Preparing an Outsourcing Cost/Benefit Analysis

Preparing an Outsourcing Cost/Benefit Analysis

1 The outsourcing trend continues to grow as businesses worldwide stretch to find solutions to increase revenue, reduce expenses and enhance profitability. Those charged with analyzing the benefits vs. the costs of such an undertaking face the challenge of conducting research, remaining objective and finding the best business solution. The following information provides a synopsis of research data on outsourcing from various sources, along with a recommended process for conducting the analysis. While much of the data gathered is relative to HR outsourcing, the concepts apply to the outsourcing of any function, including relocation. Macro-environment for Outsourcing of HR functions Most business organizations in the United States outsource at least one of their business functions, and several of their HR-related functions. As an option, outsourcing often calls into focus the cost/benefit of such an undertaking. Before undertaking such an analysis, however, it s critical to understand the underlying reasons that outsourcing is under consideration. Is it to reduce costs? Improve processes? Allow HR to focus on more strategic issues? The following chart indicates the most common reasons cited. Other Improve metrics Make up for reduced staff Avoid cost of technology Access to vendor technology Lack of in-house talent/expertise Allow HR to focus on Strategy Improved Service Delivery Reduce Staff/Related expense Allow focus on core business Additional Services Streamline HR Function Access to talent/expertise 0% 20% 40% 60% Improve Compliance Reduce Costs These objectives suggest a transformation thought process with regards to outsourcing, however in many cases only transactional activities are eliminated. And too often, these activities are outsourced to the lowest-cost bidder. A recent study by Gartner Inc. of all HR outsourcing trends suggests that cost savings should not be the sole rationale of an outsourcing initiative. Research and anecdotal evidence suggests that the most successful outsourcing ventures are those that integrate the transactions to be outsourced with a sustained transformation of the affected organization. The lack of transformation in the work groups directly affected by outsourcing can be traced to several areas: Failure of the outsourcing partner to deliver high-quality transactional value, resulting in increased oversight of the outsourced activities at the gatekeeper level. Failure of the organization to provide a strategic framework that changes the roles and responsibilities, and thereby the behavior of internal stakeholders. Failure of the organization s key business leaders to stay involved with the outsourced initiative, helping to reshape specialists into generalists, and generalists into strategic contributors.

2 Outsourcing is a fairly new business phenomenon, at least as it is named in this vernacular. Research is all fairly current, covering a period of about five years. However, two trends have emerged in studies conducted each year by The National Foreign Trade Council, Inc. in conjunction with the SHRM Global Forum: companies participating in the annual trends survey indicate increasing reliance on outsourcing, while expressing decreased satisfaction with outsourcing. While the overall satisfaction levels remain high (84%), each year, the annual survey indicates an erosion of satisfaction (down from a high of 92% for the first survey year, 2000). This trend warrants watching. Another trend, which is relevant to this study, is that larger-staff-sized companies (over 500 employees) were twice as likely to indicate that their organizations outsourced to allow HR staff to focus on strategy. (36% of large companies compared to 18% of smaller companies). This may be an indication that larger companies are better at balancing traditional HR roles with strategy and are hoping to shift the focus of HR roles from transactional to strategic roles. The rules of outsourcing are still being written in the area of contract administration. There is significant anecdotal evidence to suggest that contacts created at the implementation of the outsourced initiative are seldom used to manage the day-to-day business relationship with the vendor. A study by The Conference Board suggests that team members of the outsourcing initiative received very little training or support in vendor management, and that most metrics programs were unstructured and without significant consequence. Finally, the ROI of outsourcing is a conundrum for many organizations. While cost savings is the primary driver of outsourcing initiatives, Towers Perrin research suggests that 40% of outsourcing initiatives are saving less than projected and in some cases, costing more in both direct and administrative costs. Furthermore, the Gartner study previously referenced, suggests that 50% of the time outsourcing is more costly. Given that cost savings is the number one reason given for outsourcing, these statistics lead to the question, Why aren t more companies seeing cost-saving results? The answer is in the planning and execution of the outsourced initiative. The following are critical steps to ensuring proper execution: Have a firm grasp on your current costs (soft dollar costs, hard dollar costs and, to the degree possible, intangible costs) Know how much you expect to save Develop Service Level Agreements Define metrics targets Proper due diligence in vendor selection Outsourcing the Relocation Function According to a 2003 SHRM survey, 41% of respondents indicated that they outsource the relocation function. While outsourcing this function can reap substantial benefits, it s important for an enterprise to invest in the relationship management of the outsourced provider. For this reason, most companies retain a gatekeeper role to ensure that policy and legal compliance issues are in line with company strategy and to ensure the quality of service provided. As cited above, it s critical that this individual be educated in the nuances of vendor management and have responsibility for service level agreements, as well as knowledge of the discipline being outsourced. With the increased pressure on companies to meet corporate governance compliance issues, it s important for the gatekeeper to be educated and kept up to date on the latest laws affecting compliance from a tax and legal perspective.

3 Some other key points specific to outsourcing the relocation function vs. other HR functions are: Relocation is a major disruption of ones life. The buying and selling of a family s home is a very personal matter. Buying a home is one of the biggest investments people make in a lifetime. While outsourcing the function may reduce salary, benefit and overhead costs, there may be costs incurred in the form of service fees. Relocation is often used as a recruiting and retention tool and, therefore, could be considered a competitive advantage. Benefit Analysis of In-house program vs. Outsourcing Why is the outsourcing trend continuing? There are many forces that have changed the business environment: 1. Competitive pressures of the global economy 2. Fast changing technologies 3. Investors who demand focused management that delivers bottom line results, adding to shareholder value. 4. Information is readily available to stakeholders making it more important than ever to ensure that all factors people, facilities, equipment, technologies, capital, etc. are being utilized to their greatest and best use. 5. Increased pressure on corporate governance issues Because of the changing business environment, companies have had to take a close look at how they are conducting their business in all areas of the company. Processes that have worked for years may have to change because of these external influences. The following chart lists some of the pros and cons of outsourcing as reported by HR professionals in the various sources listed at the end of this report: Pros HR can focus on core HR business functions HR focus on strategy Improved perception of HR Improved metrics Access to vendor technologies Access to subject matter experts Ability to handle volume fluctuations/staffing issues Improved compliance/less risk Streamlined processes Potential for reduced costs Capital expenditure avoidance Company can redeploy human capital Cons Less face-to-face contact with employees/less personal Loss of in-house expertise Ineffective vendor relationship management Decreased employee morale Negative impact on corporate culture Potential increase in costs Potential for new responsibilities in dept. w/ no additional headcount (i.e. global)

4 Micro-view of Current Relocation Program A critical first step in the process is to analyze the company s current relocation program as well as the company s overall mobility strategy. Ask yourself the following questions relative to the relocation program: How many staff members make up the in-house relocation department? (Be sure to include other departments and resources that touch the process including accounting, payroll, real estate, etc. What are the current costs to administer the program? (salary, benefits, overhead not program costs) What is the annual cost per transferee? Which functions are already outsourced to service providers? What are the responsibilities of each of these players? The following is an overview of the typical responsibilities of an in-house relocation staff: Relocation policy counseling with transferees Initiating services with service providers o Spousal Assistance o Home Marketing, Home Sale and Home Purchase o Title and Closing Services o Mortgage Services o Cost-of-Living Provider o Temporary Housing providers o Household Goods Transportation Managing, requesting and dispersing transferee expenses and payments relative to policy. Order Cost of Living analyses and process and manage payments. Review and management of Mortgage Interest Differentials Tax Gross-up Administration and Reporting Vendor management Management Reporting Budget development and management Policy development and management

5 Considerations When Deciding Whether or Not to Outsource What is the company s culture? A paternalistic, take care of our own culture? A bottomline, cost-driven culture? A marketing-driven culture? What is the company s overall HR strategy, including its global mobility strategy? Does the in-house relocation function add a competitive advantage to the company? How would outsourcing affect service levels to transferees? Does an outsourced solution need to be on-site? What is the impetus for this exercise? How will you measure your success? What are you going to do with current staff? Re-deploy? Terminate? What is the impact on your processes? Who are the other constituents within the company who will be affected? (i.e. tax, payroll, accounting, legal, heads of business units, transferees) How will you get the buy-in of these constituents? Are you willing to put a service level agreement and scope of work that specifically outlines expectations of the service provider? Are there any services or processes that must remain in-house? How do you prepare for the future? (i.e. volume fluctuations, increased global relocation responsibilities, increased focus on corporate governance and compliance) What is the timeline for a decision and/or implementation of outsourcing? Place a weight on each of the items listed above and prepare a due diligence grid to assist you in making your decision. Conclusion The trend in the Human Resources and, more specifically, the Relocation industry has been to outsource. Companies should consider outsourcing this function as an alternative to developing and maintaining its current in-house program; however, they must also consider the status quo as a viable option. When considering, you need to weigh the pros and cons and put a value on your current in-house program from an internal customer service perspective as well as the competitive advantage it presents. If a company s sole reason for considering an outsourced model is cost savings, then it is not clear whether or not that goal will be met. In fact, according to PricewaterhouseCoopers Management Barometer quarterly survey of 278 top executives, only 47% report that their company has been saving either a moderate (44%) or a great deal (3%). If, however, there are other more strategic reasons for outsourcing, there are clearly some benefits more streamlined processes, fewer resources spent on tactical vs. strategic HR initiatives, centralized contract administration and supplier management, less risk associated with tax and legal compliance issues and comprehensive, synchronized management reporting. While only half of the companies in the PwC report referenced above reported that they experienced cost savings, outsourcing received high effectiveness ratings in terms of security/privacy risks, internal controls, timing and timeliness of output, advisory competences and competence of outsourced company staff.

6 Sources: Bureau of National Affairs, Inc. HR Outsourcing: Managing Costs & Maximizing Provider Relations, November, 2003, Volume 21, No. 11 Society for Human Resource Management (SHRM) Human Resources Outsourcing Survey Report, July 2004 Society for Human Resource Management (SHRM) Human Resources Outsourcing Survey Report, 2003 PricewaterhouseCoopers Management Barometer, Less Than Half of Large U.S. and European Companies Say Outsourcing is Cost Effective, PricewaterhouseCoopers Finds. National Foreign Trade Council, SHRM, GMAC Global Relocation Trends 2003/2004 Survey Report Gartner, Inc. HR Business Process Outsourcing Market is Booming, July, 2003 HR.com HR Outsourcing and BPO s Opportunity and Risk, 2003 The Trilogy Group Case study For more information contact VISION Relocation Group s Consulting Services Team at 215-641-6117 or visit us on the web at www.visionrelocation.com VISION Relocation Group s Consulting Services Team can work with your RFP team to develop a Scope of Work, write RFP Questions that will get the answers you need to make a decision, and facilitate implementation with your selected supplier. For more information talk to your VISION Director, Business Development or call +1.215.641-6117 or go to Contact Us at www.visionrelocation.com