Outsourcing Human Resources A framework for decisions

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Outsourcing Human Resources

A framework for decisions

Questions this tool is designed to help you answer

• What is outsourcing?

• How might outsourcing help us improve HR provision?

• What alternatives to outsourcing are there?

• How much could we outsource?

• Which HR activities could we outsource?

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Cover Beneﬁts of this tool Introduction Description of this tool Do you need to change the way HR operates? Is outsourcing the appropriate approach? How much could you outsource? Which HR activities could you outsource? A business case for outsourcing? Next steps Case studies Sources of information How to use this tool

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Beneﬁts of this tool

For you:

• You’ll work through the various options for your HR department and ensure that outsourcing is the best solution

• You’ll be proactive about making the case for outsourcing (or the case for keeping HR provision in-house)

• You’ll increase the chances of a successful outsourcing implementation by highlighting key issues and beneﬁts for your organisation up-front

For your organisation:

• You’ll clarify whether outsourcing is the right thing to do, or whether other solutions are more appropriate

• You’ll build your understanding of the outsourcing language and process Who is this tool for?

• HR strategists who are considering outsourcing as a route to improve HR provision • HR generalists who have an interest in outsourcing and other methods of

transforming HR What’s in the tool?

• A summary of what outsourcing is and how it may be useful • A description of the alternatives to outsourcing

• A diagnostic to help you decide what elements of HR you should outsource (if any)

• Guidance to help you consider which HR activities to outsource

• Plans and ideas to help you manage a transition from in-house to outsourced HR provision

• Case studies of organisations that decided to investigate outsourcing HR, and what they ended up doing

This tool is based on the executive brieﬁng, HR Outsourcing: The key decisions, published by the CIPD in May 2005.

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Introduction

Outsourcing is:

‘The delegation of one or more business processes to an external provider, who then owns, manages and administers the selected processes based on deﬁned and measurable performance metrics’

Gartner, 1995

The changing shape of the delivery of HR services in organisations has significant ramifications for the future of the HR function. HR outsourcing has received high levels of media attention in recent years but the subject is highly controversial. Outsourcing of HR functions will not always be the right thing for organisations to do, and outsourcing is also difficult to do well.

The CIPD therefore commissioned the research and authoring of an executive brieﬁng HR outsourcing: The key decisions (more details in the CIPD bookstore) to help organisations understand the options and implications for using outsourcing to improve HR delivery. This short HR outsourcing tool is based on the same research, and aims to help practitioners think through some of the issues so that they can plan and prepare appropriately.

The potential beneﬁts of outsourcing

• Outsourcing can save money in the delivery of HR services, particularly through improved technology and economies of scale.

• Outsourcing can give the organisation access to specialist or rare HR knowledge that they otherwise couldn’t afford to have in-house.

• Outsourcing frees up internal resources, and gives HR the space and responsibility to focus on strategic work.

• An outsourcing transition can often result in better measurement processes for HR functions, and better criteria for the effective delivery of HR.

[Click here to read about how BAE undertook their HR outsourcing project]

‘A key driver was … to eliminate duplication for departments and roles, whilst maintaining levels of service’

Chris Dickson, BAE

‘We wanted to free up HR staff to work at a more strategic level’

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The potential risks and costs of outsourcing

• Outsourcing deals are often long-term ﬁnancial commitments for the organisation.

• The transition from in-house to external provision may have ﬁnancial implications.

• Outsourcing transitions need to be carefully managed to maintain motivation in HR teams.

• Outsourcing often requires a change in behaviours of managers and employees (contacting external providers for help rather than in-house HR, for example) which can be difﬁcult to embed.

‘Don’t outsource what you don’t understand’

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Description of this tool

Figure 1: Six key areas to consider when thinking about HR outsourcing

Do you need to change the way HR operates? Key areas to consider Is outsourcing the appropriate approach to achieving your goals?

How much could you outsource?

What are your next steps? Are you in a position to make a business case for outsourcing? Which HR activities could you outsource?

Each of these areas is included in this tool.

• You’ll ﬁnd information and a model to help you decide whether outsourcing is the correct approach to help you achieve your HR function’s goals.

Following sections then cover:

• helping you decide how much you could outsource

• helping you decide which of your HR activities you could outsource • ensuring you consider all the important elements of a business case for

outsourcing

• clarifying next steps and starting to build an implementation plan.

This tool doesn’t cover selecting a provider, or managing the outsourcing transition in any detail. Materials on change management can be found in the CIPD bookstore and website (See Sources of Information).

There are six main areas to consider if you are thinking about HR outsourcing. These should be addressed before identifying and negotiating with an outsourcing provider.

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There are a number of drivers, both ﬁnancial and more philosophical, for one

considering outsourcing in general. We’ve listed here some of the more common ones – do any of these sound familiar in relation to your organisation?

• Organisations that have a history of outsourcing other activities (for example ﬁnance, IT) may decide that HR is simply ‘next on the list’.

• Cost reduction may often be a driver, because costs and proﬁt are the most easily measured and understood potential beneﬁts.

• Outsourcing may be used as a way of reducing risks (legal or ﬁnancial) associated with HR activities.

• Outsourcing providers generally claim to be able to carry out HR activities more

effectively than can be done in-house.

• Outsourcing providers may be able to offer expertise that’s not available in-house (for example, compensation and beneﬁts advice).

• Moving aspects of HR administration to an outsourcing providers has potential to free up HR people to focus on strategy.

• A few major UK outsourcing deals have been commercial joint ventures, with the aim of providing a proﬁt for both parties.

• HR functions are under increasing pressure to prepare meaningful

people management metrics.

• New HR or organisational leaders with positive experiences of outsourcing HR in a previous organisation may wish to repeat the programme in their new employment.

• The organisation may be growing rapidly (organically or through acquisitions), placing strains on the existing HR provision.

[click here to read about why CMi decided to outsource]

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Do we need to change the way HR department operates?

Review existing HR provision

Is it cost-efﬁcient? Are the admin

processes effective?

Does it have sufﬁcient HR policy and strategy

expertise?

How much do we need to change the way we deliver HR?

Major transformation? Minor tinkering?

How do we change it?

Internal Mainly external provision Mainly internal plus limited external provision Internal with external support or or or

Any of these drivers may prompt HR teams to think about the way they deliver services. The following diagram illustrates some of the questions that you’ll need to ask, before deciding on the right solution for your organisation.

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Outsourcing currently has a high proﬁle as a solution to many HR issues and opportunities. It can be a sensible and valuable strategic choice for organisations. However, the fundamental issues and opportunities that outsourcing seeks to deal with can be solved with other alternatives. Even when outsourcing is the most appropriate approach it will usually not solve organisational issues on its own, but will need to be implemented in conjunction with other initiatives.

Table 1 lists some of the potential HR issues that you might face, gives examples of underlying causes and then indicates a range of potential options available to organisations. [Click here to read about what Standard Chartered did instead of outsourcing]

Table 1: HR issues – possible causes and options

Is outsourcing the appropriate approach to

achieving your goals?

HR issue Possible underlying causes Potential options Need to cut

costs of HR administration

No leverage of IT solutions, no common data sources

Inefﬁcient, unnecessary or non-standardised processes Poor economies of scale

Processes completed at unnecessarily high quality levels

Expensive resources being used for basic processes

High ratio of ﬁxed to variable costs

Process rationalisation (stop doing things, or reduce quality)

Standardisation of your processes

Internal process redesign Shared service centre, without outsourcing Offshoring Web-enabled HR system Outsourcing Need to access specialist HR knowledge

Existing knowledge is out of date Knowledge is too expensive to hire on a permanent basis

Knowledge exists in the organisation, but is hard to access

Risks occur if a specialist is away/ leaves

Use of consultancy services Create internal centres of HR excellence Interim management Knowledge management solutions Outsourcing Need to move HR accountabilities to line management

Cultural change to line managers having more responsibility for staff Lack of HR resources to manage the employee relationship

Job redesign

Change reward/performance structures for managers

Internal advice lines for managers Outsourcing

Need to make HR more strategic

Lack of clarity about what HR does No board representation for HR HR activities not reﬂecting organisation’s needs

Administration tasks swamping HR, leaving no time for strategy formulation

Board representation for HR Recruitment of strategic expertise Greater investment in HR NB: but not outsourcing alone!

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Strategic thinking

What are your most critical HR issues today?

What might be the underlying causes?

What options might address these causes?

‘Outsourcing does not absolve HR leadership from the responsibility of the delivery of HR practice’

Tim Newham, in HR outsourcing: The key decisions

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Taking the decision to outsource a particular HR activity doesn’t necessarily mean that the organisation hands over responsibility for all aspects of that activity. Often (but not always), process management and data are outsourced, while control of strategy and policy-setting are retained in-house.

Most HR activities can be broken down into four elements:

• developing HR strategy – deciding on the future direction and vision for HR and linking HR delivery to business objectives. This is usually difﬁcult to outsource, as the strategy development will be highly dependent on the organisation’s context and situation.

• setting policy and providing advice – setting and giving guidance to managers and staff about how to access and use HR activities.

• HR transactional activity (eg screening candidates’ application forms, processing employee change of details forms, administering the annual pay review). This area is usually most responsive to improvements as a result of standardisation, simpliﬁcation and economies of scale and is therefore typically the focus of outsourcing programmes.

• the management of the data used by HR activities – effective HR activity management depends on efﬁcient data collection, manipulation, reporting and analysis.

The more strategic elements of HR provision are much less likely to be outsourced by large organisations, as they are more likely to be speciﬁc to the employer. Transactional activity and data are easier to outsource and usually make better business cases. This is because they can be standardised and therefore delivered at a reduced cost.

However, our research showed that in smaller organisations, strategy is just as likely to be outsourced as delivery, because there is usually little HR strategy capability in-house. [click here to read about what Essex County Council decided to outsource, and why]

How much could you outsource?

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An example of how much ‘recruitment’ you could outsource

Strategy: ‘We need to recruit innovative people to maintain our leading edge: we need to maintain headcount +5 per cent next year.’

Policy: ‘We require our medical sales reps to have a degree. We pay upper quartile salaries. All hiring budgets are signed off by my divisional manager.’

Transactional activity: Screening candidates’ applications forms, reference checking, production of offer letters.

Data: Time to hire, cost to hire, maintenance of CV databases, management of online recruitment. Strategy Policy Transactional activity Data In cr ea si ng c om pe tit iv e ed ge , i nc lu di ng u ni qu en es s In cre as in g p ot en tia l fo r s ta nd ard isa tio n

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Even if your organisation decides that outsourcing is the correct strategy, “HR outsourcing” does not often mean putting all aspects of HR delivery outside of the organisation. Much more common is for organisations to decide to outsource just some elements of the HR function – for example recruitment, leadership development or payroll activities.

Analysing each HR activity

You can start to identify which HR activities may be suitable for outsourcing by asking the following questions of each part of the HR service. Copy this page and use it to investigate each HR activity.

Which HR activities could you outsource?

HR activity:

Strategy-led questions:

Does this activity currently add to the value of our organisation, or reduce it? And how do we know?

Do we need to do this activity in a way that’s speciﬁc to us because of our operating business model?

Does this activity need to be specialised in order to ﬁt with our culture and values?

If our competitors knew how we did this, would it matter?

Does this activity contribute to building the core competence of our organisation? i type here type here type here type here type here type here

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Cost-led questions:

How much does this activity cost us now? (overall, per employee, per transaction)

How well is the activity working now? Is the process in control?

What level of service do we actually need? (speed/quality) – and how does that relate to current performance?

How highly do our employees value the activity?

What is the risk of getting the process wrong? How much are we prepared to pay to avoid the risk?

How unique are our processes? Could the activity be easily standardised without affecting the value added to the business?

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HR activity

How much of the activity should we consider outsourcing?

How we will retain ﬂexibility (if any is required?)

Based on Analysing each HR activity, which HR activities are most suited to outsourcing in your organisation?

Now think about how much of each of your shortlisted HR activities you would consider outsourcing.

HR activity Potential for

outsourcing? Why have you come to that conclusion? Yes No Yes No Yes No Yes No i type here type here type here

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Use this checklist to help you make sure that

• Outsourcing is the right approach for your organisation. • You’ve thought through the major issues.

• You have organisational buy-in to your plans.

Are you in a position to make a business

case for outsourcing?

We’ve reviewed our HR function and have identiﬁed a need to improve HR activities

The organisation sees this improvement as a strategic objective

We’ve considered alternatives to outsourcing (for example, shared services, improvements in IT)

Outsourcing is appropriate to our culture and organisational state

We understand which HR activity should be outsourced, and how much of each element should be outsourced

We’ve identiﬁed a shortlist of potential providers

We have a ﬁnancial case for outsourcing, and this case shows that the long-term beneﬁts outweigh the costs and short-term transition effort The organisation’s decision-makers understand and support the scope and scale of the change required

Resources to support the outsourcing transition (ﬁnancial, technological and managerial) have been planned

We understand the risks of outsourcing, and have a plan to manage or eliminate the risks

We understand how outsourcing will affect how line managers interact with HR

We understand how outsourcing will affect our current HR staff We’ve considered how outsourcing would impact on our line managers We have criteria in place to measure the effectiveness of an HR outsourcing programme (eg metrics)

Once you’re conﬁdent that these issues have been understood, discussed and agreed, you should be in a position to formulate a business case.

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This page is a space to help you think through the key areas to address and formulate your plan for action

Next steps

Summary of project scope – what does your outsourcing project need to achieve?

Timescales for implementation – when does the outsourcing programme need to be in-place and running effectively?

What needs to happen next? Who will do this, and by when?

Some next steps to consider may include:

• Create a formal business case and have it agreed.

• Identify a key person accountable for the outsourcing programme.

• Create a project plan, including communication and training.

• Finalise outsourcing provider and negotiate contract.

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These case studies are a selection from the research that underpinned the executive brieﬁng on HR outsourcing:

BAE: outsourcing and the need to integrate HR processes

BAE Systems faced the need to integrate two HR infrastructures after a merger. Chris Dickson, project manager, said: ‘A key driver was to reduce costs, and eliminate duplication of departments and roles, whilst maintaining levels of service.’ In other words, BAE Systems was focusing its outsourcing plans on obtaining a more cost-effective service, rather than on a need to increase service quality.

First, Chris reviewed HR shared services, administration and basic support to line managers. BAE Systems considered retaining HR services in-house with support of external consultants, but ﬁnally concluded that it could only achieve step change by looking to a more holistic Business Process Outsourcing (BPO) solution, largely as a result of cultural challenges created by the merger. Accountabilities for the decision and implementation were shared between Chris, the senior management team, the Group HR Director (as internal ‘champion’ for the project) and the MDs, and HR directors of the individual businesses. BAE Systems created a joint venture with Xchanging in March/April 2000 to outsource non-customer-facing roles (ie including all HR administration functions, while excluding business partners, employee relations, strategy and policy). BAE transferred 70 per cent of its HR staff to the Xchanging joint venture. ‘We achieved our initial criteria of reducing costs and maintaining service and we now have less HR staff, who are now working at more strategic levels across the business,’ said Chris.

Information supplied by Chris Dickson

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CMi: outsourcing and coping with the growing workforce

CMi plc decided to outsource HR because the company was growing very quickly, from 69 to 160 staff in about a year. As the company grew, it had the following choices:

• to grow HR internally as the internal demand for HR services increased; • to up-skill the existing HR representative and outsource the HR administration

tasks, or

• to outsource the entire function.

At the time of decision, HR became the responsibility of Finance Director, Lynne Hunt. ‘My remit was to standardise the service level and improve quality of delivery,’ said Lynne. ‘With the right strategy and management, our HR function could be a business beneﬁt by helping us to attract, retain and develop our staff. We decided to outsource HR because we felt that we did not have the capabilities in-house to deliver the required level of service.’

CMi decided to outsource its entire HR provision, including strategy and communication, to Northgate Ltd. It now has a dedicated team of three HR staff (a senior consultant, consultant and administrator). The direct cost of HR provision increased because of the outsource, but Lynne considers the overall result to be cost-effective because the costs of developing HR in-house were avoided. As a pragmatic reason, CMi also saved ofﬁce space – which was at a premium in this fast-growing company – by having HR delivered off-site.

Now, CMi has a much more professional service with clearly deﬁned strategy and policy. Lynne mentions that ‘the HR service that we receive is continuing to improve as we learn how to get the best from our outsourcing relationship, and I consider the decision to be a cost-effective one.’

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Standard Chartered: building your own shared service centre

Standard Chartered Bank employs 33,000 people in over 550 locations, serving 56 countries and territories across the Asia-Paciﬁc region, South Asia, the Middle East, Africa, the United Kingdom, and the Americas. It is one of the world’s most international banks, with employees representing 80 nationalities. Standard Chartered has effectively set up its own HR Shared Service Centre (HR SSC), which it runs itself from Chennai in southern India.

Three main drivers inﬂuenced this decision. First, there was a desire to improve the quality of the HR service. This was followed by a desire to review and improve the structure of the HR function, enabling it to deliver higher value. The third driver was the belief that the new set-up could bring signiﬁcant cost savings.

Prior to the decision to create an ‘in-house’ shared service centre, various ideas around re-engineering the HR function were being considered. At the time, there was a range of disparate HR processes and structures across the businesses. There was too much duplication of effort and time spent on non-value-adding activities and too little on critical areas such as engagement, performance management and talent development. Outsourcing was considered brieﬂy – in part to ensure the re-engineering effort reviewed all options and evaluated the merits for each, and also to look at what outsourcing providers could offer in terms of potential cost reductions. Standard Chartered concluded that there was a strong business and technical case that its own people could ‘do it better themselves’.

The project began in Autumn 2000 with a thorough review of what would be required. Today, all people data across 56 countries is managed in the shared service centre. More complex, as well as standardised HR processes, are delivered from Chennai. In addition, over 50 per cent of employees are paid out of the HR SSC, and the HR SSC administers 27 pensions schemes across 17 countries, all employee share options and share schemes. There is also a sophisticated service on offer relating to employees’ international mobility. Standard Chartered employees and managers from all over the world are also supported by a contact centre, which resolves their enquiries about these areas of HR activity. International mobility and share administration are examples of the organisation’s activities that have deliberately been brought in-house. Standard Chartered’s experience is that with the new shared service centre, it is now able to deliver these services better – and for less – itself. More importantly, it has allowed Standard Chartered’s HR function to focus on growth areas and invest in value-added services. The bank has not experienced difﬁculties attracting talented people to work in its shared service operation in Chennai. There are large numbers of graduates looking for work. Many of those who work for Standard Chartered have a Master’s degree in Human Resource Management. The focus now is on looking in more detail at appropriate talents and on honing their strengths and skills for the best service delivery. The technology underpinning the new

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Essex County Council: deciding what to outsource

Essex County Council decided to investigate outsourcing of HR in 1999. The Council needed to review and improve effectiveness and efﬁciency of HR provision, as a direct result of government insistence on providing best value to the taxpayer. Lorraine Pitt is the HR Director of Essex County Council.

In deciding what to outsource, Lorraine focused on transactional processes. ‘We wanted to free up HR staff to work at a more strategic level, providing added value to the organisation,’ said Lorraine. The Council already had external suppliers to deliver about a third of all recruitment processes, and over 50 per cent of training and development work. A proportion of organisational development work was also subcontracted to external consultants. In this environment, moving to an outsourced relationship for HR was easier because the organisation already had experience of managing HR supplier relationships – albeit on shorter timescales with less partnership.

Essex County Council decided to take the areas of HR that already had some element of supplier involvement, and move to a more complete outsourced arrangement. Now, the Council outsources all recruitment administration and a proportion of its recruitment selection work and engages consultants in partnership to deliver its training strategy. It is currently considering the outsourcing of other areas. When deciding how much of an activity to outsource, Lorraine needed to take into account the challenges of local government structure, which is two-tier with separate county and district councils. The outsourcing suppliers are starting to work with a range of stakeholders, helping the organisations to consolidate and co-ordinate HR services across the various parts of the county.

Lorraine sees some risks in outsourcing: ‘You need to be careful that the delivery of HR services by your outsource supplier does not get disconnected from your internal HR strategy and direction.’ When thinking about the future, Lorraine plans to develop HR provision in an interesting direction: ‘Ideally, we’ll move towards a model where the County Council offers HR services centrally to district councils, minimising duplication and reducing costs for the local government organisations overall.’

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Sources of information

From the CIPD website

HR Outsourcing: The key decisions (executive brieﬁng) –

CIPD bookstore Also available

HR’s Role in Organising: Shaping Change (research report) –

CIPD bookstore

Change Management (factsheet)

HR Outsourcing (factsheet)

HR Shared Service Centres (factsheet) Further references and reading

In addition, there are many books available about outsourcing in general, and also speciﬁcally about HR outsourcing. These include:

CORBETT, M.F. (2004) The Outsourcing Revolution: Why it makes

sense and how to do it right. Chicago: Dearborn Publishing.

LAWLER, E.E., ULRICH, D., FITZ-ENZ, J. MADDEN, J. and MARUCA, J, (2004) Human Resources Business Process

Outsourcing: Transforming how HR gets its work done. New Jersey:

Jossey-Bass/Wiley.

VANSON, S. (2001) The Challenge of Outsourcing Human

Resources. Spiro Press.

This tool was prepared by Tim Newham, Oxford Brookes Centre for Applied HR Research) and Vanessa Robinson and Rebecca Clake of the CIPD.

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Case study – CMi Case study – BAE Cover

Introduction

Which HR activities could you outsource?

Are you in a position to make a business case for

outsourcing? Beneﬁts of this tool

How much could you outsource? Description of this

tool

Do you need to change the way HR operates?

Is outsourcing the appropriate approach to

achieving your goals?