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Human Resources: To Outsource or Not to Outsource, That Is the Question

Written By: Sherry Fox
Published On: March 24 2010

In today’s business world, human resource outsourcing (HRO) is becoming increasingly popular. While earlier adopters of HRO have had less than ideal experiences with their outsourcing partners (poorly integrated service delivery, lack of common HR standards, etc.), today’s outsourcing services have greatly improved.

According to a mid-2009 report by AMR Research Inc. on the state of IT outsourcing, roughly 80 percent of enterprises plan to either increase their amount of IT outsourcing or keep it the same. This dramatic change occurring in today’s organizations—and its workforce—has propelled this latest trend toward outsourcing. Workers’ needs are changing, human resources (HR) costs are on the rise, there are increasing pressures for HR managers to stay abreast of the latest legislative changes (e.g., corporate governance), and there is an overall increasing demand to simplify HR-related activities.

You may be asking yourself this question: How does an organization make the transformation from the standard in-house HR administration and services? Answer: By partnering with a firm that can deliver the varying HR and benefits needs of the company’s employees and that can empower its managers to make healthy workforce decisions—ultimately driving organizational success. Enter HRO.

In this article, I will discuss some of the reasons why HRO may be right for your organization (the benefits and concerns), detail some high-level considerations, and finally provide you with some tools that you can use to make an informed decision to “outsource or not”.

 

HR Outsourcing Models

• Business process HR outsourcing: where an external service provider manages a company’s HR activities (e.g., payroll, benefits, recruitment)

• Shared services HR outsourcing: where only the transaction or administrative elements of HR activities are sub-contracted to an external service provider

• Application and facilities service HR outsourcing: where an external service provider controls/maintains the technological and physical infrastructure that supports HR activities

• HR off-shoring: outsourcing local human resource activities to another country

 

How Do You Know When HRO Is Right for You?
As with any big enterprise software purchasing decision, there are many factors that come to mind when considering outsourcing. Here are just some of the main reasons companies decide to outsource their HR activities:

Company growth is often the first trigger.  As a company grows, quite often they don’t want to be burdened with HR’s daily administrative tasks (recruitment, payroll, benefits, and training). To put it bluntly, a company has better things to do with its time like concentrating its efforts on core goals such as policy enforcement, compensation strategies, human capital management (HCM), assessing benefit healthcare plans, and delivering a higher quality of service.

Businesses can’t afford the rising costs. The world of HR is changing. Companies are no longer just managing employee folders and writing paychecks. With the addition of talent management and the point solutions and suites offered by a wide variety of software vendors, companies that already have a core HR system in place suddenly have to make very complex decisions about what types of add-ons it will need to purchase to address its changing needs. This can lead to confusion about which system might be the best. Not to mention, the costs that go along with purchasing multiple solutions can be exorbitant.

There is a need for greater knowledge and expertise. One of the fundamental reasons for outsourcing is allowing critical internal operations to be handled by a firm that can do it more efficiently—and at a lower cost. The high-end quality of outsourcing services demonstrated by experts in the area of HR is often unparalleled to their in-house counterparts—especially in the area of regulatory compliance. That’s not to say that you should let all of your HR people go. In fact, companies should always retain somebody in-house in order to oversee corporate policy, decision-making, and to manage the relationship with the outsourcer.

 

HRO Benefits and Concerns
Of course, HRO is not for everyone, but the benefits that outsourcing has exhibited over the past few years seems to heavily outweigh the concerns.

Benefits

 Concerns

Some of the main reasons why businesses
welcome the transformation to HR outsourcing are 
due to its strategic advantages.

Some of the main reasons why businesses question
the transformation to HR outsourcing are due to the
elements of risk it may impose.

      ability to focus on more strategic activities

      provider capacity constraints (bandwidth)

      cost savings; economies of scale

      impact on the employer/employee
        relationship

      facilitated access to information

      loss of control

      improving service quality

      data security

      increased process efficiency 
       (response time)

      global HRO complexities (regional
        differences, compliance regulations, etc.)

      increased flexibility

 

      gaining access to outside expertise 
       (including regulatory compliance)

 

      employee retention

 

      fewer errors

 

      improved business results

 

High-Level Outsourcing Considerations
As with any new enterprise software selection initiative, the task must not be taken lightly. Before making the decision to outsource, there are some high-level factors that must be considered.

• Do your research: Ensure the outsourcing firms you are looking at have enough experience to handle your company’s needs and that they will be able to meet or exceed your quality expectations; and ask for references. According to a Hewitt Associates 2009 survey, HR expertise continues to be valued over cost.

• Understand the technology: When choosing an HRO, it is important to understand that most firms have their own standards, generally using one multi-tenant infrastructure with one core service delivery model. Standardizing this delivery model in the end provides companies a significant cost savings (economies of scale).

• Get ready for a transition: The transition from in-house HR to an HR outsourcing firm must be well thought out. You must

  1. Identify your needs: identify tasks that take key staff away from their prime purpose; and assessing which services your business would like to outsource
  2. Develop an effective change management strategy: helps to minimize disruptions while implementing changes
  3. Prepare for the change: provide employee orientation/training in order to ease employee fears

• Partnership agreements: Both service provider and client must view the partnership as just that—a partnership. An understanding of the organization’s current and future business strategy and potential changing business profile is important before entering into any contractual arrangement. Both parties must be in sync regarding expectations, communication, governance, and processes. Having the outsourcing firm sign a service level agreement (SLA) will help to define the requirements of both parties and detail the penalties for non-compliance. While the typical length of an HRO contract is one year, increasingly, HR outsourcing arrangements are becoming more long term—five to 10 year contracts are not unusual. The other point to consider is “what kind of relationship does the outsourcing provider have with the vendor supplying the underlying technology”? Of course, there are times when they are one in the same, however more often we see that the two are separate firms altogether. No matter what your arrangement is, make sure the contract between parties is clear.

 

HRO Tips/Trends

TIPS

TRENDS

  • Understand your HRO provider's
    limitations by asking the right questions.
  • More and more companies are adopting a
    phased approach to outsourcing.
  • Maintain control of your business
    operations (even if the outsourcing
    firm has taken over some activities).
  • As companies grow, the need for global
    capabilities is a must.
  • Have open communication with your
    provider(s).
  • Off-shoring is growing.

 

HRO Service Providers/Consultants

While not an exhaustive list, these are some of the HR service providers and consultants to look for when considering your HR outsourcing needs:

• Accenture HR Services
• ACS Global HR Solutions
• Adecco
• ADP
• AON Consulting
• ARINOS International
• CGI Group
• Ceridian Corp.
• Convergys
• Excellerate HRO Corp.
• Hewitt Associates
• IBM Global Business Services
• Kelly Services
• Knowledge Infusion
• Mercer
• RSM McGladrey Employer Services
• Secova
• Unicorn HRO

Useful Information

HRO Conferences: In general, conferences offer organizations looking for enterprise software to meet with prospective vendors and learn more about their offerings. Most conferences also offer educational sessions and seminars led by thought leaders aimed at helping decision-makers make informed decisions. A few such conferences focusing on HRO that you may want to consider attending if you’re still at the information gathering stage are:

• HRO Summit – Conference and Exhibition
• HR Week – Conference and Expo

Resources

• HRO Association: Helps individuals who purchase, provide, or participate in HR transformation and outsourcing.
• HR World: Provides plenty of HRO resources including this handy Outsourcing Checklist.
 HRO Today: An online publication dedicated to covering the HR outsourced service market.
• Outsourcing Center: An Internet portal for authoritative information on outsourcing.
• HR Outsourcing Strategy: An online publication/blog about HR outsourcing.

 

Is Outsourcing Right for You?

While outsourcing may be right for some companies, one must understand that beyond the role of delivering quality services, companies need to establish a solid relationship their outsourcers. After all, you are putting the welfare of not only your employees but ultimately an important part of your business in their hands.

With the right planning, process and service delivery design, underlying technology, and service provider, it is possible to not only save money but increase efficiency and improve HR processes for future business growth and success.

 
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