The European human resources (HR) and finance community at medium and large corporations is going through a rapid transformation due to a phenomenon that the US, and to a lesser extent the UK, has been experiencing for the past 15 years – outsourcing. And, based on the experience of the US, once outsourcing begins to emerge as a trend, it will become very popular and grow rapidly.
According to an informal survey that we recently conducted among several European and US companies with substantial employee populations in Europe, the two primary reasons for outsourcing HR and pension activities are to reduce costs and to improve the quality of the provided services. How does outsourcing achieve these goals? The following reasons can be cited:
o Administrative activities by nature lend themselves to being outsourced to providers that specialise in handling transactions; and
o Administrative work rarely adds value to an organisation. Outsourcing this kind of work allows HR and finance departments to focus on more strategic activities to help meet business goals.
Emerging HR technology has given rise to customised, personalised solutions such as employee portals that enhance the employee’s work experience and relationship with employers.
Most of the new outsourcing solutions are designed for employee self-service, which reduces administration for both support functions and managers.
Within the HR and finance departments (outsourcing is not restricted to these departments, as outsourcing of IT and other functional areas are also becoming very popular), the most popular areas of outsourcing are pay and benefits, training and development, and recruitment and selection.
Within the pay and benefits arena, pension outsourcing has been the most common outsourcing activity, typically on a country-by-country basis. In Europe, where defined benefit (DB) plans are still much more prevalent than defined contribution (DC) plans, companies often outsource the transactions that relate to employee events (new hires, transfers, terminations, and retirements), a limited amount of employee interaction (for example, annual pension statements) and some regulatory reporting requirements. However, as the trend towards DC plans continues to grow, the amount of employee interaction will increase substantially, and hence, so will outsourcing. In the US, outsourcing in the pension area began with the enormous surge in the popularity of 401(k) plans in the 1980s, whereby employees were given, for the first time, choices in the investment of their pension benefits.
In Europe, there is a trend to DC plans due to a shift in government policy towards the funding of pension benefits, demographics and changing attitudes of European companies away from the employee-for-life syndrome to employee-self-responsibility.
Recent data on outsourcing in Europe shows that the UK, Belgium, France, the Netherlands and Switzerland have taken the lead.
Outsourcing has become a hot topic amongst organisations, especially in these difficult economic times. Most industries are under increasing pressure to reduce costs and improve efficiencies. Among the significant treands in HR/pensions in Europe are:
o outsourcing activities more than doubled between 1996 and 2000; HR outsourcing grew by 65% in 2001 alone;
o 84% of global companies with more than 1,000 employees outsource at least one HR function;
o 40% of medium and large European companies have increased their HR/pension outsourcing over the last three years;
o the satisfaction level of outsourcing amongst companies in Europe has been very high, with only 5% of companies saying it is ineffective;
o initially, the majority of HR/pension outsourcing was restricted to transactional and single process activities; now, the trend is towards business process management and multi-process services (for example, end-to-end pension solutions including all administrative, employee interaction, investment advice, management of pension risks, etc); and,
o while outsourcing has primarily been offered on a local, country by country basis, there is a strong movement towards regional solutions, particularly if legislation allows for more flexible programmes and poliGiven the interest and the success of outsourcing in the US, why have so many companies in Europe still not followed suit? There are many reasons, most of them unique to Europe:
o Legislation: although Europe operates under a common market, legislation is still primarily country specific, which adds a high degree of complexity to pan-European solutions. Many organisations have substantial employee populations throughout Europe, but not on a country-by-country basis. Hence, this reduces the advantages of economies of scale, often a key criteria in the financial decision making as it relates to outsourcing.
o Industrial relations: most organisations in Europe operate with several work councils and labour agreements. Adding data privacy laws to the equation, there are substantially more negotiations required with various parties whenever employees’ benefits are involved, which slows the process of outsourcing.
o Culture: HR/pension outsourcing is more than simply asking a third party to provide services to employees – it’s a major change in the employment relationship an organisation has with its employees. Many companies are reluctant to allow a third party to have access to confidential employee data, regardless of confidentiality agreements. There’s also a movement from paternalism to employee self-responsibility, which is often an enormous change from how a company has always operated and dealt with its employees.
o Efficient HR information systems platforms: a necessity of HR/pension outsourcing is access to fully comprehensive, accurate employee data. Many organisations in Europe are still in the process of implementing effective HRIS platforms. Studies in the US have shown that an efficient HRIS is critical for a successful outsourcing relationship.
HR and pension outsourcing in Europe is here to stay, it’s only a matter of how extensively and how quickly it happens.
James Dale is the European head of business development for consultants Hewitt Bacon & Woodrow