A lot of material has been written about the benefits of HR Outsourcing (HRO), mostly by the service providers of such arrangements, but not much is available to organisations helping them consider whether there are disadvantages which mean that retaining in-house HR is the better solution for them. Delia Goldring FSN contributing writer, visiting Professor in HRM at Middlesex University and Director Performance Options, looks at the practical issues of HR Outsourcing.
Common reasons for going down the HRO route are cost reduction, providing expertise not available internally, increasing HR effectiveness with increased flexibility and speed of response and allowing the resultant HR team to concentrate on strategic issues or in the case of smaller organisations replacing the HR function altogether. The specific processes that are included within any outsourcing arrangement will vary from organisation to organisation. Some organisations may outsource virtually all of their HR processes where others select specific components such as payroll or recruitment.
Costs reduction is often achieved because the provider can apply specific and more advanced HR IT systems without the capital outlay and with the ability to provide improved people management information, including human capital metrics . Additional cost reductions come from the providers’ developed streamlined, best-practice processes; and economies of scale, as they are usually providing HR services for several employers. In addition, the provider’s service management may be more rigorous than the in-house equivalent as it is working to demanding, service-level agreements.
It is mostly small or very large organisations that are involved in HRO, the former due to the absence of in-house expertise and capacity, whereas the latter outsource routine HR processes in order to focus on core businesses.
The next five years is a critical time for organisations around the world to optimise their talent and to become even more competitive. HR teams need to transform their focus and people skills toward strategy and away from administration and one way of doing that is to engage the services of HRO provider. So why shouldn’t every organisation get into HRO agreements?
Potential pitfalls
HRO is not necessarily the cure for all organisations and can have some drawbacks which are discussed below:
If the internal processes of an organisation are over-complicated or poorly understood by those involved in the design of an HRO service agreement, then simply transferring them to an outsource provider is unlikely to be an improvement on the in-house HR provision. The outsource provider will only have to subsequently solve the problem, incurring more costs for the organisation and standardisation of processes may be in line with the outsource provider specification not with the preferences of the organisation.
The cost savings of outsourcing may not be as high as providers state in their advertising materials and will be much reduced if an organisation already has comprehensive IT systems.
Outsourcing does not absolve the organisation of responsibility of good people management practices nor of overall responsibility for the provision of HR services. In some cases, it may be more uncomfortable for the HR team to be held responsible for someone else’s poor performance than for their own department.
One of the main benefits of HRO is often quoted as being that it allows HR professionals to take on a more strategic role however, splitting the internal HR service of an organisation means that day to day operations are divorced from strategy and policy direction and are not taken into consideration when planning organisational strategy. However, as Anne Rouse, associate professor of IT strategy and strategic management at Deakin Business School says if the roganisation no longer employs the staff performing transactional HR: “Where do you grow functional specialists who know your firm’s business intimately, are loyal to your firm and at the same time are experienced in the functional area and able to spot strategic use of that function?”
HRO providers often prefer tying an organisation into long term contracts for as much as five or even ten years, with promises of reductions in fees such long contracts. Over the past eighteen months the global economic climate has proved that organisations may be well advised to avoid such long term contracts. Even if the outsourcing provider has a clear understanding of what an organisation believes is its current and potential future business strategy at the time of signing a contract the organisations profile may dramatically alter within the space of two let alone five or ten years. The need for outsourcing services may change as the business environment changes, and there are instances of services being brought back in-house which is not possible without large penalties if a long contract term has been agreed.
For example, in a rapidly changing economic and business environment organisations which have outsourced their recruitment processes may experience a reduction in staff numbers and therefore also reducing recruitment volumes. The specified recruitment volumes in the contract therefore will change within the contract term and this can result in far less cost effective HRO contracts than originally hoped for.
An outsourcing arrangement will often also include significant changes to HR processes, including HR self-service systems and or a formalised HR call centre provision for employees and managers. It is therefore important that the organisation ensures that sufficient HR leadership and expertise remains internally to manage these changes as well as providing on-going leadership and strategic direction. However, this can cause problems for HRO users since many are smaller and organisations they are unlikely to retain staff in-house with the required levels of HR expertise.
Outsourcing HR processes means that organisations have a need for strategic HR players only and no requirement for lower graded HR professional staff. As Jane Saunders Managing Partner at Orion Partners says, ‘Outsourcing elements of your HR function, particularly core transactional delivery, will mean outsourcing parts of the service that are where many HR professionals have traditionally learned their trade.’ The result will be that there will be no pool of internal junior talent to fill strategic HR vacancies and therefore recruitment costs for HR staff themselves will always be high.
HRO if not carefully managed can seriously damage the ‘employer brand’ i.e. the reputation of the organisation as an employer. Sometimes HRO staff within a call centre, who may have little loyalty to the client organisation, do not understand how important the employer brand is as a vital component in attracting and recruiting the right talent for each specific organisation.
Over time the organisation’s management will suffer from the loss of local knowledge and processes which instead reside with the outsource provider, particularly when a recruitment HRO is operating and this may affect the employer/employee relationship.
The verdict
It appears that there are a number of limitations and pitfalls when it comes to HRO and ‘no one size fits all’ for HRO agreements and no prescriptive method for organisations to decide whether in-house or outsourced HR is better - it is purely a question of individual careful consideration of all the relevant facts and issues.
That said there are clear benefits to be gained from HRO in certain situations and long as organisations carefully assess their requirements before embarking on a contract and take heed of the issues discussed above the agreement will stand every chance of being a success.
Entering into HRO is complex and the biggest challenge for organisations is to gain an understanding how truly daunting the resultant change management programme will be. The processes that directly affect employees have the potential to damage the employee/employer relationship. As Kathryn Kelly of ExcellerateHRO says ‘you can't outsource anything more intimate. When you change how these services are delivered, you can expect ramifications. An HRO will only work well if both parties make an enormous investment in their relationship. They must have similar expectations and a good culture match. A good governance model is also critical. By clearly outlining timelines and responsibilities, the expectations of the buyer and the provider are defined. Good governance ensures accountability and keeps a good relationship intact throughout the implementation process.’
