16 September 2008:
Whether for specific processes, or across the full range of Human Resources (HR) activities, outsourcing is a proven and viable strategy to increase the performance of the HR function. However, there is no single formula that applies to all organisations; HR Outsourcing (HRO) is being used to address varying strategic objectives and its scope will differ in terms of HR processes and geographies involved. Organisations need a framework to help them consider the value of HRO to their organisation and their specific circumstances.
The HRO Value Equation
Traditionally, business processing outsourcing is seen as a means of driving efficiency through cost reduction. Whilst the financial business case is important and should always be understood, forward thinking organisations will consider other factors, in addition to cost reduction, when evaluating and designing HRO solutions. HRO value can be considered to be a function of a number of interrelated factors. Different organisations will have different drivers and choices for each of these factors, resulting in different HRO value propositions. We can refer to this wider view as ’balancing the HRO value equation’, to provide the specific HRO value proposition that is right for your organisation.
HR Outsourcing Value = (Cost Reduction + HR Service Model + Business Flexibility + Retained HR)
The Formula sets out the HRO value equation as a function of cost reduction, the HR service model, business flexibility, and the retained HR organisation. Organisations can use this framework to develop and assess the benefit side of a business case for HR outsourcing, but also need to recognise that these elements are interrelated, for example, the size of the retained HR organisation will influence the overall cost reduction opportunity.
Cost reduction will almost certainly be a key factor for HRO and is generally delivered via labour arbitrage when moving HR work to lower cost locations. HRO should also provide efficiency savings through the aggregation and consolidation of work into fewer locations using specialised delivery resources. Indeed, most HRO solutions have some elements of work that cannot be easily moved out of the home country and so aggregation becomes an important source of labour cost saving.
Though less often included as hard savings in a business case, HR costs opportunities can also go beyond the HR function and into the wider business when HRO provides an improved HR service model and a more effective retained HR organisation, eg, through more effective recruiting, reduced attrition and more efficient manager-employee interaction.
Organisations need to be realistic when estimating the degree of cost reduction that can be achieved; this requires a detailed understanding of the current HR baseline and the extent of the work that an outsourcing service provider will take on, and also that work which will be retained.
HR Service Model
The first consideration has to be what to outsource and to whom. For some it will be about outsourcing single or specific processes to specialised suppliers, eg, for payroll, HR data management, benefits administration, or recruitment. For others a full scope outsourcing to a single generalist supplier will be the right model. Part of this, consideration needs to take account of the extent of HR process standardisation and how technology can be used to transform HR services.
The quickest way to cost reduction might be a ‘lift and shift’ of the current HR delivery model, but, this is unlikely to maximise the long term cost reduction opportunity and will do little to address any fundamental HR service issues. Transformation of the service model provides an opportunity to gain additional efficiency savings and also improve the quality and timeliness of HR services.
Global and multinational organisations will also need to consider how to service the ‘long tail’ of countries where there are relatively few employees and hence insufficient scale of HR activity to drive a financial case for outsourcing. One approach is to outsource global, common HR processes that can be delivered from a centralised off-shore location and to retain local HR processes where there is less scale and more local content. A hybrid HR service model such as this might see that all countries served by centralised and outsourced HR Data Management and Performance Management Administration and International Assignment services, with other services such as Payroll and Benefits Administration being retained for countries with fewer employees and outsourced only for larger populations.
Moving to outsourced HR delivery can turn relatively fixed HR costs into variable costs that can scale with business changes such as acquisitions, divestitures, growth in new markets and contraction in times of economic downturn. In addition, the use of an outsourcing partner can provide access to a larger talent pool to enable faster and lower risk delivery of key HR initiatives such as the introduction of new benefits programmes, or compliance with changing legislative and regulatory requirements.
The degree of individual process flexibility is also influenced by the nature of the HRO service provider’s solution, a utility (one solution for many clients) payroll platform will suit most organisations, but plans to introduce a flexible benefits programme could be constrained if this is not offered by the HRO service provider.
Planning for the right degree of flexibility in an HRO arrangement is an important element of the overall value proposition and the need for such flexibility needs to be accounted for in contractual arrangements with the HRO service provider.
Establishing the right retained HR Organisation is a critical success factor for successful HRO, whilst responsibility for specific HR services may move to an outsourcer, the client organisation must remain accountable for the HR Function. The challenge is to put in place a retained organisation which can govern the outsourcing relationship using an arms length service management approach and which does not revert to previous practices and detailed involvement in HR service delivery as doing so will undermine the value of using an HRO service provider.
The retained HR organisation needs to recognise that HR services have transferred and then focus more on strategic support for the business, for example, planning the skill profiles required to support overall business strategy, managing and developing talent, supporting the business in deploying key HR initiatives etc.
Realising the benefits of a more strategic role for HR, together with the need for a new HRO governance activity is very likely to require the acquisition and development of new skills in the retained HR organisation.
The HRO value equation provides a simple and useful framework for developing and assessing the benefits of a business case for HRO that go beyond pure cost reduction and which can be aligned to the over arching business and HR strategies that are specific to each organisation. These can then be set against the costs of transitioning and delivering outsourced HR services to provide a comprehensive business case.
Source: Alsbridge plc