On the outs Featured

8:00pm EDT March 26, 2007
Many CEOs have long struggled with the role of human resources and how to hold its leaders accountable to the same types of ROI measurements as other business units. The reasons behind this can lead to a great debate of which came first, the chicken or the egg. But one thing is certain: regardless of the reasons behind the perception of the Human Resources (HR) Department as nonstrategic and tactically focused, the expectation for improved results and accountability by senior management is increasing.

One concept that is gaining popularity among CEOs is outsourcing some of the human resources functions. By removing purely administrative functions, the remaining staff can spend more time on human capital strategies and hopefully support a greater number of company employees without adding to their own staff.

“There are many reasons behind the outsourcing movement,” says Christoph Jenkinson, senior solutions specialist for the Employee Service Delivery Practice at Watson Wyatt Worldwide. “The globalization of many companies along with the need to comply with increasing regulations is bogging down many HR departments. Outsourcing is a solution to the challenge.”

Smart Business spoke with Jenkinson about the solutions created through HR outsourcing and how CEOs can lead the change.

Why are more CEOs outsourcing human resources functions?

They understand that the transactional portions of the human resources functions bring little strategic value to the organization. As the global war for talent heats up, CEOs want more creative energy and accountability for human capital plans to emanate from HR. CEOs want HR to develop and oversee policies, develop strategies, and be drivers of employee satisfaction. Payroll processing, for example, requires little creativity, so it often makes sense to outsource it. Within human resources, many of the sub-units have operated in silos, and that has created process redundancies and duplicate costs.

Also, outsourcing as a business concept has matured and so has executive management’s confidence in it. Originally, the concept was applied to noncore, noncritical functions. Now, business leaders have seen that success can be achieved by outsourcing noncore but critical functions such as payroll and time-card processing.

What HR functions are being outsourced?

I mention payroll because there have always been numerous providers of outsourced payroll processing, and they work efficiently and cost effectively. One of the barriers to outsourcing this company-wide has been the increased globalization of companies and their work forces. We are now starting to see an emergence of universal pay plans, and the world seems to be adopting a general payroll standard with slight variations for each country. Following that trend, we are starting to see payroll processing suppliers go global.

In the past, there was also a mindset that global payroll processing was complicated, so many managers were ‘hands-off’ and left payroll processing to each country leader. With Sarbanes-Oxley compliance requirements, it is important to know what is going on everywhere with payroll and take accountability.

Can employee benefits be outsourced successfully?

The outsourcing of employee benefits is gaining popularity among CEOs. The increased regulations imposed under the Consolidated Omnibus Budget Reconciliation Act (COBRA) and the Health Information Privacy Act (HIPAA), for example, mean that human resources must constantly stay up with the changing laws and keep the company in compliance.

Small or medium-size firms can often reduce their costs when insurance coverage is purchased through a third party, such as a staff leasing firm, by leveraging their buying power. Even in the cases where outsourcing is cost-neutral, there are other advantages to outsourcing the administration of benefit programs and the burdensome legal compliance activities.

What should CEOs do to lead outsourcing change?

Senior executives must be involved in the decision to outsource and be on board with the change. CEOs should be involved in taking the steps that generally comprise an outsourcing decision roadmap, like defining business and functional requirements, defining decision criteria, preparing an RFP, developing a vendor evaluation tool and conducting due diligence.

It is important to know what adds value to your organization and to have a vision of where you want to see HR spend its time and energies. While payroll and benefits are the most commonly outsourced functions, the outsourcing of many other HR functions — such as full recruitment outsourcing and technology outsourcing — is starting to emerge. Through greater scalability and by affording the time for HR to focus on becoming a strategic partner to business unit leaders, the outsourcing of human resources functions is gaining traction among CEOs.

CHRISTOPH JENKINSON is senior solutions specialist for the Employee Service Delivery Consulting Practice at Watson Wyatt‘s San Francisco office. Reach him at (415) 733-4144 or christoph.jenkinson@watsonwyatt.com.