A new survey by BNA Inc., found that access to greater expertise (69%) and improvement in service quality (44%) top the list of reasons companies send out HR functions. In contrast, just under a third (28%) of respondents include cost-cutting among their key outsourcing reasons.
“Too much emphasis on the cost of administering programs can be short-sighted when choosing to outsource,” said Joshua Joseph, BNA Director of Research. “Thoughtful employers recognize that money saved by outsourcing at the HR department level means little service problems end up costing them more elsewhere.”
For those out to save a buck, measuring net cost savings from outsourced HR activities remains a key challenge for employers, as 44% of those surveyed say cost savings are “undetermined.” This finding partly reflects the fact that some activities (e.g., employee assistance counseling) have never been handled in-house by most employers, giving no baseline to compare costs.
Interestingly, the survey finds that employers motivated mainly by cost savings are sometimes more disappointed with outsourcing results than are those with other motives. For example, among employers that outsource flexible spending account administration, those driven by cost savings are more often disappointed with the initiative (59 %) than those citing service quality and expertise (36 %).
Adding significance to outsourcing decisions, the 2004 survey finds that fewer than one in 10 HR executives have ever brought an outsourced activity back in-house. This is the case whether such initiatives are viewed as successful or disappointing. The fact that HR outsourcing is almost always a “one-way street” reinforces the need to thoroughly investigate the credentials and suitability of outside vendors, researchers said.
Overall, the survey results suggest that outsourcing is a long-term development. Two-thirds of HR departments (67%) use outside vendors to handle at least one of their activities, compared with fewer than six in 10 in the late 1990s. The trend toward outsourcing is most prevalent among larger organizations (those with more than 2,500 workers) that have both the demand and resources to provide a full range of employee benefits and services. Smaller organizations, which typically offer fewer HR benefits and services, have correspondingly fewer activities to outsource.
The top HR activities outsourced by employers in 2004 include employee assistance counseling (34%), flexible spending account administration (28%), pre-retirement counseling (25%), and outplacement services (22%).