeds expectations," while only about 30 percent can cite one that "falls short of expectations."  More specific outcomes, such as quality of service and cost savings are influenced by a variety of factors, including the number of years since an activity was outsourced, how much of an activity is "off-loaded," and employer motives for outsourcing.  As an example, employers that have outsourced activities for longer periods of time tend to be more satisfied with vendor quality of service.

Interestingly, the survey finds that employers motivated mainly by cost savings are sometimes more disappointed with outsourcing results than are those with other motives.  For example, among employers that outsource flexible spending account administration, those driven by cost savings are more often disappointed with the initiative (59 percent) than those citing service quality and expertise (36 percent).

HR Department Benchmarks and Analysis 2004 is a comprehensive, national survey of human resource departments that was conducted between April 12, 2004, and May 7, 2004.  The survey report presents findings on outsourcing, strategy and measurement, staffing, and expenditures and budgets.  Respondents were 943 human resource executives representing a broad cross section of U.S. employers. This year's survey was conducted with oversight from a volunteer panel of experts consisting of HR vice presidents at major companies, leading academic researchers, and established consultants.

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