Outsourcing still generates a lot of interest--and the hottest area right now is providing support for companies' human-resources functions. Last week, Delta Air Lines Inc. and Marriott International Inc. each signed seven-year deals to hand off their HR responsibilities to third-party service providers. Delta's deal with Affiliated Computer Services Inc. is worth $120 million; Marriott didn't disclose financial terms of its deal with Hewitt Associates. Earlier this month, in one of the biggest HR-outsourcing deals to date, British Telecom signed a 10-year, $575 million expansion of its HR-outsourcing contract with Accenture. The agreement covers a broad range of services for BT's 87,000 employees and 180,000 pensioners.
The main reason for the increasing interest in handing off personnel-support services is simple: cost savings. In a study released earlier this month, Yankee Group says big companies can cut their HR-administration costs by as much as 20% through a well-managed outsourcing deal. Delta says it expects to reduce HR and payroll costs by more than 25% over the life of its deal with ACS.
There are several factors to consider when weighing whether to farm out HR responsibilities: whether to work with a single service provider or multiple best-in-class firms; how to manage the privacy and security implications, especially to reassure employees when they find out personal data is moving off the premises and possibly offshore; and how easily a service provider can handle growth, particularly acquisitions and geographic expansions. The increase in human-resources outsourcing also means more business-technology executives must take on the role of internal consultant, as their employers construct complex deals with service providers in which technology plays a central role in workforce management.
Increasingly, service providers market themselves as one-stop shops. ACS will handle a broad range of functions for Delta, including compensation and benefits administration, payroll, call-center, and information services. For Marriott, Hewitt will provide benefits administration, compensation, recruiting, and learning and development services for more than 133,000 Marriott employees worldwide.
While the business case for HR outsourcing is strong, analysts say the industry's growth could be slowed if vendors can't guarantee employee privacy--particularly when personal data is moved offshore. U.S. laws such as the Health Insurance Portability and Accountability Act don't prohibit moving employee medical records offshore, but that could change if a vendor suffers a major privacy breach, says Yankee Group analyst Philip Fersht. Last year, California Gov. Arnold Schwarzenegger vetoed legislation that would have restricted movement of state residents' medical data offshore. The European Union's E-Privacy Directive already limits the movement of personal data outside the EU.
IT has a strong role in crafting HR-outsourcing deals, UPS's Sheridan says.
Photo by James Leynse
To help ensure that its arrangement with Accenture wouldn't compromise employee privacy or security, British Telecom created teams that included IT personnel with security expertise, says Andrew Lewcock, procurement manager. "There are large numbers of people within BT who have the skills to assess our provider's networks and systems, and we certainly took advantage of that," he says. BT's IT staff also will work with Accenture to deploy and manage PeopleSoft 8.8.
Companies also are turning to HR-services providers to help with growth. Defense contractor Northrop Grumman has grown through acquisitions, and it has conducted a separate benefits-enrollment program for incoming employees. This year, for the first time, Northrop Grumman will hold companywide enrollment for all of its 125,000 employees to simplify the process. "It's going to be a challenging project," says Dennis Wootan, corporate director for benefits administration.
Wootan will get help from a new partner with access to a network featuring military-grade security and scalability. Towers Perrin, Northrop Grumman's HR-services provider, is forming a joint-venture company with EDS to provide more complete HR-outsourcing offerings. As a result, Northrop Grumman's HR data will be handled by EDS's global secure network.
Northrop Grumman's IT staff will play a big part in managing the program. Wootan has an internal IT manager assigned to his group who acts as a benefits CIO, he says. "We're focused on how we get the information in our systems to [Towers Perrin] in an orderly fashion while maintaining data integrity," he says.
Most vendors are crafting Web-services-based architectures to pull employee data, minimizing the need for infrastructure changes at the customers' sites. For example, EDS uses messaging software from Tibco Software Inc. to create a services-oriented architecture through which it connects with customers.
Services vendors are partnering with specialist firms to boost their HR capabilities. Computer Sciences Corp. and Aon Corp. entered into an alliance last year to provide a broad range of HR services, including payroll and benefits management, recruitment, training, and performance management. "Aon has the capabilities around HR consulting, and we have the capabilities around transaction processing and application outsourcing," says David Michelson, CSC's director of business-process-outsourcing strategy solutions.
Geographic expansion is another reason to outsource HR functions. Entering a new market takes knowledge of local employment law, payroll-tax regulations, benefits rules, and the like. Global experience is a big reason Accenture won BT's business. "As we grow into more countries, they're able to match that," Lewcock says.
UPS likely will need help integrating data on employees in Asia into its HR portal as it expands in booming markets such as China. "If our current providers can't do it, then it's something we'll evaluate," Sheridan says. UPS's IBM WebSphere-based employee portal, UPSers.com, extends only to workers in its Western operations. Data for workers in China and other Asia-Pacific countries resides in a proprietary Web-based system, and the information "is almost manually transferred into a database," says Neil Brawley, UPS's HR-systems manager.
At least two major companies have asked EDS to provide outsourced-HR services to support expansions into China, says Steve Bohannon, EDS's VP for HR services. "We have to go there, and we're anxious to do so," he says. EDS is close to launching an HR-services center in China to be operated through the Towers Perrin joint venture.
Both global and local business imperatives make turning over human-resources functions to third parties more and more appealing. Business-technology managers must be involved to make the most of the opportunities.