If the shoe fits …: before outsourcing your HRMS, make sure the provider's systems are a good match for your long-term business needs

HR Magazine, Oct, 2004 by Bill Roberts

Outsourcing an HR management system (HRMS) platform--paying someone else to run, maintain and upgrade the software at your site or theirs--can save money and improve service. But the HR executive who is choosing an outsourcing partner should determine whether the provider is committed to investing in technology and people over the long haul, and whether the provider's systems have the capabilities needed to meet the customer's specific technology and business requirements.

The long-term benefits can be substantial, but HR executives who think outsourcing is easier than selecting and implementing their own HRMSs are in for a rude awakening.

"This can be more bewildering than choosing an HRMS," says James Holincheck, an analyst at Gartner Inc., an information technology (IT) research and consulting firm in Stamford, Conn. For example, the relationship between customer and outsourcer needs to be tighter than the relationship between customer and HRMS vendor, he says. "Choosing an outsource partner is a hard and complex decision because there are more dimensions than choosing HRMS software."

Further complicating this decision is the fact that HRMS outsourcing is still in its infancy, relative to other forms of outsourcing. In a survey of 122 large companies last year, The Conference Board, a New York-based business research and consulting firm, and Accenture HR Services, based in Chicago, found 8 percent had fully outsourced their HRMSs, 18 percent had done so partially, and 14 percent had plans to do so. By comparison, 76 percent had fully or partially outsourced their 401(k) programs, and 8 percent planned to do so, according to the Conference Board/Accenture survey report, HR Outsourcing: Benefits, Challenges and Trends.

The main reason companies outsource their HRMSs is to reduce costs. "Many companies are looking ... to reap the benefits of new technology without capital investment," the Conference Board/Accenture study concludes. About 80 percent of the survey respondents listed cost savings as their driving motivation.

However, many larger companies, while also interested in managing HR costs, are fueling the growth in HR outsourcing with their efforts to move beyond transactional HR. That requires a solid partnership between the employer and the provider. (For more information, see the Special Report on HR Outsourcing in the July 2004 issue of HR Magazine.)

But when it comes to finding that kind of partnership, large companies face both a challenge and an opportunity--one that smaller firms may not be able to afford: considering the pros and cons of what Lowell Williams, vice president and HR practice leader at Houston-based outsourcing consultant EquaTerra Corp., calls full-spectrum or full-service HR outsourcers. These outsourcers can provide all HR systems needs either through their own platform or through their own platform or through third parties, unlike companies that limit their services to specific functions, such as recruiting or benefits.

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There are at least 17 such firms, with more potentially on the way, says Williams. "There are new providers every year," he says. "Some Indian companies are on the brink and could enter the market by the end of the year."

All these factors make HRMS outsourcing an intensive task for larger businesses. Companies with large workforces, numerous locations and multiple complex legacy systems to integrate should not underestimate the amount of work it will take to outsource their HR platform. Even after selecting the right provider, employers must implement the solution and manage the new relationship. "Many of my clients don't understand how hard some of this stuff is," Williams says. (For more information, see "Managing the Partnership" on page 70.)

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Look for Long-Term Capabilities

Atop Williams' list of things an HR executive should consider is whether an outsource provider has a long-term demonstrated capacity in full-spectrum HR outsourcing. The market is so new that most don't.

"Not one of the larger providers has sorted out the model yet with a repeatable, sustainable and profitable delivery system," says Naomi Bloom, managing partner of Bloom & Wallace, a strategic HR consulting firm in Fort Myers, Fla. Without profits, providers won't stay in business.

Even Exult Inc. of Irvine, Calif., one of the most established names in HR outsourcing, has only 16 HRMS clients, and, when it merges with Hewitt Associates of Lincolnshire, Ill., the combined company will have just 21, according to Jim Koniecnzy, who runs Hewitt's outsourced-benefits service, which has 300 clients and is much more mature than its HRMS offering. Exult signed up its first large client, BP p.l.c., the London-based global petroleum giant, in 1990.

Since most providers lack demonstrated long-term capacity, consultants urge HR executives to kick the tires hard, ask current clients about the provider's capabilities, and grill the provider on its vision and its plan for accomplishing it.