Future Strategy 2006 – Outsourcing

Outsourcing individual HR processes is nothing new, but a fresh trend is emerging to outsource entire HR departments, says Victoria Furness

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Like a controversial housing development, outsourcing is one of those contentious subjects that divides communities and provokes an emotive response from affected parties. Often the knee-jerk response when the topic of outsourcing human resources arises is to query why a company would want to outsource something as fundamental as the management of its people.

Even HR directors are split over the issue of outsourcing and in particular over how it may affect their own jobs.

In a survey, from IT outsourcing provider, LogicaCMG, 48% of HR directors thought that the outsourced approach for HR would cause them concerns over their own job security, while 50% thought it would provide them with more opportunities for career and professional development.

The reality is that outsourcing HR has been around for years – processes such as pensions administration, payroll, training, recruitment, fleet management, private healthcare and, in some cases, flexible and voluntary benefits packages, have long been managed by a third party – and the trend looks set to remain.

Nigel Roxburgh, co-founder of the National Outsourcing Association (NOA), says: "The whole business process of outsourcing HR is new." Other departments, such as IT, have been entirely outsourced, but HR has been slow to follow their lead. Rightly so, says Chris Brewster, professor of international HR management at Henley Management College. "Because HR has sensibly understood what can be outsourced and what cannot," he argues.

However, where organisations may have outsourced specific HR processes in isolation in the past, this looks set to change. TPI, which advises organisations on outsourcing, claims that there has been an increase in the number of organisations grouping several HR transactional and administrative processes together and outsourcing these as one deal.

Some organisations have even decided to outsource virtually all their HR needs. QC Data UK, an outsourcing provider of data management services with 300 employees, believes its decision to outsource its complete HR function – with the exception of recruitment – to Northgate HR has been a success. Ian Wainwright, managing director at QC Data, says: "It got to the point where we needed to do something fairly dramatic as we were overstretched and running an internal payroll system that was clearly not designed for the number of people we had."

However, Henley’s Brewster remains sceptical: "There have been some moves to totally outsource HR and, by and large, they have failed. HR is key for a competitive edge and some organisations want to keep that close by. Employers are also saying that if they can get all they want done electronically, then why would they outsource it?"

Certainly the trend to put the onus on employees to manage more HR administration, through intranets, for example, is growing in popularity. Cost pressures on HR lie behind both this trend towards employees conducting more HR administration and the drive to outsourcing.

Nick Starritt, managing director of Sirota Consulting in Europe, says: "If you go back to the reasons why you are outsourcing, first it is to reveal the total cost of the activity. The second is to make the cost variable to the business so when you want the service, you pay for it and vice-versa. Once these factors are in place you can begin to look at the unit cost (per benefited person, for example) to see where economies of scale can be made." However, he warns, organisations should be realistic about the effects of cost cutting. "Do not be surprised if it takes longer to answer the phone or there is limited assistance for employees," he says.

Procurement departments might be pushing the outsourcing trend, but cost is rarely the only catalyst for any given deal. Edward Goodwyn, employment partner at law firm Pinsent Masons, says: "There are often a mix of drivers. If your organisation is global, you can make some standardisation across HR. But probably the stronger benefit is service quality."

Companies that are looking to drive additional benefits from their outsourcing investment might consider using an overseas provider in a country where labour is cheaper. However, offshore outsourcing comes with several caveats, not least because employees regard HR as more strategic than other processes that have traditionally been contracted-out overseas, such as software development or manufacturing.

QC Data is one opponent of such a move. "There is no way you can run the service Northgate HR provide from overseas because their people are on site almost everyday. I suppose support administration and payroll from a mechanical point of view could be run from overseas," explains Wainwright.

In any outsourcing deal, whether in the UK or abroad, constant engagement with staff and interested bodies, such as trade unions, is vital.

"You need to have a multi-layered communication process from the outset involving your employees, external press and internal shareholders," says Roxburgh.

With HR under continuous pressure to deliver additional value to the organisation, the trend to outsource will probably increase. But organisations must tread carefully to avoid unduly worrying employees and to ensure the process is as pain free as possible.