All HR directors should consider their sourcing options; how they should secure the capabilities required to deliver an effective an efficient HR service, and particularly whether or not they should use outsourcing to deliver key HR services. It is not credible to argue that the HR function should be excluded from the attention given to other functions such as IT, finance or facilities. If HR doesn’t assess its own options, someone else will probably do it for them.
However, outsourcing is not something that should be done lightly. Do it well, and it’s 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. For this reason, HR directors need to enter into the HR outsourcing market with their eyes open and tackle some common myths head on:
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 that cannot be afforded in other ways. Savings are available, especially for UK companies that are willing to move work to India, but the minute requirements get complicated, for example distributed populations around Europe with varying language requirements, savings become much harder to achieve.
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. But how is this different from finance or IT, which also have to support such situations? In most cases there is more to gain by combining HR transformation activities with those in other functions, bringing the best characteristics from each into the change programme and helping to ensure that its objectives are followed through across the organisation.
Don’t outsource a mess. This 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; why can you now achieve what you haven’t before? Too often this myth is used by HR leaders as an excuse to do nothing. Outsourcing can provide a trigger to get things done. I’d 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”.
You’ll lose control. Good HR 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. But the sourcing process needs to be done well, putting this requirement at the heart of the approach. The truth is that most HR outsourcing fails in this regard, with commonly used procurement and contracting processes unable to define and manage HR outsourcing contracts. Our research shows that in practice there is a ‘transparency gap’ between HR service providers and their customers – with customers believing their service providers to be too opaque.
It’s better to have ‘one throat to choke’. In fear of the overhead and capabilities required to manage multiple outsourcing contracts, HR outsourcing clients often elect to have a single large vendor that manages end-to-end services. This can result in numerous third parties being involved in the delivery of the service, but with the client having only one contractual relationship. The practical reality of this is that when something goes wrong, the master vendor may have a commercial issue, but the client owns the service issue, and an in many cases is forced to drive its resolution. Our advice is to proceed with a ‘master vendor’ approach with caution, using scenarios of likely issues to test how the provider will behave.
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 didn’t choose it, 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. This 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.
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