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Donkin on Work - Outsourcing

April 2004 - Outsourcing HR

Unless you have been living in a cave for the past 20 years, you are probably familiar with the idea of contracting out parts of your business operation to specialist companies. Today outsourcing business is becoming increasingly sophisticated. It used to be services such as catering, security and computer maintenance. Now you can find specialists to do just about everything for a price.

The theory behind outsourcing is that you keep the things that are most important to you as a business in-house and buy in the things that are less important. But as companies grow ever more enthusiastic about transferring fixed costs to variable costs the concept of what is central to a company's operations is changing.

For a short time, I once worked for a man who ran a big warehouse stuffed with theatrical props. There were thousands of items, ranging from bicycles and suits of armour to buckets and birdcages, and he knew the value of each one of them.

Television and theatre producers would arrive at his warehouse and pick out the props they needed for their productions and he would rent things at a percentage of their value. Not much in this business was written down so you could say that the warehouse owner was vital to his business. It was not going to run well without him.

Now, however, even the importance of the boss is questionable among those companies that have mastered the art of "knowledge management". After all, you can rent a chief executive for a specified period if you tap into the "interim management" industry.

And if even the boss can be rented, then so can everyone else. Little wonder then that the human resource outsourcing industry is growing. The key to this growth is cost. If an outsourcing business can demonstrate how it can make significant savings on fixed internal costs, it is going to make a potential client sit up and take notice.

Some of the earliest entrants into HR outsourcing concentrated their offerings on payroll and other purely administrative areas of HR. The broader scope of the business became apparent, however, when Exult, the US outsourcing business, signed a Dollars 600m (Pounds 357m) seven-year contract in 1999 with BP, the oil company, to provide comprehensive HR services initially covering UK and US employees.

Part of the reason for taking this route was to simplify the piecemeal approach to HR that had developed in different divisions and departments. In the UK, for example, more than 100 different types of employment contract were reduced to fewer than 10.

Now a number of HR outsourcing providers are extending their scope into more critical areas of employment policy such as recruitment and staffing strategies. Alexander Mann Solutions (AMS), a division of the Alexander Mann Group, describes its own outsourcing service as "recruitment process outsourcing ".

Some companies might regard recruitment as too critical a function to contract out to a service provider. But Rosaleen Blair, managing director of AMS, argues that it is ideal for outsourcing since the client company can retain control of its recruitment policies, pay levels and recruitment decisions, leaving the spadework - such as sifting applications and ensuring a timely supply of candidates - to the service provider.

"We see our job as freeing up the HR people to be strategic," she says.

So what are the advantages of buying in expertise instead of leaving the recruitment job to your in-house HR teams? Perhaps the clearest difference for most potential clients is the transparency of the service provider's offering.

"Too often," says Ms Blair, "we find that companies do not have a good grasp of their recruitment costs. They fail to factor in all the overheads. Our approach is to measure absolutely everything from the time to hire to the cost per hire. We look at the cost of advertising and the cost of responses.

"Typically we find that companies have never looked at what they are spending on recruitment and they don't have the tools to measure their outlay. It's not just about upfront costs either. It's also about the quality of the people you bring in, finding out how long they stay and gauging whether you are managing their expectations. Companies tend to forget to measure the cost of losing someone."

The AMS specialists tend to work in-house alongside their clients to understand individual employment systems and management cultures. They also need to be aware of internal candidates for any post because, here again, there can be measured cost savings in securing internal job moves and ensuring that staff are deployed efficiently.

I confess to having been a sceptic in the early days of HR outsourcing but two developments are beginning to change my mind. First, the scope and sophistication of HR measuring is growing. With a few exceptions, such as the Royal Bank of Scotland, the exploration of worthwhile measures of the effectiveness of employment practice has been piecemeal and sporadic.

This leads to the second significant development: the sharpening of measuring skills among HR outsourcers. This should not be so surprising because the measured results set against targets in service level agreements are the way that outsourcers earn their fees. Measuring is the way they demonstrate their worth.

Ms Blair says that the strongest resistance to outsourcing among HR directors tends to be driven by fear of losing control. On the other hand, there must be some attraction to the possibility of delivering quantified cost savings on recruitment and other HR services to the rest of the board.

A survey carried out three years ago by RebusHR, another service provider, found that most UK companies that had experimented with HR outsourcing had made their first step with payroll services. The three strongest reasons clients cited for moving to a provider were cost savings, buying-in specific expertise considered peripheral to the real business of the company, and complying with employment legislation.

Of the three, I would expect potential cost savings to prove the biggest attraction. For this reason it is important that companies seeking to go down the outsourcing route undertake an effective HR audit before doing so in order to understand the true cost of their existing HR services. Only then will they be able to make an assessment of savings in future.

Second, they should go into any contract with their eyes open. Rebuilding an HR function if a service contract fails to deliver the expected savings would not be easy. The alternative - a distress purchase of HR services from another provider - does not seem too palatable either.

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