The case against outsourcing HR

Third-party HR providers miss the custom touch that provides competitive advantage

Human resources has a reputation for coming up with flavour-of-the-month solutions. One of the latest fads is outsourcing a significant portion of its own work to an outside party. A vendor essentially takes care of an entire HR process that used to be done internally. Vendors and consultants who stand to gain from this fad often champion the idea.

Although outsourcing may, at first, seem like a good idea, it is important to take a critical look at it, especially in terms of productivity and competitive advantage. There are many day-to-day things that can go wrong.

There are four big reasons to minimize the use of HR outsourcing. It provides no competitive advantage. It can limit the growth, image and capabilities of HR. In most cases the promised cost savings never materialize; in fact, there is very little data to prove it even works at all. And it introduces risks because information security and vendor longevity cannot be guaranteed.

Outsourcing does not provide a competitive advantage

This is an economy in which HR can provide a company with an enormous competitive advantage. If HR adopts unique and successful practices, it can help the firm attract and retain higher quality staff than its competition.

Outsourcing levels that playing field, taking away any uniqueness — and competitive advantage — an HR department may offer the organization. Outsourcing destines each company to be the same as every other company. In some cases, vendors and consulting firms have even been known to develop a solution at one firm, at the client’s expense, and then turn around and sell that newly developed solution to others.

For innovation, differentiation and competitive advantage, the do-it-yourself method is the only way. If a vendor who doesn’t know the company can do a better job than the HR manager then it’s time for that HR manager to move on.

Outsourcing limits HR’s growth, image and capabilities

If the goal is to have an excellent human resource function, it is essential that HR professionals are given opportunities to grow and learn. The best way to do this is to provide them with opportunities to design, manage and improve the firm’s HR programs. Even the less strategic HR functions provide a training ground for HR professionals. Outsourcing takes learning opportunities and shifts them to the vendor. The only HR professionals who will develop and grow are those working for the vendor.

Outsourcing also damages HR’s ability to build relationships with internal customers. HR is most effective when it builds relationships with employees. Although outsourcing eliminates many tactical transactions, it also eliminates much of the face-to-face communication between HR and its internal customers. These transactions provide HR with the opportunity to build relationships, learn the business and gather information about employee issues.

Outsourcing won’t improve HR’s internal image. HR people are notoriously poor at marketing themselves. Extensive outsourcing sends a message to senior management that HR can’t handle its job as well as an outside vendor can. It may also create a suspicion that the HR team is behind the times and that it needs outsiders to develop new and innovative solutions. If the opportunity to be strategic is going to remain on the table, HR professionals must demonstrate they can both develop strategy and execute it internally.

Further, outsourcing will limit HR’s ability to become a global function. In global organizations, most current outsourcing solutions will hinder, not help, expansion. Currently, most outsourcing vendors are North American. For most of them, their size alone limits the ability to provide global services and in many cases their knowledge base is exclusively founded on domestic experience.

Cost savings rarely realized, and little proof outsourcing enhances effectiveness

Remember several years ago when all of the enterprise-resource-planning-systems and call-centre vendors promised significant savings? Those savings never materialized. Most outsourcers promise significant savings while providing no hard evidence demonstrating that those savings have actually occurred at other companies.

If outsourcing worked as well as most vendors claim it does, there would be an abundance of data demonstrating its effectiveness. In fact, the opposite is true; there is hardly anything out there that proves outsourcing works.

In addition, if vendors were confident that their product produced measurable results, they would offer cost reductions or penalties if they didn’t meet quality, time and cost promises.

What’s more, the idea that outsourcing is cheaper runs against logic. Like everyone else, outsourcing vendors must earn a profit. It is highly unlikely that using an outsourcer will cut costs significantly unless some significant economies of scale are present. In addition to profit for the vendor, companies must factor in the time it will take internal staff to manage the new external relationship when they calculate the return on investment.

In addition, outsourcing brings additional burdens that HR managers may not anticipate. These include the added cost of managing contracts, due diligence, legal fees, customization and consulting services that can drive up forecasted costs significantly. Many of the savings delivered by outsourcing upfront are not true savings because money is just being shifted from one type of expense to another.

Maintaining confidential information

In most cases, HR information must remain highly confidential. In particular, applicant databases, compensation structures, performance data and workforce planning information must be safeguarded at all costs. It’s almost impossible to guarantee data security without control, and outsourcing relinquishes a large amount of that control.

There are numerous horror stories in which vendors have gone out of business and firms have had to fight to recapture their own data. If a firm has an excellent talent base and effective human resource programs, justifying outsourcing becomes almost impossible when the economy is down and vendor stability is at an all-time low.

Other problems with outsourcing

Unfortunately, the list of things that can go wrong with outsourcing is extensive. Here are some more major problems firms are likely to encounter:

•Once a firm outsources and eliminates internal staff it is at the mercy of the vendor. Vendors occasionally under-price to get a contract and then dramatically jack up rates upon renewal, when the firm’s choices are more limited.

•Although vendors will initially treat a company well, after the deal is closed many shift their focus to newer clients and response time can increase.

•When budgets are tight, funds may not be available for program updates.

•Vendor software may be incompatible with existing internal systems. Customization costs are extremely high so firms may have to run a “vanilla” system that doesn’t meet their needs.

•Vendors that are small can’t handle the problems faced by large firms.

•Most vendors won’t accept payment based on performance.

•Vendors don’t know who the client’s internal priority customers are, so they treat them all the same.

•Some corporate cultures and systems are so complex outsiders can’t understand them.

•Vendors may have great salespeople, but after the sale, the account manager assigned to the client may be a rookie.

•Vendor firms often have high turnover so the account team the client starts with may not be there for long.

•Many HR professionals think they lose legal liability by using a vendor. On the contrary, because they lose control when they outsource, they may be more likely to run into legal issues.

It’s time for HR to stop following fads and take responsibility for increasing the people productivity of the firm. Eliminating transactions does not automatically enable the people who do those transactions to migrate into strategic roles. When there is less for HR professionals to do, rather than becoming more focused, they often just do less.

HR professionals need to take responsibility for all aspects of people management at their organizations, not just the glamorous ones.

John Sullivan is a professor of management at San Francisco State University. He can be reached at johns@drjohnsullivan or visit www.drjohnsullivan.com.

To read the full story, login below.

Not a subscriber?

Start your subscription today!