One of the more recent arrivals at the oursourcing party is the human resources department, but now the trend for using a third-party supplier has definitely taken hold, and HRO (human resources outsourcing) is an option no sizeable business can afford to ignore.

So why outsource HR? Graham White, head of HR and organisational development at Surrey county council, has three reasons: to carry out work more smartly, more cheaply and better.

“The real contribution of HR shouldn’t be measured by volume or activity. A large proportion of the work of the average HR department can be done better or more quickly by people not in HR,” he says.

But much depends on where you start, according to Dr Anthony Hesketh, co-director of the Centre for Performance-Led HR at Lancaster University Management School. “There are some very good businesses, such as Asda and Shell, that wouldn’t want to outsource HR,” he says. “The work is seen as being part of their competitive advantage.”

“It’s not a religion,” says Martyn Hart, chairman of the National Outsourcing Association. “You shouldn’t do it because everyone else is doing it; there has to be a clear business reason behind it.”

Many companies turn to outsourcing as a distress purchase, to cover poor HR performance. White, who has overseen a reduction in Surrey county council’s HR department from 400 to 40 people (it outsourced HR support for its education department to VT Four S; the HR deparment effectively outsources everything else to the county council’s shared-service centre), believes that is the wrong approach.

“Don’t outsource something that’s broken — fix it and then outsource,” he advises. In Surrey county council’s case, that meant centralising HR; then the HR processes could be monitored and measured, and decisions made about what to outsource.

“HR is not magic,” says White. “It’s a process. By centralising it, we could see that we had multiple solutions for the same process.”

Hesketh agrees. “It’s about getting your house in order,” he says. “Often a company’s share price will go up when it announces it is outsourcing — the City sees it as a positive move.”

Traditionally, it has been the administrative, transactional elements of HR, such as payroll, that have been outsourced. “In large organisations it is often driven by a desire to reduce costs, but in SMEs it can be because the company doesn’t have the capacity,” says Phil Brown of Youmanage, which offers web-based HR support for small and medium-sized businesses.

Payroll administration accounts for two-thirds of HR staff costs, according to Dr Michael Dickmann of Cranfield School of Management, so it is no surprise that payroll is often the first HR element to be outsourced. “These days cost-cutting is a given,” says Helen Neale, lead HRO analyst at NelsonHall, a research and consultancy firm. “What you are looking for is reliability — you don’t want problems paying on time, or underpaying or overpaying.” Sometimes part of an HR element can be outsourced, but not all of it: setting performance goals should be done in-house, but measuring and analysing performance can be outsourced.

Legislative requirements mean benefits administration is a hugely complex area, and for companies with staff in several countries, dealing with pensions and healthcare can be a nightmare. Hence the key to outsourcing is finding a provider that has the specialist knowledge you require — and their services might cost.

Other areas that can be outsourced to specialists include learning, training and development, staff relocation, recruitment, both temporary and permanent, and employee data management.

HRO landmarks

1999 BP/Exult (now Hewitt Associates): HR needs of about 97,000 staff in 80 countries provided remotely from Scotland and Texas. The deal, valued at £420m over seven years, was not without initial problems, but Hewitt claims BP is now saving 20% on HR costs.

2001 and 2004 BAE Systems/Xchanging: Full-service 10-year partnership, worth £500m, centralising and standardising HR across seven business groups worldwide, for 100,000 staff; seven-year £500m deal to outsource supply of contract staff signed in 2004.

2006 BBC/Capita: Strikes by BBC staff ensued when Capita, already running BBC licence-fee collection, signed a 10-year £100m deal to outsource functions, including recruitment and occupational health. It runs it from Belfast and has transferred 260 jobs from BBC to Capita.

2006 Northern Ireland Civil Service/Fujitsu Services and partners: Fifteen-year £185m contract to deliver services for 28,000 staff through an e-HR system, plus shared-services centre for payroll and recruitment.

2006 Unilever/Accenture: One of the largest ever HR outsourcing deals, worth £500m over seven years; services for 200,000 in 20 languages, delivered from centres that include Bangalore and Prague.

Women’s Aid

Allison Mann, is HR manager of Women’s Aid, a charity that helps victims of domestic violence. Analysis of its HR operation found that information was held in several different forms; this made it hard for line managers to find the information needed to manage their staff.

Women’s Aid outsourced employment/health and safety legislation to Peninsula, and employee data management to a web-based system, Youmanage, founded by Grant Strelling, near right, keeping benefits and payroll in house. Line managers control their own information needs, so performance management is now a continuous process.

“It’s definitely had an impact on the culture of the organisation,” says Mann.

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