The growth in HR/benefits outsourcing is slowing, as employers are taking more time to evaluate potential deals and being more conservative in the deals that they strike with outsourcers. They also are pushing for a better price on outsourcing services they already have.

In recent months, the growth "has dropped quite dramatically. There isn't the volume there," says Helen Neale, an HR outsourcing research manager at NelsonHall, a business process outsourcing market research firm. "Organizations are actually pulling back from outsourcing initiatives because they've got other things that they need to be worrying about" during these uncertain economic times.

In addition, she says, "The kinds of deals that we're seeing are much smaller in size. We're only getting a couple of those big deals. Because of the problems that are occurring in the economy, organizations do not want to deal with the amount of investment both in time and money that those huge deals require. The scope [of the deals] is coming down."

In 2008, although the HR outsourcing market shrank considerably in terms of new deals signed, the number of HR outsourcing suppliers increased, according to a recent report from Everest Research Institute. Compared to 47 new deals signed in 2007, Everest estimates about 30 deals were signed in 2008.

Stan Lepeak, managing director of global research for EquaTerra, an outsourcing adviser based in Houston, comments, "If you're going through a big restructuring, if you're laying people off, if you're cutting costs, if you're changing management, if you're merging, divesting, taking bailout money — it just makes it very hard to also go through outsourcing, in some cases just because management doesn't have the attention to support it, but in other cases because there's really no discretionary funds to pay for the outsourcing."

In addition, he adds, "it can be difficult to structure an outsourcing arrangement if you're not really sure what your organization's going to look like a year or two out."

Due to the recession, corporations are putting pressure on HR departments to save money by reducing the cost of current outsourcing services.

 "A lot of people are revisiting HR in terms of, 'How can I take this cost off my balance sheet?'" Neale confirms. For example, there's been a decrease in the growth of recruitment process outsourcing because many companies aren't hiring as much.

Overall, Rick Hubbard, the North American practice leader for technology and administrative solutions at Watson Wyatt, advises HR/benefits pros to closely examine three things — administration, technology and employee communication — and determine whether each one is best handled internally or externally.

Renegotiating and achieving ROI

Employers are pressing outsourcing partners for cost improvements, usually via renegotiation of pricing, service levels and other contract terms. However, consolidation among U.S. vendors may mean less leverage for employers in future negotiations, according to a recent report from Morrison & Foerster, a multinational law firm.

As U.S.-based options contract though, the next few years may see an emergence of offshore HR outsourcers. "HR services suppliers in the United States are being challenged by a growing base of Europe- and India-headquartered competitors that are well-positioned to offer buyers near-term cost-cutting solutions that can be realized through labor savings and transaction-focused offerings," says Monica Barron, vice president at Everest Research Institute.

Whether using foreign or domestic providers, more employers may accept longer HR outsourcing contracts, stretching beyond the three- or five-year duration that is typical today, Neale observes. However, that doesn't mean employers are willing to patiently wait for a return on investment.

 "They want to be able to realize the benefits from these deals as quickly as possible," Neale notes. "The days of being able to get payback on deals nine to 12 months into it are probably shortening. These organizations don't want to have to invest too much upfront."

ROI may come from savings on software, technology upgrades and HR staff. It also may come from HR leaders having more time to concentrate on strategic planning. "It puts them more on the strategic, rather than the practical, level," says Mary Tinebra, global head of sales and marketing for outsourcing at Mercer.

Lepeak confirms, "There's a lot of pressure on HR groups to focus more of their attention on those more strategic activities and quite often that might mean they focus less attention on payroll and benefits administration and basic aspects of recruiting."

Employers need to accurately measure baseline costs and other metrics before the implementation of outsourcing, have clearly defined roles for the employer and the outsourcer, carefully assess the performance of the outsourcer and make sure it aligns with the overall business strategy, Neale says. It's important to track metrics like quality of hire and retention rates for new hires after three months, six months and one year.

Hubbard says, "All companies are pushing hard on their costs. Many companies have concluded that many of the cost savings they were hoping for by outsourcing have not been realized. More often than not, I'm hearing that the savings were initially overestimated."

To solve that problem, Lepeak suggests, "Any time you see an estimate from an outsourcer, you really want to validate that they understand where you're starting from ... and [that you] understand the method and approach that's going to be taken." This helps you avoid misunderstandings or information gaps that lead to conflict in the future.

According to Morrison & Forrester, "As contract margins get tighter and customer tolerances for underperformance shrink, we are already seeing an increase in the number of disputes (including litigation) between outsourcing customers and suppliers. Unless properly handled, such claims and disputes can have a devastating impact on the overall outsourcing relationship.