Hackett: Outsourcing Increases HR Costs at Typical Companies, While World-Class Use it to Cut Transaction Processing Costs

In most cases, HR outsourcing leads to higher costs at typicalcompanies, despite the fact that world-class HR organizations rely onselective outsourcing to reduce costs in highly repetitivetransaction-oriented areas, according to newly-released 2005Enterprise Book of Numbers(C) research from The Hackett Group, abusiness process advisory firm (NASDAQ:ANSR).

Hackett's newest Book of Numbers research volume, shows acorrelation between greater spending on outsourcing and increasedtotal HR cost per employee at typical companies. This is driven, inpart, by common mistakes made by these companies during the process,such as neglecting to streamline processes beforehand and retainingexisting internal staff responsible for the outsourced function. Incontrast, world-class companies are able to use outsourcingeffectively as part of their business process sourcing mix, to cuttransactional costs and enable increased internal focus on strategicactivities.

Overall, Hackett found that world-class companies now spend 25percent less than their peers on HR and rely on 16 percent fewer HRstaff. World-class HR organizations are also achieving resultssuperior to typical companies in both quality and the effectiveness oftheir operations, with lower levels of complexity and more streamlinedprocesses that allow them to fill open positions faster, see lowervoluntary termination rates, and demonstrate greater alignment withtheir company's business goals.

The Hackett Group is a world leader in best practice research,benchmarking, and advisory services that empower executives to achieveworld-class enterprise performance. Hackett offers analysis andinsight backed by metrics derived from 3,300 benchmark studies over 13years at nearly 2,000 of the world's leading companies, including 96percent of the Dow Jones Industrials.

Hackett's research showed that at typical companies, a correlationexists between increased outsourcing as a percentage of total spendingand increased overall HR costs per employee. But world-class HRorganizations actually outsource more than typical companies in lowvalue-added transactional areas, using outsourcing to drive downcosts. World-class HR organizations dedicate nearly half of theiroverall transactional process costs to outsourcing, 26 percent morethan typical companies. As a result they are able to spend 19 percentless per employee in this area.

"These findings appear to contradict each other. But on closerinspection, they don't," said Hackett Senior Business Advisor PattyMiller. "Typical companies often outsource for the wrong reasons, inan attempt to lower costs and fix processes they know are broken. Thisis almost always a mistake. In addition they frequently haven'tstandardized and simplified their operations, and the resultingcomplexity drives increased outsourcing costs. Finally, they oftenretain redundant internal labor after outsourcing, rather than usingit as an opportunity to refocus their internal staff."

According to Hackett HR Practice Leader Stephen Joyce, "Bycontrast, world-class HR organizations take a very different approachtoward outsourcing. They understand that effective business processsourcing is about aligning their service delivery models with businessprocesses and responsibilities. They carefully evaluate individualbusiness processes and make decisions relating to outsourcing andother options based on factors like relative cost, strategic value,and non-performance risk. For low-value transactional areas, theyimplement best practices and streamline activities, use self-servicetechnology to reduce or eliminate them where possible, thenselectively outsource, making sure to hold the outsourcers accountablefor their performance. Finally, they focus internal resources onhigher-value areas, such as total rewards planning, strategicworkforce planning, and workforce development, enabling them toprovide greater strategic value to their company."

World-Class Spend Less, Yet Achieve Higher Effectiveness

Hackett's Book of Numbers research found that a significant costgap exists between world-class and typical companies, with world-classcompanies now spending 25 percent less than their peers ($1,422 versus$1,895/company employee). World-class companies also now operate with16 percent fewer staff (11.88 versus 14.11 HR staff/1,000 employees).

World-class HR organizations also achieve superior results acrossa range of other measures. They reduce complexity, relying onsignificantly fewer health and welfare plans, savings plans, andcompensation plans than typical companies. World-class HRorganizations also fill open positions for managers, professionals,and clerical staff up to 31 percent faster than typical companies, andsee 66 percent fewer voluntary terminations. This lower turnover ratehas benefits on two levels. It shrinks the direct cost ofadministering the employee life cycle processes, including hiring,orientation training, enrollment programs and termination processes,and also reduces the time and resources necessary to recruit and trainnew hires. Finally, Hackett's research showed that world-classcompanies are also much more closely aligned with their companies'business goals, and are 67 percent more likely to have an explicitworkforce strategy in place.

More information on The Hackett Group and its new Book of Numbersresearch volume, entitled "2005 Performance Metrics and Practices ofWorld-Class Companies: Executive Insights in Finance, InformationTechnology, Human Resources and Procurement," is available: by phoneat 770-225-7300; by e-mail at info@thehackettgroup.com; or on theWeb at http://www.thehackettgroup.com.

About The Hackett Group

The Hackett Group, http://www.thehackettgroup.com, a businessprocess advisory firm and an Answerthink company, is a world leader inbest practice research, benchmarking and advisory services thatempower executives to achieve world-class enterprise performance. OnlyThe Hackett Group empirically defines world-class performance insales, general and administrative (SG&A) and supply chain activitieswith analysis gained through 3,300 benchmark studies over 13 years atnearly 2,000 of the world's leading companies.

The foundation of Hackett's benchmarks, transformation services,and membership-based advisory programs is our proprietary database ofHackett-Certified(SM) Practices, approaches which are proven tocorrelate with superior performance metrics. This unparalleledknowledge repository enables Hackett business advisors to providedata, advice, and strategic insight with a level of integrity andauthority available nowhere else. As of this writing, Hackett clientscomprise 96 percent of the Dow Jones Industrials, 77 percent of theFortune 100 and 92 percent of the Dow Jones Global Titans Index.

Hackett-Certified and Book of Numbers are service marks of TheHackett Group.

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