The advantages of HR outsourcing versus the down side
Outsourcing frees up HR’s time so practitioners can focus on more important and more strategic tasks. Or, does it take HR away from its customers, and send a signal to upper management that HR can’t do its job? Outsourcing is a hotly contested issue in human resources. The debate will continue to rage, as this $1.36-billion industry (in Canada alone) is really only just getting started. Market intelligence research firm IDC predicts the market will increase 10.6 per cent each year for the next five years. Here is what people are saying, for and against outsourcing, from within the pages of Canadian HR Reporter and elsewhere in the HR community.
Advantages of HR outsourcing
Our mess for less
“Our mess for less,” is how John Boudreau, visiting research director at the University of Southern California’s Center for Effective Organizations, describes the process of handing over business processes and getting outsourcers to take care of them more cost effectively than can be done in-house. He was quoted in a 2003 article in Workforce Management.
Outsourcers promote innovation
Innovation and process improvements tend to happen more often when they are outsourced than when they are performed in-house, Tom Burt, benefits delivery manager for J.C. Penney Co. Inc., said during a roundtable held by the Outsourcing Institute and Hewitt Associates.
Companies intend to outsource strategic functions: study
HR outsourcing is widespread, growing and here to stay, states a research report by New York-based business think-tank the Conference Board. The authors surveyed 125 companies and found that two-thirds were outsourcing a major HR function; most of them intended to expand what they were doing, says the study, “HR Outsourcing Trends.” Companies are becoming interested in outsourcing strategic functions including employee communications, assessment and recruiting.
Makes HR less of a transaction processor
There is a positive side to “getting HR out of the business of transaction” through outsourcing because it can make HR a more positive business partner if it is not seen as a transaction processor, Sue Mohrman, co-author of the study “Creating a Strategic Human Resource Organization,” told HR.com in 2000.
Results can be guaranteed
Prudential Financial Inc. in Newark, N.J. had a cost savings guarantee built into its contract with Exult, which places a financial risk on the outsourcer if it doesn’t meet its monthly performance metrics. According to an article on CareerJournal.com, the Wall Street Journal’s Executive Career site, Exult assumes responsibility for the firm’s other HR third-party vendor contracts and can either renegotiate them or move them to preferred providers. Exult splits cost savings with Prudential.
Reducing the number of vendors
Most large companies use hundreds of vendors and suppliers to provide goods and services via the HR department, according to HR outsourcer Exult, Inc. in its paper, “Service Integration: The Next Level in HR Outsourcing.” A prime goal of HR outsourcing firms is reducing that number. This requires intricate effort and is often not something even the largest corporations are prepared to do, the paper says. The key benefit in reducing vendor numbers is the acquisition of purchasing leverage, increased quality control and the streamlining of services to employees.
90 per cent would do it again
An overwhelming 90 per cent of companies polled said they would outsource again, according to an article about a study conducted by the Conference Board. Less than one per cent of companies said they would take the functions back in-house. The article was published on Outsourcing-center.com.
Half of all HR working for outsourcers by 2007
As many as 50 per cent of all HR professionals could be working for outsourcers by 2007, says Harry Feinberg, CEO of New Jersey-based Outsourcing Today, which publishes HRO Today magazine. “This is not about people in HR going jobless. It is about jobs shifting… the paper-pushers go away and the strategic thinkers stay.” CHRR article #2736
Savings of 25 to 35 per cent
Most organizations do HR exactly the same way, due to government regulations, widely shared expectations about what employers need to give employees, and the emergence of a small number of HR technology providers, says Peter Bendor-Samuel, author of Turning Lead Into Gold: The Demystification of Outsourcing and CEO of Dallas-based outsource consulting company the Everest Group. Because the processes are very similar, no matter what the industry, he says, there is little reason for organizations to keep them in-house. He cites savings of 25 to 35 per cent. “I can imagine a world where 25 per cent of firms move to (the outsourcing) model,” says Bendor-Samuel. CHRR article #2736
Access to state-of-the-art HR software
Calgary Health Region outsourced three-quarters of its HR department to Telus Sourcing Solutions because it wanted access to state-of-the-art HR software, says Duncan Truscott, the organization’s VP of people and learning. “Because of needs in the clinical area… if we went looking for capital (for an HR system) we were going to be way down on the priority list.” CHRR article #3004
The down side to HR outsourcing
Losing the important project can hollow out a company
Farming out the best work and most important projects “hollows out” the organization, says Susan Cramm, president of California-based executive coaching firm Valuedance in an article for CIO Magazine in 2001. She learned the dangers of outsourcing when, as an executive at PepsiCo, a company she hired to manage a PeopleSoft implementation pulled the project manager to work for another client.
More than four times as expensive
Cost savings are far from a given, according to “The Ups and Downs of HR Outsourcing — the Insiders’ Perspective,” a 2002 study posted on HR Gateway, a European HR information site. Some users paid more than four times as much to outsource a simple service such as payroll than it cost them to carry it out in-house. “When you allocate every single cost associated with internal service provision, the figures mount rapidly.”
Security concerns
Employers need to ensure the outsourcer maintains the confidentiality and security of employee data, says Thomas Greble, a partner in the New York office of Brown Raysman Millstein Felder & Steiner LLP. Employers need to be concerned about the security of the outsourcer’s computer system, authorizations for access to information and the use of employee data, Greble wrote for HRO Today in 2003.
Training needed
Organizations have struggled to manage the outsourcing-vendor relationship. In organizations that have relationship managers to control the process between the company and the outsourcer, “informal surveys reveal” less than 25 per cent of them have been trained in the role, according to a 2004 article in HRO Today.
What they would do differently
If they could go back in time, companies that have outsourced would do a number of things differently. They would: focus more on change management, set specific service levels and make sure they are achieved, pay more attention to detail and to process redesign, go with a proven vendor and better manage their relationship with the vendor, says a study conducted by the Conference Board. The information about the study was published on Outsourcing-center.com.
HR people need a business background
Outsourcing may free up an HR professional’s time to allow him to concentrate on strategic issues, but if he really wants to add value to the company he’ll need a business degree, says Steve Bates, senior writer for HR Magazine. The profession is changing, “accelerated by the furious phenomenon of HR outsourcing,” and professionals need to change along with it.
Four reasons to minimize outsourcing
There are four significant reasons to minimize the use of HR outsourcing, says John Sullivan, a professor of management at San Francisco State University. It provides no competitive advantage, it can limit the growth, image and capabilities of HR, promises cost savings that in most cases never materialize, and it introduces risk because information security and vendor longevity cannot be guaranteed. CHRR article #2991
Outsourcing more expensive than expected
Author and academic Monica Belcourt is skeptical about the value of outsourcing. She says people are finding it more expensive to manage than they expect. About 40 per cent of organizations have ended up with higher outsourcing costs than they expected. Another risk is employee morale, she says. “Outsourcing always results in displaced employees.” CHRR article #2736
Internal HR call centres more successful
Companies with internal HR call centres were more likely to report they were successful at meeting their cost reduction goals (86 per cent of in-house versus 67 per cent of outsourcers), according to a survey by Watson Wyatt. Companies using internal call centres were also somewhat more successful at improving customer service and transaction accuracy and increasing productivity, the survey says. CHRR article #3030
Young market makes predictions difficult
Early adopters of “business process outsourcing” are still trying to understand the associated costs and benefits because the market is still new, write Rebecca Scholl and Lisa Stone in a report for Gartner Dataquest. “Even today, the BPO market shows the dynamic characteristics of an emerging market.” CHRR Article #2557
RBC cancelled outsourcing program
RBC Financial Group ended a recruitment outsourcing arrangement, and brought the function back in-house, which helped HR strengthen relationships with the company’s managers, says Maureen Neglia, RBC’s senior manager of recruitment strategies. “The better we know the manager, the better we can help them find the people they need.” CHRR article #2495
The pros and cons of outsourcing HR
PRO
•Lets companies focus on more strategic tasks.
•Outsourcers are experts at doing the specific tasks they are hired for.
•Because they focus on a specific task, they can add extras such as metrics.
•Outsourcing gives the company access to the most up-to-date technology.
•Companies say outsourcing improves HR service levels.
CON
•Outsourcers don’t know or reflect the company’s culture.
•Employee morale can suffer as workers are displaced.
•The vendor can sell the same programs to competitors.
•Vendors may not respond well to changes in the service contract.
•Costs may end up being higher than what is originally agreed to.
•Certain functions, such as performance management, should not be outsourced.
•Because it is in an emerging market, all the costs and benefits are still unclear.
Advantages of HR outsourcing
Our mess for less
“Our mess for less,” is how John Boudreau, visiting research director at the University of Southern California’s Center for Effective Organizations, describes the process of handing over business processes and getting outsourcers to take care of them more cost effectively than can be done in-house. He was quoted in a 2003 article in Workforce Management.
Outsourcers promote innovation
Innovation and process improvements tend to happen more often when they are outsourced than when they are performed in-house, Tom Burt, benefits delivery manager for J.C. Penney Co. Inc., said during a roundtable held by the Outsourcing Institute and Hewitt Associates.
Companies intend to outsource strategic functions: study
HR outsourcing is widespread, growing and here to stay, states a research report by New York-based business think-tank the Conference Board. The authors surveyed 125 companies and found that two-thirds were outsourcing a major HR function; most of them intended to expand what they were doing, says the study, “HR Outsourcing Trends.” Companies are becoming interested in outsourcing strategic functions including employee communications, assessment and recruiting.
Makes HR less of a transaction processor
There is a positive side to “getting HR out of the business of transaction” through outsourcing because it can make HR a more positive business partner if it is not seen as a transaction processor, Sue Mohrman, co-author of the study “Creating a Strategic Human Resource Organization,” told HR.com in 2000.
Results can be guaranteed
Prudential Financial Inc. in Newark, N.J. had a cost savings guarantee built into its contract with Exult, which places a financial risk on the outsourcer if it doesn’t meet its monthly performance metrics. According to an article on CareerJournal.com, the Wall Street Journal’s Executive Career site, Exult assumes responsibility for the firm’s other HR third-party vendor contracts and can either renegotiate them or move them to preferred providers. Exult splits cost savings with Prudential.
Reducing the number of vendors
Most large companies use hundreds of vendors and suppliers to provide goods and services via the HR department, according to HR outsourcer Exult, Inc. in its paper, “Service Integration: The Next Level in HR Outsourcing.” A prime goal of HR outsourcing firms is reducing that number. This requires intricate effort and is often not something even the largest corporations are prepared to do, the paper says. The key benefit in reducing vendor numbers is the acquisition of purchasing leverage, increased quality control and the streamlining of services to employees.
90 per cent would do it again
An overwhelming 90 per cent of companies polled said they would outsource again, according to an article about a study conducted by the Conference Board. Less than one per cent of companies said they would take the functions back in-house. The article was published on Outsourcing-center.com.
Half of all HR working for outsourcers by 2007
As many as 50 per cent of all HR professionals could be working for outsourcers by 2007, says Harry Feinberg, CEO of New Jersey-based Outsourcing Today, which publishes HRO Today magazine. “This is not about people in HR going jobless. It is about jobs shifting… the paper-pushers go away and the strategic thinkers stay.” CHRR article #2736
Savings of 25 to 35 per cent
Most organizations do HR exactly the same way, due to government regulations, widely shared expectations about what employers need to give employees, and the emergence of a small number of HR technology providers, says Peter Bendor-Samuel, author of Turning Lead Into Gold: The Demystification of Outsourcing and CEO of Dallas-based outsource consulting company the Everest Group. Because the processes are very similar, no matter what the industry, he says, there is little reason for organizations to keep them in-house. He cites savings of 25 to 35 per cent. “I can imagine a world where 25 per cent of firms move to (the outsourcing) model,” says Bendor-Samuel. CHRR article #2736
Access to state-of-the-art HR software
Calgary Health Region outsourced three-quarters of its HR department to Telus Sourcing Solutions because it wanted access to state-of-the-art HR software, says Duncan Truscott, the organization’s VP of people and learning. “Because of needs in the clinical area… if we went looking for capital (for an HR system) we were going to be way down on the priority list.” CHRR article #3004
The down side to HR outsourcing
Losing the important project can hollow out a company
Farming out the best work and most important projects “hollows out” the organization, says Susan Cramm, president of California-based executive coaching firm Valuedance in an article for CIO Magazine in 2001. She learned the dangers of outsourcing when, as an executive at PepsiCo, a company she hired to manage a PeopleSoft implementation pulled the project manager to work for another client.
More than four times as expensive
Cost savings are far from a given, according to “The Ups and Downs of HR Outsourcing — the Insiders’ Perspective,” a 2002 study posted on HR Gateway, a European HR information site. Some users paid more than four times as much to outsource a simple service such as payroll than it cost them to carry it out in-house. “When you allocate every single cost associated with internal service provision, the figures mount rapidly.”
Security concerns
Employers need to ensure the outsourcer maintains the confidentiality and security of employee data, says Thomas Greble, a partner in the New York office of Brown Raysman Millstein Felder & Steiner LLP. Employers need to be concerned about the security of the outsourcer’s computer system, authorizations for access to information and the use of employee data, Greble wrote for HRO Today in 2003.
Training needed
Organizations have struggled to manage the outsourcing-vendor relationship. In organizations that have relationship managers to control the process between the company and the outsourcer, “informal surveys reveal” less than 25 per cent of them have been trained in the role, according to a 2004 article in HRO Today.
What they would do differently
If they could go back in time, companies that have outsourced would do a number of things differently. They would: focus more on change management, set specific service levels and make sure they are achieved, pay more attention to detail and to process redesign, go with a proven vendor and better manage their relationship with the vendor, says a study conducted by the Conference Board. The information about the study was published on Outsourcing-center.com.
HR people need a business background
Outsourcing may free up an HR professional’s time to allow him to concentrate on strategic issues, but if he really wants to add value to the company he’ll need a business degree, says Steve Bates, senior writer for HR Magazine. The profession is changing, “accelerated by the furious phenomenon of HR outsourcing,” and professionals need to change along with it.
Four reasons to minimize outsourcing
There are four significant reasons to minimize the use of HR outsourcing, says John Sullivan, a professor of management at San Francisco State University. It provides no competitive advantage, it can limit the growth, image and capabilities of HR, promises cost savings that in most cases never materialize, and it introduces risk because information security and vendor longevity cannot be guaranteed. CHRR article #2991
Outsourcing more expensive than expected
Author and academic Monica Belcourt is skeptical about the value of outsourcing. She says people are finding it more expensive to manage than they expect. About 40 per cent of organizations have ended up with higher outsourcing costs than they expected. Another risk is employee morale, she says. “Outsourcing always results in displaced employees.” CHRR article #2736
Internal HR call centres more successful
Companies with internal HR call centres were more likely to report they were successful at meeting their cost reduction goals (86 per cent of in-house versus 67 per cent of outsourcers), according to a survey by Watson Wyatt. Companies using internal call centres were also somewhat more successful at improving customer service and transaction accuracy and increasing productivity, the survey says. CHRR article #3030
Young market makes predictions difficult
Early adopters of “business process outsourcing” are still trying to understand the associated costs and benefits because the market is still new, write Rebecca Scholl and Lisa Stone in a report for Gartner Dataquest. “Even today, the BPO market shows the dynamic characteristics of an emerging market.” CHRR Article #2557
RBC cancelled outsourcing program
RBC Financial Group ended a recruitment outsourcing arrangement, and brought the function back in-house, which helped HR strengthen relationships with the company’s managers, says Maureen Neglia, RBC’s senior manager of recruitment strategies. “The better we know the manager, the better we can help them find the people they need.” CHRR article #2495
The pros and cons of outsourcing HR
PRO
•Lets companies focus on more strategic tasks.
•Outsourcers are experts at doing the specific tasks they are hired for.
•Because they focus on a specific task, they can add extras such as metrics.
•Outsourcing gives the company access to the most up-to-date technology.
•Companies say outsourcing improves HR service levels.
CON
•Outsourcers don’t know or reflect the company’s culture.
•Employee morale can suffer as workers are displaced.
•The vendor can sell the same programs to competitors.
•Vendors may not respond well to changes in the service contract.
•Costs may end up being higher than what is originally agreed to.
•Certain functions, such as performance management, should not be outsourced.
•Because it is in an emerging market, all the costs and benefits are still unclear.
