Outsourcing HR for State and Local Government
States face continuing demands to both lower overall tax burdens, while at the same time increasing the breadth and efficiency of services. Caught between these seemingly opposing goals, state leaders are left with little choice but to consider improving and modernizing existing processes and services to achieve equal or greater service levels within the confines of a relatively fixed budget.
The Business Case
For some time now, states have been harnessing the power of technology and the Internet to make improvements to constituentoriented transactions, e.g., online drivers license renewals and postal address changes. Now, as most transactions have been either modernized or are currently in development, states are increasingly turning to cost savings on common internal processes, such as IT and HR.
One way to accomplish enormous savings is through consolidating common activities across all state agencies and then outsourcing the business function. However, it is important to point out that outsourcing can easily be confused with privatization, and this subtle difference is one hurdle that needs addressing prior to moving forward.
When a state function is privatized, the government entity ‘gets out of the business’ in a particular area, and the privatized function is actually turned over to a private provider. The state retains the responsibility and control of the process outputs while leaving the "how to" in the hands of the outsourcing provider. In addition, all activities that involve the exercise of discretion and obligation of the state are retained by the state.
The state of Florida is leading the charge in this area. Faced with a decision to either buy and maintain a new HR ERP solution or invest millions of dollars in the modernization of its existing solution, COPES, outsourcing emerged as a more attractive alternative.
The original COPES system was developed almost 20 years ago. COPES was home grown and had been modified and extended for years to meet the unique business requirements of each of the 30+ state agencies, the 67 county health departments, the State Courts and the Justice Administration Commission. Based on outdated technologies and older coding languages, it was becoming ever more difficult and expensive to support and improve.
By March, 2001, the decision had been made to either convert the COPES system to more modern standards, or replace it with one of the commercially available HR software packages. Both approaches would require enormous up-front cash outlays. Neither would have a significant enough impact on reducing support costs. Nor was there confidence that either approach would have an impact on the state’s three core objectives for the project:
- Reduce the overall cost of providing HR services.
- Leverage the technology investment made by the private sector in state-of-the-art HR systems.
- Provide the state workforce with improved HR services.
Simply replacing the existing systems would prove fruitless if significant process improvements could not be achieved at the same time. Outsourcing became a more attractive alternative in terms of infusing systems investments from the private sector, as well as best practices. The following metrics drove the business case for outsourcing:
- cost per payroll transaction;
- error rate per payroll preparation transaction;
- cost per hiring action;
- cost per employee for benefits administration and retirement enrollment;
- time required to advertise and fill vacancies;
- receipt, screening and qualification of applications;
- time required to perform employee appraisals/evaluations, tabulation, and obtain peer input review;
- work process improvements and routing of information for approval and review;
- overall cost per employee for HR services.
When these key metrics were benchmarked against the private sector, and the full costs of implementing a new system were finalized, the tremendous opportunity for saving associated with outsourcing became clear. COPES’ replacement was estimated at a onetime charge of US$80m, with ongoing maintenance costs of US$80m+ per year to support the 30+ independent HR functions throughout the state. Over a sevenyear horizon, US$651m was required to upgrade and maintain the status quo.
By contrast, outsourcing promised significant savings. Estimates were as low as US$278m for the same seven year horizon, with the state estimating an additional US$200m needed for repositioning existing state HR staff and maintaining a residual HR staff to supplement the outsourced services. Together, these costs totaled US$478m over seven years, or about a US$173m savings over the selected horizon.
Armed with this information, the state decided to pursue outsourcing, and Convergys Inc. of Cincinnati, OH was selected as the provider.
The overarching objective of the HR Outsourcing initiative is to obtain a world-class service provider of HR, payroll, and benefit administration services. These services should not only represent a tremendous cost savings for the state, but also allow greater flexibility and access to the system by state employees and managers.
The Challenges of State Outsourcing Projects
As with all major projects, the need for good communication cannot be overstated. However, when doing this for a state, it becomes even more critical because of the nature of politics and political agendas. On the surface, a project like this could, to the untrained (or uninformed) eye, seem detrimental to government jobs. In truth, states that have implemented such programs, or are in the process of doing so, end up having very little government workforce disruption; however, it takes careful preparation up front, and requires over-communication to clarify. Key considerations are:
1. Make sure the outsource provider is committed to keeping the jobs within the state.
2. Encourage the outsourcer to offer the first shot at service center positions to agency employees that will be displaced.
3. Create a transition plan for employees that can’t, or won’t, work for the outsourcer, so that they have plenty of lead time and options to fill other state positions (either newly created or available through natural attrition).
4. Communicate timelines far in advance, and create support mechanisms for employees to transition to these other positions.
In Florida, the ‘People First’ project, as the HR outsourcing project is known, kicked off in the late summer of 2002 and as of now (about 20 months later) is just getting through the first round of parallel testing. When compared to private-sector ERP implementations of the same relative size, this is right on schedule. Within state government, projects of this length and size are extremely rare. In fact, most state government plans and budgets are netted out annually, so thinking in multi-year horizons requires some change and a great deal of communication and education.
Unlike the private sector, where companies tend to have more homogeneous processes and common standards, state agencies have no such structures. There are few commonly accepted practices across a majority of agencies for any given process area. Although much of this is accounted for during the original business case analysis, the full extent of differences and the statutory situations causing the diverse processes usually turns out to be far more complex than expected.
Because of this complexity, the decision to fit everything to a single mold needs to be modified. Instead, a best practice is typically encouraged, while deviations are allowed to cover statutory requirements. However each case needs to be evaluated to determine whether system customization would be less costly than reengineering the practice or statute. This hybrid approach, between one way of doing things and mass customization, allows states to receive the full benefits of a best practice approach, limiting customization to only those instances where process change would mean amendment to the law.
The key lesson learned is to fully understand not only the existing processes, but "why" they existed at all, i.e., the root causes of the complexity, before radical change is introduced.
The other great challenge is the decentralized nature and complexity of the state decision-making process. By comparison, a private sector company of the same size would typically have a strong centralized management team for shared services functions like HR and many common systems, processes, and personnel skill sets. Unfortunately, within the state this centralized decision making authority does not exist for HR, as each agency generally has its own completely independent HR function.
Agencies typically have a Personnel Officer (PO) who is responsible for setting and enforcing HR policy. There is rarely a pressing need for the PO’s of multiple agencies to work together to achieve commonality, nor does any one group assert much influence over the PO’s right to control their processes as they see fit. When implementing outsourcing, however, it became increasingly obvious that every decision would require an elaborate and well orchestrated effort to bring together and facilitate more than 40 key decision makers, each of whom had deep and personal ties to their own processes.
It is easy to lose sight of the incredible positive changes that a project like this brings:
- Limited HR support hours become 24x7 support for many common needs.
- Employees and managers can manage their own data on-line, anywhere, anytime, allowing for much more flexibility and personal freedom.
- Tedious manual processes are automated, which makes everyone happy.
- Managers and employees are freed up to focus on more strategic issues, rather than being bogged down with monotonous processes.
- States can focus on core constituent services and not have to worry about things that don’t fall into their core competencies.
The money saved is tremendous. Most states have as much as US$25m a year or more in savings that can be tapped by outsourcing projects. For many, it is much higher.