Will HR outsourcing and shared-service techniques prove their worth over the next 12 months? Tim Palmer says there is a sourcing opportunity for almost every organisation in today’s economy, but only if an effective approach is taken.
Throughout 2009 HR leaders have found that their organisations are searching for ways to lower costs. Previously unthinkable things are being considered. HR has been asked to find 10% savings within its own budget immediately and determine whether outsourcing would provide a more sustainable long-term cost structure. The expectation is that there’s another 20% of cost savings available.
The complication with this position is that outsourcing is a hard thing to do well; it requires a strategic mandate, organisational discipline and a long-term outlook, none of which have been in abundance recently. And if you get it wrong, the costs to put it right could dwarf any potential savings.
Additionally, although there are several credible service providers and approaches to choose from, there has been some negative press about the practice of HR outsourcing, and there have been fewer large contracts announced over the last 12 months than in any comparable period since 2003. Is HR outsourcing really a tool for our times, or is it something that has been tried and should now be passed over?
Given that market precedent is so important in driving the adoption of outsourcing, let’s look at things that have been holding back the current market. What has caused the reduction in large contracts in 2008 and 2009?
- The biggest issue has been the credit crunch itself. Large-scale multi-process HR outsourcing has historically been used by organisations looking to transform their HR service delivery environments. This requires investment – often the level of investment is similar to a year’s annual operating cost for HR, resulting in a three-year payback. This is simply not acceptable when cash is in such short supply
- There have been some high-profile problems with both large contracts and key providers, which has created bad news and scepticism about the technique of HR outsourcing
- There was almost a paralysis in decision making regarding outsourcing in Q4 08, following the collapse of Lehmann Brothers. It takes between six and 12 months to get a well-managed outsourcing contract to happen and we are now in the dip following this period
But there have also been signs to suggest that the market will become buoyant and the practice of HR outsourcing be a less risky endeavour:
- There have been a number of less complex single‑country contracts, which don’t make the same headlines but which keep the industry moving. In some cases people are ‘trying and buying’ services, rather than contracting for them all upfront
- Organisations have also been turning to smaller single-process outsourcing contracts. Payroll outsourcing seems to be particularly hot at the moment
- Service providers offers have matured. There are new capabilities in the market, with deeper process, technology and people assets behind them, many based on ‘one-to-many’ technology platforms, including Oracle, SAP and various ‘software as a service’ tools used to support talent management processes
- The decision making paralysis has ended and from Q1 09, service providers’ pipelines have started to fill up again. Their biggest issue now is working out what is real and what is simply market testing. Service providers are telling us of more ‘tyre kicking’: clients coming to the table unprepared, not having explored what they want, or worse, without the authority to hold meaningful discussions
So, in this climate, should HR outsourcing be part of your recovery strategy?
The simple answer to this is yes, you should be considering it now. It would be neglectful not to consider more efficient ways of securing an effective HR service. And if you don’t, someone else may do it for you! However the question must be answered at a strategic level and a sustainable long-term decision made. This requires a properly informed assessment of both captive and outsourced opportunities, using a robust and balanced method that evaluates costs, benefits and risks. Only after this is complete can decisions be taken with more certainty, allowing for rapid and definite progress towards the chosen end-state.
The more complex part of this answer is when does it make sense? This requires a good understanding of what it is that you want to achieve. When you dig into the intent behind outsourcing contracts, cost is rarely top of the list. Most recently, data quality improvements and reporting have become common goals for outsourcing. Whatever your intent, you should understand it and put the achievement of that intent at the heart of the sourcing process. Ensure you ask for and get what you want. And don’t be tempted to go to the market too early without understanding what you want; doing this will frustrate both your team and the provider and will probably extend your overall timeline.
Finally, if you do decide to adopt outsourcing, get some help: either professional help from a consultancy, or more informal support from other buyers that have been through this before. There is now a thriving community of people with strong experiences to lean on, and there is no need to go through this alone.
Tim Palmer is from PA Consulting, and is one of Europe’s leading sourcing consultants. He has worked with more than 25 European multinationals to help them create their sourcing strategies, help them select service providers, negotiate contracts and implement their solutions