HR Trends - Review of HR outsourcing
Outsourcing is a term that is being used more frequently as increasing numbers of organisations are exploring this as a potential delivery option for some of their activities. It can be defined as ‘the delegation of one or more business processes to an external provider, who then owns, manages and administers the selected processes based on defined and measurable performance metric’1.
Within the context of HR outsourcing, the specific processes that are included within any outsourcing arrangement will vary from organisation to organisation. Some organisations may outsource virtually all of their HR processes where others select specific components such as payroll or resourcing. The most common component to be outsourced is payroll2. Furthermore, WERS (the Workplace Employee Relations Survey) 2004 suggests that outsourcing is specific to certain activities and limited in extent – training, payroll and resourcing of temporary positions were most commonly outsourced3.
So far, very few organisations have outsourced their entire HR function. In large organisations it is most common to have outsourced the operational elements of delivering HR activities whilst retaining control over HR strategy and decision-making. There are a number of well-publicised examples of large, mainly global organisations that have outsourced large parts of their HR operational activities, often in contracts for between five and ten years, for example BT, Boots The Chemist, Procter & Gamble and, most recently, Unilever. Interestingly, small organisations often do the reverse, effectively outsourcing their strategy (to HR consultants and other professional advisers) and keeping the delivery of HR processes internal.
This picture of limited outsourcing is confirmed by the CIPD survey The changing HR fucntion4 in which only 4% of respondents with an HR shared services operation said that they wholly outsourced it. Around a quarter outsourced part of their shared services activities. The vast majority of organisations maintain their shared services operation in-house. Looking ahead, 11% of the survey participants expected HR shared services to be outsourced in three years, and half expect to partly outsource some of their shared services.
Alternatives to HR outsourcing
HR outsourcing is not the only solution that organisations might consider if they want to change the way their HR function operates. There are other options to consider either as an alternative, or as partner, to outsourcing.
Shared service centres
This refers to the creation of an internal ‘hub’ for the delivery of HR services. Two distinctive features of HR shared service centres are:
* they offer a common service provision of routine administration an sometimes additional HR services
* they are service focused, enabling the customers of the shared service to specify the level and nature of the service. They are therefore flexible to the needs of the business
To date, there appear to be more organisations setting up internal shared service centres rather than using an outsourcing approach5. For more information, see our factsheet on HR shared service centres.
This is a term that can sometimes be related to outsourcing but is often incorrectly used interchangeably with it. Offshoring can be defined as the process of outsourcing business activities or services to a third party overseas and/or moving business activities or services to another country as a direct or indirect employer. In other words, offshoring does not always involve the services of an external provider.
A recent CIPD survey6 finds that whilst HR professionals do often have important roles when organisations are considering offshoring some of their activities, offshoring of HR activities themselves remains relatively uncommon. Offshoring is best considered for process transactions rather than for call centres and again is likely to be driven by cost considerations.
Employee self-service (ESS) and manager self-service (MSS) systems
Increasingly some organisations are looking to put in place comprehensive HR information systems that also enable non-HR employees and mangers to undertake a number of HR-related activities themselves via a portal or intranet, without the need for any external intervention. For example, in an ESS system, individuals may be able to update their own personal details when their circumstances alter, and in an MSS system, managers could review absence records for all their staff. This is one example of how HR can harness technology to deliver services.
Buying in consultancy services
The services of external consultants might be used to advise on specific HR issues or on the implementation of HR processes. Typically, consultants do not then manage or deliver these services once implemented – this is taken on by the internal HR team.
To outsource or not?
When considering HR outsourcing, an organisation needs to ask at the outset why it needs to change the way the HR function operates at present. In other words, what aspects of the existing HR provision are not satisfactory or would benefit from improvements? By probing these responses HR can then focus on the scale and type of changes that maybe required and these will help decide whether HR outsourcing might be an appropriate response (as opposed to some of the alternatives detailed above). Creating a business case for HR outsourcing is an important step.
There are a number of potential benefits and challenges in HR outsourcing.
When organisations put forward a business case for HR outsourcing there are a number of potential benefits that many cite. In practice, these benefits are not necessarily mutually exclusive and a number of them could be achieved through some alternative solution rather than via outsourcing. Commonly mentioned benefits include:
* reduced cost
* increased efficiency
* access to improved HR IT systems
* improved people management information (including human capital metrics)
* access to HR expertise not available internally
* increased flexibility and speed of response to HR problems
* part of an overall strategy (for example the organisation is outsourcing a number of its support functions, of which HR is just one part)
* reduced risk
* to free HR resources to operate more strategically.
From a practical point of view, there are also a number of potential pitfalls that it is useful to bear in mind when considering outsourcing. Some of the main ones are:
* Don’t outsource what you don’t understand. The outsource provider will only have to subsequently solve the problem (at a cost) and the provider’s solution might not be most suitable from your organisation’s perspective.
* Outsourcing does not absolve the organisation of good people management practices nor of overall responsibility for the provision of HR services.
* Increasingly, outsourcing arrangements are often long term (five to ten year contracts are not unusual). An understanding of the organisation’s current and future business strategy and potential changing business (and hence risk) profile by the outsourcing provider is important before entering into any contractual arrangement. This helps to avoid being tied into unfavourable contractual arrangements.
* Loss of local knowledge and processes which instead reside with the outsource provider.
* Standardisation of processes in line with outsource provider not organisational preferences.
* Fragmentation of the service provided means that day to day operations are split from strategy and policy direction.
* The need to constantly review the success of the outsourcing arrangement against specified metrics. The need for outsourcing services may change as the business environment changes, and there are instances of services being brought back in-house.
Selecting a provider and managing the transition
A number of actions and decisions must be made when selecting a suitable outsource provider – many of these will be similar to those made when entering into any contractual arrangement with a third party. In an article in The guide to HR outsourcing, Jane Pickard quotes the following top ten tips on preparing for outsourcing from consultancy firm, Orion Partners7:
‘Before an organisation embarks on this course of action, it should have:
* Identified how outsourcing fits with strategic objectives.
* Agreed which core strategic competencies must be kept in-house and what can safely be outsourced.
* Identified a complete view of internal HR service delivery costs, the main cost drivers and the potential savings and investment.
* Assessed internal outsourcing and explored how shared services might deliver the same benefits but with greater retained control.
* Identified the technological challenges and solutions around outsourcing, – have the costs of running and retiring legacy systems been calculated accurately, for instance
* Developed a clear view of the capabilities and reputation of each of the main outsourcing providers. Standardised and simplified processes and procedures prior to considering outsourcing.
* Discussed in detail the concept of outsourcing with customers (employees and business managers) and other key stakeholders in the organisation.
* Defined the key success measures that will be used to judge the performance of the provider and the structure of the deal.
* Considered the history of the organisation in terms of managing complex transition processes – is there the organisational will to see an outsourcing initiative through to completion?’
With regards to managing the transition from in-house to third-party service, a lot of the considerations will be similar to those required when managing any large-scale organisational change. For more information on managing change, see our factsheet on change management.
In addition, an outsourcing arrangement will often also include significant changes to HR processes, in a few cases, including HR self-service systems and/or a formalised HR call centre provision for staff and managers. It is therefore important to make sure that sufficient HR leadership and expertise remains internally to manage these changes as well as providing on-going leadership and strategic direction.
Being clear about who is accountable for solving problems during the transition is another important consideration - is it the outsource provider or the outsourcing organisation? The original HR management cannot simply delegate to their provider. In practice, good relationship management should contribute to a smooth transition, but a good understanding of what is involved by both parties will also help to ensure misunderstandings are minimized. An open dialogue is needed between the outsourcing company and the provider.
Finally, it is possible that there will need to be a number of changes made to the roles and skills required of the remaining internal HR staff as well as other employees and managers. This may well involve re-deploying certain staff as well as providing additional training to many others. It is important to recognise that these might take time to introduce and that this needs to be factored into any change programme. Open and ongoing communication to staff about the whole process is important.
Outsourcing is one example of how the shape of HR is transforming It is one way to meet the increasing demands being placed upon HR functions to deliver greater levels of transactional efficiency at the same time as raising the level of other HR activity to focus on ‘strategic’, ‘value adding’ service. The CIPD believes that HR functions need continually to improve the efficiency of the administrative services they deliver, as part of their shift to a more strategic and influential future. In order to act as a strategic partner in the business, basic HR service requirements need to be provided in a seamless manner: outsourcing is one potential route to achieving