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.
For more information on HR
outsourcing , visit www.ebstrategy.com
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