Outsourcing HR is gaining momentum both locally and overseas. Lynnette Hoffman looks at the trend on an international scale and examines the ramifications for companies looking at going offshore with HR outsourcing
Outsourcing HR is gaining momentum both locally and overseas. Lynnette Hoffman looks at the trend on an international scale and examines the ramifications for companies looking at going offshore with HR outsourcing
No longer just the domain of gutsy, trendsetting companies, outsourcing offshore is big and getting even bigger.
According to research by Booz Allen Hamilton, about 25 per cent of all business process outsourcing is now going offshore, and it’s growing at double-digit rates in the US and Europe. The trend is gaining ground here as well, with high profile companies such as Qantas, Telstra and Optus moving parts of their workforces abroad in an effort to stay ahead of the game in their increasingly competitive industries. A 2004 study by Hewitt Associates showed that almost 40 per cent of more than 500 Asia Pacific companies have already outsourced some of their HR functions.
For one thing improved communications technology and access to digital information in even the most far flung corners of the earth have made bridging the communications gap far easier than it was a decade ago. The advancing technology has also meant a sharp drop in the costs of telecommunications.
So despite complications from cultural difficulties to potential consumer backlash, an increasing number of large companies are considering making the leap.
India and beyond
India is still one of the largest providers of offshore outsourcing services in the world, thanks to huge numbers of highly qualified, skilled, English-speaking workers who will work for a fraction of the costs of their western counterparts and still be making a good living.
But other countries around the world are increasingly becoming major players as well.
Last year EDS put US $8.5 million ($11.3 million) into a financial services centre in Hungary that provides payroll and accounting services for both EDS employees and its clients in 17 countries.
Not too far away in Poland, HP is setting up a major BPO centre – in April the firm said it would invest $50 million in the project over five years to expand HP’s growing global BPO business presence. HP says the country’s resources make it an ideal place to meet growing service demands.
“By opening a new centre in Poland, HP expects to be able to expand its capabilities and provide a solution for customers looking to take advantage of transaction processing on a regional basis,” HP worldwide vice president Marc Schwarz says.
Many companies are also outsourcing their administrative functions to places such as the Philippines and Kuala Lumpur. Other strongholds include China and Brazil.
Further, Accenture is looking to hire another 30,000 to 50,000 staff to work in India, China and the Philippines. (The consultancy currently employs about 4,600 people in Manila; 4,000 are in IT services, which has traditionally been a major player in white collar outsourcing, while 600 people are employed in BPO, a testament to the growing trend.)
What are the advantages?
The biggest reasons for outsourcing offshore are lower administrative costs and increased access to a highly skilled workforce, says Rohan Connors of Hewitt Associates.
“India has a very highly educated middle class of about 100 million people,” Connors says. “Many companies outsource because they can’t get that quantity of skills in their own country.” It also has huge numbers of people who speak English, making it especially attractive to multinationals, he says.
Booz Allen Hamilton’s research shows companies can save anywhere from 40 to 70 per cent in labour costs by offshoring. Of course they do often need to beef up their technology, telecommunications and management overheads to make it work, but with the added costs averaging 10 to 12 per cent, savings are still significant.
The sheer volumes of skilled labour available in countries such as India mean competition is fierce, and that leads to higher productivity as well, according to research reported in a parliamentary review on outsourcing put together by researcher Dr Richard Grant and published in March. Employees in developing countries were also characterised as young, highly motivated and well educated: “the developing world is producing millions of highly motivated graduates who are as capable as the most highly educated workers in the developed world but available to work at a tiny fraction of the cost.”
And sometimes companies go offshore for different reasons all together. When Qantas decided to base 400 flight attendants in London last year, it certainly wasn’t going to be paying them any less. Instead the savings came from reduced accommodation and allowance expenses. In 1999 the airline opened a recruitment centre in Thailand, saying it wanted to diversify its staff, though labour unions questioned its motives.
The push for productivity and profits
More and more organisations are handing over back office operations and transactions processes, offshoring payroll, paperwork, processing and administration, among other HR functions.
Leading the trend are big blue chip companies such as Procter & Gamble, which first piloted offshore outsourcing in information technology in 2001 – with savings of about $28 million in that first year. Last year IBM signed a 10-year, US$400 million ($534 million) mega deal with Procter & Gamble to run its HR services, including everything from payroll to expenses to recruitment and training as well as expatriate administration and other HR functions. IBM has taken over 800 staff in 28 countries and manages the company’s three main offshore operations in the Philippines, Costa Rica and England.
Among the factors that often attract companies to offshore outsourcing is the opportunity to access best HR practices, as well as critical mass expertise and technology, according to Bill Farrell, IBM Asia Pacific partner for human capital management, but for Procter & Gamble the move to major offshore outsourcing 18 months ago was designed to improve things even further rather than to redress any gaps.
“Procter & Gamble already had what would be considered best practice human resources. They were leading the way and they wanted to move to the next level in the process,” Farrell says. “One of the key drivers was that they didn’t see HR administrative functions as part of the core business … They were looking at ways of reducing the cost and improving service.” Over the life of the 10-year contract, costs are set to be reduced by 30 per cent, he says.
Risks and concerns
Not surprisingly, global outsourcing is not without controversy – and consequently not without risks.
Exchange rates can be volatile so cost advantages often fluctuate along with them. A report by the economic consultancy Access Economics pointed out that while Australian companies offshoring to India benefited when the Australian dollar rose from 24.8 rupees to 34.7 rupees from 2001 to 2004, American companies were on the losing end as their dollar fell during the same timeframe.
One of the biggest issues companies face is potential backlash from the public and unions, as well as opposition from politicians. People are fearful of job losses and offshoring can sometimes create a publicity nightmare, as Coles Myer experienced when ABC aired the documentary ‘Diverted to Delhi’, which detailed the extent to which Indian call centre employees disguise their accents and culture, even downloading information about current news and weather in the places they’re calling (or being called from) to assist with the small talk.
After about four years in Delhi, the company moved most of its call centre employees back to Melbourne in 2003.
And sometimes the day-to-day running of the business can also be difficult from abroad. “There can be issues with infrastructure in terms of finding consistent telephones and power and water supplies that are reliable,” Hewitt consultant Andrew O’Keeffe says. If those sorts of things falter it’s a major loss for the company, so detailed planning is essential, he says.
Minimising pitfalls
“With offshoring there’s a number of key decisions that have to be made, ranging from deciding where best to locate the offshore operation to how best to resource and manage it and how best to operate and deliver the services,” O’Keeffe says. That involves figuring out how best to capture critical knowledge, develop procedure guides and importantly, document what you’re doing every step of the way, he says.
Extensive research, transparency, a solid understanding of the scope of the project, the capabilities of the workers and the global reach and a well planned transitional approach are keys to making offshore outsourcing run smoothly, Farrell says. And extensive communication and consultation can’t be ignored either.
Both Qantas and Optus have made minimising Australian job loss central parts of their strategies. While each situation is different, local staff can often stay on, focusing on front office tasks rather than administration, Farrell says. “In some cases employees will move to an organisation where (they) join a revenue centre whose core business is to provide services to their clients.”
Qantas has promised Australians will have priority for the jobs it moves to London, for instance, while Optus made a point that none of its permanent staff in Australia would lose their jobs when 150-person call-centre opens in Delhi, though it didn’t guarantee the same for its contract staff.
The two companies remain optimistic that despite the challenges their decision will give them a competitive edge, as it has for other organisations elsewhere.
