The Role of Outsourcing

It has already been stated that outsourcing can be part of the overall service approach mix. Outsourcing is a word that has come to represent a complete range of activities but we can trace the base concept back to a decision to place outside an organisation's boundaries a set of activities which were once contained inside the ownership structure of the organisation. That is, what was previously inside the tent is now outside. However, the term is also used to describe situations where resources from outside an organisation are employed in support of the core organisation's customer support when they were never ever inside the organisation's boundaries. Such an example could be the provision of technology-based applications hosted by an external organisation which represent entirely new services. The term we use to describe an organisation which provides the types of services noted above is an outsourced service provider (OSP).

There can be little doubt that HR outsourcing is on many organisations' agendas. In fact, a survey by the Conference Board in 2004 indicated that 76% of the 120 North American and European companies having annual revenues of at least US$1 billion have outsourced one or more of the HR functions. In that survey, the most popular activities outsourced included 401(k) retirement programmes, pensions/benefits, stock options, health benefits, training and development and payroll.

What to Outsource?

The usual answer to this is non-core business and typically 'Back Office' support activities are seen as less risky but we need to think carefully about the choice. Outsourcing offers the chance to do a number of things, including cost reductions on normal activities; provide increased control information; build capability and possibly capacity with some new investment; enhance current contribution and value-added capability and create new business opportunities. Each of these requires different structures and governance processes alongside key performance indicators.

What many regard as outsourcing is captured in the announcement by DuPont of a major outsourcing deal in 2005:

Convergys will provide comprehensive Human Resources (HR) transactional services to DuPont's 60,000 employees and 102,000 retirees in 70 countries and 30 languages around the world. Convergys expects this contract to generate revenues in excess of $1.1 billion over its thirteen-year duration. DuPont expects to realize a 20 percent productivity improvement as services transition to Convergys, increasing to 30 percent after 5 years.

Convergys will provide DuPont with a comprehensive suite of HR transactional services such as Organization & Employee Development, Workforce Planning & Deployment, Compensation Management, Benefits Administration, Payroll, Integrated Health Services, Recruiting, Employee & Labor Relations, HR Process Support Administration, Work Environment Support, Performance Management, Employee Data Management, Vendor Management, and HR consultative services. Deloitte Consulting, LLP will support the implementation.

Convergys will implement, host, and maintain a state-of-the-art HR information system.

Jim Borel, DuPont senior vice president, global Human Resources, said 'Convergys brings best-in-class global services to its clients, and DuPont will benefit from increased business performance through improved efficiency, reduced administrative costs, and better utilization of strategic workforce information. DuPont will be able to utilize world-class employee and manager self-service tools as well as state-of-the-art service centers located around the globe. Convergys is the right partner to enable the transformation of our HR transactional services by standardizing, simplifying, leveraging, and automating a number of our HR processes'. 
(http://www.convergys.com/news_release 2 November 2005)

It can also be planned in a sequential manner to sort a problem, develop new capability and then to bring the activity or function back inside to deliver a better and more controllable service. Alternatively, there might be an option to float off the new unit as a separate business entity with new clients and new focus on business growth. These possibilities already demonstrate the need to think more long term so that short-term decisions and processes do not restrict strategic moves later.

Of course the journey also depends on where you start from. It is likely that an HR function which has already coordinated activities across multiple sites perhaps into a shared services organisation is more ready to meet the challenges of outsourcing. Alternatively, such a structure might be so embedded that taking it outside the organisational boundaries would present a serious organisational challenge.

Without a complete understanding of the current state of expertise and potential reach, it will be very difficult for an external provider to know what they are being asked to take on and it will be extremely difficult for the internal decision makers to evaluate any external bid. The HR function, therefore, requires a level of process maturity and robustness to be in a position to consider outsourcing.

Outsourcing might be seen as a solution to a failing service which must be sorted at all costs. Such an open-ended commitment is not to be encouraged since the costs can escalate very dramatically. Without detailed internal understanding, any external Service Provider will need to consider a considerable consultancy effort to create the baseline performance level on which to build a bid for the contract. The base level description will allow the creation and evaluation of improvement agendas for support to the bid and to support the OSP's decision process that such business can be delivered profitably. Such a consultancy intervention might be even be worth the investment by the client to allow them to become an intelligent customer in evaluating the OSP's bid and might actually re-open the possibility of the in-house options.

Scope and scale decisions are also important. It is possible to outsource parts of activities (i.e., 'cherry pick' from the equivalent of the DuPont list above), complete activities or business processes (e.g., recruitment) or the whole of the HR functional business scope. This again might be a staged process to build experience and confidence without the risks of a complete functional outsourcing from which it may be difficult to retrace the steps.

In broad terms, the opportunities and threats created by outsourcing are summarised in Table 1.

Table 1: Client and outsourced service providers' opportunities and threats 

Opportunities for client	Threats to client
OSP provides focus	Loss of control
Investment in focal activity	Opportunistic pricing model
Technology support updated	Limited benefit share
Benefits of scale and scope	Loss of focus to other client's business
Dedicated skills and management	Reduced emphasis on performance and support over time
Overhead reduction	Rigid — specifically, rigidly adhered to increasing coordination costs with increased complexity
Provide operational data	Reduced compliance data visibility

Opportunities for OSP	Threats
Business growth and extension	Underestimating client complexity and underpricing
Leverage	Staff transferred are not/cannot be helped to be competent
High-efficiency utilisation	Service expectation creep
Lock in of client, barriers to entry to competitors	Contract re-tendered or re-patriated
Sell capability to other clients
Capture undervalued skills from client
Release creativity and motivation in staff

Some of the themes noted above and summarised in Table 1 were also evident in an article published in the Sunday Times (29 April, 2007), which drew attention to some of the threats and downsides, which arguably had overshadowed the perceived benefits:

In an industry full of jargon, there is one word that is becoming more popular: insourcing. Defined as the process of bringing a contract back in-house, which had first been outsourced, it is a phrase that telecoms giant Cable & Wireless (C&W) now knows well. One of the pioneers of HR outsourcing, the company surprised the industry last October by announcing that it would not be renewing its five-year contract with Accenture, but that it would be bringing its HR processes back in-house.

For an industry that mainly sees one-way traffic, the news was a shock. But C&W has not been the first company to do this: US computer firm Gateway terminated a $400 m seven-year deal with outsourcing firm ACS in 2004, a year after signing the deal, when the two reached a mutual decision to end the relationship.

The two deals have something in common: a huge change in the client company's business model. For C&W, its UK workforce had shrunk from 10,000 to 3,500, while Gateway had also slashed the size of its workforce, making the deal unprofitable.

C&W's international HR director Ian Muir was sanguine over the about-turn. 'The company had changed so much that the reasons for doing it in the first place had disappeared', he told trade magazine People Management. 'Every outsourcing provider is wanting to make a profit and the economics are not so compelling now we are a different kind of enterprise'.

These examples illustrate the need to be very mindful of the potential downsides when entering into an outsource deal. Indeed, Francis Alcock brings an insightful perspective, having worked at Cable & Wireless when it outsourced a range of its HR services, and at BT and the BBC - both of which had outsourced services already in existence. Her observations are as follows:

• Often outsourcers talk about partnering and offering 'beyond the transactional' but at the heart of any outsourcing arrangement is a hard commercial deal where organisations want higher (or at least same) quality service at a lower cost and the outsourcer wants to make money out of the deal. So relationships often end up at the transactional/contract management end.
• Set-up of outsourcing contracts is key — with outsourcing being treated like a merger change project. Time must be spent on helping the organisations get to know one another and she sees the appointment of a relationship manager as key.
• HR needs to see the outsource partner as part of the core organisation not as an arms-length supplier. The business often cannot differentiate which is the supplier of its HR service and so the whole HR function has to accept that blaming the other party for problems doesn't serve the customer or their own reputation.

These perspectives are very helpful in highlighting some of the opportunities and challenges in pursuing the outsourcing option and we now set out some practical ways in which you can deal with them.