Public Sector Revisits Outsourcing Hot Button
By Terrence McCrossan
Is your human resources (HR) department being challenged to create new efficiencies in 2007? Both public- and private-sector organizations alike are working to replace outdated systems, overcome staffing shortages, and solve recruitment and compliance challenges. But the traditional methods to improve these operations, such as IT upgrades and new (or reorganized) staff, may not be enough to take HR to the next level.
To supplement these conventional methods, private-sector organizations have long embraced outsourcing as a means of accelerating progress, leveraging this model to gain access to new technology, processes, and best practices without increasing the demands on their budgets and workforce. ADP, a provider of business services solutions, estimates that more than 50 percent of private-sector companies with 1,000 or more employees outsource some aspect of their HR, payroll, or benefits administration functions.
Government agencies, however, have been slower to adopt outsourcing as a way to transform their HR operations. A recent International Public Management Association for Human Resources (IPMA-HR) study, conducted by EquaTerra, on public-sector outsourcing showed that fewer than 20 percent of public-sector organizations currently leverage outsourcing as part of their HR service delivery, despite the fact that the research reported a 94 percent satisfaction rate amongst public-sector organizations that had taken advantage of outsourcing options.
The IPMA-HR study gathered feedback from more than 100 senior-level HR officials from federal, state, county, and local agencies to understand how they leverage alternate service delivery models for HR services. One of the primary conclusions was that outsourcing is an under-utilized but highly effective tool for HR improvement and transformation within the public sector.
Changing Perceptions of Outsourcing
While adoption to date has been gradual, public-sector organizations are becoming more receptive to the value and benefits that outsourcing delivers. This trend is reflected in the study finding that 53 percent of public-sector organizations plan to outsource additional functions in the future. EquaTerra, a sourcing advisor, attributes some of this momentum to the high satisfaction rates reported by the early adopters. It’s also likely due to a growing understanding of outsourcing as a business model.
In simple form, the outsourcing model leverages a third party expert to perform particular processes, usually administrative in nature, on behalf of an organization. Often, these processes are farmed out because they require labor resources, technology, or expertise that is not available (nor affordable) within the contracting organization. Some examples of commonly outsourced services include payroll processing, benefits administration, and retirement plan management.
For public-sector organizations that are struggling with a limited workforce, outdated technology, or a need for enhanced employee services, outsourcing has proven successful in supplementing internal efforts to meet planning and budget objectives.
Outsourcing as a Transformation Agent
As the importance of effective HR management grows in the public sector, HR leaders are requiring an enabler for moving their organizations forward. Alternative service delivery methods are often leveraged as a change agent, delivering efficient, cost-effective access to the processes and expertise needed to serve and retain a workforce.
In fact, EquaTerra found that 67 percent of the organizations that outsourced did so because they felt it was the best overall option for transforming their HR services.
Interestingly, while cost savings was a predictable motivation for the outsourcing option, it was not the only factor noted by study respondents. The research showed it may not have been as important as the model’s ability to meeting the overall needs of the organization. This speaks to the expertise that third party firms can deliver, and supports the high satisfaction scores previously noted.
In addition to the direct benefits that outsourcing delivers, its power as a transformation agent also lies in the indirect benefits it delivers to an organization. Stan Lepeak, director of research at EquaTerra and co-author of the study, comments, “These models would likely allow HR leadership staff to move away from transactional activities to deal with long-term planning, performance monitoring, innovation, and improvement.” This is critical to HR’s ability to become a strategic asset to the organization.
While it’s clear that public-sector organizations that utilize outsourcing alternatives are highly satisfied with their experience, like any business initiative, success requires effort. Outsourcing relationships represent a partnership that hinges on the commitment of both parties.
Fortunately, the experiences of the early adopters reveal some great tips for being successful. These lessons can serve as a basic guide for any public sector organization considering or pursuing outsourcing as an HR transformation model.
1. Understand the Options
Other HR departments have faced similar challenges and opportunities. When considering the best path forward, communicate goals and requirements to potential outsourcing partners. Ask them to develop a list of solution options which address specific needs and draw from their experiences with other organizations. This exchange of ideas will provide a better understanding of alternatives.
2. Obtain Management Support
Transformation and progress often requires cultural shifts. While more than 50 percent of study respondents said the move to outsourcing was painless, there will still be expectations to manage, new processes to implement, and budgets to balance. As the key influencer of the organization, management can ensure that proper priorities are set and that adoption moves at the correct pace for the organization.
When asked to rate the influence of management on outsourcing decisions, on a scale of one to five, with five being the highest, respondents gave management input a mean score of 4.0. This is a good indicator of management’s importance to the success of the effort.
3. Set Goals
As with any business effort, HR transformation requires goals. For an HR department, the goals might be to improve payroll accuracy and management reporting, introduce new services such as flexible spending accounts and employee self service, or simply to control budget costs.
For each goal, organizations should assign quantitative metrics that can be measured and assessed for progress. Goal setting is crucial for progress measures and accountability during the transformation process.
4. Measure Results
Lastly, it is essential to regularly assess progress toward–and achievement of–goals. This includes measuring internal performance against goals and commitments, as well as an outsourcing partner’s performance versus expectations.
Before metrics are agreed upon, give consideration to how data will be captured, tracked, and analyzed. The natural tendency is to over measure. So, if data is harder to capture than you anticipated, consider focusing on the crucial measurements that are most telling of the progress being made.
Consider the Possibilities
Where traditional methods of HR transformation are too costly or labor intensive to implement, outsourcing options may be ideal for delivering the flexibility, expertise, and technologies that public-sector HR departments require to become more strategic and effective.
By considering the comparative benefits and satisfaction levels, and following the lessons learned by counterparts, public-sector HR departments may find the tools they need to realize new efficiencies and expanded services in 2007.
Stan Lepeak sums it up neatly when he says, “The potential performance and cost improvements these alternative delivery models can bring–and have brought other public-sector organizations—have become too great to ignore.”
About the Author:
Terrence McCrossan is Vice President of Vertical Markets for ADP National Account Services (NAS), part of the Employer Services division. NAS serves employers with more than 1,000 employees. In his role at ADP, Terrence guides ADP’s solutions for the public sector. For information on ADP, visit www.govinfo.bz/6774-211.
State and Local Outsourcing to Increase, Report Says
The state and local outsourcing market will grow from nearly $12 billion in 2006 to approximately $20 billion in 2011, according to a report released by INPUT, a provider of government business research and information. After suffering a period of political turbulence brought on by a backlash to off-shoring and high-profile welfare outsourcing controversies, the state and local outsourcing market will regain its footing and is poised for dramatic growth over the forecasted period.
INPUT projects that the state and local outsourcing market will continue to experience steady growth through 2007. But starting in 2008, vendors will see a marked increase as several forces converge to drive growth.
Growing economic pressures as state budgets are squeezed by programs such as Medicaid, combined with new innovative approaches to outsourcing deals by the states that call for substantial capital investments and job creation in the community by vendors, will motivate leaders to explore more outsourcing initiatives in the coming years.
“Outsourcing remains a political hot button at the state and local level,” said Michelle Miller, senior analyst at INPUT. “In recent years savvy leaders have found ways to sell outsourcing plans to state legislators by focusing on an approach that strikes a balance between cost savings and keeping jobs and government revenues in state. As a result, we have seen notable outsourcing awards in Virginia and San Diego over the past 15 months. Right now everyone is in a “wait-and-see” mode, but once one of these projects is deemed a success, I believe we will see the market take off.”
According to the report, increased demand in the areas of data center management, application management, desktop services, and hosting will propel this growth.
Business Process Outsourcing (BPO) will not play as large a role as previously projected in this market. The vast majority of elected officials remain uncomfortable with the political risks of relinquishing control of government business processes to a contractor.
For more information on INPUT, visit www.govinfo.bz/6774-210.