Outsourcing human resource operations

Outsourcing of manufacturing operations has continued to grow throughout the last century, and by the 1980s most US and European multinationals had outsourced significant parts of their manufacturing operations to countries such as China or Mexico, where labour costs were lower.

The next wave of outsourcing involved technology. Although the trend began during the 1980s, by the early 1990s promises of cost savings and an emphasis on “core competencies” sparked the outsourcing of information technology and software development. The global economy is now awash in its third big wave: outsourcing of business services. At the forefront of this phenomenon is outsourcing of human resource operations.

Companies have been outsourcing human resource functions such as payroll and benefits administration for years. Many also have turned to recruiting firms for help with recruiting. What's new is that companies are outsourcing all aspects of the employment lifecycle, from employee recruitment to leadership development to executive coaching to retirement.

Why outsource?
More than three-quarters of companies responding to a recent survey in the US reported that they currently outsource a major human resource function or plan to in the near future. Among them two-thirds say that they fully or partially outsource five or more functions. The US human resource outsourcing market is expected to grow from a $21.7 billion industry in 2000 to a $58.5 billion industry in 2005.

Why employers want to reduce costs and improve services with more expertise and new technology?. Human resource administrative functions don't generate revenue and, if outsourced, can reduce budgets. In addition, outsourcing companies achieve economies of scale and consistent delivery for the increasing number of decentralized organizations.

Human resource outsourcing is where information technology outsourcing was 10 to 20 years ago. The growth of outsourcing is in part as a response to rising costs of regulatory compliance and the accelerating pace of technological change. Human resource outsourcing companies can provide cutting-edge technology and greater expertise on compliance with legislation such as personal taxation and labour laws.

They also can spread the cost of new technology over multiple clients, reducing the need for capital investments.

Here, technology is both an enabler and a driver of outsourcing. The availability of common technology platforms for human resource applications, such as the SAP, PeopleSoft, or the Oracle has made it easier for outsourcing companies to take over in-house functions. Supporters say outsourcing relieves the logistics that bog human resource staffs down – scheduling interviews, making travel arrangements and ordering background checks.

In this you're not going to outsource the fundamental questions of, 'What are we really looking for? What do we need?' And you're not going to outsource the final hiring decision. But in the middle there's a lot of room to outsource. We often see employers who want to introduce techniques such as behavioural inventories and simulations to help them hire more qualified employees and reduce turnover.

Companies with sophisticated human resource people know what they should be doing but they don't have the time or resources to do it. They want to bring all these together. Outsourcing creates a quantum leap in these processes.

Focus on value-added services
The information age has created an immediate gratification mentality. Increasing employee expectations are driving the move to new technology. Like customers, employees are demanding web-enabled access to information 24/7 and the ability to complete transactions easily and quickly.

Replacing inefficient paper transactions with a Web-based environment allows human resource managers to reduce administrative and support staff to concentrate on strategic initiatives such as staff planning and organizational development.

Outsourcing models
Outsourcing contracts typically run for 7-10 years and may include guaranteed cost savings and benchmarking clauses to ensure ongoing competitive pricing. Some also include arrangements in which the client and outsourcing company share in the savings from reduced spending on third-party vendors.

To serve them, leading consulting companies are making acquisitions or alliances to obtain the technology and expertise of firms that can manage detail-oriented functions such as payroll. Shared service centres can be a first step for companies that are looking to outsource. These centres allow companies to streamline and centralize human resource functions and keep the resulting savings. Shared services also can be a first step in streamlining processes before going to outsourcing.

Predictors
Before considering the move to human resource outsourcing, companies should examine a number of issues. Predictors of success as adequate due diligence, effective communications, and agreement between the employer and provider regarding performance levels and roles. When outsourcing starts, internal roles change. Both parties need to be crystal clear about the new process.

They also need to focus on change management: What are the areas of resistance? Who are the stakeholders? What kinds of communications are needed? If not, there are bound to be problems. For many companies, change management begins at home. Companies considering any business process outsourcing must develop a sourcing strategy before drafting a request for proposals and evaluating vendors.

The strategy should include metrics on the cost and efficiency of the organization's current service delivery and the goals it expects to achieve through outsourcing. You have to keep your focus on the business objective. When you skip over the strategy phase you end up with a situation where the deal type is not aligned with the business drivers you want. Because of the length of outsourcing contracts and the increasing responsibility given to external service providers, outsourcing partnerships involve considerable counter-party risks. Due diligence is essential to ensuring the service provider's quality of work as well as its financial stability – that is, the likelihood that it will be around to fulfil the contract.

Employers must check references and perform site visits to the providers' call centres and other facilities. Employers should pay attention to the quality of staff who will be assigned to their account and insist that individuals who are mission-critical remain with them. In addition, all contracts should include “service-level agreements” detailing the parties' obligations and expectations – from estimated workloads to performance measures such as the provider's speed in answering phone calls.

Outsourcing companies also must perform due diligence to ensure that they have properly scoped and priced their proposals. Outsourcers and prospective clients should share the findings of their due diligence before the deal is signed to ensure that the service-level agreements reflect reality. Due diligence also should uncover any mismatches between the cultures of the service provider and the employer. Implementation that aligns with key human resource milestones must be executed flawlessly. The outsourcing company and the employer must agree on the nature of their relationship and the outsourcer's potential liability.

Vendor management
The employer's job doesn't end once the contract is signed. Some companies have created “chief outsourcing officers” to oversee the transitions and monitor ongoing performance of their external providers. An outsourcing manager needs a mix of client skills, business skills, and technical skills that is more often found among providers than employers.

They have to be able to work across business lines. They have to understand contract administration. They have to be good relationship managers. They have to have knowledge of the business drivers. If they don't have technical experience, they need a deputy who does. Firms involved in outsourcing also need leaders who can garner support for the initiative throughout the organization. Lateral leaders have skills as strategic thinkers and dealmakers as well as the ability to anticipate resistance to change and to surmount it constructively.

Finding the requisite blend of capabilities demands a novel approach to recruiting and developing managerial talent, which in turn requires both top management support and well-honed systems for measuring performance and accountability.

Outsourcing to HR providers is growing because companies are beginning to recognize this reality. Many companies, especially in the US and Europe, are coming to the conclusion that if you can't be a world-class provider of service, then the best option is to partner with someone who can provide that level of service.

The future
Human resources will lead the business process outsourcing trend, followed by financial and accounting, then procurement. This is going to be a type of transaction that gets done by virtually everyone in the Global 1000. In the coming years HR outsourcing will be an important driver of long-term value for companies. HR outsourcing is an emerging field. Its true potential is starting to be recognized.

Rahim Panjwani completed his articleship from KPMG Taseer Hadi Khalid & Co. and qualified for ACA in 2000. In addition to being an ACA, Rahim is a qualified APA from PIPFA (1998) and CIA from the IIA (2001). He has also successfully completed a training course on Management Auditing from London School of Economics. His past work experience includes working with Hongkong Shanghai Bank and Serena Hotels. Presently, Rahim is engaged with The Aga Khan University – Funds Management & Corporate Affairs Department. He is a regular contributor of articles in Dawn, Business Recorder and News. He can be contacted at anoosha@akunet.org