Supply Excellence — HRO: Do the promises and $ add up?

HRO: Do the promises and $ add up?

May 30th, 2008 · by Crystal Liles · No Comments · Services Procurement, best practices, outsourcing, skills rectruitment and development

Companies are constantly looking for new and better ways to gain efficiencies and improve effectiveness, all while lowering costs. It’s the ‘holy trinity’ of business. And in the race to find this mystical balance, many have turned to outsourcing even core functions of their business to low-cost countries. However, the reality is that the perfect balance is hard to find and trade-offs leave many organizations only getting 2 out of 3 right (i.e. efficient and effective but ‘hidden’ costs erode expected ROI). Too often, eager companies scamper after the identified savings without fully understanding the implications of such decisions…and efficiency or effectiveness suffers.

This is certainly the case with Human Resources Outsourcing (HRO).

It’s easy to find arguments for HRO services. For example an underfunded HR department, while mission critical to the organization, may not have the budget to keep up with technology. On the other hand, the HRO is up on the latest and greatest of all things HR-related.

But there’s also a strong case to be made against HROs. Since HR is mission critical and has a tremendous scope of responsibility (payroll, performance evaluations, benefits, recruiting, career development, etc.), it can be nearly impossible to truly evaluate the implications of outsourcing. And frankly, you don’t want to realize the value of HR after they are already gone. Imagine the damages to morale and staff retention that can result from poorly administered annual employee bonus program for example.

With the laundry list of responsibilities and a host of large companies stepping in with offers to help, it’s no surprise more companies are looking for a ‘one-stop-shop’ for their HRO. In fact, the vendors are seeing market growth at an estimated 10-30% annual pace. From a management standpoint, a single vendor that can provide HRO services with a promised reduction in costs might sound pretty attractive. But too often these decision makers have a limited understanding of the HR functions themselves, and therefore underestimate the true costs and potential impact of their decisions. Even elements that appear to be minor differences between Vendor A, Vendor B and in-house could spell disaster for both the overall satisfaction with the program and the bottom line.

The bottom line is, the stakes are high, errors can quickly diminish any expected savings and there are no steadfast industry standards. So the decision should not be taken without a very careful look at the true costs and potential savings.

Crystal Liles is a Senior Consultant for Sourcing Strategy in Ariba’s Spend Management Services group. Prior to joining Ariba, Crystal served as Director of Strategic Analysis for ChoicePoint.

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