Outsourcing can work and be good for the business. But, time and time again, we hear reports of dissatisfaction and things going wrong.

• Third parties may be able to perform transactional HR activities more competently than an in-house team, thereby enabling it to focus on more strategic efforts rather than day-to-day personnel activities
• To enable a neutral organisation to intervene in what may have been a previously heated or difficult situation. A classic example of this is where an HR function has a perceived inability to support disciplinary action
• To lower the cost of some HR activities such as payroll and benefits (also see bad reasons below). If your chosen partner undertakes this activity as a specialism, their process costs should be lower and some of the savings should be passed on to you
• To replace technology that is prohibiting HR transformation. Problematic systems here typically include those dealing with personnel records and holiday bookings. Although not strictly outsourced in the true sense of the word, the hardware running such applications is increasingly located externally on third party vendor premises.

• To lower total HR costs. While things may initially look great on the balance sheet, costs can often spiral due to hidden and unexpected costs. For example, by outsourcing skills training, organisations may appear, on paper at least, to save up to 20% by not employing consultants directly. The problem is that as much as 50% of their outsourcing partner’s fees may end up going on administration and simply finding new training professionals. The remaining 50% will go to the trainers themselves who are likely to be far less familiar with your requirements than former in-house staff. A small consolation perhaps is that the figures on the balance sheet should look good, however
• To reduce headcount costs. To obtain a true picture, metrics should really be based on the cost of employment and/or return on investment from that cost rather than simply headcount alone.

1. Writing a full business plan. Ask yourself questions such as ‘how will the activities that I intend to outsource mesh with the other functions that HR needs to perform? What happens if the arrangement does not work? How could I do this in stages rather than hand everything over in one go?’
2. Understanding what the real return on investment is likely to be. Calculate the hidden costs, which include extra administration charges, fees for making any contract changes, travel, accommodation and all the other bits and pieces that typically add another 30% to the original price. Instead ask yourself what the real return is. To this end, undertake a cost benefit analysis as not everything comes down to finance. What about quality, loss of internal expertise, the provider’s ability to align HR and business goals and staff demotivation if things don’t work out as well as expected on launch?
3. Evaluating the capabilities of your proposed vendor carefully. Establish whether, if you outsourced payroll today and it worked, the same supplier could handle training, recruitment, benefits and so on tomorrow. Or could you end up being a contract manager looking after a multitude of vendors? While staying with a single vendor is great for communication and helps organisational fit, meanwhile, it also provides suppliers with a lot of future negotiation power. Therefore, achieve a balance and mitigate risks with a contingency plan based on ‘what if’ scenarios.
4. Ensuring that you have the right team in place. Large vendors employ professional sales people who are used to negotiating the best deal for themselves. And don’t forget that once you have signed the contract, it is you who has to manage it. To do this successfully requires jointly agreed metrics and performance criteria. But the question is are your people up to the task? If not, the result is likely to be a bad deal and low quality service. So ensure that you have the right team in place in the first instance. If you don’t, hire in external resources to make sure you get it spot on.

1. Their negotiation team is better than mine. This is often the case as outsourcing businesses don’t grow on good will alone. They know what their services can provide as well as the cost of each component and their contracts include small print. So if the business employs any good negotiators, whether they work in HR or not, use them. Alternatively, take on a third-party consultancy to be on your side.
2. Insufficient support from other business areas. This situation has the potential to kill-off your outsourcing activity as resistance grows. Remember that people as a rule do not like change, especially when it’s to do with something as fundamental as pay or benefits. So it is important to undertake internal PR and sell the changes hard. Better still, get potential well-poisoners from other departments on board from the start. Include them in your implementation group and charge them with carrying information back to their teams.
3. Failing to understand how things will work once the arrangement is up-and-running. Establish in advance key issues such as what new workflows will look like; who the primary contacts will be; where staff support will come from; how things will be monitored and what documentation will be used. And, perhaps most importantly, clarify who will make decisions at which level and to what end. To be really sure that the arrangement will function effectively, model the whole process and its underlying workflow and throw as many potential ‘what if’ spanners into the works as you can before signing the contract. This is where the implementation group has a crucial role to play – simply ask them to try to break things.
4. Gaps between expectations and implementation. Even as the implementation process is in progress, life will still go on. But it is likely that some of the old guard will leave for pastures new, while others will end up being overworked as a result of having to wear two hats – taking care of the new, while maintaining the old. The wider business will only understand your challenges to a limited extent, however, and will end up putting it down to inefficiencies arising from the new processes. This means that it is important to ensure that sufficient resources – and contingency resources – are in place. So undertake a risk analysis and make certain that contingency plans are drawn up. Such plans might include bringing in staff from other departments, back-filling roles or taking on interim or temporary personnel.
5. Failure to get to grips with what the contract says. While it is in the vendor’s interest to have a standard contract and provide a standard service, it is your interest to ensure that the service fits your real needs. Do not be afraid to question every aspect of the deal. Think about minimal terms, get-out clauses, actual levels of service provision, having full service level agreements in place and establish which personnel will be involved. Try to ensure that the contract is as customised to your requirements as possible.
6. Disparities in the quality of the sales team compared with the business-as-usual team. Vendors have staff turnover too. But it is in your interest to meet and approve both the implementation team and the business-as usual team. Account managers are always great at making the right impression but will not be the ones servicing you. So meet and approve everyone that you will be working with – and feel free to interview them. Then agree that staff continuity will be maintained in relation to both implementation and business-as-usual teams.
7. Lack of interest once the deal has been signed. Outsourcers usually have great sales teams. But, while implementation costs are typically sizable, most vendors make their money from ‘annuals’ or the money you pay them each year. Because it is in no one’s interest to have sub-standard service, ensure that you have service level agreements in place that are based not only on quantitative but also qualitative measures. Feel free to insist that survey evidence taken from users at regular intervals is also taken into account – as long as the questions are reasonable for both sides.
8. Cultural differences. All too often outsourcing partners are chosen based on costs and other financial considerations. But just as important is the ‘cultural fit’ between your people and theirs. It has taken time to build your organisational culture so why let staff motivation suffer as a result of choosing the wrong partner? This is another key reason for getting to know the implementation and business-as-usual teams in advance. Interview them, invite them to company events and even provide team-building exercises if you have the budget. This is a partnership that needs to work, and to work quickly, if you want to get a return.

Sean McPheat, founder and managing director of HR consultancy and management development firm, MTD HR.