Many organizations lack metrics needed to know true value of outsourced HR services: report
While organizations may consider outsourcing some part of HR, most lack the hard evidence needed to support an outsourcing decision, according to a recent survey of Canadian HR leaders.
HR outsourcing is often heralded as a solution for organizations looking to improve service delivery while improving strategic HR support, but for the most part it is driven by a desire to cut costs, said Ed McMahon of Watson Wyatt, the firm that surveyed 127 Canadian companies about benefit and defined benefit pension plan administration.
The study revealed that in most cases HR departments simply don’t know how much it costs to manage those services.
Watson Wyatt considers metrics, like total transaction administration costs and total service centre costs, important for organizations looking to benchmark performance against other companies and make decisions about outsourcing opportunities. But through a series of questions on DB pension plans administration costs, the consultancy concluded 80 per cent of respondents did not know the total transaction cost per plan participant and 96 per cent did not know total service centre costs per plan participant. (Of those already doing some outsourcing, almost 51 per cent did not even know ongoing costs of outsourced arrangements.) The findings for group and health-care benefits were similar (see charts page 2).
Not knowing costs puts HR decision-makers at a distinct disadvantage when dealing with potential outsourcers, said McMahon.
“If you are not defining your cost structure, who is? The answer is almost always the HR vendor,” he said. Vendors won’t guarantee cost savings but talk about “typical costs reductions.”
HR leaders usually know how much it costs at a macro level to meet their responsibilities, but that is all, he said. “They often don’t understand what it costs to produce a benefits cheque,” he said. “They don’t know at an activity level.” That makes it very difficult to determine if outsourcing would be good for the organization or not, he said.
“When someone says to them, ‘We can do thing X for cost Y,’ they have no legitimate basis for cost comparison.”
Despite this lack of understanding, outsourcing continues to gain momentum. McMahon said it could be because pressure to outsource HR often comes from outside of HR. “More often it is the senior operations person or CEO or CIO who says we are implementing (a product like) J.D. Edwards, do you want the HR component?”
Corporate decision-makers assume that since outsourcing saved money in some other part of the business it should save money in HR. “I think the assumption is that we outsourced IT and saved a whole whack of dough, we can outsource HR and save a whole whack of dough.” Then when an outsourcer can provide numbers about “typical cost reductions,” it makes outsourcing look like a good idea.
“The presence of numbers looks better than the absence of numbers,” said McMahon.
On the whole, respondents to the survey report they are satisfied with their outsourcing arrangements, though they are least satisfied with hoped-for cost savings.
Organizations have seen greatest success in improvements to customer service and transaction integrity and accuracy. “I have been saying for some time that if you are going into this for cost reduction reasons you may be disappointed,” said McMahon.
An organization can only truly know if the move is successful if it knows how it was doing before.
Many never clearly see the before picture and end up disappointed by the after picture. It is reminiscent of the period when enterprise resource planning systems were all the rage, he said.
“Cost reduction pitches made then were often never met. I see huge similarities.”
Ceridian is one of the established players in the outsource market and John Cardella, vice-president of HR at the company, also said there have been some disappointments in HR outsourcing. He too attributes it to common misunderstanding of costs.
“I would tend to agree that most organizations do not have a well-defined basis for how much certain components (of HR) do cost them,” said Cardella.
But he said the biggest gap in cost projections is oversight of intangible costs like lost time through inefficient processes.
“They have no idea of how much money is being wasted by managers trying to access information, or even employees that might be looking for a form online.”
Consequently, organizations underestimate the true costs.
It is relatively easy for an organization considering outsourcing recruiting to figure out the hard costs by adding up money spent on in-house recruiters, a tracking system and advertising, he said. “But if you have an inefficient process and a lot of managers spending a lot of time trying to locate recruits, those are real costs but they don’t get factored into the overall valuation of what is going on.”
HR outsourcing is often heralded as a solution for organizations looking to improve service delivery while improving strategic HR support, but for the most part it is driven by a desire to cut costs, said Ed McMahon of Watson Wyatt, the firm that surveyed 127 Canadian companies about benefit and defined benefit pension plan administration.
The study revealed that in most cases HR departments simply don’t know how much it costs to manage those services.
Watson Wyatt considers metrics, like total transaction administration costs and total service centre costs, important for organizations looking to benchmark performance against other companies and make decisions about outsourcing opportunities. But through a series of questions on DB pension plans administration costs, the consultancy concluded 80 per cent of respondents did not know the total transaction cost per plan participant and 96 per cent did not know total service centre costs per plan participant. (Of those already doing some outsourcing, almost 51 per cent did not even know ongoing costs of outsourced arrangements.) The findings for group and health-care benefits were similar (see charts page 2).
Not knowing costs puts HR decision-makers at a distinct disadvantage when dealing with potential outsourcers, said McMahon.
“If you are not defining your cost structure, who is? The answer is almost always the HR vendor,” he said. Vendors won’t guarantee cost savings but talk about “typical costs reductions.”
HR leaders usually know how much it costs at a macro level to meet their responsibilities, but that is all, he said. “They often don’t understand what it costs to produce a benefits cheque,” he said. “They don’t know at an activity level.” That makes it very difficult to determine if outsourcing would be good for the organization or not, he said.
“When someone says to them, ‘We can do thing X for cost Y,’ they have no legitimate basis for cost comparison.”
Despite this lack of understanding, outsourcing continues to gain momentum. McMahon said it could be because pressure to outsource HR often comes from outside of HR. “More often it is the senior operations person or CEO or CIO who says we are implementing (a product like) J.D. Edwards, do you want the HR component?”
Corporate decision-makers assume that since outsourcing saved money in some other part of the business it should save money in HR. “I think the assumption is that we outsourced IT and saved a whole whack of dough, we can outsource HR and save a whole whack of dough.” Then when an outsourcer can provide numbers about “typical cost reductions,” it makes outsourcing look like a good idea.
“The presence of numbers looks better than the absence of numbers,” said McMahon.
On the whole, respondents to the survey report they are satisfied with their outsourcing arrangements, though they are least satisfied with hoped-for cost savings.
Organizations have seen greatest success in improvements to customer service and transaction integrity and accuracy. “I have been saying for some time that if you are going into this for cost reduction reasons you may be disappointed,” said McMahon.
An organization can only truly know if the move is successful if it knows how it was doing before.
Many never clearly see the before picture and end up disappointed by the after picture. It is reminiscent of the period when enterprise resource planning systems were all the rage, he said.
“Cost reduction pitches made then were often never met. I see huge similarities.”
Ceridian is one of the established players in the outsource market and John Cardella, vice-president of HR at the company, also said there have been some disappointments in HR outsourcing. He too attributes it to common misunderstanding of costs.
“I would tend to agree that most organizations do not have a well-defined basis for how much certain components (of HR) do cost them,” said Cardella.
But he said the biggest gap in cost projections is oversight of intangible costs like lost time through inefficient processes.
“They have no idea of how much money is being wasted by managers trying to access information, or even employees that might be looking for a form online.”
Consequently, organizations underestimate the true costs.
It is relatively easy for an organization considering outsourcing recruiting to figure out the hard costs by adding up money spent on in-house recruiters, a tracking system and advertising, he said. “But if you have an inefficient process and a lot of managers spending a lot of time trying to locate recruits, those are real costs but they don’t get factored into the overall valuation of what is going on.”
