Management guru Tom Peters is a long-time advocate of outsourcing but he’s
not a fan of using it primarily as a means to cut costs. In a recent journal
interview, the prolific American author argued that HR departments should
keep a careful watch over their outsourcing arrangements and should not
allow their colleagues in procurement to be overly influential.
“Real outsourcing is not about minimising expense,” he said. “It’s about
finding a better way to do things that probably will cost you a little bit
less. The definition of a losing proposition is when you do it for cost
alone.”
Sian Beacham, head of UK outsourcing at Accenture, the global management
consultancy, says HR accounts for only about 2% of the average
organisation’s operating costs, so targeting such HR functions as
record-keeping, payroll or basic recruitment tasks gives only limited scope
to influence a business’s overall bottom line. “You’re trying to influence
perhaps 20%-30% of a small percentage of operating costs,” she says.
HR outsourcing starts to become more viable when you take the overall employee
costs to a business into account. Salaries, benefit packages, pension
contributions, learning and training and the like mount up to a hefty
40%-60% of a business’s outgoings, so the real benefit of basic HR
outsourcing is that it frees a firm’s HR professionals to address issues
that can make a real impact on their organisation’s competitiveness. “They
can start focusing on the talent agenda – defining it, discovering it,
retaining it and deploying it,” she says.
Richard Phelps, a partner specialising in human capital issues at management
consultancy PricewaterhouseCoopers (PwC), puts direct HR costs at 0.5%-1% of
an organisation’s operational costs, so the argument for outsourcing, he
says, has to be made around value. What’s more, he believes the notion that
outsourcing cuts cost is not conclusive. According to his company’s HR
Shared Service Index, which aggregates cost data from 40 organisations,
in-house payroll administration costs for efficient firms are £22.40 per
head, compared with £38.80 for companies that partly or fully outsource. For
less efficient firms with in-house arrangements, payroll costs rise to
£83.10 per head. Here, however, fully or partially outsourced set-ups fare
better, at £80 per head.
The costs are very closely defined, he says. “The way we measure them is based
on a robust and clear definition for each HR process, identifying the scope
of the whole process, factoring in elements such as costs around technology,
office space and so on. We work with each organisation to ensure that the
data reported match the standard definitions.”
Kevin Barrow, a partner at law firm Blake Lapthorn Tarlo Lyons who specialises
in HR and recruitment, says the problem with HR outsourcing is that it is
not a well-defined proposition. “What it comes down to is someone applying
intellectually rigorous analysis to HR activities and breaking them down
into required outputs. Even now, a lot of HR departments have not broken
down their processes scientifically. There are a lot of generalists.”
Outsourcing ought to be able to deliver cost savings, but it is still
difficult to make a business case for HR because specific costs have not
been analysed and isolated, he says.
Transaction-based activities, such as payroll administration, recruitment and
record-keeping, lend themselves to outsourcing more readily than activities
that involve one-to-one casework, such as performance management, says
Barrow. But even areas that are apparent “no-brainers”, such as payroll
administration, are important to get right. “People soon get fed up if you
don’t pay them on time,” he says.
Barrow says we’ve yet to see an explosion in HR outsourcing, but the
setting-up of shared service centres – taking out local HR offices and
centralising their activities to streamline them – is growing in popularity.
“Then it doesn’t really matter if you haven’t worked out a fair charge [for
HR activities] because you’re keeping the work in-house.”
In fact, making the business case for outsourcing, says Vanessa Robinson, an
adviser at the Chartered Institute of Personnel and Development, often
hinges on such issues as the level of expertise required. Many firms
outsource pension administration, for example, because they don’t have the
specialist knowledge to manage this area in-house. Others outsource
recruitment to cope more easily with seasonal ebbs and flows in demand. A
shortfall in skills provides a clear-cut business case for outsourcing, but
companies that are looking to outsource more than one or two HR functions
need a systematic approach.
Robert Bolton, director in the “people and change” division of consultancy
KPMG, says companies need to look very carefully at the activities that
their HR staff currently handle and then seek to retain those where staff
genuinely add value. Areas where the HR department does not add value –
where it can’t tell the board that it increases organisational effectiveness
or does the work involved better than anyone else – should be candidates for
outsourcing.
Mike Theaker, leader of HR effectiveness at Mercer, the international
consultancy group, says assessing which areas of HR might be outsourced
involves an array of factors, including a long, cool look at how efficiently
HR services are being delivered currently, the relevance of each activity to
the firm’s overall aims and the question of whether carrying out a
particular task adds competitive advantage. “For instance, if you can
recruit good people speedily, if you can retain them more effectively than
your competitors, then you help secure competitive advantage for your
organisation. The opposite would be payroll. No matter how efficiently and
accurately you carry it out, you’re not going to exceed anyone’s
expectations.”
According to a survey by Mercer, 40% of European organisations outsource their
pension administration and 25% outsource their payroll, both areas that are
readily defined and transaction-based. Other areas, such as relocating
staff, coaching employees and recruitment scored less highly: 34%, 25% and
9% respectively.
Advisory firms that can provide industry benchmarks for HR activities include
the Hackett Group and PricewaterhouseCoopers. PwC’s human capital
measurement and benchmarking service, Saratoga, has performance metrics on
productivity, engagement and talent, and statistics on days taken to recruit
new employees, payroll administration costs per member of staff, job
acceptance and attrition rates, broken down by sector and country.
Outsourcing providers range from niche firms to large players, such as Hewitt
Associates and Accenture, looking for clients who want to hand over
virtually all of their HR functions. Key players in the more mature arena of
outsourced payroll adminstration include Ceridian, Northgate Information
Solutions’ HR division and Midland HR.
The price of early outsourcing deals was often little more than a stab in the
dark, but Barrow says outsourcing providers and their clients have become
better at quantifying HR processes and valuing them. Many buyers now opt for
a “cost-plus” arrangement, where the plus is an agreed margin for the
supplier.
Alternatively, deals may be structured around shared savings, where the
supplier agrees to carry out functions more cheaply than would be possible
in-house, and splits the saving with the client. Both methods work better
than the “finger in the air” approach of early deals, says Barrow.
“Suppliers have worked out what the processes are and are more confident as
to what they have in their arsenal to match clients’ requirements,” he says.
WHERE OUTSOURCING WORKS
EMPLOYEE RECORD KEEPING
Strong case for outsourcing? Yes, but often as part of a wider contract.
Potentially a sensitive area from a data protection perspective Commonly
outsourced in the UK? Yes Key providers: Ceridian, ADP, Accenture and Hewitt
Popular with: Organisations across the board
RECRUITMENT
Strong case for outsourcing? Yes, front-end recruitment admin lends itself to
outsourcing deals Commonly outsourced in the UK? Very Key providers: Hays,
Capital Consulting, Origin Popular with: that prefer to keep other HR
functions in-house
REWARD AND COMPENSATION
Strong case for outsourcing? Not if this area is considered to be of strategic
importance Commonly outsourced in the UK? No, except as part of some large
HR outsourcing deals Key providers: Mercer, Ceridian, ADP Popular with: Not
widely taken up
PAYROLL
Strong case for outsourcing? Yes, on the basis of cost and efficiency Commonly
outsourced in the UK? Yes Key providers: Northgate, Ceridian, ADP, Xchanging
and accountancy firms Popular with: Smaller organisations that lack in-house
expertise and large organisations that want to shift transactional tasks
PENSIONS
Strong case for outsourcing? Yes, if external expertise is required Commonly
outsourced in the UK? Yes, but many also keep this area in-house Key
providers: Mercer, Aon, JLT Popular with: The decision to outsource doesn’t
seem to be dependent on size or sector
PERFORMANCE MANAGEMENT
Strong case for outsourcing? Not a good area to cede control to a third-party
supplier Commonly outsourced in the UK? No Key providers: Management
consultancies offer advisory services; Kaisen is a PM software provider Some
smaller companies looking to outsource in order to gain technical support
TALENT MANAGEMENT
Strong case for outsourcing? Organisations might seek help from consultants,
but how companies handle talent management is part of what defines their
culture and direction Commonly outsourced in the UK? No Key providers: The
big management consultancies offer advisory services Popular with: Not
widely taken up
