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Human Resources

The Grass Isn't Always Greener

Pros and Cons of administrative outsourcing.
University Business, Mar 2006

The most frequent out-sourced human resource functions at any college or university are usually payroll, employee assistance programs (EAP), and benefits administration. IHEs are certainly doing it, but at the end of the day, does outsourcing really save money?

It all depends upon whom you ask. Some HR administrators swear by it, pointing to not only cost and time savings but also enhanced employee services. Then there are those who would never outsource a thing, firmly believing it would detract from their school's tight-knit culture and ability to meet employee needs while instilling fear in HR employees about losing control, losing touch, or even losing their jobs.

Anyway you look at it, this isn't a black or white issue. And forget the one-size-fits-all theory. What works well for one small college may be disastrous for a large university. Leaders must decide whether outsourcing makes sense based on a variety of factors ranging from cost and the school's culture to strategic goals and objectives.

Consider the University of Arizona. Its HR department supports a staff of 54 and won't outsource any function--either now or in the near future. "It's more of a quality issue," explains Allison Vaillancourt, associate vice president of HR. "Folks who work at the University of Arizona want to know whom they're dealing with and like being able to call on campus rather than some anonymous person off campus."

Still, HR has some hard data to back up its decision. Administrators explored outsourcing specific functions. After crunching the numbers, they quickly realized that outsourcing wasn't always the cost-savings panacea that many people claim it to be. Vaillancourt says the cost to outsource professional development, for example, would have been exorbitant--at least three times more money than in-house delivery. Besides, she adds, it would be difficult for outsiders to understand the university's culture and help HR craft a consistent message.

But making such decisions can't be based on cost alone. Rollins College (Fla.) outsources a series of functions: criminal background checks and administration of COBRA, flexible spending accounts, and its defined contribution plan. Likewise, its EAP has been outsourced for roughly 15 years, says Maria Martinez, assistant vice president of HR and risk management.

"First of all, we wanted the program," says Martinez, whose HR department supports eight staff. "We always felt that EAP was not something we wanted to do internally. We did not have the expertise in-house and to purchase that expertise would have been very expensive. Our No. 1 priority is what is best for our employees. This was certainly the best route to go for us."

Up until several years ago, the college administered COBRA and flexible spending accounts. But it joined a health-care association for private colleges that offered administration of such programs. Martinez says the trade-off for outsourcing these services is that its small HR staff can now organize health fairs and other important employee programs that they never had time for in the past.

In this scenario, no one was laid off and outsourcing didn't detract from HR's main focus. Instead, it helped the department offer more value-added services for employees. Maybe that's the answer to this whole outsourcing debate. Perform your core functions well, devote time to programs that matter most, and outsource the rest.

Overall, HR actually performs four types of functions, according to Glenn Davidson, president at EquaTerra Public Sector, a Washington, D.C.-based firm that helps organizations improve efficiency of back-office functions.

First on the list are transactional activities, including tasks related to payroll, time and attendance, travel and entertainment, relocation, benefits administration, and HR information systems. The next category is consulting activities, with HR turning to consultants for a variety of projects, such as designing a compensation or succession plan. The third is strategic planning, which needs to stay in-house and usually involves workforce planning, labor relations, and talent management. The last are tasks related to a specific location or those handled by a single department, like centralized drug testing.

Davidson says the first category is really ideal for outsourcing, mainly because significant efficiencies and effectiveness gains can be realized. More often than not, organizations save money by outsourcing such processes. In many cases, employee satisfaction rates have risen since external vendors can deliver these types of services faster and more accurately than resource-strapped HR departments.

But there are other alternatives. "You might also find that some organizations with multiple campuses create a shared services organization as opposed to outsourcing," says Davidson, explaining that centralizing common functions under HR's wing might be very effective. "You could have a call center instead of people walking down the hall, knocking on the door of their HR rep and asking how much vacation time they have."

Although outsourcing typically saves more money than shared services, the latter approach can serve as an interim step to outsourcing, Davidson adds. It allows HR to get a close-up view of how a specific service might be delivered by a single vendor as well as the pitfalls and unique opportunities outsourcing can create for HR.

But outsourcing decisions should never be based on emotion. Fear of downsizing staff can taint anyone's perspective, explains Andy Brantley, chief executive officer at the College and University Professional Association for HR in Knoxville, Tenn., which has 7,300 members nationwide.

"One thing that's always a fear when you're looking at outsourcing is the possibility of the loss of jobs," Brantley explains. "You should be looking at outsourcing more routine tasks so that you can reassign those positions to more value-added tasks for the college or university. Instead of having staff dedicated to processing routine paperwork, look at the opportunity to outsource those things to people who have true competencies in those areas, so that you can refocus those staff within HR on key things."

Organizations with
multiple campuses might
create a shared services
organization as opposed
to outsourcing.
-Glenn Davidson,
EquaTerra Public Sector

So whether it's organizing health fairs, developing a succession planning program, or revamping the recruitment process, HR can dedicate its staff to activities that carry out the school's mission or strategic goals.

Start the outsource decision-making process by examining core services, especially those linked to your school's strategic plan and that are mandated or required by your governing board. Ask yourself why routine processes, such as maintaining employee records, aren't outsourced. Hopefully, the answer moves beyond "to protect jobs."

It sounds harsh, but if someone else can perform a task better, cheaper, faster--why wouldn't you outsource? This may be time to discard conservative thinking--something that higher ed has earned a reputation for--to better help your school gain that competitive edge or deliver services that those in-house aren't qualified to perform.

A good example is organizational development. Brantley says most HR departments lack the staff or resources to provide guidance in this area--which focuses on an organization's performance, development, and effectiveness--to other departments.

Another is benefits. When Brantley served as chief HR officer at the University of Georgia several years ago, he says HR had maxed out the number of benefits it could administer to employees. Through an RFP process, a vendor was found to administer a variety of services, everything from pet insurance to discounts on cell phones.

When outsourcing is justified, be sure to simplify or standardize processes before handing any program over to a vendor, says Stephen Joyce, HR practice leader at The Hackett Group, a global business process advisory firm. Here's why: If processes are overly complex or detailed, the vendor will perform more work than may be necessary. Big mistake. You'll end up paying somebody else to fix processes that don't work. All that extra effort will drive up costs.

Consider what vendors do to streamline processes. Many use self-service technologies where employees can log online for address changes, insurance program enrollments, and other simple tasks. It drives down labor costs so vendors can make a profit over the life of an outsourcing arrangement, explains Joyce. It can be done across multiple transactional areas, ranging from payroll and attendance to employee communication and benefits administration.

However, many world-class organizations can slash costs by outsourcing low value-added, highly repetitive transactional functions, according to a 2005 report by The Hackett Group. Nearly half of their overall costs in these areas are dedicated to outsourcing--in fact, 26 percent more than typical companies. Yet, they spend 25 percent less than their peers on HR, rely on 16 percent fewer staff, and spend 19 percent less per employee on transaction processing costs. They can also assign staff to higher-value areas, enabling HR to contribute greater strategic value to their organization.

So, will outsourcing work for your school? The only way to know is to take a good look at your overall service delivery model. Examine your programs, staff, technology, strategic goals, and any vendors under consideration. While outsourcing should never be seen as a silver bullet, it could be a solid solution for a shrinking budget. And it could help HR strengthen its strategic value and give its administrators a seat at the leadership table.

Carol Patton is a Las Vegas-based freelance writer who specializes in covering human resources issues.