HR outsourcing’s rise and rise

Outsourcing is increasingly big business across Australia and the Asia Pacific, as many organisations and their HR departments farm out transactional duties in order to focus on more strategic work. Craig Donaldson examines the ramifications for HR professionals and functions and how they can get the most out of outsourcing arrangements

Outsourcing is increasingly big business across Australia and the Asia Pacific, as many organisations and their HR departments farm out transactional duties in order to focus on more strategic work. Craig Donaldson examines the ramifications for HR professionals and functions and how they can get the most out of outsourcing arrangements

Outsourcing administrative HR duties is commonplace in today’s business world. Early adopters have already demonstrated the cost benefits but despite the significant savings offered by outsourcing business processes, executives and HR divisions need to ensure their management is fully integrated with the company’s operations if they are to avoid the risks inherent in outsourcing.

“People management plays a crucial role in delivering organisational performance. In today’s modern knowledge economy this is more true than ever before. The decision to outsource HR services is therefore not to be taken lightly,” says Vanessa Robinson, organisation and resourcing advisor at the Chartered Institute of Personnel and Development (CIPD). “However, there are many circumstances in which outsourcing HR services can deliver tangible benefits to the organisation, for example freeing HR professionals to devote more time to a strategic role in supporting organisational performance.”

Cost reasons alone are not sufficient to drive the decision, she says, pointing out that decision makers need to ask whether there is a need to change the way the HR department operates and review existing provision. Such reviews need to consider cost, administrative efficiency and HR policy strategy and expertise. Where gaps are identified, Robinson says organisations need to consider whether they are best solved by minor tinkering or major transformation.

It must not be forgotten that a transition from in-house HR provision to the use of an outsourced provider is a significant change for the organisation, and must be managed accordingly, she adds. “If significant time is not devoted to the process of change, with unequivocal top-level support, there is a danger that the relationship between staff and line managers and other aspects of people management policy may be neglected.”

Still, Bryan Doyle, president of Hewitt Associates, an HR outsourcing group, predicts the growth of HR outsourcing will continue to gain momentum as organisations reap benefits such as cost savings, new capabilities and services for employees, and enabling HR to focus on more strategic work that is integral to the business. “For most organisations, HR administration is not their core area of expertise, so by turning it over to an HR expert, they can focus on critical business needs.”

It is also crucial to remember that HR is different from other functions that companies typically outsource, he adds, so there must be a thorough evaluation to ensure they select a provider with the HR expertise, experience and capabilities needed to manage people issues and deliver the quality service and results they are looking for.

Michael Cornetto, senior HR delivery consultant at Watson Wyatt, says most companies are taking an incremental, selective approach towards the outsourcing of their HR functions. While most companies expect to outsource more in the future, they are less inclined to consolidate their outsourcing activities with a single vendor, and far less willing to outsource the more strategic components of their HR function, he says. In taking a selective approach to HR outsourcing, Cornetto says they look for an optimal mix of internal and external processes and technologies. “Despite much speculation otherwise, there is no headlong rush toward the total outsourcing of all HR services. Many companies that investigate full HR outsourcing alternatives choose to refine their existing delivery model rather than outsource everything,” he says.

Robert Brown, research director for Gartner, says that business responsiveness is the number one issue in HR outsourcing (HRO) - specifically, to what degree HRO can underpin the strategic direction if the business.

“Five years ago most companies would outsource a single sub-process to a vendor primarily for cost reduction. Today, it’s all about managing HR to dynamically respond to changes in the business and hopefully at a better price point than can be attained internally,” he says. There is no way that a “steady state” HRO contract can adequately predict where a business’ HR requirements will be in five to seven years, he adds, and not all HRO vendors are managerially equipped to keep up with rapid rates of change.

In successful HRO deals, Brown says HR managers focus strategically on what they do best: manage and retain the “best and brightest” talent within the organisation. Successful HRO sees the senior HR management unshackled from the day-to-day fire fighting modes of operation such as painstaking compliance assurance with HR laws and spreadsheet management, to allow them to focus on the important, business focused activities that position HR as a strategic partner to the senior executives of their companies, he says.

“Increasingly, leading buyers of HRO stress the new-found accountability of their HR organisations through a well-measured business process outsourcing (BPO) relationship,” Brown says. “Successful buyers will likely grow their outsourced relationships comprehensively to include more and more HR functions over time, as opposed to solely benefits or payroll outsourcing. Keeping the relationship flexible enough to anticipate change and continuously drive business value will be a challenge.”

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