Co's Stepping Cautiously on HR Outsourcing

May 31, 2005 ( - Companies responding to a recent survey reported that a majority have no plans to consolidate their outsourcing activities with a single vendor.

Respondents to a recent Watson Wyatt survey are far less willing to outsource the more strategic components of their HR function. Rather, according to the survey, most companies are taking an incremental, selective approach.

Nearly two-thirds (65%) of the 135 companies surveyed characterize their HR function as mostly or completely handled in house, according to survey results detailed in a news release. Some 29% say they have an approach that is equally mixed between outsourcing and handling the functions in house, while only 7% say they are mostly outsourced.

“Most companies have decided to take a selective approach to HR outsourcing as they look for an optimal mix of internal and external processes and technologies,” said Michael Cornetto, senior HR delivery consultant at Watson Wyatt, in the news release. “Despite much speculation otherwise, there is no headlong rush toward the total outsourcing of all HR services. Many companies that investigate full HR outsourcing alternatives choose to refine their existing delivery model rather than outsource everything.”

Of those companies that outsource multiple HR functions, only 8% consolidate the administration of retirement plans, health and welfare benefits and other HR activities with a single vendor, and only an additional 5% plan to do so in the future, according to the news release. Overall, 54% of companies have no consolidation approach in place and do not plan to have one.

According to the survey, companies that mix internal and external resources end up with the most efficiency in terms of costs and the number of full-time employees supported by each HR staffer.

Looking at specific HR activities, results show that a large majority of companies outsource transactional HR activities such as 401(k) administration (84%) and at least some aspects of their pension administration (71%).

In the pension administration area, for example, many companies already outsource using a hosted Web-based model. “But we are seeing more interest in companies asking the outsourcer to handle additional administration, such as the preparation of benefit packages for new retirees,” said Jim Shaddy, retirement practice leader for the central US division at Watson Wyatt, in the news release.

Health and welfare administration is the next most likely area to be outsourced, but only 44% of respondents reported doing so.

Looking into the future, one-third (36%) of companies expect to outsource more in the next two years, while 51% expect their sourcing approach to remain about the same. Six percent of respondents said they will cut back on their outsourcing activities.