Industrial-Organizational (I-O) Psychology’s Contribution to Strategic Human Resources Outsourcing (HRO): How Can We Shape the Future of HR?
Kevin Kramer1
Accenture
1 Kevin Kramer, PhD, is director of Human Capital at Accenture, a global management consulting, technology services, and outsourcing company. Kevin wishes to acknowledge his I-O colleagues Tasha Eurich, Martin Lanik, and Tommie Mobbs. Without their involvement and interest in this topic, I probably would not have written this paper. Thank you!
Our “profession,” broadly defined as industrial-organizational (I-O) psychology and human resources (HR) management, is evolving in ways of which we never dreamed. Driven by technology advancements, globalization, cost pressures, and changing workforce demographics (Cascio, 2003), we are experiencing an unprecedented shift in how HR professionals deliver human capital services and in who employs them. That shift, which is the highest impact HR industry trend in 20 years, is HR outsourcing (HRO). As HRO becomes more predominant in large organizations, I-O psychologists, with our unique competencies and perspectives, can play a meaningful role and strategically impact this major workforce trend.
The purpose of this article is to explore the following topics:
- Introduction to human resources outsourcing (HRO)
- Executive priorities for HR and talent management
- Opportunities for I-O psychology to create more HR value
- How I-O psychology can shape the future of HRO
The introduction to HRO provides a baseline explaining what HRO is and is not, and gives a quick primer of the key considerations from this industry. The human capital and talent management priorities of top corporate executives give us insight into why HRO trends are important to our profession. The section on opportunities for I-O psychology to create more HR value explores those places within the broader HR industry where we can deliver stronger business results and have executive-level impact. We have an opportunity to shape the future of the HR industry, or alternatively, we will be pulled along by current trends. It’s up to us, and our basic awareness and involvement with key HR trends is the first step.
Introduction to Human Resources Outsourcing (HRO)
The term outsourcing is used liberally in business today. Specifically, human resources outsourcing (HRO) connotes a coordinated, usually multifunction, multiyear contract to transition HR activities from a client organization to an HR service provider. HRO contracts tend to be large scale, although HRO activity for small and midsize firms increased in 2008 and 2009. Although pricing models vary depending on service provider and client environments, HRO contracts often are fee for service up to a fixed price ceiling, and sometimes HR strategy or HR information system (HRIS) design pieces are priced as time and material or cost reimbursable. The larger, more complex contracts tend to be 5- to 7-year deals that deliver several key HR functions, such as recruitment and staffing, operating HRIS (commonly PeopleSoft, Oracle, or SAP), HR transaction processing, payroll, or delivering training and learning activities. Effective HRO relationships require executive-level sponsorship, strong program managers on both client and provider sides, and implementation of enforceable statements of work (SOW) and measurable service-level agreements (SLA) to ensure that the client company is getting the HR services they require under the contract. Outsourcing takes HR functions that were the client company’s back office and transfers them to the service provider’s front office. Often I hear business professionals say they are “outsourcing” one or two HR positions when actually they may mean that their company is using temporary staffing or staff augmentation for a short-term HR support need versus engaging in a long-term “true” HRO contract.
HRO providers vary widely in their delivery capabilities and in the HR specialty areas they serve. Within the global HR transformation market, the large outsourcing firms have greater presence and critical mass to support the most complex HRO projects. To achieve executive priorities for HR transformation, HRO efforts often include strategic HR assessments, HR program development, HR shared-services design, outsourcing key HR functions, or, in a growing number of companies, outsourcing entire HR functions.
History of HRO. Starting in the 1960s to 1970s, the earliest forms of outsourced HR services provided HR assistance for company payroll or employee benefits. The late 1990s marked the beginning of large multifunction HRO as we know it today. In 1999, two HRO contracts were awarded, and in 2000 six more contracts were awarded. Since then, approximately 280 large multi-function HRO contracts have been signed and implemented. To give an appreciation of the vast HRO industry today, leading HRO industry analysts predict an increase in global HRO services from $27 billion in 2008 to $34 billion in 2012, with an annual growth rate of 5.3% (Gartner, 2009).
HRO market outlook. It is interesting to note that seven publicized multi-function HRO deals were signed in 2008 versus 26 in 2007, marking a decline of 75%. However, the overall number of HRO contracts was down only 26%, indicating that many smaller contracts were signed. In 2009, there was less focus on large-scope HR transformational deals with up-front investments and more focus on “component” outsourcing contracts covering transactional processes. In 2009, payroll and benefits services maintained activity, with declines in talent management, recruiting, and learning, however I-O psychology-related services (talent management, recruiting, and learning) are expecting an increase in HRO activity in 2011. The firm ADP led deal signings in 2009 primarily providing payroll services, while the comprehensive HRO firms of Hewitt, IBM, and Accenture continued to account for over 50% of overall HRO market share in terms of annual contract value (International Data Corporation [IDC], 2009).
A growing area within HRO particularly relevant for I-O psychologists to contribute is recruitment process outsourcing (RPO). Although RPO creates tremendous business value by improving the quality of the organization’s new hires and lowering recruitment costs (Pinstripe, HROA, & TPI, 2009), overall RPO activity slowed in 2009. Recruitment outsourcing for open positions should increase in 2011 if the global economy revives and high-volume hiring commences. Talent management was a hot topic with CEOs in 2009 and outsourced talent services should have seen activity, but due to the economic slowdown HR service providers tended to offer traditional outsourcing offerings, such as payroll or HR transaction processing.
Benefits of HRO. It is widely believed within the HRO industry that HR outsourcing can cut costs 10% to 30%, although these numbers vary by geography and organization. Cost savings continue to be an important but not the only driver of the HRO business case. Other major reasons that top executives continue to outsource HR services is that HR delivery transformation generally improves the organization’s ability to recruit and manage talent, improves HR service quality, and can protect the company from potential lawsuits by standardizing processes, such as HR policy dissemination, recruitment and staffing, or performance assessments on a regional or global basis.
Shifting buyers of HR services. Due to globalization and workforce trends, the percentage of total HR work performed is shifting from corporate HR departments to large HRO providers. Historically, the primary customer of HR consulting and services has been the corporate HR department or company executives. As trends toward outsourcing continue, increasingly the direct buyer of specialty HR services will be the large HRO firms (to the extent they do not grow or acquire specialty HR capabilities within their HRO organizations). Therefore, it benefits I-O professionals to be aware of HRO industry trends and the major players in the HRO market so that those mutually benefitting business relationships between the HRO providers and the HR or I-O specialty providers can continue to expand.
Executive Priorities for HR and Talent Management
Continuing challenges of the global economy have caused many organizations to make difficult decisions regarding resource allocation, staffing, and workforce sizing for corporate functions (Corporate Leadership Council, 2009). During these challenging times, top executives continue to acknowledge effective talent management as a major source of modern competitive advantage. A recent Accenture study found that talent is among the top five issues on the minds of senior executives. In order of importance, executives listed: (1) attracting and retaining skilled talent, (2) managing change within the organization, (3) changing organizational culture and employee attitudes, (4) acquiring new customers, and (5) aligning people, processes, and technology to support business models. Of the top five issues, three of them deal directly with talent management (1, 3, and 5). The results of the study showed that less than 15% of executives were satisfied with organizational progress or programs to improve these key talent areas (Accenture, 2008).
New HR delivery models. Over the last 10 years, CEOs have emphasized the efficiency of HR administrative and transactional operations through introduction of new HR service delivery models like shared services, Web self-service, call centers, and HR outsourcing. HR strategy suggests that the primary way for organizations and HR professionals to focus on talent management and high-value human capital work is to free themselves of administrative and transactional HR activities (Martin, Reddington, & Alexander, 2008). Although this varies widely by company and industry, there are some rough averages that HR experts use to gauge the amount of time and cost that HR professionals spend on strategic or talent management activities versus transactional and administrative work (Kramer, 2010). As illustrated in Figure 1, many firms spend approximately 30% of time and cost on strategy and talent management and nearly 70% on transactions and administration, resulting in the triangle HR model. Whereas high-performing organizations who transform their HR function through HRO efforts or shared service centers spend approximately 70% of time and cost on strategy and talent management and only 30% on transactions and administration, resulting in the diamond HR model.
Similarly, a respected market research firm surveyed 102 U.S.-based business executives about HRO services.2 The survey showed that the primary drivers for HRO were internal cost savings mandate (55% of responses), decision to focus on company’s core competencies (34%), need to reduce headcount (33%), and need to standardize HR practices globally (29%). Executives surveyed estimated expected cost savings at approximately 22% annually (IDC, 2009). From the CEO perspective, HRO will continue to be a key agenda item, and I-O psychology will benefit from being more involved and aware of these trends.
2 Respondents worked in firms of 1,000 full-time equivalents (FTEs) or more and identified themselves as primarily involved with decision making for HRO services.
Opportunities for I-O Psychology to Create More HR Value
I-O psychologists are gaining greater opportunity to impact large-scale HRO transformation. At least 36% of I-O psychologists work in HR consulting or private business settings (SIOP, 2006). These I-O practitioners could have a large and direct impact on strategic HRO and related CEO-level business decisions.
I-O skills relevant to HRO. Anecdotally, I have observed over time that more members of our I-O and HR profession are working for mid- and larger size firms (via acquisitions and I-O industry consolidation) and are supporting new business areas that I-O psychologists traditionally have not supported. This situation presents opportunities for I-O professionals to use our broad analytical and problem-solving skills to deliver valuable work in strategic and operational business areas, such as HR operations management, HR process improvement, and HR outsourcing, which typically have been the purview of MBAs, master’s in HR, or other HR professionals trained by years of practical work experience. As the HR industry moves away from a focus on “transactional HR” toward a more integrated concept of “strategic human capital” management, this offers opportunities to emphasize I-O analytical skills, such as HR analysis, enterprise-wide data integration, and designing and tracking business metrics, which I-O psychologists have been performing successfully for years. Although HRO customers over the past decade increasingly have required high-value HR and talent-management services from their outsourcing efforts, it does not appear that the global HRO firms have significantly increased their cadres of I-O psychologists to provide those high-value services. The large HRO providers tend to subcontract for I-O specialty services versus hiring and growing large groups of I-O consultants focused on HRO customer segments or industries.
Outsourced I-O work. Another way that I-O psychology has become involved in outsourcing is through an increasing number of I-O-based firms using outsourcing and offshoring delivery strategies to provide I-O consulting services to their clients. Although this outsourcing activity is on a smaller scale than most HRO deals, it is a notable trend in our industry. To substantiate this trend, Global Assessor Pool conducted a survey of 44 I-O service provider organizations in 2009. Of those I-O-based firms, 42% were multinational and were involved in delivering outsourced services such as: (a) employee selection (45%), (b) organizational change (39%), (c) testing and measurement (36%), (d) job analysis and competency modeling (32%), and (e) performance management (25%).
Further results indicated that 18% of I-O service providers currently offshore I-O work or plan to offshore I-O work in the next 12 to 18 months (Lanik & Putter, 2009).
Consolidation in the I-O consulting firm market is creating new opportunities for I-O psychologists to influence the services provided by the HRO industry. Within the past 5 years, there has been some significant consolidation, such as ICF International acquiring Caliber Associates, and Qwiz acquiring e-Predix and PDRI to form PreVisor. Although these firms have maintained their focus on HR and I-O consulting services rather than pursuing HRO opportunities per se, some other consulting firms have strategically moved into the HRO market.
I-O activity in recruitment process outsourcing. RPO is a major area within HRO relevant to I-O psychologists. Kenexa is a notable firm with strong vision in the global RPO marketspace. Kenexa has capitalized on the merger of HR technology firms such as WebHire and BrassRing, StraightSource RPO solutions, and the deep I-O expertise of Gantz Wiley Research and Psychometric Services to form a unique and successful company that employs rigorous assessment methods to deliver quality new hires. Aon Consulting has built its RPO business through a combination of acquisition, new private-sector accounts, and several large contracts in the U.S. federal HR market. To start its RPO practice, Aon acquired the firm Selective Staffing from RPO pioneer Terry Terhark before he founded The Right Thing in 2003. Within the RPO space, Development Dimensions International (DDI) has built an impressive list of alliances with HRO providers such as Hewitt and The Right Thing, under which DDI can either provide RPO services directly or have their assessments integrated into the HRO firm’s offerings. As an Oracle/PeopleSoft partner, DDI had its competency and development content certified as compliant with the PeopleSoft Human Capital Management (HCM) platform. This creates opportunities for DDI licensed content to be used in PeopleSoft-based HRO environments.
Several consulting firms with strong foundations of I-O psychologists, including Aon Consulting, Kenexa, and Select International, have been recognized by the HRO industry. This recognition includes being named to HRO Today’s Baker’s Dozen list of the top 13 RPO service providers in either 2008 or 2009. In July 2010, Aon Corporation, parent of Aon Consulting, announced its intention to acquire Hewitt Associates for $4.9 billon to expand the firm’s global benefits, insurance, and multiprocess HRO businesses. The combined company will be named Aon Hewitt, and its revenues will be approximately 50% consulting services and 50% HRO (including RPO and benefits outsourcing). This represents a strategic move by Aon, making it a stronger HR consulting and outsourcing firm globally. Given Aon’s background in I-O psychology, this merger may provide Aon with opportunities to leverage more I-O psychologists on future HRO and RPO programs.
Although outside the RPO domain, Accenture and IBM have developed strong market positions in business intelligence services focused on designing HR, financial, or information technology (IT) metrics and dashboards to improve business decision making. Increased demand from clients for HR and workforce analytics creates opportunities for Accenture to leverage additional I-O capabilities beyond its I-O professionals currently supporting HRO contracts that include HR analytics or talent consulting.
To keep these market developments in perspective, although the specialty I-O and HR consulting firms have provided quality services in HR content and program development, the large HRO firms have maintained their broad global impact on the direction of the HR services business. The HRO firms (such as Accenture, Aon Hewitt, IBM, and NorthgateArinso) maintain their global impact because those firms shape and manage the most complex (multihundred million dollar, multiyear) outsourcing programs at leading firms such as Best Buy, British Telecom, Marriott, Proctor & Gamble, and Unilever. To give an example of the size of large HRO programs, Accenture’s contract with Unilever, awarded in 2006, is one of the largest enterprise-wide HRO contracts ever awarded. Accenture is providing a broad range of HRO services ranging from recruitment to payroll processing and performance management in 100 countries. The 7-year contract covers 200,000 global workers and is estimated at over $1 billion. This single outsourcing program equates to annual revenue of approximately $140 million per year, which is larger than several midsize I-O consulting firms combined.
At present, the I-O profession has limited influence on the global direction of HR strategy and outsourcing. As I-O scientist–practitioners, we should work to improve our strategic position and value we provide to the executive leadership of our organizations. As a field, we need to increase the numbers of well-rounded I-O practitioners that can bring I-O discipline and methods further into the HR consulting and HRO mainstream.
I-O Psychology Can Shape the Future of HRO
The following recommendations may help I-O psychologists become more relevant to the strategic HRO industry and provide more value to the executive leadership of their organizations. Please consider the following:
- Learn more about your industry or agency: (a) Read about your industry in newspapers or industry publications, such as Wall Street Journal, Business Week, Fortune, Government Executive, or HR Executive; (b) attend conferences related to your industry versus only attending I-O or HR conferences. This breadth of knowledge will increase your overall credibility with executives and help you implement I-O based HR programs.
- Learn more about HR and human capital: (a) Consider joining the Society of Human Resource Management (SHRM), Human Capital Institute (HCI), HR People and Strategy (HRPS), or similar organization; (b) if you typically attend SIOP, try attending an additional HR conference, such as SHRM, HCI, and so on; (c) intermittently scan Web sites of leading “mainstream” HR consulting firms, such as Towers-Watson or Mercer; (d) intermittently scan Web sites of leading HRO firms to learn new HR trends.
- Improve your “business management” skills: (a) If you are in school, consider taking MBA level courses in management, finance, or technology as electives in your I-O program; (b) develop your business skills (such as project management, vendor management, contract management, and negotiation) and your relationship skills (such as communication, influencing, and managing people inside and outside your organization).
- Challenge yourself to apply I-O principles in new ways: (a) Attempt to develop service-level or business-unit performance metrics instead of traditional performance criterion development or workforce survey analysis; (b) get involved in program management, such as staffing analysis, workload estimating, schedule and budget tracking, and performance metric tracking.
- Accept work assignments outside your comfort zone: (a) Consider managing other HR areas for a few years, such as recruitment (not selection), compensation, or training; (b) serve on HR task forces involved in HRIS implementations or HR/benefits vendor selection.
- Consider alternative career options. When considering career options, look closely at HRO firms and mainstream HR consulting firms in addition to the traditional I-O employers and research universities.
- Consider I-O and HRO research topics. Some interesting research has been conducted on I-O involvement in HRO (Eurich, Lanik, Kramer, and Mobbs, 2010). However, it would be valuable to know much more about the relationship between I-O and HRO. For example, how many I-O psychologists work in the HRO industry? What roles do they play? To what extent are they are impacting HR strategy and CEO level decisions? For the I-O psychologists that accept “nontraditional” assignments, how successful are they? If you are interested in conducting additional research in this area, please contact me (kevin.m.kramer@accenture.com).
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