Outsourcing of HR services is one potential route by which HR functions can take on a more strategic and influential role within their organisations. But as Human Resources examines, such decisions needs to be carefully considered as one size does not fit all
Outsourcing of HR services is one potential route by which HR functions can take on a more strategic and influential role within their organisations. But as Human Resources examines, such decisions needs to be carefully considered as one size does not fit all
Outsourcing of HR services is one potential route by which HR functions can take on a more strategic and influential role within their organisations, but the decision needs to be carefully considered, will not be right for all, and considerable effort needs to be devoted to ensuring a smooth transfer of responsibilities.
A recent report from the UK has found the decision to outsource HR services is a complicated one. “People management plays a crucial role in delivering organisational performance. In today’s modern, knowledge economy this is more true than ever before. The decision to outsource HR services is therefore not to be taken lightly,” says Vanessa Robinson, organisation and resourcing advisor at the Chartered Institute of Personnel and Development (CIPD), which produced the report. “However, there are many circumstances in which outsourcing HR services can deliver tangible benefits to the organisation, for example freeing HR professionals to devote more time to a strategic role in supporting organisational performance.”
Bryan Doyle, president of Hewitt Associates, HR outsourcing group, predicts the growth of HR outsourcing will continue to gain momentum as organisations reap benefits such as cost savings, new capabilities and services for employees, and enabling HR to focus on more strategic work that is integral to the business. “For most organisations, HR administration is not their core area of expertise, so by turning it over to an HR expert, they can focus on critical business needs.”
Commenting on a Hewitt survey of 129 large US companies, he said 94 per cent currently outsource at least one HR function or activity. The most commonly outsourced HR functions – either fully outsourced or almost fully outsourced –include outplacement services (91 per cent); employee assistance programs (89 per cent) and defined contribution or 401(k) (83 per cent) plans. By 2008, companies plan to expand outsourcing into the following areas: leave management, learning and development, payroll, recruiting, health and welfare, as well as global mobility.
Cathy Tripp, practice leader for health and welfare benefits administration at Watson Wyatt, has seen similar trends in HR outsourcing. “Over the next few years we will likely see increases in the outsourcing of transactional administration, such as retirement and payroll activities, but the vast majority of companies are planning to keep the more strategic components of their HR activities in-house,” Tripp says.
Why outsource?
“Cost reasons alone are not sufficient to drive the decision,” according to the CIPD’s Robinson. “Decision makers need to ask whether there is a need to change the way the HR department operates and review existing provision. This review needs to consider cost, administrative efficiency and HR policy strategy and expertise. Where gaps are identified, organisations need to consider whether these are best solved by minor tinkering or major transformation.”
According to the Hewitt survey, companies’ top reasons for outsourcing HR include access to outside HR expertise, service quality, ability to focus on core business, cost savings, opportunity for better data and relief from administrative burdens. In selecting an outsourcing provider, companies say the following requirements are most important: demonstrated HR process expertise (95 per cent), prior experience/track record (93 per cent), service level agreements in contracts (83 per cent), cost savings guarantees in contracts (65 per cent), and leading-edge technology (65 per cent).
“It’s important to understand that HR is unique from other areas that companies typically outsource, so it’s critical that they conduct a thorough evaluation to ensure they select a provider with the HR expertise, experience and capabilities needed to manage people issues and deliver the quality service and results they are looking for,” says Doyle.
Michael Cornetto, senior HR delivery consultant at Watson Wyatt, says most companies are taking an incremental, selective approach towards the outsourcing of their HR functions. While most companies expect to outsource more in the future, they are less inclined to consolidate their outsourcing activities with a single vendor, and far less willing to outsource the more strategic components of their HR function, he says. In taking a selective approach to HR outsourcing, Cornetto says they look for an optimal mix of internal and external processes and technologies. “Despite much speculation otherwise, there is no headlong rush toward the total outsourcing of all HR services. Many companies that investigate full HR outsourcing alternatives choose to refine their existing delivery model rather than outsource everything,” he says.
Outsourcing challenges
It must not be forgotten that a transition from in-house HR provision to the use of an outsourced provider is a significant change for the organisation, and must be managed accordingly, Robinson says. “If significant time is not devoted to the process of change, with unequivocal top-level support, there is a danger that staff/line manager relationships and other aspects of people management policy may be neglected.”
Hewitt’s Doyle says that even when organisations decide to pursue HR outsourcing, some face challenges. The survey ranked their top concerns about HR outsourcing as (1) losing control of key processes, (2) employee reactions to an external service provider, and (3) difficulty in building a business case. During the outsourcing transition, 81 per cent of companies said it went smoothly, without any significant problems.
To help prepare their HR function for outsourcing, the majority of employers typically defined new HR roles and responsibilities (70 per cent), restructured HR (62 per cent), developed and communicated a new HR strategy (55 per cent), and provided training for employees in new roles (43 per cent). Companies also prepared all of their employees for outsourcing by creating communication campaigns (88 per cent), and providing training for managers and employees (56 per cent).
Only 23 per cent of companies have brought an outsourced function back in-house, and of those that did, 62 per cent did so because of poor service while 38 per cent did so because they did not achieve anticipated cost savings.
Philip Fersht, lead software and services analyst for US-based HR business process outsourcing firm Yankee Group believes a well-crafted HR outsourcing configuration can give executives views into their workforce lifecycle management, effectively managing employee performance with the rapid information access needed to make quick decisions. “However, transforming a business function as intimate as HR is a process that must be managed diligently – many organisations that have rushed into HR outsourcing to reduce costs are going through the pain barrier because they did not scope their needs well,” he says.
Outsourcing: the pros and cons
Strategic drivers for outsourcing HR services
• Reducing costs: A key determinator in many decisions to outsource, but not to be considered in isolation from other costs and benefits.
• Increasing effectiveness of HR delivery: HR processes can often be carried outmore effectively by experienced outsourcing providers, for example recruitment can be undertaken more quickly, reducing the costs of labour turnover and speeding up the pace of growth.
• Providing greater expertise: Outsourcing can secure greater levels of specialist knowledge or experience than affordably available to many.
• Moving HR up the value chain: By outsourcing HR admin, the focus of HR delivery can be shifted to a model driven by the desire to focus more clearly on policy and decision making.
• To aid organisational growth: Either rapid organic or acquisitive growth can leave an organisation with insufficient HR capacity to deliver business objectives, making HR outsourcing an attractive prospect.
Potential pitfalls of HR outsourcing
• Transferring poorly understood or overly complicated systems to an external provider can be like ‘picking up spaghetti’, limiting the potential for any benefit from the move. Processes need to be improved before outsourcing, or the organisation may have to accept that existing processes may be replaced with new ones not specifically tailored to the organisation.
• Cost savings associated with outsourcing frequently come from the use of sophisticated software, so where effective IT systems already exist, cost savings may not be delivered.
• Good employee management practices remain essential, and the key relationship between staff and their line managers remains in-house, leaving plenty of work on manager / staff relationships that still has to be handled despite the outsourcing relationship.
• There is a risk that local knowledge and ownership of HR processes could be lost.
Source: HR outsourcing: The key decisions. Chartered Institute of Personnel and Development (CIPD).
