August 13, 2004—National and state governments are rapidly joining the private sector in outsourcing key human resources and other functions, according to a Conference Board report released recently.
The report, sponsored by Accenture HR Services, finds the outsourcing movement is taking hold in governments and government agencies, showing how countries such as the United Kingdom and Australia moved early into outsourcing. The three major drivers: cost savings, reducing capital spending, and transforming fixed costs into variable ones.
But the study notes that governments must carefully weigh negative consequences, such as job losses, skills transfers, unemployment costs and the disruption of local services against the promised benefits.
“Through technology tools and processes that most public-sector organizations could not afford to build internally, outsourcing can provide much improved and more convenient services for employees,” says Ton Heijmen, Senior Advisor to The Conference Board on Outsourcing/ Offshoring. “This is a particular concern for public-sector organizations, which generally cannot compete with the private sector’s pay packages to attract and retain talent.”
But convenience and cost reduction are not the only attractions offered to public organizations by HR outsourcing. Outsourcing can enable public sector organizations to centralize often complicated and fragmented processes throughout their organization, helping their HR departments keep talented workers and improve service to U.S. citizens.
Some 10 to 15 states are now said to be considering HR outsourcing. The government trailblazers include the U.S. Transportation Security Administration, the State of Florida, Detroit Public Schools and the Texas Health and Human Services Commission.
Says Heijmen: “States considering outsourcing should be developing a business case for this move. It’s clear that more organizations are considering the wholesale outsourcing of integrated functions, including human resources.”
The study, based on in-depth interviews and case studies, identified three forces that are converging to fuel the HR outsourcing movement in U.S. government. First, IT systems are reaching the end of their life span. Legacy computer systems, which are 25 years old, need to be replaced. With growing deficits and a reluctance to increase taxes, many states are looking at capital outlays of $80 million to $100 million to replace these systems.
Financing technology upgrades is too costly for many government organizations, given the rapid rate of technological change and persistent cost-reduction pressures.
Second, the economic downturn that struck the nation in the late ’90s has created severe budget shortfalls throughout the government sector, particularly in state governments. Rising deficits threaten government’s ability to perform key services. Also, more government employees want to run their organizations by management principles of efficiency, optimum customer service, and performance measurement that have been long embraced by the private sector.
A number of government agencies in the UK, Europe, and Australia were early examples of public sector outsourcing of all or parts of the HR function a trend now growing in the U.S.
HR historically has lacked organizational stature in both the private and public sectors. This has only recently begun to change as organizations slowly recognize the strategic value of human capital and other intangible assets in today’s largely service-based economy.
The Office of Personnel Management, the federal government’s HR agency, is also weighing the merits of outsourcing HR. In the U.S., the trend is likely to center on the federal and state level, since scale is necessary for organizations to realize outsourcing’s full benefits and justify its costs.
Despite political sensitivities and union resistance, many in the industry see no abatement of interest from public-sector organizations. As one study participant observed: “HR outsourcing in government is ready to explode.”
With some government workforces more than 90 percent unionized, an organization can easily have 10 different benefit packages, the terms of which must all be accurately reflected in employee databases.
For more information, contact The Conference Board.
