Author: Jennifer Koch

Each year, UPS interns are selected for the Community Internship Program by following these steps.

1. Each operations-management department within UPS’s 12 regions keeps a list of managers’ names as potential interns. The criteria for selecting managers vary, but employees generally must have been with the organization for several years, be in mid- to upper management and be respected leaders within their own work groups. Managers may submit their own names for consideration; but volunteering doesn’t necessarily guarantee that a certain manager will be chosen. Because UPS is highly decentralized, the selection criteria are specifically vague so that senior managers have the latitude to select individuals whom they think are the best candidates for the program.
2. Each regional operations-management department submits a list of three to four names of potential interns to the corporate-training department in Atlanta. This department is responsible for running the internship program.
3. The corporate-training manager, along with the internship coordinator, chooses six to eight managers who will participate in each internship session. There are seven internship sessions each year at four different sites across the U.S. A total of 43 managers participate each year. The training department is careful to select managers with varied backgrounds and from varied locations so that the intern mix represents a cross section of UPS management.

Deciding to outsource is a decision that will have long-lasting impact both on your human resources department and on your entire organization. Outsourcing is defined as contracting for outside services that are a necessary part of doing business, but are not core functions. Although the decision to outsource one or more functions to an outside vendor can be a decision that you’re tempted to make rapidly because of an urgent need or because you’ve got too many other areas to juggle already, it’s important to take the time to outsource for the right reasons, armed with the right facts to guide you.

The following factors can be critical to making and implementing a successful outsourcing decision:

• Make sure that your goals for outsourcing are clear from the outset
• Look at outsourcing over the short-and long-term
• Consider who will control the outsourcing decision and why
• Consider how well your company’s culture will support an outsourcing decision
• Decide whether it’s better for your operation to be centralized or decentralized before outsourcing.

Before you make an outsourcing decision, however, you need to ask whether the areas that you want to outsource, such as COBRA administration or relocation, are mission-critical to your organization. These days, many organizations’ management teams are re-engineering process functions and are asking themselves if certain areas are essential to their core business. If not, they often outsource them so that they can focus on what they have to do, and let other companies assist by providing the services that they’re good at.

In a February 1992 article in Management Accounting, management guru Tom Peters asks, “Could [a function’s] output be successfully sold on the open market? If not, subcontract [the] work to firms that specialize in each function, which will almost certainly do it better and more cheaply.”

Sometimes a company can simply pay for an outsource vendor to help re-engineer a process. Other times, however, that isn’t enough. If a company can’t maintain the improvements or devote the management time to a certain area, it may want to consider outsourcing temporarily or permanently to a strategic partner rather than continuing to perform the function internally.

Make sure that your goals for outsourcing are clear.
Whether you want to reduce the response time for employees’ benefits questions or you want to rely on the expertise of a 401(k) vendor to provide retirement services, it’s important to explicitly lay out your goals before making an outsourcing decision.

If you don’t, you could be disappointed with the results even as early as a few months down the line, warn the experts. “Some people say, ‘I want to outsource because I think I can save some costs.’ That’s the wrong reason to do it,” warns Richard Dole, vice chairman for Coopers & Lybrand’s process-management area based in Houston. “You probably will save costs when you outsource because you’re [outsourcing] with a company that does it better and faster. But you shouldn’t do it [just] to save costs, [because then] you haven’t completely gone through the thought process.”

Dole stresses that outsourcing is just a tool, not a cure-all. “It’s one of the tools that companies use in connecting their business processes to their strategy,” he adds. “Every company has a different idea about what is critical for them to keep and what they don’t need to keep.”

There may be some companies that outsource, but aren’t sure about their reasons for doing so. “You can end up a year later and maybe have spent a little less on the outsourced project, but did you really get what you wanted?” asks David Partridge, vice president of the financial-services practice for Towers Perrin in San Francisco. “You’ve got to have that road map in place.”

To prevent problems, decide what you want from an outsourcing partnership ahead of time, and define those expectations specifically in your mind and in the contract, say outsourcing experts. Make sure that there are safeguards, such as being able to opt out of the contract for noncompliance. It’s important to define, for example, what you mean by noncompliance. Make sure that there are specifications regarding daily, weekly and monthly communications and reports. If an outsourcing company doesn’t perform to the letter and within the spirit of the outsourcing partnership as defined in the contract, don’t be afraid to terminate the relationship. It’s your company and, therefore, your terms that are important. “If it isn’t done before going in the door, it invariably creates problems,” says Partridge.

The key to good outsourcing is setting up a good working relationship from the beginning. “It’s all in how you set it up up-front,” says Patricia Deschler-Griffin, vice president of outsourcing for Adia’s outsourcing division, based in Menlo Park, California. “When you have a healthy alliance, you work through the problems and issues that occur, because obviously, [problems] can [arise].”

In spite of the best intentions and planning, you may have to end an agreement with an outsourcing vendor. Before you terminate a relationship with a vendor, however, realize that you probably will have invested months, if not years, in an ongoing relationship. Much will have changed in that time, especially if you have eliminated in-house staff, as most companies that outsource do. You probably no longer will have the internal expertise to carry on the function for very long without an outsource vendor, so you’ll need to proceed cautiously.

Other important areas for goal setting involve the issue of management time allocation. If your goal is to completely walk away from a function once you outsource it, you might want to think again. Because companies typically downsize a staff function once it’s outsourced, someone still will have to spend time overseeing the overall process, even if a manager is no longer overseeing it on a day-to-day basis.

One corporate benefits director of a Fortune 50 company discusses the two-year research-and-planning process that took place before his company’s senior management decided to outsource its retirement, savings-plan and ERISA compliance functions. “We’ve seen both successful and unsuccessful outsourcing projects where companies have turned over administration to a third party and walked away and it’s failed,” he says. “You can’t walk away. You’ve got to manage your vendor.”

Senior management also needs to be aware that outsourcing doesn’t mean that managers no longer will be needed. During the outsourcing decision-making process, the benefits director at the previously mentioned company kept senior management informed about the goals for outsourcing and what would be needed in terms of management staff. “I have made it a point to stress to senior management the importance of ongoing staff and ongoing management of the vendor,” he says. If you don’t, and it fails, there are serious consequences. “Once you outsource, you don’t take it back in-house easily. You don’t go out and reacquire that expertise you have today, overnight. You also don’t fire a third-party vendor overnight.”

Perhaps no one is more acutely aware of the problems of a failed outsourcing partnership than Kathryn Devos, manager of employee services for Madison, New Jersey-based Schering-Plough Corp. The first outsource vendor that she hired five years ago in the relocation area caused a virtual disaster.

Even though Devos had specified certain performance criteria in the contract with the relocation vendor, a few years down the line, the criteria weren’t being met. “A contract is just a contract,” says Devos. “It’s just a piece of paper. Although we had a contract, the performance standards weren’t being met.”

One of the major problems that Devos had with the relocation vendor was the issue of who was in charge. At one point, the vendor representatives began to think that they knew more than Devos did about her company and about how things should operate. “It’s the hardest thing because sometimes outsourcing vendors become complacent,” she says.

“I gave them a certain amount of time to correct the issues. When they weren’t met, it was sayonara,” she adds. The next time around, Devos was even more diligent about making her specifications clear from the outset. So far, the relationship is working out better this time. Devos says of the experience: “I’ve been through both changing outsourcing vendors and a divorce. The divorce was easier.”

Don’t be shortsighted when making an outsourcing decision.
Most companies outsource with long-term objectives in mind. Others, however, outsource only for a year or two, with the idea of bringing the function or process back in-house in the future when they can buy improved technology or again can commit the internal resources to the task.

It’s important to think about these issues before you outsource, because often outsourcing can cost a lot in start-up costs. “If this were a short-term, two-or three-year decision, it certainly wouldn’t be a good investment because of the developmental and implementation costs,” says the benefits director who’s about to outsource. “The intent is that you forecast for the future. As you have a vendor give you long-term cost projections, you sign a contract that safeguards against future inflation and is cost-beneficial to your company.”

Saving money is another long-term objective, but it isn’t the only factor. “From time to time, we’ll talk to organizations where cost is the number-one factor. But more often than not, it’s the other factors like the speed, flexibility, consistency of delivery, the ability to react on a dime—that really are an organization’s long-term objectives,” says Mark Mitter, the defined-benefit administration practice leader for Hewitt Associates. “In this economy, there’s clearly more pressure for organizations to look at how they can trim head counts and how they can save money, but there are certainly many organizations in which saving dollars immediately isn’t the highest priority.”

Increasingly, companies are outsourcing more than one area, thereby buying what are known as bundled services, according to a survey by New York City-based Towers Perrin on outsourcing within the benefits function. If they’re going to outsource many areas at the same time, it’s essential to conduct a pre-outsourcing audit that defines what the current processes are and how those might be changed or integrated once they’re outsourced. Tunnel vision could result in duplicated efforts down the line. “Companies really want to look at outsourcing from a consistent, coordinated effort,” says Mitter.

Lillian R. Gorman, executive vice president and HR director of Los Angeles-based First Interstate Bancorp, outsourced her company’s entire benefits department to Towers Perrin along with the 401(k) plan nearly two years ago. Another vendor was taking care of the 401(k) at the time, but Gorman gave it to Towers Perrin when she made the decision to outsource the benefits department because of the better deal that she would get by outsourcing both functions to the same vendor. In addition, there was the issue of greater efficiency by having two areas handled by the same vendor.

Gorman signed a two-year contract with the vendor for both areas. “We have every intention of working toward a second contract,” says Gorman, who considered both the short-and long-term when she made the decision. “It’s just that [outsourcing the benefits function] was so new an idea that neither Towers Perrin nor ourselves wanted to get into it forever,” she says. “On the other hand, we wanted it to last long enough to work out the bugs so that the start-up costs associated with it made sense.”

Senior staff members often are more willing to outsource than lower-level managers.
According to the Towers Perrin report, willingness to outsource differs significantly by responsibility level. The report compared the willingness of human resources professionals to outsource within three different areas of benefits administration—defined benefits, defined contribution and health and welfare.

• For all three plans, the survey found that human resources vice presidents and managers are more willing than benefits vice presidents or managers to outsource planning activities (in most cases, they’re twice as likely to be interested in outsourcing)
• The same holds true within the areas of defined-contribution and health-and-welfare plans for outsourcing of government compliance and written communications
• Benefits managers are slightly more willing to outsource record keeping for defined-benefit and health-and-welfare plans than HR managers.

The problem is that many managers at the lower levels can’t see the bigger picture or aren’t anxious to see their jobs possibly eliminated. You can overcome objections with facts based on sound business strategies.

“I get probably five to seven calls a week from the CEO level interested in outsourcing,” says Dole. “The CEO will say, ‘I just don’t need to own this.’ ” As the typical scenario unfolds, the CEO discusses his or her interest in outsourcing to the manager responsible for that area. That manager often will build a case about why it shouldn’t be done. “It’s kind of like putting the wolf in the hen house to guard the chickens,” says Dole.

“Most people are afraid of [outsourcing] simply because it looks on the surface that it tends to eliminate your job,” says Devos. “It doesn’t.” If corporate people don’t go along with it, they’re going to be left behind, according to Devos. “I’ve noticed it in quite a few corporations where the corporate people haven’t gone along with outsourcing, and pretty soon an outsourcing vendor has come in and convinced their senior management that it can do things better, cheaper and more efficiently. Then they’re sort of relegated to bystander status.”

Devos’ observations seem consistent with current research on the subject. According to a recent survey by the Relocation Compass, 50% of corporate staffs view outsourcing as a threat.

The best way to look at outsourcing is from a business perspective, say outsourcing experts. It may be an option that should be considered because it will help streamline processes or help the business succeed. It’s difficult to argue with these kinds of solid business reasons, regardless of the management level from which you’re viewing it.

Loss of control is a big concern.
Outsourcing represents a new business paradigm in which companies decide to focus on their core competencies. All other activities are peripheral and therefore, are nonessential.

“It’s a permanent shift in the way companies are going to do business, and the human resources element of it [has been] permanently changed,” says Dole. “It’s a great opportunity for those who embrace change. But it’s going to be a horrible experience for those who are in fear of change.”

Many respondents to the recent Relocation Compass survey expressed concern that their companies would lose control over running their own departments if they outsourced. In fact, someone still must oversee the process, even if it’s no longer down the hall or in the next building.

For example, Devos outsourced relocation, but the vendor team is on-site at Schering-Plough’s Kenilworth, New Jersey, offices. She also outsourced service awards, but directly oversees the work. “We still maintain a great deal of control, simply because we care about our employees,” says Devos. “The bottom line is, you still have to answer to your own employees, no matter who does the work.”

Devos says that she’s noticed more companies within the relocation industry turning to outsourcing. “This is the way things are going to go, and if corporate people don’t go along with it, they’re going to be left behind.”

“In the end, [the loss of control] is probably the highest barrier people have,” says Dole. “For a lot of them, it’s like trying to do a high jump at a height they’ve never jumped before. Some people run up to the bar and stop. Some run up to the bar and knock it over. Some run up to the bar and leap over it.”

Losing control because of outsourcing is an issue with which many managers struggle. The reason, according to Dole, is that they’re used to the traditional business paradigm. He says that the new business paradigm, however, is “matrix-oriented,” which involves using strategic alliances that help an organization move more quickly and deal with change more rapidly. “For those who can’t make those decisions, they’ve got a lot more problems than whether they should outsource. They’ve got problems on how they’re going to compete, because their culture hasn’t shifted yet,” says Dole.

To support outsourcing, a corporate culture must be open to change.
“Some companies don’t trust outsiders and want to do everything themselves,” says Partridge. “For example, the company that has a company cafeteria and company cars doesn’t usually outsource too much. But companies that try to run absolute minimum in terms of what they’ve got to do to be great in their own business tend to be the ones who outsource.”

Sometimes a change in corporate structure will prompt or support an outsourcing climate. At First Interstate Bancorp, for example, the entire company structure was re-engineered in 1991. “We restructured our whole company into regions,” says Gorman. “We had a culture prior to this restructuring that was very entrepreneurial and independent state by state, and that meant a lot of duplication.”

During the restructuring process, the bank’s human resources department also re-engineered itself. “We looked at how we could do HR better and more cheaply throughout the company,” says Gorman. “We came up with a common structure that put all of the policy-and-program development on behalf of the whole culture in one place.” Specifically, she centralized the design areas of human resources and decentralized the administrative tasks.

“Most companies that have outsourced have done so either because it’s consistent with their culture or because they had a particular need that they were responding to,” says Partridge.

Some companies have no problem outsourcing some areas, such as the more administrative tasks, but wouldn’t consider outsourcing the design elements as First Interstate did with its benefits-design area. For example, Devos says that Schering-Plough is a very paternalistic corporation, and there probably are many functions that it would never let go of.

It’s smart to communicate your company’s culture and its approach to process and functional design to your outsourcing vendor. Says one outsourcing expert: “You’ve got to outsource to people who know the kind of culture you want to develop within the company.” He notes that the problem with corporate cultures is that they’re evolutionary. “The character of the company will change over time, perhaps in a different direction,” he says. “So, for the first little while, there’s probably no change, and you’re probably better off for having outsourced. But three or four years down the road, will it be? If you’re a really small firm, it could be a good idea. If you’re a decent-sized company, you might end up paying quite a price for doing that.”

It’s true that corporate cultures are constantly changing. However, this shouldn’t prevent companies from reengineering themselves so that every function operates at its greatest efficiency. Says Carl Nielson, HRIS manager for Dallas-based Frito-Lay, a company that recently initiated a re-engineering effort for the entire HR department: “The mission in human resources is to create a team-oriented, owner-based and performance-driven culture. Eliminating administrative processes or pushing those processes out allows us to concentrate more on our true mission. That’s what it’s all about.” He says that human resources at Frito-Lay wants to concentrate on re-engineering its processes to fit the company’s employee self-service concept, rather than just trying to improve existing systems. “That has a lot to do with the whole culture,” he says. “So, for example, where we used to not have systems that an employee could access, we now have benefits enrollment over the telephone.”

Centralized operations may be an easier base from which to outsource.
Whether it’s better to outsource when your organization has a centralized or decentralized human resources department depends on which area you’re considering outsourcing and how the function already operates.

The Towers Perrin survey highlights some of the problems that decentralized companies face when outsourcing benefits activities. The problems include:

• Inadequate level of knowledge in divisional human resources personnel
• Too much turnover at the division level
• Poor quality and consistency of communication
• Benefit personnel too task-oriented, not enough people looking at the big picture
• Costs and staff levels for benefit functions and programs almost impossible to judge accurately
• Difficult to attain consensus on design policies and issues
• No direct-reporting relationship between corporate and divisions; cooperation is a lost cause.

By contrast, the problems faced by centralized companies include:

• High level of bureaucracy leading to feeling out of touch with employees
• Extensive staffing constraints due to easy monitoring of growth in staff size
• Unsatisfactory handling of employee inquiries
• Managing a large administrative staff diverts time from planning and the big picture.

Clearly, centralized and decentralized functions each represent their own unique challenges. Some problems, however, have nothing to do with centralization levels; they stem from the reporting structure or from the plan or functional structure, according to the Towers Perrin report.

The benefits director who’s about to outsource three headquarters-based areas of his company’s human resources function thinks that it’s better to start with a centralized operation before outsourcing. “We have a common, central administrative function, therefore, we have common administrative practices and common interpretation of plan provisions,” he says. “It reduces costs significantly to hire a vendor to work with one staff versus having a series of interfaces between different administrative offices. It also offers that many fewer opportunities for failure.”

There’s a growing trend toward centralization in certain industries. According to the Relocation Compass, for example, there’s a trend developing among many companies to centralize their relocation departments. It reports that no fewer than eight corporations located in one metropolitan area have recently centralized.

According to another survey of corporate relocation policies conducted by Evansville, Indiana-based Atlas Van Lines, 85% of companies administer employee relocations from a centralized department, and 15% from decentralized departments.

“What we’re hearing is that most organizations—particularly larger organizations that may have decentralized administrations—are feeling that an outside organization [an outsource vendor] has much more ability to react in terms of speed, flexibility and innovativeness in consistency of delivery,” says Mitter.

In other cases, such as with Frito-Lay and First Interstate Bancorp, outsourcing coincides with a larger structural reorganization. According to the Hewitt Associates survey, 23% of the surveyed employers named “organizational shift”—which included centralization/decentralization, work-force reduction and the changing human resources role—as a reason for outsourcing.

In the end, companies that conduct a complete review of their human resources structures, processes and procedures will have the kind of information that they’ll need in order to make an informed decision about whether to use outsourcing as a tool for process innovation.

Outsourcing-having an outside vendor provide a service that you usually perform inhouse-isn’t exactly a new idea. For years, companies have contracted with outside firms to perform such functions as mail room, payroll, security, data processing and a myriad of other services.

Now, HR professionals are beginning to see-with increasing popularity-the benefits of having outside companies perform some of the functions for which they traditionally have been responsible. These include recruitment, benefits communication, benefits plan design, retirement services and HR recordkeeping services.

Even within HR, outsourcing isn’t all that new. For many years, certain HR functions have been outsourced by many companies, including temporary placement (temp agencies now even set up shop on-site), employee assistance programs, 401(k) plans, relocation, medical-claims processing, transaction processing and awards and incentives programs.

As companies demand that management constantly streamline the way the business operates, however, management is taking a closer look at how blending the services performed both inside and outside the organization can help contribute to the bottom line. In these evaluations, outsourcing has become one option on a larger menu of strategies. Some organizations are using it to re-engineer and streamline their HR departments and other functions to be more responsive to customer needs, both internally and externally.

Although outsourcing a function to a third-party vendor isn’t always the right solution, say some business analysts, HR professionals are finding that, in the right situations, they can improve efficiency, save money, help focus energy and resources or improve the quality of services through contracting with a vendor.

There are several reasons why outsourcing recently has increased in popularity. Such factors as corporate restructurings, downsizings and the sagging economy have contributed to many outsourcing decisions.

Bruce Pittneger, managing director of general management consulting for New York City-based Towers Perrin, offered this observation at a recent conference: “Restructuring will produce a Swiss-cheese organization: one that has a solid overall form, but is missing pieces.” Pittneger suggests that a company’s missing pieces increasingly will be found outside the organization as strategic business units buy services formerly provided by staff functions.

As the economy contracts, outsourcing will grow, explains The Trends Journal in a recent article. Faced with the high cost of payrolls and payroll taxes, health-care costs and other expenses associated with full-time workers, businesses increasingly will look to get work done through outside sources, the journal forecasts.

In the temporary-services area alone, outsourcing has become a way that companies can expand and contract their work forces without having the burden of keeping people on the permanent payroll. According to a survey titled The Olsten Forum on Human Resource Issues and Trends, sponsored by Westbury, New York-based The Olsten Corp., 18% (of those companies surveyed) currently outsource their entire flexible staffing departments to a third party.

“Outsourcing is a natural outgrowth of the temporary-services concept of balanced staffing, whereby a flexible ring of temps is added to a basic core of permanent employees on an as-needed basis,” says Edward Grant, CEO of Career Horizons, Inc., which is the parent company of Woodbury, New York-based TempForce, Inc. “Outsourcing is proving to be an effective cost saver in helping companies climb out of this recession.”

Is outsourcing just a fad? Or is it more than that? According to the 1993 Trend Forecast by The Trends Journal, outsourcing is tenth on a list of trends that are “in” this year, suggesting that next year it possibly could be “out.”

Outsourcing also is number ten on Rochester, Wisconsin-based Runzheimer International’s list of current industry trends. Although contracting with outside vendors isn’t a new phenomenon in relocation, the management consulting firm’s report notes that the practice now embraces the comprehensive administration of ongoing relocation programs in two areas:

• Supplementing corporate relocation staff with outside, contractual personnel
• Replacing in-house staff or departments with outside service providers.

Within the relocation area alone, more than 75% of companies offering relocation programs use a relocation firm for at least part of their corporate mobility needs, according to reports by Valhalla, New York-based Prudential Relocation Management.

It’s also pervading other business functions. According to recent research by New York City-based Coopers & Lybrand, which provides outsourcing services to clients in addition to consulting, 80% of Fortune 500 companies are expected to outsource some information technology processes by 1995.

Other experts suggest that outsourcing is more than a fad or a trend. Richard Dole, vice chairman for Coopers & Lybrand’s process-management area in Houston, says that outsourcing is a shift in the traditional business paradigm. “People are refocusing their core businesses and their core strategies,” says Dole. In the process, they’re asking themselves: What is my core business? How much time should I be spending on administrative tasks? Could I get more value from outsourcing to an outside vendor who probably could do it better and cheaper? Will outsourcing leave me more time for higher-level strategic planning?

Make sure that you have a good reason to outsource.
Experts suggest that any company considering outsourcing should first be clear about their short-and long-term goals. A study of “Employee Benefits Outsourcing,” completed by Towers Perrin in 1992, highlights reasons that companies choose to outsource:

1. Increased focus on core business: Companies want to spend their discretionary management time and energy on the business of their business.
2. Cost and quality: Companies assume that a consultant can do it better and more cheaply than it can do internally.
3. Access to improved technology: Companies with less-sophisticated automation capabilities have greater tendencies to outsource than companies with better technology and automation capabilities.

What’s another reason that HR is turning to outsourcing? HR department workloads are increasing, with literally no end in sight. According to the Olsten survey, more than eight out of 10 (83%) of the respondents stated that their workloads have increased over the past year, and a third report the increase as “substantial.”

Often, the increase in work has little to do with strategic planning. In a recent issue of HRM News, Reuben A. Larson, 3M Co.’s director of HR planning and systems, advises redesigning so that HR spends little or no time on advocacy or administrative duties. According to Larson, line management should take on the advocacy role, and all HR tasks should be examined for possible elimination, automation, restructuring or outsourcing.

Some naysayers warn against outsourcing, saying that it often promises more than it delivers. Outsourcing such functions as the mail room or payroll may work well, says one industry expert. But, he says, outsourcing core functions, especially within HR, could get companies into more problems than they’ve bargained for. They must consider what the legal, tax, legislative and procedural ramifications might be before making the decision to outsource.

Some view these as reasons not to outsource. Others see them as good reasons to make the switch to outsourcing services. With the growing complexity of legal and other issues faced by HR departments, especially those having reduced staffs, paying for and relying on an outside company to provide this kind of up-to-the-minute information can be the difference between being on top of the growing body of regulations and simply trying to hold onto its constantly wagging tail.

Companies need to be very sure about what they’re outsourcing and why, say the experts. Don’t just outsource because it’s popular or seems easier to do so. Some companies, for example, may outsource their temporary-services area simply to get out of being responsible for many of the regulations and legalities associated with hiring workers onto their payrolls.

This strategy may prove ineffective. Recently, in another type of situation, an employer with a self-insured medical plan recently lost its case against the third-party administrator whom it had hired to handle claims under the plan (Kyle Railway v. Pacific Administrative Services, 9th Circuit 1993). Kyle Railway asserted that the administrator had:

• Paid claims not covered by the plan
• Double-paid some claims submitted to the plan
• Failed to pay some claims on a timely basis as required by the plan.

The company lost its case. Ultimately, the organization was responsible for the inequities created by the vendor.

The government may even mandate that companies “insource” before they outsource. An arbitrator recently ruled that the U.S. Postal Service must offer some off-site mail-sorting positions to its own employees before contracting out jobs to private firms.

Others in HR see the benefit of outsourcing some activities, but aren’t convinced that everything should be given to an outside vendor. Although San Francisco-based Levi Strauss & Co. outsources its medical-claims processing and participant record keeping, it outsources few other HR activities on an ongoing basis.

The reasoning? “Nobody’s shown me an outside group that could provide these services like we do,” says Reese Smith, director of employee benefits. Because Levi Strauss has a strong service orientation, he’s wary of looking for outside vendors to provide benefits services to employees. Still in the questioning mode, Smith says that he’s currently considering the pros and cons of outsourcing other areas.

Smith isn’t alone. Many in HR are wondering what outsourcing can do for them. Others have moved beyond curiosity, actually outsourcing various functions. Here’s what some are doing and why.

Outsourcing can save time and help focus energy and resources.
According to a study recently released by Lincolnshire, Illinois-based Hewitt Associates titled Employer Experience in Outsourcing, time is the main reason that employers want to outsource (see chart). More than a third (37%) of those surveyed said that the time they’d save was their foremost consideration in making the decision to outsource benefit activity. Most said that an activity currently performed in-house was too time-consuming or that turnaround time was inadequate.

As the details and recordkeeping of HR have steadily increased over the years, many personnel professionals are interested in having those burdens lifted so that they once again can focus on their “core competencies.”

For example, about two years ago, Dayton, Ohio-based NCR Corp. made a decision to outsource portions of its pension administration-an area long considered too company-specific and too complicated to be handled effectively by an outside vendor.

“With approximately 13,000 retirees, 12,000 terminated vesteds, and 26,000 active employees in the U.S., we at corporate found our days virtually consumed by the need to service participants,” says Douglas M. Bartlett, Director of Employee Benefits, U.S., in a Hewitt report. “We’ve always maintained a high level of service, but with a limited corporate staff and increasingly complex administrative requirements, our resources were strained. We needed to find a way to administer our retirement plans and satisfy participant needs, without doing more internally.”

The solution for NCR was to mix inside and outside resources. Although it still maintains a corporate benefits staff and handles administration through local benefit organizations (LBOs) in various NCR locations across the U.S., the company added another feature. The NCR Service Center, which is now staffed by outside pension consultants, handles most of the day-to-day pension-related activities.

“Originally, the Service Center was intended to support our local benefit representatives only,” Judith E. Hamer, pension manager, explains in the Hewitt report. “As the relationships developed between the LBOs and the Service Center, it became more natural for the Service Center people to begin to deal directly with participant or third parties as a more efficient means of resolving situations.”

In the report, Bartlett adds: “We at corporate are in no way out of the process. But our time is spent differently today. We still get involved from the managerial perspective to resolve the material or unusual situation, but most of our time is devoted to the larger benefit and HR issues confronting an organization the size of NCR. We are able to focus on our primary mission, which is planning the future benefits of the corporation.”

Blending resources, such as in NCR’s solution, often are called strategic alliances. Outsourcing vendors can provide companies with the edge on business they need so that they can “do what they’re best at” rather than spending time, money and resources on processes that don’t contribute to the bottom line.

Companies also can outsource strategic functions, such as benefits planning, since outside vendors often can stay more up-to-date with current practices in those areas because it’s their primary business. Few companies can afford to hire full-time experts in every area of HR. Large outsourcing vendors can.

New York City-based Bankers Trust Co. outsources benefits administration, according to What’s Ahead in Personnel. For nearly two years, the nine people who used to handle these tasks have been employees not of Bankers Trust, but of Towers Perrin Forster & Crosby (TPF&C).

TPF&C is responsible for hiring, firing and supervision. Although Bankers intends to save money, that wasn’t the major reason for the change, according to Ellen Reynolds, VP of HR for Bankers Trust. The arrangement will cost more, but it will free her and other managers from day-to-day involvement in the personnel and administrative issues related to benefits.

Outsourcing can cut costs.
More often, as companies downsize, rightsize or simply economize, they need to watch their budgets to find areas to trim costs. The ever-present dictum is to do more with less. In some cases, HR now is being asked to make money.

“The whole idea of outsourcing done right is creating new career paths that are on the revenue side of the equation instead of on the cost side of the equation,” says Dole of Coopers & Lybrand. “What we almost become is a vehicle to transform a lot of the workplace from a cost-oriented mentality to a value-added mentality.”

Along these lines, Armonk, New York-based IBM outsourced its own HR staff functions by creating Workforce Solutions in 1992. Workforce Solutions sells HR services both internally to IBM and externally to other organizations. According to a May 10, 1993, article in Business Week, IBM claims that it’s now saving $45 million per year by spinning off its entire employee-benefits department into a separate company. It expects to become a profit center by 1994.

Another organization also found it helpful to completely outsource its HR function, including the strategic areas. The New York City-based advertising firm DDB Needham Worldwide has outsourced its entire HR function to People Management Inc. since January 1992.

What’s unique is that the New York City-based HR company is a spin-off of DDB Needham. “It spun us off, but it retains no ownership,” says Jud Saviskas, president of People Management, Inc. Saviskas formerly was DDB Needham’s HR director. When DDB Needham was going through a streamlining and downsizing process in 1991, Saviskas suggested that the company allow him and several members of the HR staff to become a completely autonomous company. The firm’s senior management agreed.

Now, in addition to its largest client, People Management Inc. has more than 10 other clients. The company does everything from employee relations to risk management.

According to Jerry Germain, CFO of DDB Needham Worldwide, the switch-over has been virtually wrinkle-free. “It has been extremely effective,” Germain says. “There has been a cost advantage, and frankly, that was a portion of the rationale for doing it in the first place.”

Carl Anderson, president of Doremus & Co., a small, New York City-based advertising agency, says that HR services cost less to outsource than to maintain an HR staff in-house. His firm buys its HR services from People Management. “Economics was one of the issues for making this decision,” says Anderson. He also now has access to expertise that he didn’t have in his former two-person HR staff. Anderson says that it saves his corporation time because it can identify HR problems sooner. He can do something about issues before they’re problems.

Relatively few companies outsource their entire HR functions. Others outsource bits and pieces, and still get cost savings. For example, a large telecommunications company saved $8 million, cut 48 jobs and increased employee involvement in its 401(k) plan by outsourcing its 401(k) plan to an outside vendor.

Using telephone-based interactive voice-response systems is another way to save money by cutting down on benefits staff time. One bank that uses a phone-based interactive voice-response system (maintained by an outside vendor) reduces its employee benefits staff and provides employees with better services.

On the recruitment side, Diedre Moire Corp., Inc., based in East Brunswick, New Jersey, lowers clients’ hiring costs in the following way. Where fees typically range from 25% to 35% of secured candidates’ salaries, outsourcing the recruitment function brings those costs down to 15% or lower.

There may be an initial cost outlay in terms of feasibility studies and start-up costs. However, costs over the long term often can be less than what an organization currently spends (adjusted for inflation).

Outsourcing improves efficiency.
Management is always looking for ways to improve systems and enhance the way in which business processes run. In the case of HR, an entire restructuring often may result.

At Dallas-based Frito-Lay, HR has been working on outsourcing as part of a general reengineering effort. In the process, it outsourced the work for several functions and “insourced” one other. According to Carl Nielson, manager of HRIS, some previous HR systems were old, cumbersome and complicated. “There were a lot of ways things could be improved at perhaps lower cost,” he says. “We focused it from there.”

HR currently has some work outsourced including accident reporting, preemployment test scoring and service and safety awards administration and is in the process of outsourcing the relocation function. It also insourced its benefits services department to the associate services (payroll) department. These changes, according to Nielson, have helped HR improve its efficiency and concentrate more on the mission of HR.

“We’re in a pilot environment for many of these efforts,” says Nielson. “As we learn more about each project and mature the processes, I have no doubt we will enjoy significant returns on our investment, but it is still early.”

Outsourcing improves quality.
According to the survey by Towers Perrin, HR department personnel who were surveyed indicate that their number-one criterion in choosing an outsourcing vendor is quality of service.

Quality of service was the primary reason that Lillian Gorman, vice president of HR at Los Angeles-based First Interstate Bancorp, says she outsourced her entire benefits function in early 1992.

In 1991, First Interstate went through a corporate restructuring. With 996 offices in 13 Western states, the company decided to centralize many of the functions that previously were duplicated. “We were wanting to turn into a company that had a common culture and common products and common policies,” says Gorman. “That had not really been very prevalent prior to this restructuring.”

HR was the first staff function to look inward to see how it could do things better and more cheaply. As a result, the HR team created an employee-services center in Phoenix, for all administrative tasks. The center employs 75 people, ranging from employee-relations specialists to employment representatives.

The team also created a central design function, or what it calls an R&D center for HR, in Los Angeles. This group originally consisted of 40 HR professionals.

“We didn’t outsource the administration side because we figured that as a bank, we have a lot of operating units and we already know how to do operating and processing fairly well,” Gorman explains. As she looked at the activities of the remaining R&D staff, it was clear that they also were spending the bulk of their time on administrative tasks. Gorman redesigned and again downsized the staff by about 40%, and sent most of the administrative tasks to the Phoenix group.

According to Gorman, when she looked at how little her team actually was doing in the area of benefits-plan design and what they were capable of doing, she discovered why they were not realizing their potential. “Because [benefits-plan design is] so technical and so fast-changing, and so determined by legislative and regulatory changes, it’s very difficult for inside resources to keep up with it,” says Gorman. Because she could afford to have only one expert in retirement or medical, for example, the team was spending a lot of time on compliance issues and little on proactive-planning issues.

“That was a very reactive way of taking care of a very large portfolio of money,” says Gorman. “So we stepped back at a high management level and took a look at whether the whole package was up-to-date, was cost-effectively designed, was in employees’ best interests and was delivering to what our culture would want-all of those strategic issues you have to ask about the whole package.”

Thinking that there must be a better way, she approached Towers Perrin, which had been taking care of the company’s 401(k) plan services. “We asked them if they’d consider outsourcing their brainware,” says Gorman. In early 1992, the vendor agreed to be the company’s benefits strategists on a retainer, rather than on a consulting, basis.

Gorman downsized her inside benefits staff further from eight people to one and outsourced the benefits function to Towers Perrin. “Why did I do it? To improve quality, primarily,” says Gorman. “But it had cost objectives as well. I wanted to make sure that we were spending the dollars we spend in the right places.”

Outsourcing also makes sense for Kathryn Devos, manager of employee services for Madison, New Jersey-based Schering-Plough Corp. She says that she outsources primarily to get better-quality service for employees.

She outsources three areas-relocation, awards and incentives and the EAP program. “I will outsource everything I can,” says Devos. For example, she outsourced relocation to an outside company that now comes on-site. One of the points on which she sold the idea to upper management was that employees were dealing with 17 different people during a relocation. “I couldn’t see the sense of it,” she says. Now employees have one point of contact.

“As things become more efficient, we have to be more efficient,” says Devos. “One of the best ways to do this, and one of the least expensive ways to do this, is to outsource.”

Although on the surface outsourcing may appear to put HR people out of a job, according to Devos, it really doesn’t. “There still has to be a corporate person involved in everything,” she says, and warns: “If you don’t do it, somebody’s going to do it for you.”