HR Outsourcing - When and how to outsource your HR

In this article, I explore what aspects of HR make sense to outsource, the benefits and some key considerations before you do so.

HR functions in organisations often find that they are struggling to focus on the most important activities that generate real strategic value as they try to manage the numerous demands on their time for anything people related. For example, effective talent development is essential for an organisation, enabling it to grow and retain competitive advantage whilst payroll is process driven and has the potential to be successfully outsourced.

What to outsource in HR?

The top three reasons cited for undertaking outsourcing in the CIPD 2009 survey HR outsourcing and the HR function of which 315 organisations took part are access to skills and knowledge, quality and cost reduction. This survey also found that almost one third of respondents outsource some of the HR function and that the most commonly outsourced HR activities are legal services, payroll and pensions. The former and latter areas rely on expertise that may not be integral to the organisation whilst the administrative nature of payroll lends itself to outsourcing.

Interestingly, outsourcing can be viewed by HR professionals as a narrowing of opportunity for them to apply and develop their skills, furthermore some organisations regard their internal HR teams as well resourced and see no advantage to outsourcing.

The case against HR outsourcing

There are strong arguments against outsourcing the whole of the HR function. Activities such as reward need to be kept in house as this activity demands an inside knowledge of the organisation’s goals and philosophy. Likewise, strategic workforce planning and talent management require the inside track to function effectively. In addition, there is the issue of lost expertise and understanding, the more an HR function becomes outsourced; in effect HR becomes removed from operations and its understanding of them.

If, strategic areas of HR are to remain in-house then the role of the HR manager must become more strategic in both thinking and practice. This can lead to HR strategy becoming more embedded in to the overall business strategy and HR gaining more credibility in the organisation. Fluctuations in staff turnover can be reduced as the outsourced functions are no longer populated by the organisation’s staff whilst a reduction in time spent on administration can be achieved freeing up time to spend on key strategic activities.

Delivering a successful HR outsource - KPIs

In order for HR outsourcing to be successful, the HR function needs to be mindful that it may lose the flexibility of changing its services to fit with business requirements when they become outsourced. Careful analysis of future requirements therefore needs to be made in order to mitigate this risk. 

Moving to an HR outsourcing model will create a major cultural shift and employees need to be prepared accordingly, change management will need to have strong leadership in order for this shift to be successful. The outsourcing relationship will need to be carefully managed and monitored and contracts negotiated according to the organisation’s requirements. Following these principles is more likely to lead to an effective outsourcing arrangement.

The Key Performance Indicators (KPIs) that need to be agreed and monitored to ensure effective outsourced performance include:

1. Percentage of user complaints on contracted services as a percentage of all user complaints.
2. Number of formal disputes with suppliers.
3. Percentage of key stakeholders satisfied with their suppliers.
4. Percentage Actual vs. Estimated Savings: Percentage of actual or realized savings on spend against a negotiated contract vs the estimated spend determined during the sourcing initiative.
5. Percentage of suppliers screened on human rights: Percentage of significant suppliers and contractors that have undergone screening on human rights and actions taken.
6. Percentage of time sheets in need of correction and/or validation by submitter.
7. Percentage of vendor services delivered without agreed service targets.
8. Percentage of invoices disputed.

Back-sourcing or reversibility

What if your outsourcing contract comes to an end or is prematurely terminated? When initially considering outsourcing, it is important to plan for the possibility of back-sourcing at some stage in the future. The danger otherwise is that the organisation will lose the expertise for an outsourced process or activity. A framework for bringing the process back in-house is essential to include in an outsource contract. Key areas to include in a contract are:

• Low Termination Fees
• Robust Transition Support Clause
• Ability to reduce the services gradually as work transitions

HR outsource – a case study

A good example of a firm that has benefited from HR outsourcing is BP. In 1999, it outsourced its activities to Exult in the USA and UK for services such as payroll, recruiting, expatriation, records management, vendor management and relocation services for 63,000 employees.

The only function that remained in-house was BP's learning and development program in the United States. Over the last two years, the company has reaped many benefits from this arrangement including reduced costs of up to $15 million and more effective HR service provision for 72,000 employees

A final word from Michael Stephan, Principal, Deloitte Consulting LLP