Tuesday, March 20, 2012

The Hidden Benefits of HR BPO – The Back Story

The Hidden Benefits of HR BPO study introduced last week was a fascinating study I had wanted to conduct for years. 

Read on to find out why we did this study and what we hoped to learn.

For years we've worked with companies to help them not only determine the current costs for the delivery of payroll, HR and benefits administration, but also to project what future state costs could be given the introduction of new technology or outsourcing. The previous work we did analyzing companies that have outsourced payroll in a traditional model yielded interesting results. The market study looking at companies that outsource benefits administration was even more illuminating.

The key to these studies is understanding the dynamics of cost and the balance and relationship between outsourcing fees and internal costs in an outsourcing environment. You see, when an organization outsources any function, it doesn't reduce internal costs to $0. Some costs always remain. How much costs remain will typically depend on the outsourcing model employed and the effectiveness of the outsourced provider.

Perhaps most important, however, is the extent to which the organization embraces the change and optimizes the opportunities afforded through outsourcing. 
  • Do they reduce the internal headcount now that many tasks are performed by the outsourced provider? 
  • Do they maintain redundant and unnecessary systems? 
  • Precisely what does the "retained organization" look like, and what percent of total cost does it represent? 
Yes, there is a right way and a wrong way to outsource! 

To put it in day-to-day terms, I "outsource" my lawn maintenance. A team comes once per week and mows, edges, trims, prunes and puts down all those chemicals needed to keep my lawn green and weed free. In this case, my "retained organization" goes to zero! I (thankfully) don't do a thing. But imagine if I went out a bought a mower and fertilizer and did my own mowing and fertilizing and weed killing between treatments? Not only would that increase my costs (in time and hard dollars), but it could also undermine quality. Too much fertilizer and weed killer could kill my lawn!

Well, the same applies to organizational outsourcing of an administrative function like payroll. If the client doesn't have just the right amount of involvement, it can not only increase cost, but also undermine the quality and risk mitigation that can come from outsourcing.

This study was, in large measure, designed to determine what the "right mix" is. How much internal cost does BPO displace in an effective outsourcing relationship?

You can read the details for yourself on pages 12 and 13 of the white paper, but to give you an idea, 80% - 90% of internal costs can be displaced in a most effective HR BPO arrangement! We saw a significant portion of clients attaining this, especially after 4 and 5 years of engagement. To give you some perspective, this compares to 50% percent or so in a traditional payroll outsourcing environment.

This data is powerful! It provides empirical data which we can now use to not only project out future state costs, but we can also use it to identify ways that current outsourcing arrangements can drive toward attainable benchmarks and efficiencies.

I love the power of numbers!

About the author - Donald Glade is president and founder of Sourcing Analytics, Inc., an independent consulting firm specializing in helping companies optimize their HR / benefits / payroll service delivery through financial analysis, relationship management, and process improvement.

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