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"Outsourcing may or may not be right for your HR department, but failing to proactively assess sourcing options is a dangerous strategy."

 

HR TRANSFORMATION CONSULTING, PA CONSULTING GROUP

Dispelling the myths of HR outsourcing

PA experts

HR Director
January 2011

 

HR directors should consider their options for sourcing HR services. HR cannot be immune to the pressures that today apply to every other part of an organisation, and there is a need to find the right way to deliver the required services for the best value for money. The reality is that if HR doesn’t assess its own options, in this climate, someone else will probably do it for them.  Rather than having a sourcing strategy forced upon the HR department from elsewhere, it is better for HR directors to proactively assess alternative strategies, from the creation of internal shared services to outsourcing. HR can get ahead of the game and present its own strong opinion on the best way forward.

Key to success is to have clear goals

This might sound as if outsourcing is being advocated for use in all situations; in fact the opposite is true. Outsourcing is not something that should be done lightly. Do it well, and it is a great way to achieve strategic goals that might not be otherwise available. Do it badly, and it has the potential to cost you more money and more grief than you ever thought possible.  

Being realistic, outsourcing will not solve all HR issues; and it is rarely possible to achieve every requirement in one outsourcing solution. Outsourcing cannot deliver lower costs and better service and new systems and lower risk; but, done well, it can deliver one or two of these goals and provide quantifiable value to the organisation. Good outsourcing involves trade-offs, and HR directors need to be honest about their true objectives, so that they can understand what they have to play with.  

So how to move forward? The outsourcing market is awash with ‘bumper sticker’ advice about the pros and cons of various approaches. From impossibly over-optimistic return on investment figures to dire warnings about loss of control. These simplistic and ill-founded myths are adding unnecessary confusion.

In fact, despite the perceived complexity, HR outsourcing is a relatively simple thing. The HR director has to determine the strategic goals; and the organisation must decide whether or not it is prepared to have a third party working to support the delivery of those goals. Taking the outsourcing route is not a software selection exercise or something to be worn as a badge of honour. Deciding whether or not to outsource HR should be a sound, sensible decision taken with all of the necessary facts at your disposal.

For this reason, HR directors need to enter into the HR outsourcing market with their eyes open and tackle some of these bumper sticker myths head on:

Myth 1: HR outsourcing will save you large amounts of money. The truth is that most multi-process HR outsourcing is not done solely to save costs, but is instead aimed at accessing capabilities not available within the organisation – for example a new HR system or multi-lingual service centre that cannot be afforded in other ways.  

Indeed, no one in the HR outsourcing business can claim credibly that it will save huge amounts of money. Headline numbers of 40 per cent savings are unrealistic and overlook other costs, including severance costs, supplier management costs, the cost of exiting the contract at the end and the effect of currency and wage inflation. 

Modest savings are available, especially for UK companies that are willing to move work to Asia. However, when requirements become complicated, for example serving distributed populations around Europe with varying language requirements, savings become harder to achieve. 

On the face of it, typical single digit savings for multinational contracts might not seem worth the pain of making outsourcing happen. But the headline numbers do not speak to the other major benefits that the client gets from outsourcing. These come from transforming the HR organisation’s capability, for example having access to much better HR data, and having a partner to provide transactional work, while the internal team concentrates on delivering HR’s strategic role in the business. 

Myth 2: You shouldn’t outsource HR while transforming other areas. It is common for organisations to look at their transformation options across the range of their corporate functions at the same time. HR teams often have a supporting role in such transformations and sometimes argue that they shouldn’t be transformed at the same time. This is a valid concern because there is a lot to do.

But there is a risk in leaving HR out of a multi-functional transformation and outsourcing planning processes. Firstly, if HR is not included up‑front, the organisation may never get around to realising the benefits of transforming HR at all; and secondly, the HR director may discover that their own plans for transformation are incompatible with those of other functions.  By failing to join in with the organisation’s transformation effort, HR can lose its voice and find a strategy has been imposed upon them. The worst result would see an HR team included in another department’s outsourcing deal or put in a shared service without being consulted properly.

In most cases there is more to gain by combining HR transformation activities with those in other functions, such as finance and IT, bringing the best characteristics from each function into the change programme, helping to ensure that its objectives are followed across the organisation. 

Myth 3: Don’t outsource a mess. This claim is often repeated, especially by people that have had one bad experience of outsourcing, but industry insiders don’t buy it. Whilst it is undoubtedly better to have well-defined processes and take out surplus headcount before outsourcing, you have to ask yourself why you haven’t managed to do this before and have a credible answer as to why things are different now.

Too often this myth is used by HR leaders as an excuse to procrastinate. Outsourcing can provide a trigger to get things done. So I would like to propose a better alternative to this myth: ‘Don’t outsource a mess unless you understand what the mess is and exactly what you and the service provider are going to do to correct it’. 

It is also important to look beyond the ‘mess’ and consider what innovation will be delivered in years three, four and five of the contract. How can the organisation ensure the outsource provider has an incentive to, for example, upgrade HR applications and processes when new capabilities become available?

There is therefore a need to build in incentives for the outsourcing provider that reflect the requirement for innovation, such as the delivery of better training services or a streamlined leaving process, and to build in a fair way of sharing the risk and reward. The organisation needs to be prepared to pay for this innovation, but the outsource provider must also shoulder some of the risk, taking its benefit as its client also achieves its desired outcome.

Myth 4: You’ll lose control. In theory, good outsourcing should increase the level of transparency over the service and the level of control that the HR function and business is able to exert. Unfortunately, this myth is too often true in practice; but it doesn’t need to be so.  

Our research into European HR outsourcing shows that there is a ‘transparency gap’ between HR service providers and their customers – with customers believing their service providers to be too opaque. It seems that the outsourcing industry defaults to minimal transparency where allowed. If this transparency gap is to be closed, the onus is on the client organisation to put this at the heart of its requirements as it engages with the market. If this is done, enhanced control and better service quality will follow. 

Much HR outsourcing to date has failed in this regard. Commonly-used procurement and contracting processes do not drive transparency. Indeed, the rhetoric of the outsourcing industry is that organisations do not need to worry about how the work is being done; ‘look instead at the end results’. But this is another myth. When an outsourcing approach is transformational - with services provided in a new way, usually from a remote location, such a ‘black box’ approach - can fuel suspicion. With no clarity over what is happening, who is delivering services and what skills they have, client teams understandably assume the worst.  Is the provider deliberately cutting costs by downgrading the skills in the offshore centre? More likely, the provider has lost staff and is struggling to recruit adequate skills. But with no transparency, who knows?

Accepting this black box model is irresponsible. Unless the company is outsourcing a very clearly defined transactional process – such as reference checking – this is not a fit for purpose way of working, at least at the start of the project.

Myth 5: It’s better to have ‘one throat to choke’. HR requires a number of specialist skills to be delivered properly. There is much debate over whether or not it is better to have a master vendor that manages other parties on behalf of the client.  

In the early days of HR outsourcing, it was typical to see a single service provider take over the entire transactional HR service. Often, this involved transferring an already formed HR shared service organisation from the client. This model worked in most cases, but in certain specialist areas it started to fail. These were often later taken out of scope from the master contract – most commonly, expatriation and relocation services and elements of recruitment. The industry learned that some things are just not best delivered by generalist providers.  

Where this work moved to another service provider, it gave rise to the question of whether or not it was better to retain a master vendor, charged with managing the complete HR service, or whether it was better for the client to manage multiple service provider relationships. This question also arose when clients insisted on payroll services being part of HR service contracts; most of the large HR service providers have always preferred to subcontract payroll related work to specialists. As a result, it is now common for organisations to have multiple providers meeting the needs of a single HR function. And, in fear of the overhead and new capabilities required to manage multiple outsourcing contracts, HR outsourcing clients often elect to have a single large vendor managing end-to-end services.

The question is whether or not this is the right approach. At one level it seems sensible; after all, a master vendor should be more adept at securing a good price and service from a smaller organisation. However, after seeing many different commercial approaches over the years, I am firmly of the opinion that the client needs to expect to have a significant involvement with all main third parties in their HR ‘supply chain’, even if the contract is set up with one provider being the prime contractor. The theory of having ‘one throat to choke’ does not work in practice.

The reality is that when something goes wrong, the master vendor may indeed have a commercial issue, and they will certainly try to fix the problem, but the client cares most about the service issue, and in many cases is forced to drive its resolution. Whatever the contract says, the client ultimately owns the issue. The difficulty with this is that it is hard to achieve the resolution of a commercial and service issue if you have no direct commercial relationship with one of the third party providers. 

Our advice is to proceed with a ‘master vendor’ approach with caution, making sure that you at least have the right to access all of your supply base, and using scenarios of likely issues to test how each provider will behave in the event of an issue. 

Conclusion

So, how should you move forward and assess your sourcing options? A practical step is to create a realistic sourcing strategy, setting out what you want to achieve and how you will achieve it. Even if outsourcing isn’t the selected outcome, you should document why you did not choose it, as this will be useful to help with future challenges from stakeholders. And should the outcome be that you use outsourcing, write down your objectives and put them at the heart of your sourcing process. Be honest about what you are trying to achieve – not just a headline ‘better service, less cost’; but the real objectives, properly thought through. 

It is also valuable to document the outsourcing provider’s objectives and your combined joint objectives. This is rarely done, but will help you achieve a contract and relationship that meet your requirements and help counter the issues and fears that underpin the myths discussed in this article. 

It is easy to use ‘bumper sticker’ advice as a delaying tactic. In today’s global business environment, with the search for better, more cost effective service delivery, inaction is unacceptable. Outsourcing may or may not be right for your HR department, but failing to proactively assess sourcing options is a dangerous strategy – and one that could cost far more in lost control and corporate reputation.


To visit PA's page on HR services, please click here.

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