How to Find a Suitable Outsource Provider

So how do you decide whether to outsource HR services, and on what basis? Remember that outsourcing is not the only option. All sourcing options should be evaluated against clear objectives and with an understanding of how benefit delivery will be measured. Do not assume that existing suppliers will make good outsourcing partners, and be creative in the way you define projects of 'work packages' to meet business objectives.

A key decision must revolve around the perception of the degree of internal management control which is necessary to protect a vital interest or where the impact of failure is severe.

The treatment of core activities, seen as critical to the organisation or a source of competitive advantage, should be the central elements of any outsource decision. Some organisations may take the view that these should be closely guarded and kept in-house, whereas others would be only too ready to outsource these if the overall cost/benefit analysis proved favourable.

Having decided to outsource an activity, the next step is to establish your contract strategy. This helps you to decide what kind of provider you are looking for, how you make your choice and broadly, at this stage, the nature of the contract you want.

Providers offer the following broad range of capabilities:

• niche skills: for example, recruitment and learning;
• technical solutions: useful where technology is expensive, leading edge or complex such as supporting Web-based HR applications;
• broad-based capability: this is combined with sufficient technology.

There are several models depending on whether you use one single or several best-of-breed suppliers, or a main contractor with subcontractors, and whether you intend to contract out part or all of the function/process. Individual suppliers will probably not be the best at everything and single supplier deals are not always the most cost effective. On the other hand, there is much more work involved in managing multiple contracts and suppliers need to work together to provide the best service.

Also, in recent years, 'off-shoring' has become more popular. In this context, off-shoring describes the relocation by a company of HR services from one country to another. The architectural design decisions that come into play need to accommodate full consideration of both cost and service quality. It is important not to view off-shoring simply in the context of cost savings, as this could have serious service quality and reputational consequences.

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.

Web-Based HR Processing Practice

There is very little independent research on the take-up and impact of Web-based HR solutions by UK-based employers. Most of the larger surveys are drawn from predominantly North American samples and are undertaken or funded by proprietary software suppliers or consultants.

These surveys suggest the most effective implementation of Web-based HR solutions depends on several factors. Key among these include standardisation of processes, to the greatest possible extent; available IT infrastructure; data quality and ongoing data maintenance. Where HR management is highly decentralised, it is much more difficult to implement shared core HR technologies, such as HRIS and payroll, or Web-based employee and manager self-services. In highly decentralised organisations, there is likely to be significant resistance to standardising processes. Without adequate IT infrastructure, implementing broad-based Web-based HR technologies is simply impossible. Managers and employees must have at least workplace Intranet access, and the supporting data and telecommunications network must have adequate capacity to accommodate the level of usage that results from implementing Web-based HR services.

Other studies support the main themes evident from the above reports and show us that:

• Web-based HR will not succeed unless it is part of an employee focus culture, where people are trusted to manage their personal affairs. A corporate Intranet with an employee directory will not of itself increase performance. It may save time, but it may not necessarily make people perform better (it may just give them more time in which to perform badly).
• HR needs to take ownership for establishing a relationship between the deployment of Web-based HR and enhanced organisational and employee performance.
• As the guardian of employee and organisational performance, the HR function will increasingly be caught up in the growing debate regarding the sustainability of the dependence upon new technologies in the workplace, such as Web 2.0. These developments are often associated with the research and prescriptions of Ulrich (tripartite model), there are many variations on this theme. It appears to be the case that significant numbers of large, complex organisations are using the Ulrich model in whole or in part, while smaller organisations have tended to stick with traditional models.

So what we see is that the advent and deployment of new technology that has enabled employers to change the structure of their HR functions by creating new options for delivering HR services. As we have noted, amongst these are, for example, call centres, Web-enabled self-service and shared service centres. 

However, technology is not the only factor in determining options in HR service delivery. The different levels of access amongst sections of the workforce and the willingness of managers and employees to use them are just as important, if not more so.

It seems likely that most HR functions would prefer to offer multiple channels at least until self- and assisted service have become more culturally acceptable to the organisation. However, the key to success seems to lie in creating a strategy of self-service contact that is driven by business imperatives, whilst being responsive to users' needs. Our own experience and the published material considered earlier emphasise the need for technology decisions to be firmly rooted in business and functional strategies and HR practices, if they are to maximise the potential benefits. HR should expect senior management to exert more pressure on HR to justify investments in HR technology through return on investment analysis (ROI) and business case developments.

The Role of Web-Based HR

Developments in technology underpin, to varying degrees, the different HR service delivery approaches. However, introducing new technology is not an end in itself. It enables the organisation to complete work more efficiently through better processes and more effectively by improving quality control. However, it is an expensive venture to upgrade computing and communication devices and this has driven some organisations towards outsourcing, because they cannot fund the capital investment themselves. 

As we have already noted, Web-based HR is a recent phenomenon, emerging within the more established and broader context of technology, organisation and people management. The more visionary, advanced interpretations describe a fully integrated, organisation-wide electronic network of HR-related data, information, services, databases, tools, applications and transactions that are generally accessible at any time by employees, managers and HR professionals. So instead of a centralised personnel team handling everyday tasks such as approving pay raises, sorting out training and checking holiday entitlements, these can be handled by the employees themselves or their line manager — Figure 1 provides an illustrative screen shot of an employee self-service home page.

 
Figure 1: Illustrative employee self-service screen (courtesy of HR.net).

Part of the espoused case for Web-based HR is that it offers the potential to transform HR's role. It promises to do this by increasing the HR function's influence as consultants focused on the needs of managers and employees and expanding HR's reach as the experts of the organisation's people processes and the developers of value propositions for different employee groups.

The emerging literature and our own research and experience show that in order to meet or exceed expectations associated with investment in Web-based HR, it is vital that a number of considerations are addressed at the outset:

• The focus on occasion is too much on the efficiencies of Web-based HR, that is, cost-cutting and not the longer term gains enabled by the new infrastructure. One clear cause for concern is that discussion at senior management levels regarding the transformation impact on the HR function's capability could be too little and too late.
• The extent to which Web-based HR software is over-engineered and designed by IT consultants and not HR practitioners.
• The fact that Web-based HR is designed for the HR function and not the line managers who should be the real custodians of people and performance.
• The difficulties in securing access to the information that people really want.
  • New technology does not remove poor-quality data.
  • Expect user resistance — unless the new Web-based HR-derived functionality is easy to use and seen to be relevant to the user, adoption rates are likely to be low.

In order to assess whether or not Web-based HR is meeting the promises, we should perhaps look in more detail at what has been achieved with the Web enablement of HR processes in practice.

Managing the Boundaries between the Different HR Service Delivery Channels

This is an area of difficulty often faced by HR functions. The underlying issue is primarily about which role is the tail and which is the head. Does it matter? Ultimately, the function needs to develop an HR agenda which will support and help the business succeed. So what matters is that the function works through issues around the client interface and how work is commissioned and then delivered.

In the Reilly et al. (2007) report, 56% of organisations identified 'boundary disputes' within HR shared services as the most prevalent problem affecting their operations. These can often relate to a lack of clarity about roles, responsibilities and accountabilities of the different parts of shared services and fragmented processes. Transferring HR activities to a shared service centre can have knock-on effects on existing career paths, creating tensions and conflicts between an apparent 'esteem' attached to business partners and specialists, compared with the 'institutionalised devaluation' often attached to HR staff involved in administrative and transactional support roles. This thinking can drive wedges among HR professionals and weaken the overall effectiveness of the HR function.

Indeed, Nick Worrall, HR Director at National Grid, identified similar issues associated with the development of its UK shared service centre. As he reflected:

When it became apparent that various people, including myself, were to be part of comprehensive shared service solution, we didn't exactly go home skipping that night. However, those initial thoughts were progressively dispelled as it became evident that the adopted structural approach allowed for end-to-end responsibility for many big ticket HR services, such as recruitment and learning and development, in addition to general transactional support.

Elaborating these insights, it is becoming recognised that one of the ways to mitigate these effects is to involve staff in the design of the centre and being explicit about career development and opportunities. Some organisations have opted to keep their HR service centre separate from the wider HR function. Others have encouraged those wishing to develop a career in HR to acquire wide-ranging HR knowledge in the centre through, for example, rotating around different business streams, and then moving to line or specialist roles in HR or elsewhere in the organisation.

There is also the potential for boundary issues between business partners and specialists. In our experience, if HR specialists are business-focused, boundary issues are less of a concern, as their work will be inexorably linked in with business priorities. Problems arise when HR specialists are semi-detached from the business, pursuing their own agendas and priorities rather than those of the business. For example, in one organisation some learning and development specialists had invested significant time in developing a whole range of training workshops which were not a priority. There are many other examples outside L&D, such as the development of inappropriate policy, investing in unnecessary external research, participating in external bodies of dubious value to the organisation and so on.

One of the ways HR functions are resolving these organisational boundary issues is through adopting aspects of the consultancy model. In particular, there are three aspects that help business partners and specialists to work together more effectively:

• The acceptance that HR professionals need to be addressing those issues that are most critical to their clients. This is an important way in which value is expressed and is based on the principle that there will be a commissioning of work by the client.
• This work will be packaged as a project, with clear terms of reference — including deliverables, timescales, resources, costs, etc.
• HR participates fully in these business-critical projects because they have valuable skills that will help their client to make progress.
  Whatever the structural solution, it is likely that boundary issues will arise and require resolution. 

Architectural Design Decisions in Relation to Business Partners and HR Specialists

In truth, this varies from organisation to organisation and the shades of HR organisational design are many. A number of themes emerge and include the following:

• The primacy of the business partner role in managing the client interface. This is a significant change and shifts power within many HR functions away from the specialist to the business partner. As such, it is both a substantive and a symbolic change representing a cultural shift to a more client-centred approach. For many HR functions, this change has involved a difficult transition for specialists and can be a significant point of resistance during the early stages of HR transformation. We have found that this is particularly true of training and development areas, which may have previously had account management posts and may have been organisationally distinct from HR.
• The specialist role is being increasingly provided externally through outsourcers, consultancy and specialist providers.
• Areas previously staffed by HR specialists (e.g., HR policy) are increasingly being led by HR business partners. For example, in one organisation the development of new HR policy will be led by an HR business partner and run as a project involving a variety of stakeholders on the project team. In another organisation, HR business partners may have responsibility for leading an HR process or policy area, for example, resourcing, performance management and diversity.
• Whether HR professionals report through a business unit or the HR function, there is a need to develop an HR community — for development, networking, knowledge sharing and learning.

Key Architectural Design Issues

When setting up a shared service centre, a lot of thought needs to be given to the following areas:

• Determine a clear case for creating shared services that is based on the value-added to the business. How will shared services help the organisation manage its business more effectively? Decisions about whether a shared service environment is appropriate need to reflect a full stakeholder perspective — including leaders in individual business units, trade unions and employees.
• Review and redevelop HR processes. How do we organise our HR processes to most effectively deliver the service our customers expect? Simply pulling processes together in a central hub is unlikely to deliver a more streamlined, customer-driven service. Moving to a shared service provision requires a fundamental re-engineering of HR processes.
• Explore options for the structure of the shared service centre. How can the centre most effectively be structured to deliver its business objectives? Multinational organisations need to decide whether the shared service is most effectively delivered a number of centres based on, for example, business groups, regions or a global shared service. A key factor in helping managers to make this decision is the number of people employed in the operating countries. For example, Standard Chartered Bank introduced their shared service centre on a global basis, despite the company having a large geographical spread, because the numbers of people employed in each of the countries was relatively small. Others, for example, IBM, introduced their shared services on a regional basis, or in the countries where they have the largest numbers of employees, as in the case of PricewaterhouseCoopers. National Grid, which has major operations in the United Kingdom and the United States, designed a model described in Box 8.1.
  Box : National grid shared services

  ---

  An example of how an FTSE 20 company has evolved its shared services to meet changing business requirements is found in National Grid. In a move to bring clarity over each core people process from strategy/policy to administration, National Grid implemented a 'deep' shared services model. This model incorporated specialists into the shared services structure from areas such as resourcing, L&D and ER.
  Since then, National Grid has set out a business strategy aimed at standardising policy and ways of working across its UK and US businesses as a whole. For HR it was decided that this would be best achieved by giving senior specialists Centres of Expertise roles outside of shared services with global rather than regional remits. As a result, regional shared services now focus on process excellence and transactional execution. This aligns with the broader business strategy of standardising processes where possible and creating a global approach to policy and thinking, whilst still allowing regional execution. This evolution of the shared services model has also allowed National Grid to revisit where responsibilities lie for what they term 'professional delivery' — areas such as graduate recruitment, technical training and professional recruitment — and to determine where the demarcation line is best set in terms of CoE or Shared Services responsibility.

  ---

  
  
• Clarify the role, responsibilities and accountabilities of the HR shared service centre. The content and scope of the HR shared services centre can vary between organisations, but they largely fall into two types: (1) basic administration of, for example, relocation services, maternity leave and recruitment services and (2) providing specialist information and guidance to employees and managers on HR policy and practice and employment law. The centre may also offer pooled internal consultancy and project support.
• Clarify and communicate the role and responsibilities of the customers (e.g., line managers). If the shared service centre model will require them to act differently (which it is likely to, for example, through the introduction of Web-based self-service), they must be given the appropriate support.
• Agree on performance indicators to ensure the services are being delivered to plan by using, for example, service-level agreements and a performance management framework to measure the effectiveness of the service delivery.
• Specify the scale of capital and the nature of the resources required to get the right technology and organisation infrastructure in place. Don't underestimate!