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Not in for Outsourcing Bucking the HRO Trend

March 7, 2007
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It’s unusual for a company to send one of its managers to a conference about HR outsourcing when it has no plans to outsource.

    But that’s what Schneider Electric North America’s Peggy Gann did in September when she sent compensation manager Shalin Kothari to the Conference Board’s 2006 Human Resources Outsourcing Conference.

    The conference focused largely on the various advantages employers can realize by outsourcing HR. But Kothari and the rest of the HR staff at Schneider say that by outsourcing all of its HR processes to a single vendor, the company would lose a lot of control and flexibility.

    "We have been able to be efficient and keep costs down by automating some processes and keeping a lot in-house," he says.

    So why was Kothari at an HRO conference? "To stay on top of best practices," he says.

    At a time when a growing number of large employers are entering into multiyear HRO deals, Schneider Electric North America, a Palatine, Illinois-based electrical company with 22,000 employees, is taking a contrarian stance.

    Schneider’s approach might not be an option for many employers, given the cost and expertise required, but it shows the importance for companies to assess their own organizations thoroughly before signing an HRO deal, analysts say.

    Too often employers jump into HRO deals without figuring out their needs first, says Michel Janssen, research director at the Hackett Group. "Often companies are saying, ‘I don’t want to spend $20 million on a new technology platform, so I’m going to jump into HRO,’ " he says.

    In the end, outsourcing might be the right decision, but it’s important for companies to weigh all of their options before entering into these deals, Janssen says.

    Rather than tap a provider to take over all of its HR processes, Schneider spent four years and $10.7 million building a shared-services model that would allow it to automate some things, like offering self-service benefits enrollment, while keeping all of its data in-house. Creating a shared-services model is different for each company, but at Schneider it meant keeping key elements in-house while working with third parties to automate administrative processes.

    The investment has paid off so far. Overall HR costs have dropped 11 percent, not including cost savings that the firm has realized as a result of the move. And most important, Schneider’s workforce data is available in real time, Kothari says.

    "A lot of people talk about outsourcing their transactional capabilities so that they can be more strategic," Kothari says, "but often those transactional processes can help companies identify trends and issues."

    And by not entering into an HRO deal, Schneider doesn’t have to operate at the mercy of a single vendor, Kothari says.

    "There is a lot of vulnerability there," he says.

Looking within
    Six years ago, when Gann became senior vice president of human resources at Schneider, she was familiar with the mounting hype around HR outsourcing. And Gann knew the issues that caused many companies to outsource HR processes.

    Schneider did everything manually, from payroll to benefits administration. Not surprisingly, much of the company’s 170-person HR staff was bogged down in paperwork. Managers said they were spending 80 percent of their time on administrative duties and only 20 percent on strategic activities.

    "Our goal was to flip those numbers," says Elaine Brettmann, vice president of total compensation.

    At the same time, companies like General Electric and Motorola were announcing that they were outsourcing HR processes. But instead of embracing the idea, Gann bristled at it.

    "I just hate the term ‘HR outsourcing.’ It’s very misleading," she says. "These companies aren’t outsourcing the conversation between the managers and HR professionals about recruitment, for example. They are just outsourcing some administrative functions."

    But Gann’s dislike of the terminology wasn’t the reason Schneider has avoided signing an HRO deal, she says. It does, however, speak to the value the company places on the strategic importance that HR managers can have in a business.

    "We realized we had a strong HR information systems team and a wonderful platform of data that was available to us," she says. So instead of following the pack, Schneider decided to see if the company could put together its own automated platform while keeping all of its data in-house.

    Gann and her staff spent several months surveying employees to get a better understanding of what needed to be improved. For example, if recruiting was slow in certain divisions, Gann interviewed employees and HR managers to figure out what the problem was.

    As part of this process, Gann and her team began identifying which areas of HR could be automated and standardized.

    "By controlling the whole process, we could easily determine where the pinch points were and redesign the process," she says. "When third parties do this kind of work, they don’t have a clue and they don’t know who to ask to get to the bottom of things."

"One to many" approach
    After benchmarking its processes against other companies from within and outside the industry and interviewing vendors, Gann agreed that the company would be better off relying on a number of small providers to automate various services, rather than signing on with one single vendor to do everything, she says.

    "By choosing one vendor, we felt that we would be hostage to that one provider," Gann says. And since the turnover at many providers is often high, Gann anticipated it would cause additional headaches.

    In all, the company selected more than 20 vendors to provide services like employee self-service tools, 401(k) administration and affirmative-action record keeping.

    Many HRO providers argue that it’s too difficult for employers to manage numerous relationships. But Schneider has not found it to be an issue, Gann says.

    "If we had one person managing each relationship, it might be an issue, but Shalin and Elaine are in charge of all of them," Gann says.

    Also, since each of the vendor relationships is multi-year, it’s not as if Schneider has to renegotiate its contracts every 12 months, Ko¬thari says.

    "If you are working with only one vendor and you are unhappy with the service, you have a big problem," he says. "This way we can negotiate each deal."

    In return for more legwork at times, Schneider has more control and flexibility. That’s amplified by the fact that the company keeps things like its call center and data warehouse internally—which it wouldn’t be able to do under a traditional HRO model.

    Having an internal call center operating out of its headquarters keeps simple procedures simple, Brettmann says. Last January, Schneider launched a program to reimburse employees for their annual membership with a health club.

    Educating call center reps could have been a huge production if they were offshore in another time zone, Brett¬mann says. By having them in-house, the company was able to design the program, educate its 13 call center reps on it, communicate it to employees and launch the program within 60 days of deciding to offer it.

    The advantages of keeping its own data warehouse became even more evident when Schneider’s parent company, which is based in France, decided to implement enterprise resource planning from a global perspective for the first time.

    "We were being asked to report very specific employment demographic data," Gann says. "If we hadn’t had that formatted [in a standard way] and all in-house, it could have taken forever." But Kothari was able to pull up data within minutes.

    Even on a day-to-day basis, having the data in-house is invaluable, she says.

    "I can drive my team crazy asking for various HR scorecards on an ad hoc basis," she says. "But having ownership of all of the data allows us to do very in-depth analysis, down to functional departmental levels, that we could not get from a third-party vendor without doing a lot of programming work."

Looking ahead
    One of the ironies that Gann and her team see is that despite the decision not to outsource HR, they have found themselves dealing with the same challenge that HRO buyers face: getting their HR managers to be more strategic.

    "We need to invest time developing our HR people around the business fundamentals," she says. Like many other employers, Schneider has learned that just because it has taken the administrative work away from its HR managers to give them time to be more business-oriented, it doesn’t mean that they know how to do that.

    To address this, Schneider’s executives are developing courses for HR managers focused on business fundamentals. Also, Gann is changing the competencies on which they’re evaluated to help them be more strategically oriented, she says.

    "We want our HR managers to be able to talk return on investment," Brettmann says.

    Despite Schneider’s success with its shared-services model, Gann and her team stay on top of trends in HR outsourcing. They have to. Schneider’s top executives check in regularly to make sure that costs are in line and that the company couldn’t be doing things more efficiently, she says.

    "We continually revisit the model," Gann says.

    Every few years, she and her team will examine their approach to see if it can be improved. But the key to doing this well is maintaining focus on the long term, she says.

    "It’s more than what’s in the next profit and loss statement," she says. "Too often companies get trapped in the short-term gain, but you have to look at three years from now."

    The pressure on Gann and her team to continue to show results has not eased, but so far they have shown results that have persuaded senior management to stay the course. In fact, the company’s parent, Schneider Electric, has moved toward a shared-services model based on the North American division’s success, Brettmann says.

    "They consider our shared-services center a best practice for the company," Kothari says.

    Gann, of course, isn’t the only HR executive under pressure to move to an HRO deal.

    "The decision to outsource is usually a board-level or CEO-level decision," says Jason Corsello, an analyst at Yankee Group in Boston.

    Despite the success of companies like Schneider with the shared-services model, analysts anticipate that the trend toward HRO deals will continue in the long term.

    "Part of the reason that companies outsource is because they realize that someone can do it better than they can," says Stan Lepeak, managing director of research at Equa¬Terra, a Houston-based sourcing advisor. "Doing shared services takes a lot of work, and not all companies are going to be able to do that."

    Gann’s advice to organizations deciding whether to sign an HRO deal is to remember that a one-size-fits-all approach is not the only way to go.

    "Each company has to create a strategy around how they want things done," she says. "It doesn’t have to be all or nothing."

Workforce Management, February 12, 2007, p. 1, 18-21 -- Subscribe Now!

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