Ask FERF about ... outsourcing human-resource services.

Increasingly, leading companies in the U.S. see the value in building a strong working partnership between the finance and human resource (HR) functions. This partnership is driven by continuing pressure to streamline internal processes and procedures, as well as by the realization that human capital represents the single greatest cost and asset for many organizations.

Nowhere is this newfound spirit of cooperation more evident than when discussing outsourcing HR services, particularly in the administration and management of payroll and benefits, where HR and finance have traditionally overlapped. For many companies, this administration has distracted attention from higher-value activities. Outsourcing these services allows the functions to focus on areas where finance and HR can collaborate on what really matters to the business.

Based on a recent survey of 375 FEI and WorldatWork members, HR and finance share similar, collaborative views of how to use HR outsourcing to drive value to the business. Conducted in August 2004 by FERF, WorldatWork and Mellon Financial Corp. Human Resources & Investor Solutions, the survey is the first to look at how attitudes contrast between HR and finance professionals on outsourcing HR functions and services.

The data collected in this survey support increased collaboration between HR and finance. Responses were very similar for members of WorldatWork (HR) and FEI across a wide array of outsourcing decision-making and management factors: HR (44 percent) and finance (31 percent) were almost equally seen as champions of pursuing outsourcing; 72 percent of finance respondents believe HR outsourcing should be a joint HR/finance partnership.

Finance and HR agree on the drivers of outsourcing: access to improved information, technology and service levels, and an ability to focus on higher-value activities. Cost reduction and avoidance of capital investment were nearly as important, but dissatisfaction with current HR performance was the least significant factor in pursuing outsourcing.

Benefits administration (401(k), health and welfare, defined-benefit plans) remains the most commonly outsourced set of services within HR, followed closely by payroll and training. HR administration is the area that appears most likely to grow, with nearly one-fifth of companies currently considering it for outsourcing.

Most companies use surveys of employees to measure performance against these standards. One company indicated that its contracts with partners contain specific performance metrics in order to measure performance. More specific methods of measurement are included in the chart below.

HR and finance report similar levels of satisfaction: 73 percent of respondents say the decision to outsource resulted in improved service to employees; 70 percent suggested they were better able to focus on high-value activities. Two thirds report the decision to outsource resulted in reduced capital investment and cost savings.

Additionally, respondents were asked to indicate the standards their organization used to measure satisfaction or dissatisfaction with outsourcing. General standards included: accuracy, timeliness of processing and reporting, dependability, service quality, responsiveness, customer satisfaction, compliance with company's stated requirements, reduced in-formation technology time and cost of services. One company indicated there must be a clear cost savings in outsourcing a function versus keeping it in-house. Furthermore, all outsourcers must provide an appropriate SAS 70 (Type 2) for its Sarbanes-Oxley Section 404 attestation.

A complete report of the findings is available through the FERF bookstore at www.fei.org/rf bookstore.

HR Function Outsourced       Measurement

Payroll                      Error rate on paychecks

Health and Welfare           * Number of employee complaints
                             regarding insurers
                             * Turnaround time to resolve
                             regular claims as well as
                             escalated cases
                             * Financial and procedural accuracy
                             * Abandonment rates of
                             benefit call center
Defined benefits and 401(k)  Comparison of investment
                             performance to a number of
                             different performance indices,
                             selected by the company, which
                             are independent of reports provided
                             by the service provider.

Michael Bendorf and Bruce N. Barge are with Mellon Financial Corp. Human Resources & Investor Solutions. Cheryl de Mesa Graziano, CPA ([e-mail]), is Director of Research at Financial Executives Research Foundation (FERF).

contributed by FERF