For HR, like all company departments, budget restrictions and market competition means the pressure to perform in the most cost effective way possible is greater than ever. So is HR outsourcing (HRO) the answer? Proponents argue that HRO allows firms to streamline their processes and achieve results with far less manpower and funding, while critics claim that control can be lost and the inevitable internal job cuts cannot be justified. Dan Martin reviews the arguments.
The HRO industry
The outsourcing industry has exploded over recent years and the sector providing specific HR services is no exception. It is generally expected that the concept first entered the business vocabulary in 1989 when the chief executive of Eastman Kodak referred to the outsourcing of his firm’s computer operations as “lock, stock and mainframe, and farming them out”.
Throughout the early 1990s, an increasing number of IT outsourcing companies sprung up. By the second half of the decade, the outsourcing of HR processes emerged. A decade on, 30% of UK companies outsource some element of their HR. In 2004, the global HRO industry was estimated to be worth £27.3bn in 2004 and is expected to grow to £42.8bn by 2008.
Why outsource?
Whereas in previous years, all HR processes from recruitment to payroll, training to employee benefits had to be managed by internal staff, a multitude of outsourcing suppliers are now available to oversee all operations. But why should firms consider the HRO option?
Much criticism has been thrown at the outsourcing industry claiming that the service is a threat to the HR profession. Critics argue that the services provided are often ineffective and too general, with many bemoaning the negatives effects of a loss of local knowledge and previously internal processes being moved to the outsource provider.
On the other side of the fence however is research which shows that an increasingly number of firms believe outsourcing provides benefits and allows them to transform previously inefficient HR processes. A study conducted by HR Zone in 2005 found more than half of respondents believed HRO presents the department with the opportunity to focus on other areas of work with just 19% feeling it was a threat to the profession.
The verbal backing of HRO also appears to have translated into practical action, with recent research by IDC showing that 90% of FTSE 100 and Fortune 100 firms have outsourced some element of HR. Commenting on the research in his 2006 report ‘Outsourcing the HR function: Possibilities and Pitfalls’, Dr Anthony Hesketh, from Lancaster Business School, said: “The thinking here is straightforward. Outsourcing the administrative tasks of the HR function – payroll, pensions administration, some aspects of recruitment, and so on – releases crucial resources. It also enables these to be used for more strategic – and what is perceived to be more value adding – activities, which may or may not be located in HR.”
One major advocate of HRO is Graham White, head of HR, at Surrey County Council. According to the council’s own figures, a restructuring campaign which included the council’s general recruitment being outsourced to TMP and temporary staff recruitment to Commensura, has led to £9m in savings over the past four years.
White admits that a major driver behind the changes was the pressure on local government to ensure value for money. “At the same I was acutely aware that the future of HR as a professional was singularly dependant on debagging ourselves of the non added value elements of our legacy activity and historic bureaucracy,” he says. “Much of what we were doing at the turn of this century could be and can be done by others smarter, faster and cheaper.”
Penny de Valk, strategy director for outsource supplier Ceridian, argues changes in the needs of HR has generated renewed interest in the sector. “The industry has changed 180 degrees,” she says. “It used to be the case that HR needed to redesign itself and then outsource but it was often the case that the change management required took too long. Many people say outsourcing spurs people on to make the changes, particularly if the client is partnered with a supplier with good specialist change management skills.”
Unfortunately for those concerned outsourcing often results in internal job cuts. Surrey County Council’s restructuring saw jobs in its HR department slashed from 400 to 40. Critics of outsourcing argue that such job cuts cannot be justified. Graham White however insists the opposite is true. “Jobs cuts can be justified because of cost, contribution and impact,” he says. “With a tenth of the people we are delivering a better provision of service.”
De Valk admits that potential job losses are a issue which many of Ceridian’s clients express worries about. “If HR departments are not efficient and if firms are going into outsourcing to drive efficiency than sometimes job cuts are inevitable.”
How can you help me?
When taking on an HRO supplier, firms should ensure they ask key questions. At the top of the pile is: ‘Do you know our business?’. If the supplier doesn’t, disasters could occur. Contracts can last for up for to 10 years so organisations should check that the suppliers are in for the long haul.
White advises firms seek answers to the following key questions:
- What HR expertise does the supplier organisation have?
- What are the suppliers’ views on the future role of outsourced HR?
- Does its contribution help the organisation look forward or back?
Beware the pitfalls
Not all in the HRO garden is rosy. There are several potential problems which firms embarking on the process should keep in mind.
Although many organisations outsource what are considered non-core HR functions such as recruitment, fewer take the step of outsourcing areas such as staff management, HR helpdesks and employment advice. Surrey County Council is one such organisation. White says that the heart of an organisation is its engagement with staff, something he believes an external supplier cannot provide. “Success for HR is in delivering an added value contribution, which ensures the organisation is equipped with managers and staff who regularly engage in ways that develop the activities that are core to business success,” he adds. “This cannot be provided by an external source.”
Whether to pick multiple or a single supplier for outsourcing particular functions also often provides a difficult decision and for some companies going down the all-in-one deal route, problems have occurred. Cable & Wireless, for instance, pulled out of its case handling and recruitment deal with Accenture after discovering that the HR function was becoming too remote from employees. As a result, the company switched separate suppliers for case handling and recruitment.
White’s reasons for picking separate suppliers for Surrey County Council’s recruitment needs are clear. “Much of the time we are beating a path not just following a trail,” he says. “To do this effectively we need to ensure we are able to benchmark and evaluate these activities and providers to ensure we don’t move from one inefficient process to another or from internal bureaucracy to external bureaucracy. And never forget what gets measured gets done.”
Other pitfalls to bear in mind include ensuring that the business and strategic case for HR outsourcing is clear. “Outsourcing everything on principle is a mistake,” Ceridian’s de Valk says. “Businesses should ask themselves what strategy is outsourcing supporting? If the organisation is not clear on what it is trying to achieve and what the business requirements are, then HRO is probably risky.” She adds that successful organisations take a practical, strategic approach to outsourcing by saying, for example, that anything related directly to clients will be outsourced.
When a deal with a supplier is done, firms should ensure there is mutual clarity about what is required. “If it’s just about take our mess and do it for less, it will be difficult for expectations to be met,” de Valk continues. “Beware of the snake oil. It’s a long term and difficult road. Lots of suppliers will promise what they can’t deliver. Once a function has been outsourced, the organisation that’s left internally will look very different. Firms should ensure a working interface between what is and isn’t outsourced is maintained.”
