HR Outsourcing: It’s not all about the money
Cost is often the driver behind outsourcing. But organisations are discovering that this route can also bring other benefits, including better service standards
© Brett Ryder
It is hard to generalise about today’s HR outsourcing market. Some organisations are doing it, some aren’t. Most, particularly those still new to outsourcing, are driven by the need to reduce their costs, but others have their eye on how it can bring broader business improvements.
“It is very difficult to identify clear trends as the behaviour of organisations is so situational,” says Paul Sparrow, director of Lancaster University Management School’s Centre for Performance-led HR. “Even in the same sector you could have two large multinationals of the same type taking fundamentally different approaches because there are so many internal structural factors involved. -Companies are looking at their own circumstances and taking their own decisions.”
One reason that companies are taking a variety of approaches is that they recognise that cost savings and other potential benefits are not automatic – not least because outsourcing can add significant business complexity. This, in turn, means that HR buyers need to take account of internal political and cultural organisational factors when considering whether outsourcing will work in their organisations, says Sparrow. “The cost pressures are still there… but there is no simple answer. HR professionals have to look at their own model, their own organisational culture and then make a decision about the likely benefits that might result,” he adds.
Bharat Vagadia, who is on the board of the National Outsourcing Association, argues that while cost savings are “a given” and remain the driving force behind most deals, buyers at organisations with outsourcing experience are starting to look for other benefits as well. For example, some multinationals see it as a way of standardising processes in areas such as payroll, benefits management and recruitment across all their global locations. “It is more a question of ‘how can you help me make HR more strategic?’ rather than ‘how can you help me save money?’,” he says.
For outsourcing provider Accenture, this change in focus is not happening fast enough. The company recently published a report that concluded that 60 per cent of organisations using HR outsourcing (HRO) do so primarily for cost reasons, while only 20 per cent are what it calls “high performers”, who in many cases have outsourced their entire function. “We were hoping that the number of high-performing business process outsourcing (BPO) engagements would be a little higher – we would like to see the market move a little bit more aggressively that way – but the data is the data,” says Jill Goldstein, HR BPO offering lead at Accenture. What makes that 20 per cent different, she adds, is that they are more connected to the business and they think of outsourcing as something that can be used to do more than move transactional services to someone else’s care. For example, they want to see how it can be used to support business growth.
The people in that 20 per cent usually fall into one of two categories: those with a trusting, collaborative relationship with their provider, who have spent time transforming the part of their HR function retained in house so that its skills and experience complement the outsourcing arrangement; and those who were on a “burning platform” and turned to Accenture for rescue. This second group still counts as part of the top 20 per cent, because the provider defines high performers as those who get the most out of their BPO arrangements. “What motivated them to engage is maybe something that is not as relevant,” says Goldstein.
Some other providers are seeing a change in the motivation of HRO buyers. Philippa Kilgannon, the head of Vista HR services, and Paul Willis, the managed-services director at MidlandHR, both identify a demand for service improvement. “A lot of customers are looking not just to improve costs, although that is always part of it, but for an additional level that allows them to achieve different things,” says Willis.
Kilgannon says: “Buyers are much more strategic about it. Rather than saying ‘let’s outsource all of HR’, they are identifying the services that they do not believe are adding the strategic value to the business that they should.
“They are more specific in what they ask for, they have more commercial awareness and they are more accountable to the business for what they achieve.”
However, Mel Missen, HR vice-president for Europe, the Middle East and Africa at Axciom Corporation, a multinational marketing business, is sceptical about the idea that HR buyers are becoming more strategic but argues that the driving consideration for HR should always be its customers. “It is definitely not about cost saving,” he says. “You can save costs as a consequence, but if you start from that premise you are prioritising the wrong thing. You start with what your customers want, what they value and you look at whether you can offer that internally or externally, and which way brings better value.” Outsourcing some things makes sense, as it frees up resources, allowing in-house HR to concentrate on the areas where it can add most value to the business. “Too many HR teams think about what’s good for them, rather than what it is that their customers want.”
Missen is not a fan of extending the shared-services concept into the employee-relations arena.
Managers struggling with a personnel issue want support from someone with a face, who can provide ongoing advice over the days or weeks it takes to resolve the situation. These are not available over a telephone helpline. “A lot of businesses are looking at HR to be co-leaders, and you can’t do that if you outsource everything,” he says. “Outsourcing makes sense where it adds value and frees up in-house HR to concentrate on what it does best. I look to outsource the staff I regard as transactional because, first, the work can be done mechanistically and, second, you can apply a standard across many different countries and know that it will be met because of the service-level agreement.”
Missen has also outsourced benefit and pension management for a mixture of financial and quality-related reasons. “The cost of the outsourced service is negligible because the provider takes its fees out of commission from end suppliers, so the actual cost to us of outsourcing it is peanuts. And because we are letting experts deal with these things, the employee is actually getting much better value for money.” Staff recognise this, too: pension take-up has increased from less than 50 per cent to 85 per cent since the outsourcing arrangements were put in place.
In the public sector, cost-cutting has not led to the wholesale move to outsourcing that some had expected. “We face a number of years of reducing budgets and that has had an impact on the HR community as much as any other part of the public sector,” says Martin Rayson, president of the Public Sector People Managers’ Association and director of HR and organisational development at the London Borough of Barking and Dagenham.
“Organisations have taken the steps that are necessary over the past few years to drive costs down among their support functions, including HR.
“When we started this process, there was some talk of a rush to outsourcing – but that has not taken place,” he adds. “What organisations have done is to look at how they can reduce cost internally. They have not seen outsourcing as a panacea. They want to take out the cost and keep the savings themselves, rather than seeing any of that saving taken by a third party.
“But we are at a point where future cost savings have to be made, and organisations will look at ways that they can make these reductions, while protecting the quality of the service that they can provide.” These options may include outsourcing, but, says Rayson: “We do not see necessarily one silver bullet that will solve our problems. It’s about looking [at all the options] pragmatically.”
“It is very difficult to identify clear trends as the behaviour of organisations is so situational,” says Paul Sparrow, director of Lancaster University Management School’s Centre for Performance-led HR. “Even in the same sector you could have two large multinationals of the same type taking fundamentally different approaches because there are so many internal structural factors involved. -Companies are looking at their own circumstances and taking their own decisions.”
One reason that companies are taking a variety of approaches is that they recognise that cost savings and other potential benefits are not automatic – not least because outsourcing can add significant business complexity. This, in turn, means that HR buyers need to take account of internal political and cultural organisational factors when considering whether outsourcing will work in their organisations, says Sparrow. “The cost pressures are still there… but there is no simple answer. HR professionals have to look at their own model, their own organisational culture and then make a decision about the likely benefits that might result,” he adds.
Bharat Vagadia, who is on the board of the National Outsourcing Association, argues that while cost savings are “a given” and remain the driving force behind most deals, buyers at organisations with outsourcing experience are starting to look for other benefits as well. For example, some multinationals see it as a way of standardising processes in areas such as payroll, benefits management and recruitment across all their global locations. “It is more a question of ‘how can you help me make HR more strategic?’ rather than ‘how can you help me save money?’,” he says.
For outsourcing provider Accenture, this change in focus is not happening fast enough. The company recently published a report that concluded that 60 per cent of organisations using HR outsourcing (HRO) do so primarily for cost reasons, while only 20 per cent are what it calls “high performers”, who in many cases have outsourced their entire function. “We were hoping that the number of high-performing business process outsourcing (BPO) engagements would be a little higher – we would like to see the market move a little bit more aggressively that way – but the data is the data,” says Jill Goldstein, HR BPO offering lead at Accenture. What makes that 20 per cent different, she adds, is that they are more connected to the business and they think of outsourcing as something that can be used to do more than move transactional services to someone else’s care. For example, they want to see how it can be used to support business growth.
The people in that 20 per cent usually fall into one of two categories: those with a trusting, collaborative relationship with their provider, who have spent time transforming the part of their HR function retained in house so that its skills and experience complement the outsourcing arrangement; and those who were on a “burning platform” and turned to Accenture for rescue. This second group still counts as part of the top 20 per cent, because the provider defines high performers as those who get the most out of their BPO arrangements. “What motivated them to engage is maybe something that is not as relevant,” says Goldstein.
Some other providers are seeing a change in the motivation of HRO buyers. Philippa Kilgannon, the head of Vista HR services, and Paul Willis, the managed-services director at MidlandHR, both identify a demand for service improvement. “A lot of customers are looking not just to improve costs, although that is always part of it, but for an additional level that allows them to achieve different things,” says Willis.
Kilgannon says: “Buyers are much more strategic about it. Rather than saying ‘let’s outsource all of HR’, they are identifying the services that they do not believe are adding the strategic value to the business that they should.
“They are more specific in what they ask for, they have more commercial awareness and they are more accountable to the business for what they achieve.”
However, Mel Missen, HR vice-president for Europe, the Middle East and Africa at Axciom Corporation, a multinational marketing business, is sceptical about the idea that HR buyers are becoming more strategic but argues that the driving consideration for HR should always be its customers. “It is definitely not about cost saving,” he says. “You can save costs as a consequence, but if you start from that premise you are prioritising the wrong thing. You start with what your customers want, what they value and you look at whether you can offer that internally or externally, and which way brings better value.” Outsourcing some things makes sense, as it frees up resources, allowing in-house HR to concentrate on the areas where it can add most value to the business. “Too many HR teams think about what’s good for them, rather than what it is that their customers want.”
Missen is not a fan of extending the shared-services concept into the employee-relations arena.
Managers struggling with a personnel issue want support from someone with a face, who can provide ongoing advice over the days or weeks it takes to resolve the situation. These are not available over a telephone helpline. “A lot of businesses are looking at HR to be co-leaders, and you can’t do that if you outsource everything,” he says. “Outsourcing makes sense where it adds value and frees up in-house HR to concentrate on what it does best. I look to outsource the staff I regard as transactional because, first, the work can be done mechanistically and, second, you can apply a standard across many different countries and know that it will be met because of the service-level agreement.”
Missen has also outsourced benefit and pension management for a mixture of financial and quality-related reasons. “The cost of the outsourced service is negligible because the provider takes its fees out of commission from end suppliers, so the actual cost to us of outsourcing it is peanuts. And because we are letting experts deal with these things, the employee is actually getting much better value for money.” Staff recognise this, too: pension take-up has increased from less than 50 per cent to 85 per cent since the outsourcing arrangements were put in place.
In the public sector, cost-cutting has not led to the wholesale move to outsourcing that some had expected. “We face a number of years of reducing budgets and that has had an impact on the HR community as much as any other part of the public sector,” says Martin Rayson, president of the Public Sector People Managers’ Association and director of HR and organisational development at the London Borough of Barking and Dagenham.
“Organisations have taken the steps that are necessary over the past few years to drive costs down among their support functions, including HR.
“When we started this process, there was some talk of a rush to outsourcing – but that has not taken place,” he adds. “What organisations have done is to look at how they can reduce cost internally. They have not seen outsourcing as a panacea. They want to take out the cost and keep the savings themselves, rather than seeing any of that saving taken by a third party.
“But we are at a point where future cost savings have to be made, and organisations will look at ways that they can make these reductions, while protecting the quality of the service that they can provide.” These options may include outsourcing, but, says Rayson: “We do not see necessarily one silver bullet that will solve our problems. It’s about looking [at all the options] pragmatically.”
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