Sector Report Outsourcing-BPO Bandwagon

November 10, 2005
Whirlpool makes a front-loading washer that cleans 16 pairs of jeans at once. It offers a refrigerated oven that keeps food cold until it’s time to be cooked. But the home appliance maker’s personnel department is far from high-tech.

    Many tasks are still done manually. Aging computer systems can’t crunch basic numbers on a global scale. To get a corporation-wide headcount, for example, the HR staff at company headquarters in Benton Harbor, Michigan, must phone their counterparts in divisions around the world.

    Executives knew things had to change. This year they mapped out a mission to modernize, creating a "to be" list of what they wanted HR services to look like. Then they hired an outsourcer to make it happen.

    Per a 10-year contract signed in July, outsourcer Convergys will take over payroll, benefits and pension administration as well as aspects of recruiting and performance management for Whirlpool’s 68,000 employees worldwide and 14,000 U.S. retirees and their spouses. The deal’s financial terms weren’t disclosed.

    Whirlpool’s story has become common as more companies opt to outsource back-office personnel processes to improve service levels and refocus on more strategic endeavors. By shifting the responsibility of upgrading and maintaining technology to an outsourcer, companies also cut capital expenditures and financial risk, executives and analysts say.

    For all those reasons, industry experts believe HR business process outsourcing will continue to pick up through the remainder of the decade. While companies that are outsourcing multiple HR processes remain in the minority, their numbers are increasing. The U.S. HR BPO market is expected to grow 16 percent annually through 2009, to $16.5 billion, according to a March report by industry researcher IDC.

"Rather than going out and putting together an entire department, they’re looking to outsource to lower costs and keep the overhead down or change over from something that was less cost-effective."
--Lisa Rowan, HR industry
analyst with IDC

    If all goes as planned at Whirlpool, an executive for the $13 billion company says, the partnership will create a more efficient, cost-effective global HR delivery system--on a state-of-the-art SAP technology platform--that benefits Whirlpool’s employees and shareholders.

    "We’re going to significantly change the way we do our work," says Abbe Luersman, Whirlpool’s VP of total rewards and HR solutions.

    Besides Whirlpool, Fortune 1,000 companies that have signed HR BPO deals in the past nine months include BASF, NiSource Inc., Pepsico and Wachovia Corp. Mega-deals involving companies with 25,000 or more employees are on track to jump 30 percent this year, according to Everest Research Institute, an HR industry consulting firm in Dallas.

    Major corporations were first to embrace outsourcing, but as time goes on, small and midsize companies with 10,000 or fewer employees are joining the ranks. Outsourcing is attractive to midmarket companies looking for any advantage they can muster over larger competitors, says Mike Hogan, divisional VP of comprehensive outsourcing services at ADP, a small-business payroll provider that has jumped into the HR BPO business.

    "They’re competing on a global scale but don’t have the (same) large capital budgets, so they’re looking for ways to manage their human capital as efficiently as possible," he says.

    Companies want outsourcers to help them manage HR processes on the latest technology, and on a global basis. Both were important considerations at Whirlpool, which hadn’t made significant investments in HR information systems in 10 years, Luersman says. To upgrade computer systems now would have cost $10 million or more, an expense the company is avoiding by partnering with Convergys, she says.

    As part of the upgrade, Convergys will build Web-based self-service "dashboards" that managers can use for global headcounts and employee performance tracking, among other tasks. Whirlpool started transferring work to Convergys on October 31, with an expected completion date of December 2007.

    Whirlpool’s pending takeover offer for Maytag could be another reason the company is outsourcing, says Lisa Rowan, an HR industry analyst with IDC. Whirlpool officials won’t comment on the offer, but Rowan says outsourcing HR is ideal in mergers, startups and spinoffs, when companies need to rapidly assimilate or create HR departments.

    "Rather than going out and putting together an entire department, they’re looking to outsource to lower costs and keep the overhead down or change over from something that was less cost-effective," Rowan says.

    As more companies use outsourcers, standards will become an issue. Historically, hiring people, processing paychecks and enrolling employees in health insurance plans differed from one company to the next. But when those jobs are farmed out to vendors building common platforms for multiple customers, HR managers may have to abide by standards the outsourcers set, says Michel Janssen, managing research director at Everest Research Institute.

    "As (outsourcing) moves to smaller organizations and the main market and pricing pressures come into play, this will become more and more critical," he says.

    The experience of early adopters has shown that shifting HR processes to an outsourcer doesn’t always go as quickly or as smoothly as anticipated. Prep work often uncovers faulty systems and policies that exist only in staffers’ heads. Deadlines get missed. Contracts are revised. The more planning a company does on which processes will be implemented and how outsourcer relationships will be governed, the better off they’ll be, says Katherine Jones, enterprise application research director for the Aberdeen Group, an industry analyst.

    "This is a change-management exercise, and if you don’t treat it that way, it doesn’t have a chance," she says.

    Jones acknowledges that there’s resistance to outsourcing inside some HR departments, where top managers can feel threatened by the loss of responsibility that they perceive will happen if certain functions are removed from their direct control.

    "It’s a new job description for the folks left behind," Jones says. "They have to be contract managers, vendor managers. They have to make sure the program works and (address problems) when it doesn’t. Those might be skills they don’t know if they have or not. It’s scary stuff."

    Though scary to some, outsourcing is happening at more companies of all sizes. IDC analyst Rowan says that as the practice catches on, companies are beginning to outsource not only record-keeping tasks, but processes such as hiring and e-learning that will ultimately improve their workforces.

    Says Rowan: "We’re getting to the Holy Grail of transformation."

Workforce Management, November 7, 2005, pp. 33-34 -- Subscribe Now!