Many organisations faced with endless efficiency drives and demands for reduced overheads and increased profitability turn to outsourcing; so is it a one-size fits all solution?

Payroll in particular is one of the most outsourced business processes, with a quarter of FTSE 100 firms and 30 per cent of all UK businesses now doing it, according to a 2004 Times report. Early deals focused on the administrative aspects of payroll and HR, but lately there has been a move towards transformational HRO and deals that have become much broader in scope.

An example of the movement in the HR space is this year’s ACS announcement of its acquisition of the HR outsourcing business of Mellon. There has also been a lot of supplier consolidation in the HRO industry – last year Hewitt Associates, an industry leader in benefits administration, acquired Exult, an HR outsourcing specialist company, creating a new entity within the HR sector.

Other companies have also migrated from traditional IT outsourcing into the business process outsourcing (BPO) space, adding services such as HRO to their portfolio – tier one players like IBM and customer care specialists like Vertex are examples of companies that have done this.

But why are so many organisations turning to HR and payroll outsourcing?

The main reasons why companies outsource include cost reductions and access to skills and technology that are not available in-house– things that are relevant to the HRO marketplace too.

Another more specific reason is that outsourcing non core HR functions, such as payroll management and employee administration, can free up HR professionals to concentrate on more strategic issues, like work force planning and development as well as performance appraisals.

Constantly changing UK and EU legislation with regards to maternity, paternity and adoption pay and working tax credit is another reason companies outsource elements of HR. The cost of keeping abreast of changing legislation and staff training in-house can be huge, so outsourcing brings economies of scale.

Another key advantage is that outsourcing provides an alternative to upgrading existing technology or investing in new equipment – HR departments can get technology costs off the balance sheet and convert it into service payments.

Outsourcing can also be beneficial for HR divisions when there has been a business acquisition or when there has been a restructure – it can aid in aligning a variety of systems or the existing infrastructure.

When the decision has been taken to outsource, the organisation must consider a number of planning issues in order for the HRO project to have the best chance of success.

Firstly, it is essential to identify which functions are suitable for outsourcing and how that outsourcing will be conducted. Mistakes can be costly. Assess the benefits, costs and problems of providing a payroll/HR service internally, such as compliance with legislation, accuracy and timeliness of payments and then evaluate the benefits and risks of outsourcing. Mechanisms to manage or mitigate those risks can then be built into the contract.

The next step is to identify the scope of the services to be outsourced – it is likely that these services will not be documented in detail internally.

Clearly defined customer requirements will enable better supplier responses. In addition to this, identifying current internal service levels and gathering information to support them will assist during the negotiation of service levels and help to set realistic expectations of the quality of the outsourced service.

Another consideration is getting the right internal people involved early on. It isn’t just about HR and payroll – legal, IT, financial or other input will usually be required too. This is important in getting business buy in for the project from a wider company perspective.

In addition to assessing who will be involved, it is also essential to gauge the impact on current HR employees – staff could transfer to the supplier under TUPE, for example. The correct procedures need to be in place to manage this transfer effectively.

Performing sound due diligence on suppliers prior to selection is another key point. Use a provider that has proven experience in HR and payroll as well as sector specific experience.

Ask for references that are easily traceable to real companies, both current and past clients if possible. Always research a provider in terms of financial stability and reputation.

Cultural compatibility is another critical aspect in terms of determining the success of the partnership, especially with HRO, as certain HR tasks are very closely intertwined with the culture of the company.

For further information, it may also be worth visiting www.inlandrevenue.gov.uk where lists of all payroll applications and versions with Inland Revenue approval can be found. The accreditation list runs for12 months from the date shown and packages have to be retested at the end of the twelve-month period to retain their status.

Prior to starting the project, the supplier also needs to properly assess the risks and identify where there is poor performance, such as inadequate or incorrect data. They also need to determine which of the end user’s HR systems will interface with the supplier’s.

In short, the better the information available to the supplier before the contract is signed the better both parties will be able to assess and mitigate risk. The suppliers will also be able to price on fact rather than assumption.

Finally, organisations have to consider the different types of HRO models. These range from a “one-stop-shop” where an organisation outsources both HR and payroll functions to a supplier that will provide the whole spectrum of services.

A “payroll plus” model is where organisations outsource primarily their payroll but with HR add-ons, including employee self-service portals. Finally a “bureau service” means the supplier hosts the software application on its own technology platform, into which the customer feeds data, which is then hosted and processed by the supplier.

It is also important that organisations plan ahead – identifying areas of potential change, so that flexibility can be built into the contract to accommodate that change as far as possible, without the need for detailed re-negotiation, can save money and time in the long run.

Being prepared is the best advice as there are a myriad of considerations to make prior to HR and payroll outsourcing.

Being armed with the right information, the customer will be able to craft a better contract that will be best suited to their requirements and will be able to mitigate any risks from outsourcing elements of HR and payroll.

Margaret Harvey is a partner at the technology and outsourcing group of Addleshaw Goddard