Outsourcing: Making HR more strategic

by 11 Jul 2006

Many HR departments are looking to outsource certain business processes so that HR professionals can focus on more strategic issues for their organisation. Melissa Yen investigates the trend and details the steps HR functions need to take to ensure business process outsourcing initiatives are successful

Outsourcing is becoming an increasingly mainstream business practice. According to the 2006 National Employee Benefits Trends Survey, 75 per cent of employers outsource at least one HR function. And the trend is no longer restricted to large corporations. More and more, small and mid-sized businesses are examining the benefits of outsourcing.

The decision to outsource certain business functions and use outside experts is some often based on the organisation’s desire to reduce costs, offer improved services and productivity within specific functions, while giving HR time to align itself with the strategic issues of the business.

Evidence suggests that, increasingly, HR business process outsourcing (HR BPO) will change the nature of HR and increase its ability to add value within the business. “Whenever you mention outsourcing there is a common reaction which is fear, that is, ‘what does that mean for my job?’ But in fact it can be a very powerful leader to help refocus HR and to reposition their value add in the context of the business objectives,”said Catriona Brash, executive partner of human performance at Accenture.

Peter O’Brien, director of ExcellerateHRO Australia and New Zealand, claims that outsourcing HR processes will challenge HR professionals to move from a traditional vertical services organisation to a cross-functional solution that addresses workforce management, talent management, employee engagement, total rewards and HR program costs. Enabled by BPO, HR can have a meaningful impact on the bottom line: “Over the next five years, CEOs will continue to require HR departments to support enterprise operational and growth objectives, so HR professionals must become comfortable with HR BPO technology that supports strategic business decisions and human capital management, ensuring that there are qualified and satisfied workers when and where they are needed,” he says.

HR process automation will grow in importance, according to O’Brien. “A continued focus on cost reduction will move more HR departments to adopt automated, self-service delivery models. And finally, but essential to the success of HR BPO, HR professionals must plan adequately for the post-outsourcing HR organisation, by identifying the appropriate staffing structure and the skills and training needed for each position.”

Justyn Sturrock, human capital management partner for IBM Global Business Services believes that as the market continues to realise the limitations of traditional BPO, an area of increasing interest will be “HR’s transformation to help optimise the HR service delivery model. Hence, we see a change in terminology from business process outsourcing to business transformation outsourcing (BTO)”.

Potential pitfalls

BTO has seen a fundamental shift in the way HR services are delivered. Sturrock said that HR professionals must be comfortable with relinquishing many traditional elements of their function. “This will present various degrees of challenge to the HR community,” he says.

To accommodate the shift, HR professionals should align themselves closely with the business and adopt a more operational focus. “Ask the simple question, ‘what are my organisation’s strategic goals and how does HR support this in a meaningful way?’”said Sturrock.

According to Andrew Woolf, senior manager of human performance at Accenture, the successful transition will depend on effective relationships. One of the major challenges will be determining how “to get best use out of a service provider relationship and that is actually quite a different way of thinking for most HR professionals”, said Woolf.

Another part of the challenge for HR professionals lies in ensuring that the business practice is engineered to match best practice standards before becoming part of an outsourced model. Sturrock believes it is essential for the HR professional to talk straight with the outsourcing company concerning their HR business processes. HR professionals “should be prepared to conduct a feasibility study with the BTO provider, to determine if a value proposition exists for the client and the provider”, says Sturrock. “They should also expect to conduct extensive due diligence to ensure that the business case for outsourcing is robust.”

Gaining executive support

There can be no doubt that a more than convincing business case is required to help implement any form of change. But how can HR best get support from the CEO and CFO level that is critical to their outsourcing program? The key is in proving outsourcing’s positive transformational power.

“Start by assessing your current state of operations across three dimensions: people, process and technology. Then define your future state,” says O’Brien. “Build a business case by identifying the business need and quantifying the expected results of outsourcing in terms of cost efficiency and improved functionality.”

Woolf takes a slightly different approach towards articulating the benefits to the CEO and CFO and other key executives. “We like to talk to our clients around some of the other benefits they’re going to get from a transformational outsourcing program. In particular superior customer service and the ability for the in-house HR function to refocus on the more strategic aspects of the company.”

To ensure optimum support, a successful BTO provider must provide better employee experiences by transforming the workplace for HR professionals as well as make continuous improvements by investing in new technology, improving HR processes and optimising the delivery model, argues Sturrock. “People should enquire about the provider’s ability to transform the business process or function concerned. The sort of question to ask is; ‘how can you help make the outsourced function more efficient, more responsive to customer need and more flexible?’”

What to look out for

Experts warn that ineffective communication between organisation and outsourcer can have a detrimental effect on the success of a program. Ultimately, joint decisions from both parties are to be made. In order to achieve this, it is essential that an organisation be clear on its requirements from the outset.

During the negotiation and contracting process, O’Brien says it is critical to specify the scope of work and the outcomes expected, so an outsourcing partner’s service framework and delivery model are engineered to meet your organisation’s requirements. “A solid change management and communications program initiated early in the process will smooth the transition of services and help ensure the success of the outsourcing arrangement,” he says.

Both the organisation and service provider must be comfortable with the solutions put on the table, Woolf believes. He warns that the perfect solution is often a challenge and while most organisations go into the relationship with a definitive end state in mind, they need to recognise and be flexible in terms of where they may end up, paying particular attention to the whole cost-benefit trade off.

“Most organisations I speak to want the HR utopia. They want technology solutions that are all singing and dancing. The reality is that service providers can deliver that, but it comes at a cost. Once you start getting under the business cases for these arrangements you need to jointly sit down and work out what is particularly important to the client,” says Woolf.

Making the return worthwhile

To tackle the critical issue of return on investment (ROI) it is important to ensure that your outsourcing program goes beyond the limitations of traditional BPO by making changes evident as a result of removing various company functions.

“Companies should be looking at business transformation outsourcing,” says Sturrock, “as it enables an organisation to have an ‘on demand’ or ‘scalable’approach to the outsourced HR function.”

Sturrock claims that while BTO may not be a new idea in human resources, many HR managers may not have been won over by it, as until recently, providers have not been capable of offering the service successfully and on a realistic scale. BTO not only outsources, but transforms HR functions by benchmarking them to best practices, improving reporting with better metrics and incorporating better delivery channels, such as enterprise portals and employee service centres, he explains.

According to Woolf, the key to organisations obtaining maximum return is scope. “The biggest benefits and biggest return on investment are where you have full end-to-end HR outsourcing relationships, preferably including some technology implementation,” he says. “Don’t just look at ROI as it relates to the specific scope of services that are under discussion. Think about the overall ROI of HR transformation.” It is likely in any outsourcing arrangement that the so-called retained HR function will deliver some significant overall benefits as a result of a move to outsourcing. “I encourage organisations to think about the total cost, rather than just the cost associated with the outsourced element,” he says.

Accenture’s Brash believes that the outsourcing partnership should be viewed not just as a contract provider but also as a strategic partner in the execution of a core business process. “There’s a way in which you approach outsourcing in addition to the scope outsourced and what you do with you residual capabilities. That is a critical determiner of wether or not you perceive it as being a successful outsourced relationship or not.”