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Stellar Growth
How prevalent is HR outsourcing by the middle market? According to a recent survey by Gartner Inc., 89% of midsize companies outsource at least one HR function. "It's the sweet spot of the midsize business process outsourcing market," says Robert Brown, a senior industry analyst at the San Jose-based technology research firm.

By way of comparison, the second most outsourced activity by midsize companies was finance and accounting, outsourced by only 25% of respondents in Gartner's 2002 survey.

Payroll administration was the primary HR function shifted to outsourcing service providers, according to the study, with 89% of HR departments reporting they had hired companies like Paychex, ADP, TALX and Ceridian to handle payroll functions for them.

Benefits administration, including 401(k) programs, short-term disability and pension management, was the number two HR process outsourced by the respondents, with 52% shifting the responsibility to service providers like Exult, Fidelity Employer Services and Hewitt Associates, among others. Employee education and training was outsourced by 43% of respondents, hiring and recruiting by 20% and personnel administration by 7%.

ChildTime Learning Centers Inc. currently outsources two HR functions--employment verification and unemployment administration. The Farmington, Mich.-based educational and child-care center operator employs some 7,500 people a year, though few remain in place for long.

"This business has a high turnover rate," says Scott Smith, vice president of HR at the $200 million in revenues company. "You would not believe the huge number of phone calls we get to verify that someone worked for us. We had two people on staff whose sole job was verifying employment, sifting through old employee records and processing all the documents. Plus, we had to train each of the managers at our 325 locations how to handle these calls. It was unbelievably time-consuming."

Ditto the time it took to process unemployment claims in the 30 states in which ChildTime conducts business. Each state's different unemployment forms, rates and requests for employee data was so burdensome, Smith says, slip-ups were inevitable.

"There were issues with the wrong data and, especially, frivolous claims," he notes. "We were unable to teach our 300-plus managers how to detect or respond to claims that were invalid. Since shifting the task to TALX, which has expertise in protesting such claims, we've got a 90% win ratio saving us between $800,000 and $1 million a year."

St. Louis-based TALX Corp. also handles unemployment claims for Spherion Corp., a Fort Lauderdale-based temporary staffing company with more than 500,000 temps flowing in and out of its employ each year. Roy Krause, Spherion executive vice president and CFO, estimates outsourcing this transactional function chips $2 million a year off the bottom line. "HR now focuses on strategic issues like employee succession, recruitment and compensation--not processing unemployment claims," he says.

Realizing Return
Measuring the return on investment from HR outsourcing is not brain surgery. Companies save dollars by trimming headcount and avoiding expensive technology investments, while putting their HR resources to work on high-level strategic endeavors like recruitment and compensation.

According to TPI Inc., a Houston-based outsourcing advisory firm, companies that perform HR functions in-house typically employ one HR employee for every 100 active employees. Outsourcing HR functions to a specialty provider reduces this to one HR employee for every 150 to 200 employees, representing a significant savings in labor expenses.

Not that outsourcing HR is pain-free or error proof, even in the middle market. Prof. Lawler cites one major risk_hiring an inferior outsourcing service provider. "The big challenge is knowing a good provider from a bad one, and by `bad' I mean a company that may not be in business next week," he warns. "Few things are as disastrous as transferring all your employee records in payroll and benefits administration to a company that goes bankrupt." To reduce the risk, he recommends having a financial consultant review the provider's financial situation and obtaining referrals from multiple clients.

As for determining which HR functions to outsource, Lawler says discern the company's core competency first. "Assess your brand as an employer_the HR functions that distinguish your company in its market," he counsels. "If customer relations or management development distinguish you as an employer, don't outsource them. Everything else, on the other hand, can go.

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