Description
The HRO market is in transition. Until recently, the market followed a relatively predictable path, with the majority of HR outsourcing engagements conforming to conventional transaction-focused, singleprocess business arrangements with individualthird-party providers
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2005 SHRM®Research Quarterly
Research SHRM
?
Research Quarterly
HR Outsourcing:
Reaping Strategic Value
for Your Organization
Leslie A. Weatherly, SPHR
HR Content Expert
HR Outsourcing: Reaping Strategic Value for Your Organization
2005 SHRM
®
Research Quarterly
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2
Introduction
The HRO market is in transition. Until recently, the
market followed a relatively predictable path, with
the majority of HR outsourcing engagements con-
forming to conventional transaction-focused, single-
process business arrangements with individual
third-party providers (e.g., payroll services, health
care and pension plan administrators, temporary
staffing agencies, etc.). However, it is now clear
that the HRO market has achieved a degree of
maturity on the business life-cycle continuum. A
second-generation market has emerged, the HRO
multi-process market. As the HRO vendors have
begun to partner with and acquire other firms, they
are broadening their service capabilities to include
organizational and people development, employee
data management, workforce planning and deploy-
ment, and human capital services. In fact, a 2004
market research study by a well-known business
process outsourcing (BPO) analyst firm forecasts
that the worldwide market for multi-process HR
BPO will grow at the rate of 21% annually, reaching
$7 billion by 2008.
1
This forecast is highly signifi-
cant because this same study forecasts that the
total HR outsourcing market will grow by just 11%
to $33 billion worldwide by 2008. In other words, in
terms of projected growth, the multi-process com-
ponent of the HRO market is expected to be appre-
ciably more robust in terms of projected growth
than the market for those organizations electing to
outsource the HR function in its entirety.
What Is Outsourcing?
In a nutshell, outsourcing is an accepted manage-
ment tool for restructuring and refocusing the way
an organization does business. It challenges man-
agement to build a more flexible organization cen-
tered on the core competencies of the business. In
making the determination that a business has more
to gain by having certain “non-core” aspects of the
business outsourced to a third-party service
provider, the organization transfers responsibility for
one or more activities or functions that would nor-
mally be performed in-house to a qualified vendor,
for a specified period of time and at a negotiated
fee, in accordance with terms stipulated in a serv-
ice level agreement (SLA). In essence, the organiza-
tion is making a decision to send certain parts of
the business out to a provider whose “core compe-
tency” is that part of the business.
Types of HR Outsourcing
In the past, HR outsourcing was thought of as hiring
a vendor to provide a service. With the new focus
on outsourcing, there is more of an opportunity to
partner with the vendor to provide the service on a
longer term basis rather than just a one-time vendor
contract. HR outsourcing can include:
• Discrete services: In this instance, one element of a
business process or a single set of high-volume
repetitive functions is outsourced to a third-party
administrator. Examples of discrete services could
include the annual open enrollment process, flexi-
ble spending accounts or employee background
checks.
• Multi-process services: The complete outsourcing
of one or more functional human resource
processes would be an example of multi-process
outsourcing (also called blended services). As
such, the outsourcing of either health and welfare
benefits administration or defined retirement plan
and 401(k) plan administration to a third-party
administrator would be an example of multi-
process or blended services outsourcing.
• Total HR outsourcing: Total HR outsourcing repre-
sents the transfer of the majority of HR services
to a third party, to include recruitment, payroll,
HRIS, benefits, compensation and communica-
tions, as well as the transition of HR management
and staff. However, HR executive management
would normally remain in place within the organi-
zation, along with strategic planning related to
people management and other key HR functions
at the discretion of management.
Why Outsource HR?
“We see a tremendous savings opportunity in HR
outsourcing. If it’s not there, we’ll walk away.”
Gregg Phillips
Deputy Executive Commissioner for Social Services,
Texas Health and Human Services Commission
Abstract
Companies of all sizes and industries are outsourcing parts of their HR business processes in record
numbers to effect improvements in efficiency, service and cost. Vendors are driving this shift away from the
traditional HR service delivery model with promises of increased access to better technology and systems,
at a reduced cost, in conjunction with improved levels of quality and service to the customer. Between the
dynamic challenges employers face and the intense competitive pressures in the vendor community, it would
appear that HR outsourcing (HRO) has, in fact, evolved to give employers more choice and an increasingly
flexible, creative and comprehensive menu of services. This article explores some of the reasons behind the
transformation of the HRO industry. It then provides information to help HR business leaders make informed
choices regarding HRO options as a means to reap professional experience in relation to HRO and strategic
value for their organizations.
According to a recent study on HRO in government
organizations, while HR outsourcing in the public
sector is significantly less common than in the pri-
vate sector, the rationale for outsourcing is essen-
tially the same. Three basic financial drivers behind
HRO are noted:
• To save money (ongoing expenditures).
• To avoid capital outlay (often a more important
consideration than direct cost savings).
• To turn a fixed cost into a variable one (i.e., if the
workforce shrinks, HR costs can be reduced
accordingly).
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HR Transformation—Refocusing Priorities
“Adding value is going to be critical in the next
phase of HRO. The first wave of HRO engagements
was really all about achieving cost savings. And
while cost savings will always be a critical driver for
HRO adoption, productivity will gain in importance.
HRO, in the second wave, will increasingly be viewed
as a strategic tool for achieving high performance.
HRO is, after all, a proven, reliable, affordable means
to achieving productivity gains.”
Gill Rider
Accenture
3
HRO is not just about cost savings. HRO is, in many
ways, forcing a change in how HR does business by
making HR business leaders refocus on what is
important to the organization. For those organizations
serious about getting out from under the yoke of
transaction-based HR processing and reaping strate-
gic value from the HRO process, repositioning HR
within the organization through multi-process or sec-
ond-generation HRO means that:
• The diversity and quality of HR services will be
enhanced.
• HR staff can now have more time to focus on core
business functions.
• HR staff can utilize internal resources more
effectively and efficiently.
• HR staff will have access to subject-matter expert-
ise not previously available in-house.
Future Prospects for HRO
HRO is the fastest growing segment of the BPO
industry. Some experts argue that within the next
five years, HRO companies will employ half of all HR
professionals.
4
In the broader context, BPO is the
delegation of one or more IT-intensive business
processes to an external provider that, in turn,
owns, administers and manages a selected process
or set of related processes, based on defined and
measurable performance metrics.
5
Currently, the
most frequently outsourced processes in order of
priority are: IT development, customer service,
HR/payroll processes, IT support, transaction man-
agement, travel expense reimbursement, tax con-
sulting, financial reporting and general accounting.
It is projected that HR/payroll processes, general
accounting and travel expense reimbursement will
see the fastest increase in growth going forward.
6
Within the HR profession, there is a wide variety of
activities/tasks and functions that are candidates for
outsourcing. Figure 1 lists examples of tasks and/or
functions within HR that are commonly outsourced.
The HRO Process
Any organization making a significant commitment to
HRO is making a decision with far-reaching implica-
tions—not just for HR, but for the entire organization.
For this reason, it is crucial that all stakeholders
involved in the HRO process (see Figure 2) be
involved from the outset and that there is clarity in
relation to the goals and objectives that the organiza-
tion expects to achieve. As a starting point, a multi-
departmental steering team, consisting of
representatives of all potential users of the service
provider, should be formed and convened. Ideally, HR
HR Outsourcing: Reaping Strategic Value for Your Organization 3
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2005 SHRM
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Figure 1
Examples of Frequently
Outsourced HR Functions
• 401(k) programs.
• Assessment testing.
• Background checks.
• Compensation and/or incentive plan administration.
• Consolidated Omnibus Budget Reconciliation Act (COBRA).
• Employee assistance counseling.
• Employee communication plans/strategies.
• Employee counseling.
• Executive development and coaching.
• Expatriate administration.
• Flexible spending account administration.
• Health and welfare benefits administration.
• Human resource information systems (HRIS) development.
• Outplacement services.
• Payroll administration.
• Performance management.
• Policy development and/or implementation.
• Recruiting/staffing of employees (nonexecutives).
• Recruiting/staffing of executives only.
• Retirement benefits administration.
• Retirement planning.
• Relocation services.
• Risk management.
• Temporary staffing.
• Training and development programs.
• Strategic business planning.
• Work/life balance benefits administration.
Source: Adapted from SHRM 2004 Human Resource Outsourcing
Survey Report.
4 HR Outsourcing: Reaping Strategic Value for Your Organization
will either lead the decision-making process or be
crucial to it. Other key members of the steering team
should include high-level managers and executives
with a vested interest in all aspects of human capital
asset management and its return on investment,
including operations, information systems technology,
finance, accounting and logistics. The goals and
expectations of the outsourcing process should be
developed and defined in a detailed project plan.
Developing a Detailed Project Plan
The multi-departmental steering team should work
together throughout the outsourcing process. The
following steps are offered as a resource in this
effort. This tool can be tailored to meet the particu-
lar needs of the organization.
1. Map internal processes and assess baseline
costs.
2. Select processes for outsourcing.
3. Define vendor requirements and selection criteria.
4. Draft Request for Information (RFI)/Request for
Proposal (RFP).
5. Identify potential vendors and prequalify.
6. Distribute RFI/RFP.
7. Implement review steps.
8. Select vendor and backup vendor(s).
9. Determine service level requirements.
10. Determine vendor review points.
11. Negotiate contract.
12. Develop transition plan.
13. Determine impact on current staff and need for
job transition arrangements.
14. Monitor vendor performance/key performance
indicators (KPIs).
15. Initiate corrective action in accordance with
contract terms, if needed.
Helping Ensure a Successful Solicitation Process
It takes time and effort to ensure a successful
solicitation effort. Suggestions to help guarantee a
favorable outcome for the organization are summa-
rized below.
• Independent third-party advisor—An organization
new to HRO may wish to seek the services of an
independent third-party advisor specializing in HRO
to guide it through the initial outsourcing process.
This firm should have no vested interest in the
outcome of the final HRO contract.
• Soliciting vendor input—In addition to a formal RFP,
it is recommended that a formal RFI be issued first.
This document serves as a first-level screen for
qualified, interested vendors. It also serves to out-
line the basics of the project and asks for vendor
capabilities and background. The reason that this is
important is that the organization will be able to use
the RFI as a prequalification tool to help identify the
most qualified vendors to participate in the RFP.
• RFP format—The RFP should include an introduc-
tion and background of the company, an overview of
the project, including submission information, due
date, scope, requirements, selection criteria and
objectives. The RFP should also include a proposal
outline or main content points in relation to approach,
company structure, resources, anticipated project
timeline, references and related previous experi-
ence. A non-disclosure agreement or confidentiality
agreement should be included to protect the propri-
etary interests of the organization.
• Assessing vendors—A structured approach should
be used; the RFP is frequently formatted in a way
that allows weighted points to be assigned for each
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Figure 2 Business Process Outsourcing
Establish
steering team
Develop detailed
project plan
Map process
and assess costs
Determine what
to outsource
Define vendor
requirements
Assess and
select vendors
Contract
with vendor
Transition
to vendor
Monitor and
manage contract
Assess vendor
performance
Determine
contract revisions
or termination
Source: SHRM Business Academy Program: HR Outsourcing.
HR Outsourcing: Reaping Strategic Value for Your Organization
criterion. Multiple raters are encouraged in this
process. Vendor presentations are normally first
made to the steering team for phase-one elimina-
tions, with the top finalists going forward with pre-
sentations to senior management.
• Due diligence—Care should be exercised in check-
ing vendor references; an effort should be made to
make site visits, if possible. Both current and for-
mer clients should be interviewed (i.e., be sure to
ask why former clients elected not to renew out-
sourcing contracts). Develop a structured interview
questionnaire to ensure that the same questions
are asked of all clients for the sake of consistency
and the references are documented for the benefit
of the steering team. Be sure that services are con-
sistent with past experience, especially if industry
experience is important. Obtain bios for all staff
assigned to the project and check the personal ref-
erences of these individuals. Interview the people
who will be responsible for working with the client
company, not just the sales team. If possible, get a
commitment that any change in team members will
be coordinated with the company first. The financial
stability of the vendor should also be assessed,
and all required business licenses should be
checked to ensure they are current.
• Contract—The contract should be developed and
reviewed by legal counsel. There will normally be a
master services agreement or a service level agree-
ment, or both. These documents set specific serv-
ice levels, document all project requirements and
expectations and establish fees and invoicing, the
duration of the contract, stipulations of vendor own-
ership changes, cancellation provisions, parties to
the contract, services, performance standards, con-
tract termination provisions, the confidentiality/non-
disclosure agreement, fees (i.e., invoicing, payment
terms, resolving differences, incentives and penal-
ties), and audit proceedings.
• Transition process—This is a team effort. The com-
pany and the vendor are equally responsible for
ensuring a smooth transition. Communication and
project management are the key watchwords during
this phase of the project. Plan to jointly review all
project plans, services, equipment and staff who
will be in transition. Ensure that responsibilities for
the transfer have been defined well in advance and
confirmed. A successful transition should be trans-
parent to the organization. This means that the cul-
ture of the company must be considered. For example,
if there is a high-touch culture where people expect
lots of personal service and insight from HR, con-
sider how to integrate the outsourcing vendor.
Include the vendor as a resource in the internal
company directory, have assimilation meetings to
ensure that the staff from the outsourcing partner
are properly introduced to the in-house manage-
ment staff, etc.
• Implementation—Implement HRO as a change man-
agement initiative for the entire organization. Decide
who needs to be involved in the planning, communi-
cate the compelling business case for the change and
discuss how potential resistance in the organization
can/will be managed, how people will be rewarded, as
well as what needs to be communicated and when.
• Vendor management—It should come as no surprise
that a few matters may fall through the cracks during
the implementation phase. HRO is a massive under-
taking, and the planning and implementation process
is intensive for both the vendor and the client organi-
zation. The internal senior HR staff is normally
responsible for the day-to-day management of the
vendor relationship (see Figure 3), tracking work per-
formed against defined service levels and continuing
service levels for HR operations not outsourced. A
regular meeting schedule should be established with
the vendor at the outset to review status and vendor
reports, service levels, routine contingency planning
and disaster recovery, process improvement plans,
rewards/incentives for performance, etc. If and when
problems should develop, contingency plans will
need to be implemented, so consideration should be
given to some of the more common problems that
may surface during HRO operations. Typical problems
for which remedial action may be required are: serv-
ice levels do not meet expectations, turnover of
employees at vendor, difficulties managing the ven-
dor, hidden and escalating costs, employee resist-
ance, and cultural differences in the way business is
conducted. Using good judgment in relation to con-
tract terms can help avoid some of these problems
in advance. For example, in an attempt to head
off/avoid problems with employee turnover, the client
company can specify in the contract which vendor
staff members must be assigned to the contract. To
address potential cost escalation, the company may
negotiate limits to fee increases and/or fee addi-
tions to the contract for new services. The best time
to negotiate these contingencies is before the initial
contract is signed.
Drivers and Risks of HR Outsourcing
A list of drivers and risks associated with HR out-
sourcing is presented in Figure 4. As previously
noted, the outsourcing decision should only be
made after thorough examination and planning and
after an in-depth investigation into the qualifications
and experience of the vendors under consideration.
While this list is not intended to be all-inclusive, it
does provide some insight into the more common
advantages and disadvantages of HR outsourcing.
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6 HR Outsourcing: Reaping Strategic Value for Your Organization
Studies on HR Outsourcing
SHRM Human Resource Outsourcing Survey Report
7
This 2004 survey report revealed that HR outsourc-
ing was a practice used by almost six out of 10
organizations. However, one-third of organizations
did not outsource any HR functions, and only a few
planned to outsource HR functions in the next three
years. HR functions were usually partially out-
sourced or completely outsourced. The difference is
that when functions are partially outsourced, the
organization co-manages the function with the ven-
dor; when they are completely outsourced, the ven-
dor takes full responsibility (see Figure 5 for factors
in considering an outsourcing vendor). More than
one-half of HR professionals indicated that their
organizations partially outsourced an HR function.
Administration of health care benefits, pension
benefits and payroll were examples of functions
most commonly cited as partially outsourced. The
top three functions that were outsourced completely
were background checks, employee assistance
programs and administration of flexible spending
accounts. Some of the most frequently named drivers
for outsourcing were reducing operating costs and
controlling legal risk by improving compliance.
However, large-staff-sized operations, compared with
small organizations, were twice as likely to indicate
that their reason for outsourcing was an attempt to
free up the time of their HR staff to focus more on
organizational strategy. When asked about the future
of outsourcing, about two-thirds of HR professionals
predicted that their level of outsourcing would
remain the same over the next five years, and nearly
one-third expected their organizations to increase
their level of HR outsourcing. Outsourcing seemed to
be favored to a greater extent in large-staff-sized
organizations: almost twice as many HR profession-
als from these organizations, compared with medium
organizations, indicated that HR outsourcing was
likely to increase in the next five years. When asked
about the benefits of outsourcing, the majority of HR
professionals indicated that outsourcing allowed HR
professionals the chance to concentrate their efforts
on core business functions, such as organizational
strategy development and execution. Correspondingly,
nearly three-quarters of HR professionals agreed
that the role of HR professionals became more
strategic with the outsourcing of certain, specifically
transactional, HR functions.
Transforming HR: Realities,
Futures and the Role of BPO
8
This study was conducted by EquaTerra in March
2005. EquaTerra polled 589 executive management
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Figure 3
Who Manages Relationship
With Outsourcing Vendor
Source: BNA. (2004). HR department benchmarks and analysis™
2004. Washington, D.C.: Author.
HR department
85%
Other
10%
Vendor management
group
2%
Procurement department
1%
Legal department
1%
Figure 4 Drivers and Risks of Outsourcing
Source: Adapted from Bajpai, N., Sachs, J., Arora, R., & Khurana, H. (2004, June). Global services sourcing: Issues of cost and quality [CGSD
Working Paper No.16]. Retrieved June 10, 2005, from www.earth.columbia.edu.
Drivers of Outsourcing
• Cost savings (reduce and control operating costs)
• Increased capacity
• Access to better technology and systems
• Increased service levels
• Improvement of inefficient internal processes
• Consolidation of business processes across
divisions/locations
• Better compliance with regulatory requirements
• Lack of internal staff/capabilities
Risks of Outsourcing
• Loss of institutional knowledge
• Lack of internal staff/capability
• Difficulty managing relationships with vendor
• Mismatch of cultures
• Security of databases with external provider
• Lack of vendor knowledge regarding industry/systems
not ready
• Sarbanes-Oxley compliance
• Financial stability of chosen vendor
• Organizational resistance/internal staff not ready
• Security of transaction in a multi-client environment
• Unpredictable costs or cost/benefit calculations that
are not justified
HR Outsourcing: Reaping Strategic Value for Your Organization
and HR decision makers, 75% of whom were manager
level or above. Most respondents were generally sat-
isfied with the current state of HR in their organiza-
tions, according to the study. HR processes fared
better than HR information technology (HRIT) applica-
tions and systems. HRIT dissatisfaction was attrib-
uted to both antiquated and underperforming
systems, as well as general dissatisfaction with
aggressive self-service automation efforts. The survey
revealed no significant difference in satisfaction lev-
els across organizational size or industry. Most organ-
izations have already moved away from the traditional
distributed HRIT model (currently used by only 16% of
respondents) toward a shared-services model (used
by 56%). While the study reflected only 3% of compa-
nies in a predominately outsourced HR environment,
25% of respondents were operating in a blended envi-
ronment encompassing distributed shared services
and outsourced HR operations. The top six efforts to
transform HR undertaken by survey respondents, in
priority order, were process improvements/business
process reengineering (61%), HR self-service (61%),
upgraded HRIT (56%), HR benchmarking (41%), reor-
ganization/downsizing (38%) and shared-services
environment (32%). The top six barriers to HR trans-
formation were lack of resources/high cost (66%),
not deemed critical (40%), inadequate support of
HRIT (39%), other more critical issues to address
(35%), lack of skills to undertake (31%) and inability
to build a compelling business case (21%).
Calling a Change in the Outsourcing Market:
The Realities for the World’s Largest Organizations
9
According to a study released by Deloitte
Consulting, the world’s largest companies should
be able to replicate the vendor’s advantages in-
house and rely on vendors going forward only under
specific circumstances. This is because “in the
real world, outsourcing frequently fails to deliver on
its promise,” according to the study. Lack of trans-
parency in relation to vendor costs due to bundling
of services and a variety of marketing techniques
has created suspicion about the potential for true
savings from outsourcing. The study finds that the
fundamental belief system held by most companies
is that cost savings are delivered mostly through
the vendors’ ability to achieve economies of scale
(70%), followed by capabilities (48%) and knowl-
edge/experience (39%). The findings also reflect
that outsourcing is still highly driven by cost sav-
ings as an expected benefit (83%), cost savings as
a key driver of outsourcing (70%) and cost savings
as the primary criterion for choosing a vendor
(43%). However, vendor complacency, coupled with
employee turnover, the unsatisfactory delivery of
vendor resources and unbalanced contracts, has
prompted some organizations to increase their
demands for vendor accountability. The study notes
that contracts permitting vendor self-reporting of
SLAs have often dictated the course of outsourcing
relationships, resulting in an unfavorable outcome
for the client. In response, clients have been forced
to include gain-sharing incentives and more strin-
gent quality and service requirements in subse-
quent contracts. Clients have also responded by
bringing operations back in-house and by exploring
alternatives, such as the transform-operate-transfer
model, where organizations employ vendors to
transform and run a function for a short-term peri-
od before returning it to the control of the client.
The message from this study for HR business lead-
ers is that outsourcing demands an intensive ongo-
ing working relationship with the vendor and cannot
be perceived by the organization as a simple hand-
off. The organization must be clear about its goals
and objectives upfront and disciplined about man-
aging all aspects of the outsourcing contract and
relationship from beginning to end.
Trends to Watch in HR BPO
According to SHRM’s HR Outsourcing Special Expertise
Panel, the following BPO trends are expected to gain
momentum within the next two to five years. As such,
these trends and their possible implications on the
future of the HR profession were further examined as
part of the research for this article.
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Figure 5
Top Factors in Considering
HR Outsourcing Vendor
Note: Percentages do not total 100% as respondents were allowed
to indicate multiple response options. Based on HR professionals
from organizations that currently outsource one or more HR functions.
Source: Adapted from SHRM 2004 Human Resource Outsourcing
Survey Report.
0% 20% 40% 60% 80% 100%
Niche in a specific area 38%
A compatible corporate culture 40%
Recommendations from
other companies
41%
Flexible contract options 53%
Guaranteed service levels 64%
Cost of vendor services 82%
A proven track record 89%
(n = 168)
8 HR Outsourcing: Reaping Strategic Value for Your Organization
1. Growth in multi-process HRO and
total HRO market is expected to continue.
• Emerging trend: The demand for the outsourcing of
increasingly complex HR functions is likely to grow.
On the supply side, the overarching challenge for
HRO vendors will be their ability to manage multi-
process, multi-client shared-service environments
as the interest in and the need for the outsourcing
of broad-based HR versus transaction-based HR
escalate.
• Implication(s): Organizations interested in outsourc-
ing multiple HR processes and/or total HR out-
sourcing are now seeking a reduction in HR
operating costs and an improvement in HR service
quality and efficiency at the same time. Critical
components for calculating HRO success will be
whether vendors follow through on promises to
introduce and/or upgrade to state-of-the-art e-HR
service delivery models and provide improved
access to management information, in conjunction
with performance metrics that demonstrate whether
proof of return on investment has, in fact, been
realized—all without any dilution in company cul-
ture, loss of data security and in compliance with
confidentiality and privacy requirements.
2. Increasing weight of non-cost
factors as decision drivers in HRO.
• Emerging trend: Short-term cost savings may not
remain the primary driver in outsourcing HR func-
tion(s). The 2004 Bureau of National Affairs survey
of HRO found that gaining access to greater expert-
ise (69%) and improving service quality (44%) were
the top two reasons to outsource; only 28% of
respondents mentioned cost savings as a main
driver for outsourcing.
10
• Implication(s): While it should be noted that the over-
whelming majority of outsourcing surveys continue
to list cost as the primary driver behind outsourcing
decisions, regardless of business function, non-cost
related factors appear to be playing an increasingly
influential role in HR-related outsourcing decisions.
This is because decisions made for short-term cost
savings reasons alone may not hold up over the
long term. Along with cost considerations, strategic
drivers may play an increasingly important role as
companies focus on core missions that align more
closely with their products and services. This may
require a shift in company vision and people man-
agement practices, including workforce develop-
ment, as a necessary cost of doing business.
3. “Commoditization” of many HR functions continues.
• Emerging trend: HR services, especially transaction-
based HRO tasks, may become increasingly “com-
moditized” and, therefore, susceptible to market-
place competition. This may, in turn, drive down the
cost of HRO for transaction-based and/or discrete
outsourcing services as new customers begin to
enter the HRO marketplace.
• Implication(s): How HR staffing will be impacted
internally as discrete services are outsourced will
vary with each organization. In certain cases, this
arrangement will benefit HR, leaving more time for
the internal HR staff to refocus their efforts on the
core competencies of the organization. In other
cases, HR department may be expected to become
more productive with a reduced staff. To ensure
that HR has an equitable voice in the introduction
of a discussion regarding HRO, HR business lead-
ers can gain credibility by initiating and leading HR
outsourcing and decision-making initiatives within
their organizations.
4. Development of new roles
for senior HR business leaders.
• Emerging trend: HR business leaders will be visible
at the executive level and play a strategic role in
initiating and facilitating HRO implementations within
their organizations.
• Implication(s): Senior HR business leaders will be
actively engaged in the negotiation, selection,
implementation and management of HRO
providers. The complexity and accountability of HR
in relation to HRO within the organization will be
heightened. However, the competencies and skill
sets required to manage HRO contracts are spe-
cialized, and not all senior HR practitioners will
possess this expertise. New skill sets and compe-
tencies for HR practice leaders that will be
required to bridge this gap include negotiation,
contract management, the ability to manage ven-
dor relationships, benchmarking, performance
measurement and project management skills.
5. As HRO adoption becomes more commonplace
within organizations, the number and type of
career opportunities for HR professionals will
change.
• Emerging trend: The number of job opportunities
within organizations for entry-level HR professionals
will begin to decline, while the demand for strategic
HR expertise will be emphasized.
• Implication(s): Fewer internal HR roles will be avail-
able in the coming years for entry-level HR profes-
sionals to gain in-house experience. As in-house HR
services shift to HRO providers, it may ultimately
become more common for entry-level HR profes-
sionals to gain their initial HR experience in an HRO
work environment, i.e., new entrants to the HR pro-
fession may have the opportunity to work for multi-
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HR Outsourcing: Reaping Strategic Value for Your Organization
ple clients from different industries at the same
time. This diversity of experience may prove benefi-
cial from a career perspective over the long term,
as HR practitioners rise through the ranks to
assume senior strategic leadership roles in organi-
zations within the HRO industry and in private and
public sector organizations.
6. Small/medium-sized HRO markets will expand.
• Emerging trend: Although total HRO is expected to
remain dominant in organizations with sales in
excess of $1 billion, small- and medium-sized
organizations are expected to significantly expand
their use of HRO services by offloading repetitive,
time-consuming tasks.
• Implication(s): Advances in technology should per-
mit highly capitalized players to provide value-added
services to large numbers of small clients by further
reducing costs and increasing efficiencies. This
trend is expected to intensify as employees become
more comfortable with interface technologies, such
as benefits portals, and accept “low-touch” (i.e.,
technology-based) HR practices. Cost savings and
increased quality can be realized through economies
of scale, expertise and scalability of resources.
However, small- and medium-sized businesses
should proceed with caution until vendors are able
to ensure that data integrity, data security and
employee privacy are protected.
7. Demographic changes increase HRO’s appeal.
• Emerging trend: Recruitment and selection are
expected to become increasingly competitive, espe-
cially for technical positions, as baby boomers
retire and the labor market tightens due to a labor
shortage complicated by low immigration rates, low
birth rates from the 1980s and 1990s and declin-
ing literacy rates in relation to science, math and
technology in the United States.
• Implication(s): There are two possible directions in
relation to recruitment: 1) more emphasis on HRO
recruitment; or 2) the search for talent remaining a
key focus for internal HR staff members in certain
organizations. The benefits of HRO recruitment are
likely to come to the forefront, as Generation X and
younger employees may not need the “personal
touch” provided by the in-house HR staff, making
HRO and the related use of “low-touch” technolo-
gies more palatable. However, more mature workers
may not be as receptive to the use of technology
for personal issues such as benefits.
8. Demand for standardized HRO performance metrics
and key performance indicators will continue.
• Emerging trend: As the demand for outsourcing dis-
closure and accountability increases, it will be criti-
cal for organizations to have standardized HRO per-
formance metrics and key performance indicators
available for benchmarking purposes.
• Implication(s): These tools will be used to monitor
vendor SLAs and demonstrate proof of return on
investment in relation to the HRO process. It will be
imperative, from a strategic perspective, that HR
business leaders be able to critically analyze the
performance and benchmarking metrics presented
by outsourcing providers to ensure that they accu-
rately account for the value of the services provided.
9. Sole-sourcing may be identified as a viable
HRO option in terms of cost, quality of service
and efficiency.
• Emerging trend: Sole-sourcing is the practice of
working with a single service provider to define,
negotiate and purchase services. In theory, sole-
sourcing relationships should be able to streamline
operations and deliver significant potential
economies of scale over multi-vendor outsourcing
initiatives in terms of the cost, service, response
time and other issues deemed critical to a success-
ful outsourcing outcome.
• Implication(s): Management of HRO projects is sim-
plified when only one vendor is involved. By the
same token, dependence on one outsourcing firm
to deliver a number of services can be risky, as per-
sonnel changes or failure to appropriately manage
the client’s resources may result in reduced client
satisfaction (both on the part of management and
employees) and/or in the event of financial instabil-
ity on the part of the HRO provider.
10. HRO failures may cause a
reassessment of HRO decisions.
• Emerging trend: Although not a common practice,
some organizations (both large and small) are
exploring the feasibility of re-establishing HR
processes internally that were once outsourced.
• Implication(s): Returning an HR function in-house
after a failed HRO experience may be difficult, espe-
cially if HR was responsible for the original out-
sourcing decision. HR leadership will need to
determine transfer-back costs and perhaps even
bear the blame for its failure, depending on how the
recommendation to outsource came about in the
first place. On the other hand, HR systems, core
competencies, corporate memory, etc., might be
deemed too costly to re-establish in a total HRO sit-
uation. As a result, smaller companies, in particu-
lar, may be forced to become outsourcing
“captives.”
9
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10 HR Outsourcing: Reaping Strategic Value for Your Organization
In Closing
“Currently, most HR leaders can still choose
whether they will respond to change or whether
they will lead change. HR executives still have the
opportunity to shape how they and the HR function
respond to the demands that their function is expe-
riencing. To us, the path is clear. We believe that HR
executives who stick with the status quo and main-
tain a focus on transactional work will soon become
obsolete. At the same time, we believe that HR pro-
fessionals who meet the need for strategic expert-
ise concerning human capital management and
organizational effectiveness will contribute value
that far exceeds the past contributions of the HR
function. In the process, they will make themselves
indispensable to their organizations.”
11
In today’s competitive business environment, HRO is
an accepted management practice and an opportu-
nity that should be embraced, not ignored, by the
savvy HR business leader. With the proper research
and analysis, it is a tool that can be applied strate-
gically to reap value for the organization. Outsourcing
can be used to achieve cost-effective solutions that
leverage technology and knowledge to transform the
business of human resource management. While
HRO is not the right answer in every situation, used
wisely and judiciously, it can be positioned to the
strategic advantage of the HR profession and the
stakeholders it serves.
Acknowledgement
The author would like to express her appreciation to
the members of the SHRM HR Consulting and
Outsourcing Special Expertise Panel for sharing
their insights in relation to the “Trends to Watch in
HR BPO” section of this report. Special thanks and
appreciation, in particular, go to panel member
Nancy Anheier, HR Directions, LLC, and SHRM
Business Academy instructor Marla Bradley,
Lambert-Bradley, Inc., for their advice and sugges-
tions with this report.
Footnotes
1
Newman, J., & Willmott, J. (2004). NelsonHall forecasts
21% annual growth in multi-process HR BPO market by
2008 [Press Release]. Retrieved May 20, 2005, from
www.nelson-hall.com/pressdocs/pr_22.html.
2
Koch, J. (2004). HR outsourcing in government organiza-
tions: Emerging trends, early lessons [Research Report E-
0007-04-RR]. New York: The Conference Board.
3
Whitehead, J. (2004). 2005 HRO superstars. Retrieved
June 1, 2005, from www.hrotoday.com/pdf/200412_
Superstars.pdf, p. 31.
4
Scott, J., Kies, P., Schoch, B., Wesley, J., & Bernard, S.
(2003). Human resource outsourcing gaining traction fast: A
look at factors driving growth and consolidation in this
emerging industry. Retrieved June 1, 2005, from
www.rwbaird.com.
5
Bajpai, N., Sachs, J., Arora, R., & Khurana, H. (2004,
June). Global services sourcing: Issues of cost and quality
[CGSD Working Paper No.16]. Retrieved June 10, 2005,
from www.earth.columbia.edu.
6
Ibid.
7
Esen, E. (2004). SHRM human resource outsourcing
survey report. Alexandria, VA: Society for Human Resource
Management.
8
EquaTerra. (2005). Transforming HR: Realities, futures
and the role of BPO. Retrieved June 2, 2005, from
www.equaterra.com.
9
Deloitte. (2005). Calling a change in the outsourcing
market: The realities for the world’s largest organizations.
Retrieved June 5, 2005, from www.deloitte.com.
10
BNA. (2004). HR department benchmarks and analysis™
2004. Washington, D.C.: Author.
11
Lawler, E., Ulrich, D., Fitz-enz, J., & Madden, J. (2005).
Human resources business process outsourcing:
Transforming how HR gets its work done. San Francisco:
Josey-Bass.
2005 SHRM
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Online Resources
Bradley-Lambert, Inc.: www.bradleylambert.com
EquaTerra: www.equaterra.com
Everest Group: www.everestgrp.com
HR Outsourcing Association:
www.hroassociation.org/index.asp
HRO Today: www.hrotoday.com
NelsonHall: www.nelson-hall.com
Outsourcing Center:
www.outsourcing-research.com
Outsourcing Institute: www.outsourcing.com
Shared Services & BPO Association:
www.sharedxpertise.org
Society for Human Resource Management:
www.shrm.org
ABOUT THE AUTHOR
Leslie A. Weatherly, SPHR, is an HR Content Expert for the Society for Human Resource
Management. Her responsibilities include identifying topics and focus areas in need of
additional human resource management research and creating HR products of strategic
and practical value for target audiences. She is certified as a Senior Professional in
Human Resource Management by the Human Resource Certification Institute. Ms.
Weatherly can be reached by e-mail at [email protected].
ABOUT SHRM RESEARCH
SHRM Research produces high quality, leading edge research and provides expertise on
human resource and business issues for the purpose of advancing the HR profession.
SHRM’s cutting edge research is used by human resource professionals to develop their
knowledge and to provide strategic direction to their organizations. As leading experts in
the field of HR, SHRM Research works closely with leading academics, policy makers and
business leaders.
ABOUT SHRM
The Society for Human Resource Management is the world’s largest association devoted
to human resource management. Representing more than 200,000 individual members,
the Society’s mission is to serve the needs of HR professionals by providing the most
essential and comprehensive resources available. As an influential voice, the Society’s
mission is also to advance the human resource profession to ensure that HR is recog-
nized as an essential partner in developing and executing organizational strategy.
Founded in 1948, SHRM currently has more than 550 affiliated chapters and members in
more than 100 countries. Visit SHRM Online at www.shrm.org.
This report is published by the Society for Human Resource Management. The interpreta-
tions, conclusions and recommendations in this report are those of the author and do not
necessarily represent those of SHRM. All content is for informational purposes only and is
not to be construed as a guaranteed outcome. The Society for Human Resource Manage-
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the use or misuse of any such information.
© 2005 Society for Human Resource Management. All rights reserved. Printed in the
United States of America.
This publication may not be reproduced, stored in a retrieval system or transmitted in
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For more information, please contact:
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Phone: (703) 548-3440 Fax: (703) 535-6473
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The Society for Human Resource Management (SHRM) does not endorse or imply
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05-0434
Research SHRM
doc_871707132.pdf
The HRO market is in transition. Until recently, the market followed a relatively predictable path, with the majority of HR outsourcing engagements conforming to conventional transaction-focused, singleprocess business arrangements with individualthird-party providers
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2005 SHRM®Research Quarterly
Research SHRM
?
Research Quarterly
HR Outsourcing:
Reaping Strategic Value
for Your Organization
Leslie A. Weatherly, SPHR
HR Content Expert
HR Outsourcing: Reaping Strategic Value for Your Organization
2005 SHRM
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Research Quarterly
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2
Introduction
The HRO market is in transition. Until recently, the
market followed a relatively predictable path, with
the majority of HR outsourcing engagements con-
forming to conventional transaction-focused, single-
process business arrangements with individual
third-party providers (e.g., payroll services, health
care and pension plan administrators, temporary
staffing agencies, etc.). However, it is now clear
that the HRO market has achieved a degree of
maturity on the business life-cycle continuum. A
second-generation market has emerged, the HRO
multi-process market. As the HRO vendors have
begun to partner with and acquire other firms, they
are broadening their service capabilities to include
organizational and people development, employee
data management, workforce planning and deploy-
ment, and human capital services. In fact, a 2004
market research study by a well-known business
process outsourcing (BPO) analyst firm forecasts
that the worldwide market for multi-process HR
BPO will grow at the rate of 21% annually, reaching
$7 billion by 2008.
1
This forecast is highly signifi-
cant because this same study forecasts that the
total HR outsourcing market will grow by just 11%
to $33 billion worldwide by 2008. In other words, in
terms of projected growth, the multi-process com-
ponent of the HRO market is expected to be appre-
ciably more robust in terms of projected growth
than the market for those organizations electing to
outsource the HR function in its entirety.
What Is Outsourcing?
In a nutshell, outsourcing is an accepted manage-
ment tool for restructuring and refocusing the way
an organization does business. It challenges man-
agement to build a more flexible organization cen-
tered on the core competencies of the business. In
making the determination that a business has more
to gain by having certain “non-core” aspects of the
business outsourced to a third-party service
provider, the organization transfers responsibility for
one or more activities or functions that would nor-
mally be performed in-house to a qualified vendor,
for a specified period of time and at a negotiated
fee, in accordance with terms stipulated in a serv-
ice level agreement (SLA). In essence, the organiza-
tion is making a decision to send certain parts of
the business out to a provider whose “core compe-
tency” is that part of the business.
Types of HR Outsourcing
In the past, HR outsourcing was thought of as hiring
a vendor to provide a service. With the new focus
on outsourcing, there is more of an opportunity to
partner with the vendor to provide the service on a
longer term basis rather than just a one-time vendor
contract. HR outsourcing can include:
• Discrete services: In this instance, one element of a
business process or a single set of high-volume
repetitive functions is outsourced to a third-party
administrator. Examples of discrete services could
include the annual open enrollment process, flexi-
ble spending accounts or employee background
checks.
• Multi-process services: The complete outsourcing
of one or more functional human resource
processes would be an example of multi-process
outsourcing (also called blended services). As
such, the outsourcing of either health and welfare
benefits administration or defined retirement plan
and 401(k) plan administration to a third-party
administrator would be an example of multi-
process or blended services outsourcing.
• Total HR outsourcing: Total HR outsourcing repre-
sents the transfer of the majority of HR services
to a third party, to include recruitment, payroll,
HRIS, benefits, compensation and communica-
tions, as well as the transition of HR management
and staff. However, HR executive management
would normally remain in place within the organi-
zation, along with strategic planning related to
people management and other key HR functions
at the discretion of management.
Why Outsource HR?
“We see a tremendous savings opportunity in HR
outsourcing. If it’s not there, we’ll walk away.”
Gregg Phillips
Deputy Executive Commissioner for Social Services,
Texas Health and Human Services Commission
Abstract
Companies of all sizes and industries are outsourcing parts of their HR business processes in record
numbers to effect improvements in efficiency, service and cost. Vendors are driving this shift away from the
traditional HR service delivery model with promises of increased access to better technology and systems,
at a reduced cost, in conjunction with improved levels of quality and service to the customer. Between the
dynamic challenges employers face and the intense competitive pressures in the vendor community, it would
appear that HR outsourcing (HRO) has, in fact, evolved to give employers more choice and an increasingly
flexible, creative and comprehensive menu of services. This article explores some of the reasons behind the
transformation of the HRO industry. It then provides information to help HR business leaders make informed
choices regarding HRO options as a means to reap professional experience in relation to HRO and strategic
value for their organizations.
According to a recent study on HRO in government
organizations, while HR outsourcing in the public
sector is significantly less common than in the pri-
vate sector, the rationale for outsourcing is essen-
tially the same. Three basic financial drivers behind
HRO are noted:
• To save money (ongoing expenditures).
• To avoid capital outlay (often a more important
consideration than direct cost savings).
• To turn a fixed cost into a variable one (i.e., if the
workforce shrinks, HR costs can be reduced
accordingly).
2
HR Transformation—Refocusing Priorities
“Adding value is going to be critical in the next
phase of HRO. The first wave of HRO engagements
was really all about achieving cost savings. And
while cost savings will always be a critical driver for
HRO adoption, productivity will gain in importance.
HRO, in the second wave, will increasingly be viewed
as a strategic tool for achieving high performance.
HRO is, after all, a proven, reliable, affordable means
to achieving productivity gains.”
Gill Rider
Accenture
3
HRO is not just about cost savings. HRO is, in many
ways, forcing a change in how HR does business by
making HR business leaders refocus on what is
important to the organization. For those organizations
serious about getting out from under the yoke of
transaction-based HR processing and reaping strate-
gic value from the HRO process, repositioning HR
within the organization through multi-process or sec-
ond-generation HRO means that:
• The diversity and quality of HR services will be
enhanced.
• HR staff can now have more time to focus on core
business functions.
• HR staff can utilize internal resources more
effectively and efficiently.
• HR staff will have access to subject-matter expert-
ise not previously available in-house.
Future Prospects for HRO
HRO is the fastest growing segment of the BPO
industry. Some experts argue that within the next
five years, HRO companies will employ half of all HR
professionals.
4
In the broader context, BPO is the
delegation of one or more IT-intensive business
processes to an external provider that, in turn,
owns, administers and manages a selected process
or set of related processes, based on defined and
measurable performance metrics.
5
Currently, the
most frequently outsourced processes in order of
priority are: IT development, customer service,
HR/payroll processes, IT support, transaction man-
agement, travel expense reimbursement, tax con-
sulting, financial reporting and general accounting.
It is projected that HR/payroll processes, general
accounting and travel expense reimbursement will
see the fastest increase in growth going forward.
6
Within the HR profession, there is a wide variety of
activities/tasks and functions that are candidates for
outsourcing. Figure 1 lists examples of tasks and/or
functions within HR that are commonly outsourced.
The HRO Process
Any organization making a significant commitment to
HRO is making a decision with far-reaching implica-
tions—not just for HR, but for the entire organization.
For this reason, it is crucial that all stakeholders
involved in the HRO process (see Figure 2) be
involved from the outset and that there is clarity in
relation to the goals and objectives that the organiza-
tion expects to achieve. As a starting point, a multi-
departmental steering team, consisting of
representatives of all potential users of the service
provider, should be formed and convened. Ideally, HR
HR Outsourcing: Reaping Strategic Value for Your Organization 3
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2005 SHRM
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Figure 1
Examples of Frequently
Outsourced HR Functions
• 401(k) programs.
• Assessment testing.
• Background checks.
• Compensation and/or incentive plan administration.
• Consolidated Omnibus Budget Reconciliation Act (COBRA).
• Employee assistance counseling.
• Employee communication plans/strategies.
• Employee counseling.
• Executive development and coaching.
• Expatriate administration.
• Flexible spending account administration.
• Health and welfare benefits administration.
• Human resource information systems (HRIS) development.
• Outplacement services.
• Payroll administration.
• Performance management.
• Policy development and/or implementation.
• Recruiting/staffing of employees (nonexecutives).
• Recruiting/staffing of executives only.
• Retirement benefits administration.
• Retirement planning.
• Relocation services.
• Risk management.
• Temporary staffing.
• Training and development programs.
• Strategic business planning.
• Work/life balance benefits administration.
Source: Adapted from SHRM 2004 Human Resource Outsourcing
Survey Report.
4 HR Outsourcing: Reaping Strategic Value for Your Organization
will either lead the decision-making process or be
crucial to it. Other key members of the steering team
should include high-level managers and executives
with a vested interest in all aspects of human capital
asset management and its return on investment,
including operations, information systems technology,
finance, accounting and logistics. The goals and
expectations of the outsourcing process should be
developed and defined in a detailed project plan.
Developing a Detailed Project Plan
The multi-departmental steering team should work
together throughout the outsourcing process. The
following steps are offered as a resource in this
effort. This tool can be tailored to meet the particu-
lar needs of the organization.
1. Map internal processes and assess baseline
costs.
2. Select processes for outsourcing.
3. Define vendor requirements and selection criteria.
4. Draft Request for Information (RFI)/Request for
Proposal (RFP).
5. Identify potential vendors and prequalify.
6. Distribute RFI/RFP.
7. Implement review steps.
8. Select vendor and backup vendor(s).
9. Determine service level requirements.
10. Determine vendor review points.
11. Negotiate contract.
12. Develop transition plan.
13. Determine impact on current staff and need for
job transition arrangements.
14. Monitor vendor performance/key performance
indicators (KPIs).
15. Initiate corrective action in accordance with
contract terms, if needed.
Helping Ensure a Successful Solicitation Process
It takes time and effort to ensure a successful
solicitation effort. Suggestions to help guarantee a
favorable outcome for the organization are summa-
rized below.
• Independent third-party advisor—An organization
new to HRO may wish to seek the services of an
independent third-party advisor specializing in HRO
to guide it through the initial outsourcing process.
This firm should have no vested interest in the
outcome of the final HRO contract.
• Soliciting vendor input—In addition to a formal RFP,
it is recommended that a formal RFI be issued first.
This document serves as a first-level screen for
qualified, interested vendors. It also serves to out-
line the basics of the project and asks for vendor
capabilities and background. The reason that this is
important is that the organization will be able to use
the RFI as a prequalification tool to help identify the
most qualified vendors to participate in the RFP.
• RFP format—The RFP should include an introduc-
tion and background of the company, an overview of
the project, including submission information, due
date, scope, requirements, selection criteria and
objectives. The RFP should also include a proposal
outline or main content points in relation to approach,
company structure, resources, anticipated project
timeline, references and related previous experi-
ence. A non-disclosure agreement or confidentiality
agreement should be included to protect the propri-
etary interests of the organization.
• Assessing vendors—A structured approach should
be used; the RFP is frequently formatted in a way
that allows weighted points to be assigned for each
2005 SHRM
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Figure 2 Business Process Outsourcing
Establish
steering team
Develop detailed
project plan
Map process
and assess costs
Determine what
to outsource
Define vendor
requirements
Assess and
select vendors
Contract
with vendor
Transition
to vendor
Monitor and
manage contract
Assess vendor
performance
Determine
contract revisions
or termination
Source: SHRM Business Academy Program: HR Outsourcing.
HR Outsourcing: Reaping Strategic Value for Your Organization
criterion. Multiple raters are encouraged in this
process. Vendor presentations are normally first
made to the steering team for phase-one elimina-
tions, with the top finalists going forward with pre-
sentations to senior management.
• Due diligence—Care should be exercised in check-
ing vendor references; an effort should be made to
make site visits, if possible. Both current and for-
mer clients should be interviewed (i.e., be sure to
ask why former clients elected not to renew out-
sourcing contracts). Develop a structured interview
questionnaire to ensure that the same questions
are asked of all clients for the sake of consistency
and the references are documented for the benefit
of the steering team. Be sure that services are con-
sistent with past experience, especially if industry
experience is important. Obtain bios for all staff
assigned to the project and check the personal ref-
erences of these individuals. Interview the people
who will be responsible for working with the client
company, not just the sales team. If possible, get a
commitment that any change in team members will
be coordinated with the company first. The financial
stability of the vendor should also be assessed,
and all required business licenses should be
checked to ensure they are current.
• Contract—The contract should be developed and
reviewed by legal counsel. There will normally be a
master services agreement or a service level agree-
ment, or both. These documents set specific serv-
ice levels, document all project requirements and
expectations and establish fees and invoicing, the
duration of the contract, stipulations of vendor own-
ership changes, cancellation provisions, parties to
the contract, services, performance standards, con-
tract termination provisions, the confidentiality/non-
disclosure agreement, fees (i.e., invoicing, payment
terms, resolving differences, incentives and penal-
ties), and audit proceedings.
• Transition process—This is a team effort. The com-
pany and the vendor are equally responsible for
ensuring a smooth transition. Communication and
project management are the key watchwords during
this phase of the project. Plan to jointly review all
project plans, services, equipment and staff who
will be in transition. Ensure that responsibilities for
the transfer have been defined well in advance and
confirmed. A successful transition should be trans-
parent to the organization. This means that the cul-
ture of the company must be considered. For example,
if there is a high-touch culture where people expect
lots of personal service and insight from HR, con-
sider how to integrate the outsourcing vendor.
Include the vendor as a resource in the internal
company directory, have assimilation meetings to
ensure that the staff from the outsourcing partner
are properly introduced to the in-house manage-
ment staff, etc.
• Implementation—Implement HRO as a change man-
agement initiative for the entire organization. Decide
who needs to be involved in the planning, communi-
cate the compelling business case for the change and
discuss how potential resistance in the organization
can/will be managed, how people will be rewarded, as
well as what needs to be communicated and when.
• Vendor management—It should come as no surprise
that a few matters may fall through the cracks during
the implementation phase. HRO is a massive under-
taking, and the planning and implementation process
is intensive for both the vendor and the client organi-
zation. The internal senior HR staff is normally
responsible for the day-to-day management of the
vendor relationship (see Figure 3), tracking work per-
formed against defined service levels and continuing
service levels for HR operations not outsourced. A
regular meeting schedule should be established with
the vendor at the outset to review status and vendor
reports, service levels, routine contingency planning
and disaster recovery, process improvement plans,
rewards/incentives for performance, etc. If and when
problems should develop, contingency plans will
need to be implemented, so consideration should be
given to some of the more common problems that
may surface during HRO operations. Typical problems
for which remedial action may be required are: serv-
ice levels do not meet expectations, turnover of
employees at vendor, difficulties managing the ven-
dor, hidden and escalating costs, employee resist-
ance, and cultural differences in the way business is
conducted. Using good judgment in relation to con-
tract terms can help avoid some of these problems
in advance. For example, in an attempt to head
off/avoid problems with employee turnover, the client
company can specify in the contract which vendor
staff members must be assigned to the contract. To
address potential cost escalation, the company may
negotiate limits to fee increases and/or fee addi-
tions to the contract for new services. The best time
to negotiate these contingencies is before the initial
contract is signed.
Drivers and Risks of HR Outsourcing
A list of drivers and risks associated with HR out-
sourcing is presented in Figure 4. As previously
noted, the outsourcing decision should only be
made after thorough examination and planning and
after an in-depth investigation into the qualifications
and experience of the vendors under consideration.
While this list is not intended to be all-inclusive, it
does provide some insight into the more common
advantages and disadvantages of HR outsourcing.
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6 HR Outsourcing: Reaping Strategic Value for Your Organization
Studies on HR Outsourcing
SHRM Human Resource Outsourcing Survey Report
7
This 2004 survey report revealed that HR outsourc-
ing was a practice used by almost six out of 10
organizations. However, one-third of organizations
did not outsource any HR functions, and only a few
planned to outsource HR functions in the next three
years. HR functions were usually partially out-
sourced or completely outsourced. The difference is
that when functions are partially outsourced, the
organization co-manages the function with the ven-
dor; when they are completely outsourced, the ven-
dor takes full responsibility (see Figure 5 for factors
in considering an outsourcing vendor). More than
one-half of HR professionals indicated that their
organizations partially outsourced an HR function.
Administration of health care benefits, pension
benefits and payroll were examples of functions
most commonly cited as partially outsourced. The
top three functions that were outsourced completely
were background checks, employee assistance
programs and administration of flexible spending
accounts. Some of the most frequently named drivers
for outsourcing were reducing operating costs and
controlling legal risk by improving compliance.
However, large-staff-sized operations, compared with
small organizations, were twice as likely to indicate
that their reason for outsourcing was an attempt to
free up the time of their HR staff to focus more on
organizational strategy. When asked about the future
of outsourcing, about two-thirds of HR professionals
predicted that their level of outsourcing would
remain the same over the next five years, and nearly
one-third expected their organizations to increase
their level of HR outsourcing. Outsourcing seemed to
be favored to a greater extent in large-staff-sized
organizations: almost twice as many HR profession-
als from these organizations, compared with medium
organizations, indicated that HR outsourcing was
likely to increase in the next five years. When asked
about the benefits of outsourcing, the majority of HR
professionals indicated that outsourcing allowed HR
professionals the chance to concentrate their efforts
on core business functions, such as organizational
strategy development and execution. Correspondingly,
nearly three-quarters of HR professionals agreed
that the role of HR professionals became more
strategic with the outsourcing of certain, specifically
transactional, HR functions.
Transforming HR: Realities,
Futures and the Role of BPO
8
This study was conducted by EquaTerra in March
2005. EquaTerra polled 589 executive management
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Figure 3
Who Manages Relationship
With Outsourcing Vendor
Source: BNA. (2004). HR department benchmarks and analysis™
2004. Washington, D.C.: Author.
HR department
85%
Other
10%
Vendor management
group
2%
Procurement department
1%
Legal department
1%
Figure 4 Drivers and Risks of Outsourcing
Source: Adapted from Bajpai, N., Sachs, J., Arora, R., & Khurana, H. (2004, June). Global services sourcing: Issues of cost and quality [CGSD
Working Paper No.16]. Retrieved June 10, 2005, from www.earth.columbia.edu.
Drivers of Outsourcing
• Cost savings (reduce and control operating costs)
• Increased capacity
• Access to better technology and systems
• Increased service levels
• Improvement of inefficient internal processes
• Consolidation of business processes across
divisions/locations
• Better compliance with regulatory requirements
• Lack of internal staff/capabilities
Risks of Outsourcing
• Loss of institutional knowledge
• Lack of internal staff/capability
• Difficulty managing relationships with vendor
• Mismatch of cultures
• Security of databases with external provider
• Lack of vendor knowledge regarding industry/systems
not ready
• Sarbanes-Oxley compliance
• Financial stability of chosen vendor
• Organizational resistance/internal staff not ready
• Security of transaction in a multi-client environment
• Unpredictable costs or cost/benefit calculations that
are not justified
HR Outsourcing: Reaping Strategic Value for Your Organization
and HR decision makers, 75% of whom were manager
level or above. Most respondents were generally sat-
isfied with the current state of HR in their organiza-
tions, according to the study. HR processes fared
better than HR information technology (HRIT) applica-
tions and systems. HRIT dissatisfaction was attrib-
uted to both antiquated and underperforming
systems, as well as general dissatisfaction with
aggressive self-service automation efforts. The survey
revealed no significant difference in satisfaction lev-
els across organizational size or industry. Most organ-
izations have already moved away from the traditional
distributed HRIT model (currently used by only 16% of
respondents) toward a shared-services model (used
by 56%). While the study reflected only 3% of compa-
nies in a predominately outsourced HR environment,
25% of respondents were operating in a blended envi-
ronment encompassing distributed shared services
and outsourced HR operations. The top six efforts to
transform HR undertaken by survey respondents, in
priority order, were process improvements/business
process reengineering (61%), HR self-service (61%),
upgraded HRIT (56%), HR benchmarking (41%), reor-
ganization/downsizing (38%) and shared-services
environment (32%). The top six barriers to HR trans-
formation were lack of resources/high cost (66%),
not deemed critical (40%), inadequate support of
HRIT (39%), other more critical issues to address
(35%), lack of skills to undertake (31%) and inability
to build a compelling business case (21%).
Calling a Change in the Outsourcing Market:
The Realities for the World’s Largest Organizations
9
According to a study released by Deloitte
Consulting, the world’s largest companies should
be able to replicate the vendor’s advantages in-
house and rely on vendors going forward only under
specific circumstances. This is because “in the
real world, outsourcing frequently fails to deliver on
its promise,” according to the study. Lack of trans-
parency in relation to vendor costs due to bundling
of services and a variety of marketing techniques
has created suspicion about the potential for true
savings from outsourcing. The study finds that the
fundamental belief system held by most companies
is that cost savings are delivered mostly through
the vendors’ ability to achieve economies of scale
(70%), followed by capabilities (48%) and knowl-
edge/experience (39%). The findings also reflect
that outsourcing is still highly driven by cost sav-
ings as an expected benefit (83%), cost savings as
a key driver of outsourcing (70%) and cost savings
as the primary criterion for choosing a vendor
(43%). However, vendor complacency, coupled with
employee turnover, the unsatisfactory delivery of
vendor resources and unbalanced contracts, has
prompted some organizations to increase their
demands for vendor accountability. The study notes
that contracts permitting vendor self-reporting of
SLAs have often dictated the course of outsourcing
relationships, resulting in an unfavorable outcome
for the client. In response, clients have been forced
to include gain-sharing incentives and more strin-
gent quality and service requirements in subse-
quent contracts. Clients have also responded by
bringing operations back in-house and by exploring
alternatives, such as the transform-operate-transfer
model, where organizations employ vendors to
transform and run a function for a short-term peri-
od before returning it to the control of the client.
The message from this study for HR business lead-
ers is that outsourcing demands an intensive ongo-
ing working relationship with the vendor and cannot
be perceived by the organization as a simple hand-
off. The organization must be clear about its goals
and objectives upfront and disciplined about man-
aging all aspects of the outsourcing contract and
relationship from beginning to end.
Trends to Watch in HR BPO
According to SHRM’s HR Outsourcing Special Expertise
Panel, the following BPO trends are expected to gain
momentum within the next two to five years. As such,
these trends and their possible implications on the
future of the HR profession were further examined as
part of the research for this article.
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Figure 5
Top Factors in Considering
HR Outsourcing Vendor
Note: Percentages do not total 100% as respondents were allowed
to indicate multiple response options. Based on HR professionals
from organizations that currently outsource one or more HR functions.
Source: Adapted from SHRM 2004 Human Resource Outsourcing
Survey Report.
0% 20% 40% 60% 80% 100%
Niche in a specific area 38%
A compatible corporate culture 40%
Recommendations from
other companies
41%
Flexible contract options 53%
Guaranteed service levels 64%
Cost of vendor services 82%
A proven track record 89%
(n = 168)
8 HR Outsourcing: Reaping Strategic Value for Your Organization
1. Growth in multi-process HRO and
total HRO market is expected to continue.
• Emerging trend: The demand for the outsourcing of
increasingly complex HR functions is likely to grow.
On the supply side, the overarching challenge for
HRO vendors will be their ability to manage multi-
process, multi-client shared-service environments
as the interest in and the need for the outsourcing
of broad-based HR versus transaction-based HR
escalate.
• Implication(s): Organizations interested in outsourc-
ing multiple HR processes and/or total HR out-
sourcing are now seeking a reduction in HR
operating costs and an improvement in HR service
quality and efficiency at the same time. Critical
components for calculating HRO success will be
whether vendors follow through on promises to
introduce and/or upgrade to state-of-the-art e-HR
service delivery models and provide improved
access to management information, in conjunction
with performance metrics that demonstrate whether
proof of return on investment has, in fact, been
realized—all without any dilution in company cul-
ture, loss of data security and in compliance with
confidentiality and privacy requirements.
2. Increasing weight of non-cost
factors as decision drivers in HRO.
• Emerging trend: Short-term cost savings may not
remain the primary driver in outsourcing HR func-
tion(s). The 2004 Bureau of National Affairs survey
of HRO found that gaining access to greater expert-
ise (69%) and improving service quality (44%) were
the top two reasons to outsource; only 28% of
respondents mentioned cost savings as a main
driver for outsourcing.
10
• Implication(s): While it should be noted that the over-
whelming majority of outsourcing surveys continue
to list cost as the primary driver behind outsourcing
decisions, regardless of business function, non-cost
related factors appear to be playing an increasingly
influential role in HR-related outsourcing decisions.
This is because decisions made for short-term cost
savings reasons alone may not hold up over the
long term. Along with cost considerations, strategic
drivers may play an increasingly important role as
companies focus on core missions that align more
closely with their products and services. This may
require a shift in company vision and people man-
agement practices, including workforce develop-
ment, as a necessary cost of doing business.
3. “Commoditization” of many HR functions continues.
• Emerging trend: HR services, especially transaction-
based HRO tasks, may become increasingly “com-
moditized” and, therefore, susceptible to market-
place competition. This may, in turn, drive down the
cost of HRO for transaction-based and/or discrete
outsourcing services as new customers begin to
enter the HRO marketplace.
• Implication(s): How HR staffing will be impacted
internally as discrete services are outsourced will
vary with each organization. In certain cases, this
arrangement will benefit HR, leaving more time for
the internal HR staff to refocus their efforts on the
core competencies of the organization. In other
cases, HR department may be expected to become
more productive with a reduced staff. To ensure
that HR has an equitable voice in the introduction
of a discussion regarding HRO, HR business lead-
ers can gain credibility by initiating and leading HR
outsourcing and decision-making initiatives within
their organizations.
4. Development of new roles
for senior HR business leaders.
• Emerging trend: HR business leaders will be visible
at the executive level and play a strategic role in
initiating and facilitating HRO implementations within
their organizations.
• Implication(s): Senior HR business leaders will be
actively engaged in the negotiation, selection,
implementation and management of HRO
providers. The complexity and accountability of HR
in relation to HRO within the organization will be
heightened. However, the competencies and skill
sets required to manage HRO contracts are spe-
cialized, and not all senior HR practitioners will
possess this expertise. New skill sets and compe-
tencies for HR practice leaders that will be
required to bridge this gap include negotiation,
contract management, the ability to manage ven-
dor relationships, benchmarking, performance
measurement and project management skills.
5. As HRO adoption becomes more commonplace
within organizations, the number and type of
career opportunities for HR professionals will
change.
• Emerging trend: The number of job opportunities
within organizations for entry-level HR professionals
will begin to decline, while the demand for strategic
HR expertise will be emphasized.
• Implication(s): Fewer internal HR roles will be avail-
able in the coming years for entry-level HR profes-
sionals to gain in-house experience. As in-house HR
services shift to HRO providers, it may ultimately
become more common for entry-level HR profes-
sionals to gain their initial HR experience in an HRO
work environment, i.e., new entrants to the HR pro-
fession may have the opportunity to work for multi-
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HR Outsourcing: Reaping Strategic Value for Your Organization
ple clients from different industries at the same
time. This diversity of experience may prove benefi-
cial from a career perspective over the long term,
as HR practitioners rise through the ranks to
assume senior strategic leadership roles in organi-
zations within the HRO industry and in private and
public sector organizations.
6. Small/medium-sized HRO markets will expand.
• Emerging trend: Although total HRO is expected to
remain dominant in organizations with sales in
excess of $1 billion, small- and medium-sized
organizations are expected to significantly expand
their use of HRO services by offloading repetitive,
time-consuming tasks.
• Implication(s): Advances in technology should per-
mit highly capitalized players to provide value-added
services to large numbers of small clients by further
reducing costs and increasing efficiencies. This
trend is expected to intensify as employees become
more comfortable with interface technologies, such
as benefits portals, and accept “low-touch” (i.e.,
technology-based) HR practices. Cost savings and
increased quality can be realized through economies
of scale, expertise and scalability of resources.
However, small- and medium-sized businesses
should proceed with caution until vendors are able
to ensure that data integrity, data security and
employee privacy are protected.
7. Demographic changes increase HRO’s appeal.
• Emerging trend: Recruitment and selection are
expected to become increasingly competitive, espe-
cially for technical positions, as baby boomers
retire and the labor market tightens due to a labor
shortage complicated by low immigration rates, low
birth rates from the 1980s and 1990s and declin-
ing literacy rates in relation to science, math and
technology in the United States.
• Implication(s): There are two possible directions in
relation to recruitment: 1) more emphasis on HRO
recruitment; or 2) the search for talent remaining a
key focus for internal HR staff members in certain
organizations. The benefits of HRO recruitment are
likely to come to the forefront, as Generation X and
younger employees may not need the “personal
touch” provided by the in-house HR staff, making
HRO and the related use of “low-touch” technolo-
gies more palatable. However, more mature workers
may not be as receptive to the use of technology
for personal issues such as benefits.
8. Demand for standardized HRO performance metrics
and key performance indicators will continue.
• Emerging trend: As the demand for outsourcing dis-
closure and accountability increases, it will be criti-
cal for organizations to have standardized HRO per-
formance metrics and key performance indicators
available for benchmarking purposes.
• Implication(s): These tools will be used to monitor
vendor SLAs and demonstrate proof of return on
investment in relation to the HRO process. It will be
imperative, from a strategic perspective, that HR
business leaders be able to critically analyze the
performance and benchmarking metrics presented
by outsourcing providers to ensure that they accu-
rately account for the value of the services provided.
9. Sole-sourcing may be identified as a viable
HRO option in terms of cost, quality of service
and efficiency.
• Emerging trend: Sole-sourcing is the practice of
working with a single service provider to define,
negotiate and purchase services. In theory, sole-
sourcing relationships should be able to streamline
operations and deliver significant potential
economies of scale over multi-vendor outsourcing
initiatives in terms of the cost, service, response
time and other issues deemed critical to a success-
ful outsourcing outcome.
• Implication(s): Management of HRO projects is sim-
plified when only one vendor is involved. By the
same token, dependence on one outsourcing firm
to deliver a number of services can be risky, as per-
sonnel changes or failure to appropriately manage
the client’s resources may result in reduced client
satisfaction (both on the part of management and
employees) and/or in the event of financial instabil-
ity on the part of the HRO provider.
10. HRO failures may cause a
reassessment of HRO decisions.
• Emerging trend: Although not a common practice,
some organizations (both large and small) are
exploring the feasibility of re-establishing HR
processes internally that were once outsourced.
• Implication(s): Returning an HR function in-house
after a failed HRO experience may be difficult, espe-
cially if HR was responsible for the original out-
sourcing decision. HR leadership will need to
determine transfer-back costs and perhaps even
bear the blame for its failure, depending on how the
recommendation to outsource came about in the
first place. On the other hand, HR systems, core
competencies, corporate memory, etc., might be
deemed too costly to re-establish in a total HRO sit-
uation. As a result, smaller companies, in particu-
lar, may be forced to become outsourcing
“captives.”
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10 HR Outsourcing: Reaping Strategic Value for Your Organization
In Closing
“Currently, most HR leaders can still choose
whether they will respond to change or whether
they will lead change. HR executives still have the
opportunity to shape how they and the HR function
respond to the demands that their function is expe-
riencing. To us, the path is clear. We believe that HR
executives who stick with the status quo and main-
tain a focus on transactional work will soon become
obsolete. At the same time, we believe that HR pro-
fessionals who meet the need for strategic expert-
ise concerning human capital management and
organizational effectiveness will contribute value
that far exceeds the past contributions of the HR
function. In the process, they will make themselves
indispensable to their organizations.”
11
In today’s competitive business environment, HRO is
an accepted management practice and an opportu-
nity that should be embraced, not ignored, by the
savvy HR business leader. With the proper research
and analysis, it is a tool that can be applied strate-
gically to reap value for the organization. Outsourcing
can be used to achieve cost-effective solutions that
leverage technology and knowledge to transform the
business of human resource management. While
HRO is not the right answer in every situation, used
wisely and judiciously, it can be positioned to the
strategic advantage of the HR profession and the
stakeholders it serves.
Acknowledgement
The author would like to express her appreciation to
the members of the SHRM HR Consulting and
Outsourcing Special Expertise Panel for sharing
their insights in relation to the “Trends to Watch in
HR BPO” section of this report. Special thanks and
appreciation, in particular, go to panel member
Nancy Anheier, HR Directions, LLC, and SHRM
Business Academy instructor Marla Bradley,
Lambert-Bradley, Inc., for their advice and sugges-
tions with this report.
Footnotes
1
Newman, J., & Willmott, J. (2004). NelsonHall forecasts
21% annual growth in multi-process HR BPO market by
2008 [Press Release]. Retrieved May 20, 2005, from
www.nelson-hall.com/pressdocs/pr_22.html.
2
Koch, J. (2004). HR outsourcing in government organiza-
tions: Emerging trends, early lessons [Research Report E-
0007-04-RR]. New York: The Conference Board.
3
Whitehead, J. (2004). 2005 HRO superstars. Retrieved
June 1, 2005, from www.hrotoday.com/pdf/200412_
Superstars.pdf, p. 31.
4
Scott, J., Kies, P., Schoch, B., Wesley, J., & Bernard, S.
(2003). Human resource outsourcing gaining traction fast: A
look at factors driving growth and consolidation in this
emerging industry. Retrieved June 1, 2005, from
www.rwbaird.com.
5
Bajpai, N., Sachs, J., Arora, R., & Khurana, H. (2004,
June). Global services sourcing: Issues of cost and quality
[CGSD Working Paper No.16]. Retrieved June 10, 2005,
from www.earth.columbia.edu.
6
Ibid.
7
Esen, E. (2004). SHRM human resource outsourcing
survey report. Alexandria, VA: Society for Human Resource
Management.
8
EquaTerra. (2005). Transforming HR: Realities, futures
and the role of BPO. Retrieved June 2, 2005, from
www.equaterra.com.
9
Deloitte. (2005). Calling a change in the outsourcing
market: The realities for the world’s largest organizations.
Retrieved June 5, 2005, from www.deloitte.com.
10
BNA. (2004). HR department benchmarks and analysis™
2004. Washington, D.C.: Author.
11
Lawler, E., Ulrich, D., Fitz-enz, J., & Madden, J. (2005).
Human resources business process outsourcing:
Transforming how HR gets its work done. San Francisco:
Josey-Bass.
2005 SHRM
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Online Resources
Bradley-Lambert, Inc.: www.bradleylambert.com
EquaTerra: www.equaterra.com
Everest Group: www.everestgrp.com
HR Outsourcing Association:
www.hroassociation.org/index.asp
HRO Today: www.hrotoday.com
NelsonHall: www.nelson-hall.com
Outsourcing Center:
www.outsourcing-research.com
Outsourcing Institute: www.outsourcing.com
Shared Services & BPO Association:
www.sharedxpertise.org
Society for Human Resource Management:
www.shrm.org
ABOUT THE AUTHOR
Leslie A. Weatherly, SPHR, is an HR Content Expert for the Society for Human Resource
Management. Her responsibilities include identifying topics and focus areas in need of
additional human resource management research and creating HR products of strategic
and practical value for target audiences. She is certified as a Senior Professional in
Human Resource Management by the Human Resource Certification Institute. Ms.
Weatherly can be reached by e-mail at [email protected].
ABOUT SHRM RESEARCH
SHRM Research produces high quality, leading edge research and provides expertise on
human resource and business issues for the purpose of advancing the HR profession.
SHRM’s cutting edge research is used by human resource professionals to develop their
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business leaders.
ABOUT SHRM
The Society for Human Resource Management is the world’s largest association devoted
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the Society’s mission is to serve the needs of HR professionals by providing the most
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mission is also to advance the human resource profession to ensure that HR is recog-
nized as an essential partner in developing and executing organizational strategy.
Founded in 1948, SHRM currently has more than 550 affiliated chapters and members in
more than 100 countries. Visit SHRM Online at www.shrm.org.
This report is published by the Society for Human Resource Management. The interpreta-
tions, conclusions and recommendations in this report are those of the author and do not
necessarily represent those of SHRM. All content is for informational purposes only and is
not to be construed as a guaranteed outcome. The Society for Human Resource Manage-
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