Aggressive growth drives decision to outsource payroll and HR
Starbucks Coffee Company’s “grande” growth plan — which will see it open an average of seven new outlets every day for the next four years and almost double its global workforce — is the driving force behind its recent decision to outsource global HR business process services to Cincinnati-based Convergys Corporation.
The arrangement includes payroll and HR administration for the United States and Canada as well as benefits for Canadian employees, and the outsourcing deal is estimated to be worth about $400 million US, according to Toronto-based market intelligence firm IDC Canada.
A spokesperson at the Seattle-based coffee retailer said the outsourcing deal will maximize Starbucks’ ability to process HR data and administrate more than $4 billion US in payroll — which is essential to the success of the coffee retailer’s expansion goal to add 110,000 employees to its current 145,000 global staff in just three years.
The goal of the outsourcing deal is to help Starbucks build a single global platform for HR services. Outsourcing HR transactions is part of a growing trend in North America and the end result could be a more strategic role for HR practitioners, according to some analysts.
Jim Westcott, a research manager at IDC, pegs the value of HR outsourcing in Canada in 2007 at $1.9 billion — significantly more than the $90 million it was just a year ago.
“A lot of it is driven by processing services,” said Westcott, adding that the Starbucks-Convergys deal is mid-sized for the industry.
Most of the growth is occurring in the U.S. simply because large HR outsourcing players, such as Accenture, EDS and Hewitt Associates, target larger companies, said Westcott. Given many clients are global, country-specific sensitivities, such as privacy regulations, are well managed by the outsourcing companies.
“They typically have local capacity to manage data within the country of origin,” he said.
Westcott added that, in Canada, those organizations poised to offer selective outsourcing in HR only — rather than combined business process outsourcing (BPO) that can include IT, for example — will fare better because companies prefer not to put all their outsourcing investment dollars in one basket.
John Simke, president of Toronto-based Centre for Outsourcing Research and Education (CORE), said “passing off risk” is the number-one reason companies are outsourcing HR processing services.
“HR systems cost tens of millions of dollars. And a lot of companies are saying, ‘Forget it. I am not going to invest in this, it’s too expensive.’ Many companies have limited capital and they want to spend it on the customer, not on an HR system,” said Simke.
Simke added that outsourcing isn’t as much about saving money as it is avoiding future increased costs of maintaining the investment. Outsourcing leaders offer economies of scale, plus experience, which is attractive to companies, he said.
Bridget Baker, a spokesperson for Starbucks, said many of its HR systems were manual and would not have been able to handle processes for 110,000 new employees. She would not comment on whether Starbucks considered investing in a new system of its own.
While some reports suggested the Starbucks-Convergys deal sets a precedent for outsourcing because of growth rather than to fix a problem, Simke disagreed. There have been several large deals that have nothing to do with damage control, he said, pointing to the Canadian Imperial Bank of Commerce deal with EDS in 2001.
And outsourcing isn’t always bad news for front-line HR employees. HR processing staff are often absorbed and valued by the outsourcing company, said Simke. That can be a marked contrast to companies that may treat them as a necessary evil.
Another key benefit is non-processing HR people are freed to focus on strategic competencies.
“There’s a huge opportunity for the HR people who stay behind,” said Simke. “They can focus on the bigger picture and what skills the organization needs to be competitive as the business evolves in a changing environment.”
Some companies mistakenly believe outsourcing HR processes is a simple solution, something that is particularly untrue when the deal marks a transformation to self-automation (for example, where employees must do more of their own paperwork).
“It takes two years before employees even begin to get used to the changes, and they are often up in arms and don’t like it,” said Simke.
According to CORE research, one-half of all organizations report satisfaction with an outsourced HR arrangement. That doesn’t compare well with IT outsourcing, for example, which achieves anywhere from 75-per-cent to 85-per-cent satisfaction, he said.
“Companies need to understand that outsourcing is a business transformation,” said Simke. “Too often it is seen as a procurement.”
The transfer takes time, which explains why the deals often take anywhere from seven to 10 years, said Simke. To ensure a smooth transformation, a permanent stay-behind team of skilled HR staff needs to be created, solely to manage the glitches that naturally result in an HR outsourcing relationship, he said.
“This is a change program, which requires change management and change communication,” said Simke.
Baker could not comment on any specific transformation strategy the coffee retailer will put in place, nor whether the deal will shift Starbucks to more automated HR processes.
The global and local design of the system, as well as testing and implementation, are projected to be completed by spring 2008. And by spring 2009, she said, Convergys will take over payroll and HR administration, with final hand-over in 2010.
Lesley Young is a Toronto-based freelance writer.
The arrangement includes payroll and HR administration for the United States and Canada as well as benefits for Canadian employees, and the outsourcing deal is estimated to be worth about $400 million US, according to Toronto-based market intelligence firm IDC Canada.
A spokesperson at the Seattle-based coffee retailer said the outsourcing deal will maximize Starbucks’ ability to process HR data and administrate more than $4 billion US in payroll — which is essential to the success of the coffee retailer’s expansion goal to add 110,000 employees to its current 145,000 global staff in just three years.
The goal of the outsourcing deal is to help Starbucks build a single global platform for HR services. Outsourcing HR transactions is part of a growing trend in North America and the end result could be a more strategic role for HR practitioners, according to some analysts.
Jim Westcott, a research manager at IDC, pegs the value of HR outsourcing in Canada in 2007 at $1.9 billion — significantly more than the $90 million it was just a year ago.
“A lot of it is driven by processing services,” said Westcott, adding that the Starbucks-Convergys deal is mid-sized for the industry.
Most of the growth is occurring in the U.S. simply because large HR outsourcing players, such as Accenture, EDS and Hewitt Associates, target larger companies, said Westcott. Given many clients are global, country-specific sensitivities, such as privacy regulations, are well managed by the outsourcing companies.
“They typically have local capacity to manage data within the country of origin,” he said.
Westcott added that, in Canada, those organizations poised to offer selective outsourcing in HR only — rather than combined business process outsourcing (BPO) that can include IT, for example — will fare better because companies prefer not to put all their outsourcing investment dollars in one basket.
John Simke, president of Toronto-based Centre for Outsourcing Research and Education (CORE), said “passing off risk” is the number-one reason companies are outsourcing HR processing services.
“HR systems cost tens of millions of dollars. And a lot of companies are saying, ‘Forget it. I am not going to invest in this, it’s too expensive.’ Many companies have limited capital and they want to spend it on the customer, not on an HR system,” said Simke.
Simke added that outsourcing isn’t as much about saving money as it is avoiding future increased costs of maintaining the investment. Outsourcing leaders offer economies of scale, plus experience, which is attractive to companies, he said.
Bridget Baker, a spokesperson for Starbucks, said many of its HR systems were manual and would not have been able to handle processes for 110,000 new employees. She would not comment on whether Starbucks considered investing in a new system of its own.
While some reports suggested the Starbucks-Convergys deal sets a precedent for outsourcing because of growth rather than to fix a problem, Simke disagreed. There have been several large deals that have nothing to do with damage control, he said, pointing to the Canadian Imperial Bank of Commerce deal with EDS in 2001.
And outsourcing isn’t always bad news for front-line HR employees. HR processing staff are often absorbed and valued by the outsourcing company, said Simke. That can be a marked contrast to companies that may treat them as a necessary evil.
Another key benefit is non-processing HR people are freed to focus on strategic competencies.
“There’s a huge opportunity for the HR people who stay behind,” said Simke. “They can focus on the bigger picture and what skills the organization needs to be competitive as the business evolves in a changing environment.”
Some companies mistakenly believe outsourcing HR processes is a simple solution, something that is particularly untrue when the deal marks a transformation to self-automation (for example, where employees must do more of their own paperwork).
“It takes two years before employees even begin to get used to the changes, and they are often up in arms and don’t like it,” said Simke.
According to CORE research, one-half of all organizations report satisfaction with an outsourced HR arrangement. That doesn’t compare well with IT outsourcing, for example, which achieves anywhere from 75-per-cent to 85-per-cent satisfaction, he said.
“Companies need to understand that outsourcing is a business transformation,” said Simke. “Too often it is seen as a procurement.”
The transfer takes time, which explains why the deals often take anywhere from seven to 10 years, said Simke. To ensure a smooth transformation, a permanent stay-behind team of skilled HR staff needs to be created, solely to manage the glitches that naturally result in an HR outsourcing relationship, he said.
“This is a change program, which requires change management and change communication,” said Simke.
Baker could not comment on any specific transformation strategy the coffee retailer will put in place, nor whether the deal will shift Starbucks to more automated HR processes.
The global and local design of the system, as well as testing and implementation, are projected to be completed by spring 2008. And by spring 2009, she said, Convergys will take over payroll and HR administration, with final hand-over in 2010.
Lesley Young is a Toronto-based freelance writer.
