One-stop Shopping Versus Best of Breed

By Todd Henneman

Jul. 5, 2005

Like many companies, United Parcel Service slowly has expanded its human resources outsourcing since the 1980s. Today, multiple vendors administer human resources tasks for the world’s largest package carrier.

    CitiStreet, a joint venture between Citigroup and State Street, manages UPS’ 401(k) program. Hewitt Associates administers health care. Talx, a business software and services provider, handles employment verifications. ChoicePoint provides background checks. PricewaterhouseCoopers manages UPS’expatriates program. And Mellon Securities manages a bonus stock program for UPS managers.

    But some industry experts see signs that the multiple-vendor approach of UPS may become less common as more companies look for suppliers able to handle all of their human resources processes. As more companies explore outsourcing, they’re weighing the pros and cons of one-stop shopping versus piecemeal outsourcing to so-called best-in-breed vendors.

    “While working with best-of-breed vendors, in theory, is very attractive, in practice, it is very difficult to master,” says Robert Brown, a principal analyst with Gartner.

    Even organizations outsourcing just payroll or benefits administration, for example, often select vendors capable of doing much more. That’s because companies increasingly look for vendors that could take on more processes if they decide to expand their human resources outsourcing, Brown says.

Single-vendor approach
    Twenty-three percent of companies already have consolidated their human resources services with one outsourcing provider or plan to do so within the next three years, according to a survey of 122 companies conducted by the Conference Board.

    In fact, 60 comprehensive human resources outsourcing deals have been formed since 2000, according to outsourcing advisory firm EquaTerra.

    Some companies want “a single face” for their vendor or hope to use one human resources information system. “It’s usually easier to manage (one) vendor,” says Larry Kurzner, senior vice president with Aon Human Capital Services, which provides end-to-end human resources outsourcing to clients such as AT&T.

    If Aon hires another firm to handle some aspect of the outsourcing agreement, Aon manages that tertiary relationship, Kurzner says. The client still has only one vendor to oversee: Aon.

    Organizations that use only a few vendors believe that their approach leads to less employee confusion, better integration and easier coordination of services, less time dedicated to vendor management and more buying power, according to a recent survey by Hewitt Associates.

    But going with a single vendor comes with potential downsides. “If you go with one provider, sometimes you have to compromise one area for the sake of another area,” says Robin Rasmussen, managing director of human resources research at EquaTerra.

    Research by EquaTerra suggests that companies that outsource to more than one provider are more satisfied than those with just one provider are. The reason why, though, is unknown. It could be that buyers who choose multiple vendors have a preconceived belief that they are receiving best-in-class service, Rasmussen says.

    Despite hoopla about large companies such as Bank of America, Prudential Financial and Motorola signing comprehensive human resources outsourcing deals, most companies outsource incrementally, according to a study released in May by Watson Wyatt Worldwide.

    Only 7 percent of the 135 respondents say their HR departments are mostly outsourced, according to the Watson Wyatt study, compared with 65 percent who say they are mostly insourced. Twenty-nine percent say their human resources administration is split equally between insourcing and outsourcing.

    “The value of the unbundled approach is that you’re getting the best services from those companies that specialize in those services,” says Bob Crow, a senior consultant for Watson Wyatt’s strategic sourcing practice. “I’m pretty much a fan of the unbundled model because a lot of companies don’t like to have all of their eggs in one basket, and it gives them leverage to negotiate if they keep it broken up.”

Market consolidation
    The competitive market of human resources business process outsourcing has fueled consolidation as suppliers buy niche expertise that they lack.

    Last year, Hewitt Associates bought rival Exult. In January, Electronic Data Systems agreed to pay $420 million for the human resources outsourcing division of Towers Perrin. And in May, Affiliated Computer Services completed its $405 million acquisition of Mellon Financial Corp.’s human resources consulting and outsourcing businesses.

    “Yesterday the industry was made up of tons of suppliers,” says Michel Janssen, president of the supplier solutions division at Everest Group. “Today the trend is to consolidate those into one main contractor.”

Todd Henneman is a writer based in Los Angeles.

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