The endless cycle of efficiency initiatives, profit chasing and focus on the bottom line has led many to go down the HR outsourcing route so should it be feared by those in HR or embraced as the next step in the functions development? Annie Hayes, HR Zone Editor reports.

What is meant by HR outsourcing?
The terms HR outsourcing (HRO) and offshoring are often confused as one in the same thing. Chris Noon, Head of Development for Hewitt Associates, a global HR outsourcing and consulting outfit tells me, however, that offshoring is merely a mechanism by which HR outsourcing can be delivered.

So what do we mean by it? Essentially when we outsource an HR function we transfer its operation to a third party. Exactly the relationship that Unilever, the manufacturer of leading brands in foods, home care and personal care has recently signed up for in what is being dubbed by the media as the ‘world’s most extensive HR outsourcing contract’.

HR outsourcing is not an ‘all or nothing’ approach and contracts differ from single processing agreements whereby payroll for example is the only service to be outsourced to multi-process deals where typically one or more functions are contracted to a third party. Unilever has signed up to the latter handing over administrative and systems support for activities such as recruitment and resourcing, reward, and training, and performance management to Accenture.

How is the market maturing?
Fast is the short answer.

Stephen Dunn, managing principal of the Everest Group, the leading independent strategic outsourcing advisory firm told me that the market crossed a significant threshold in 2005. Close to 40 HRO deals were signed pushing the number of HRO agreements to well over the hundred mark. All this equates to a market that is now worth US$2.0 billion in size and, at 28% growth per annum is growing nearly four times as fast as the general HR services market. A remarkable and important achievement.

The market began says Dunn seven or eight years ago when BP signed an outsourcing deal with Exult, now owned by Hewitt. This he says was the, “Advent of the multi-process market.”

Reflecting on the markets development, Noon who has worked with Hewitt for the past eleven years explains that whilst fives years ago no one was interested in multi-process deals today people are starting to listen and take action.

“In the last two to three years it has gone off the scale. What I notice particularly is that clients come to us with well thought through outsourcing propositions.”

And Dunn agrees. A lot of the success of recent years has to do with falling prices and shifting the risk of capital expenditure.

“A business may look for example to upgrade their HR information system but they want to do this without spending vast amounts on capital expenditure. Essentially they want to shift the risk. What is happening in these deals is that the supplier funds the transformational effort,” he explains.

Research by the Everest Group depicts a sophisticated market in which the segmentation between large and mid-market continues to shift.

Companies such as Hewitt, Accenture, Convergys, ACS, EDS, IBM, and Fidelity have close to 90% share of the larger (>15K employees) segment (in terms of Total Contract Value) while ADP, Ceridian, AON, Mercer, and Arinso focus more significantly on the Mid-market (<15K employees) segment.

And given the smaller size of mid-market transactions, larger market players are cherry-picking special situations in the mid-market segment where transactions typically have a larger scope and price point than those involving mid-market players.

What can businesses achieve?
Noon tells me that it centres upon a shift in purpose.

“Organisations are now recognising there’s a lot of administration involved in the HR function. Typically 70-80% and they’re deciding that they want to change the broad-based HR activities.”

And there has been an awakening by HR professionals that if they’re to become more strategic in focus they need to get rid of the administrative burden. Outsourcing is a means of speeding up that process.

Sandy Ogg, Unilever’s HR Director explained the reasons behind their HRO decision:

“We believe that it is best for our business if we concentrate on our core competencies and transfer what is our back office and make it into someone else’s front office. We can also leverage Accenture’s capabilities and expertise. This deal allows us to create a simpler, more agile global HR function to better support Unilever’s growth agenda.”

And that is in essence is what it is about. A mechanism by which HR can leverage its own capabilities and develop its skills free from the shackles of the administrative load.

But there are also serious financial gains to be had says the Everest Group who finds that HRO can save 15 per cent plus off the total direct HR cost base depending on the buyer’s current cost base and willingness to use cost reduction levers such as self service and offshoring.

Mark Moorton, HR Director at AXA PPP healthcare outsourced their payroll function to Ceridian at the start of the year. Beyond the cost driver was also the hope of gaining access to ‘best in class’ process management. A reason that many businesses give when deciding to go down the HRO route is the buying of ‘expertise’ and delivering access to new technologies that circumvent the need to invest in costly technologies or skills that can be purchased for a fraction of the in-house price.

Is it more effective?
Do HR outsourcing providers actually provide services more efficiently then in-house HR teams can?

Noon says yes. “Service levels are part of the contract. We have to be more efficient and deliver the best-in-class contact support and web tools. Most clients don’t really measure how employees think. We measure everything.”

There is a certain level of ‘education’ involved says Noon who explains that the more delicate aspect of the job is telling clients that the way they worked before wasn’t particularly robust.

“We start to give them feedback and it’s at this point that noises start to be made.”

It isn’t always smooth sailing however and trust and communication are key if services are to be delivered as effectively as before. Moorton tells me that there were some ‘teething’ problems when they first outsourced to Ceridian.

“Pay slips used to be delivered to people’s desks but when we moved the payroll over to Ceridian they started to be sent home. And there was the whole worry about identity fraud and suddenly everyone was double checking their pay details concerned that our outsourcing provider may have got it wrong.”

Noon tells me that it is indeed an issue, “When it’s ‘Bob’ in payroll that has got it wrong forgiveness is a lot easier. When you go into these things you can’t go in as a client provider you have to work together. It’s got to be a partnership, only then can you have an open and honest relationship.”

Attitudes do vary says Dunn who explains that whilst some HR practitioners embrace it and welcome the removal of the more mundane aspects of their work, others fear it.

Moorton says it’s more subtle then that. “You’ve got to get the bread and butter stuff right. Otherwise people won’t listen to you about other things.” Fostering the right relationship is crucial if the HRO deal is going to be a success.

Selecting the right HRO partner
So have the likes of Unilever, AXA PPP healthcare, Boots who recently signed up to a £16m deal with Northgate and Catholic Health Initiatives who’ve gone with Hewitt got it right?

Sabimir Sabev of the Everest Group recommends a procurement process that facilitates joint design of the right eventual solution, that promotes a joint understanding of the solution requirements as well as the capabilities of each supplier, and that awards the contract at the end to the right supplier.

Sabev suggests asking the following questions:

1. Does the potential HR partner have a track record of sustained service commitment?
2. What HR expertise and/or special skills does the provider possess?
3. What is the quality of the potential partner’s processes, personnel and technology?
4. Who are the potential partner’s existing customers, how satisfied are they?
5. Does the potential HR partner offer a robust migration plan?
6. How will your account be managed?
7. How are services priced?
8. How much flexibility does the provider offer in accommodating your specific HR needs?
9. What are the legal and regulatory issues?

And needs can be very different. In the public sector it has been a reaction to the demands of the Gershon review, which stressed the need to streamline HR. Whilst for their private sector colleagues motivations have had more to do with cost savings. Matching these needs with the right partner that can deliver most closely what is wanted is the key to any HRO deal.

What does the future hold?
It’s clear that the market has exploded in the last two to three years. Now no longer a question of will you outsource but when, at least for the bigger players, client organisations are becoming all together more sophisticated in what they want and how they want it delivered.

The HRO phenomena is as much about changing the model of HR away from one of a traditional administrative and welfare function to one that is more strategically aligned to the business. As with any change process there will inevitably be causalities along the way. Unilever predicts that its Accenture deal with threaten the jobs of around 40% of its 3,000 strong HR community.

HR practitioners that are quick to cotton onto the changing needs of business will adapt and survive the HRO rollercoaster, those that lurk in the corridors of paper pushing and bureaucracy will find that they can quickly be replaced, cheaper, more effectively and with little remonstration from those that have embraced the HRO movement.