Farming out the admin: Outsourcing HR

HR business processes outsourcing is big business overseas, and the trend is picking up here. Lynnette Hoffman looks at the common benefits and challenges of HR BPO and why it’s important to do your homework before making a decision

Automotive component manufacturer F. Muller was on the verge of collapse five years ago when it was bought by Tripac International, an American company owned by Email. Not turning a profit, and already in the midst of turmoil, it was time to make some major changes.

Tripac became one of the first companies in Australia to completely outsource its human resources business processes.

“If we were going to shrink in our overall size we realised we needed to be a little innovative,” its then general manager Gilman Wong says.

General HR practices were taking up a big part of management’s time and requiring significant input, and trying to find their ideal HR manager proved too difficult a task for the company, which had 80 employees.

“We were a small company, and having to employ an HR manager with all the necessary skills was very difficult. We were too small to attract the right sort of candidate, and even if we had found someone there’d be the question of whether they would have had enough interest.”

So in 1999 Tripac hired EL Blue, a division of EL Consult, as its staff-leasing firm. This allowed Tripac’s management to concentrate on what they were good at: manufacturing heat exchange components.

Part of a bigger trend

Few companies in Australia have taken HR BPO to quite that level, but the trend is increasing, and the number of businesses outsourcing at least some of their processes is well on the rise.

Right now, spending on Australian BPO services sits at $2.5 billion and is expected to increase to $3.6 billion by 2008, while spending on HRO in Australia is now at about $320 million and is expected to grow to $440 million at a return rate of 9 per cent by 2008, according to research by IDC Group.

Globally, HR outsourcing is huge – a $16 billion market.

Some 85 per cent of US companies outsource at least one component of their HR function – payroll, benefits administration, education and training, hiring and recruiting and personnel administration are top targets.

And Australia is starting to catch up, with a majority of companies outsourcing at least one HR BPO, most commonly payroll, says Rohan Connors of Hewitt Associates, one of the largest providers of HR BPO in the world.

More and more companies are outsourcing their more complicated HR applications, according to Grant Sandstrom, head of outsourcing and information technology at Aon. In the past five years there’s been a huge increase in the number of companies outsourcing their superannuation, for example. And as they become more comfortable outsourcing more complex processes they tend to move toward outsourcing additional applications as well, he says.

Part of the reason for the delayed reaction here is that in America there is a different set of drivers. For one thing, companies are responsible for paying hefty pensions when their staff retire, so after a person leaves there’s a big potential liability on the balance sheet that they don’t have to worry about if they’re outsourcing. The expense of health benefits can also be cut by outsourcing.

Traditionally these haven’t been major issues here, but with Australia gradually moving toward the US system, it’s likely HR BPO will continue to grow here as well, Connors says.

In the past, large scale multinational companies with more than 10,000 employees have been most likely to outsource, but there’s a limited market for that size of company here. But with costs of technology dropping, those issues of scale are being addressed, according to Connors.

“The trigger point is getting lower,” he says.

So why outsource?

One of the most common reasons companies say they outsource their HR processes is to free up time and increase productivity among management.

At F. Muller, staff whose skills and training were in engineering and production control were being asked to work in HR roles for which they had no specialised training. Wong says the move to outsourced HR processes changed all that.

“Our management became quite focused on the core competencies of running the business, rather than being diverted. If an issue came up they could just pick up the phone and call HR to address it. Otherwise the management would have had to stop what they were doing and address it,” Wong says.

The change was cost and time effective in other ways as well. Rather than having to spend time and money advertising and interviewing people whenever they wanted to recruit, they could simply pick up the phone and say, “I need to increase the staff by five to 10 people, can you get them?” Wong said.

Outsourcing also allows companies to get and pay for specialist expertise as they need it, rather than hiring one person and expecting them to master everything, or paying for several employees to be experts in different areas that they may only need for a few weeks out of the year.

“You’re getting skills that are exactly relevant for the job that you need done. For example, at one point there were changes to the OHS requirements, and we had an expert in right away who knew all the new requirements. Otherwise we would have had to hire someone to come in and train us on the new regulations,” Wong says.

So instead of having full-time employees permanently on the premises to cover every area of expertise, the outsourcing company can send in staff regularly as its needed.

And according to research by the US group CFO Research Services, outsourcing HR processes can also create IT benefits in terms of software licenses and initial hardware purchases and maintenance, and it can cut back on the costs of training.

So is it worth it?

In terms of the bottom line, the decision to outsource worked for Tripac.

“Our business was previously uncompetitive, and because of the changes we were able to make lean opportunities which we could not have done otherwise, and that turned the business into a profitable one.”

Direct labour was reduced by 40 per cent for the same output, Wong says.

Within nine months of making the switch, the business had already turned from uncompetitive to profitable with output up by almost 50 per cent and product rejection rates down by 37 per cent.

But that said, outsourcing is not for everyone, and it does present some challenges.

What could go wrong?

Potentially, getting stakeholders to buy in can be a challenge, especially for large publicly listed companies such as Telstra or BHP, where the stakeholder expands to include community groups and unions, as well as other interest groups, Connors says. Early, open communication and addressing all the stakeholders’ concerns from the get-go is key, he says.

For Tripac, stakeholder buy in was not an issue at all given its circumstances, Wong says.

“Because we went through an acquisition and we were uncompetitive, people recognised that if we were going to continue we were going to have to reinvent and do things a little differently, so that was an advantage there. If things had been running along fine it might have been more difficult to convince people,” he says.

But that’s not to say there were no issues to work around. Because Tripac had most of the staff working on site, there was some concern that the outsourced employees would be left out.

“One of the challenges was to mould people from being employed by another company to working for our company and building a sense of belonging to Tripac. One of the ways we did that was by focusing on building relationships. We addressed that through planning – we planned times to go around in the morning and talk to all staff and we also ran team building initiatives from time to time,” Wong says.

Wong says it’s also important not to get too complacent and relaxed with the new set up.

“It divorced us from all the mundane issues so we could be cohesive and concentrate on what we were good at, but you can’t just outsource and then forget about it. You can’t just say ‘it’s no longer my concern, it’s somebody else’s’. Certainly you can forget about the day to day functions, but you have to remember they’re still a part of the overall organisation.”

Tripac closed in November for reasons unrelated to the outsourcing.