Saturday, September 11, 2004

Outsourcing: Should it Stay or Should it Go?

By Mark Hodges Outsourcing HR processes is a major decision. Incredible value can certainly be achieved, but determining which portions of HR can be outsourced is fraught with difficulties. Common questions that arise during the decision-making process include: "How much of HR can be outsourced?" "Which processes should be in-scope?" and "Which HR processes and elements should be retained?" The answers are neither obvious nor easy. Most HR professionals agree there are 20 to 25 different processes that constitute the HR function, including payroll, recruiting, succession planning and HRIS, to name only a few.

HR professionals should examine all these processes and break them up first into subprocesses, and then further into discrete work activities. For instance, the payroll process can be segmented into at least seven subprocesses: process design, employee setup, calculations, pay distribution, labor distribution, issue resolution and reconciliation. A subprocess such as pay distribution can be segmented further into multiple work activities such as payroll runs, confirmations, etc. This decomposition of a HR organization's processes allows the HR professional to apply a disciplined approach to what can and should be outsourced versus retainedOne technique that is helpful in determining what should stay and what should go is to take each HR process under consideration and classify it into one of four process layers: strategy and governance (typically retained), design and expertise (typically retained and including consulting activities that lend themselves to knowledge centers), administrative and operations (frequently outsourced) and the technology/systems category (frequently outsourced).

Remember, it is rare that a process in its entirety (i.e., all four process layers) is outsourced. The norm is for a combination - a set of subprocesses are retained and others are outsourced.
From a HR service delivery perspective, the 20-plus processes in the HR function can be grouped into five distinct clusters of similar work activity.

• The human capital cluster includes labor and employee relations, strategy, third-party vendor management and employee communications. Core activities such as HR strategy and labor and employee relations are often retained (but with heavy reliance on consultancies). Vendor management, through which all third-party HR service contracts (training, benefits, recruiting, etc.) are managed, is a prime candidate for outsourcing. Most HR outsourcing firms specialize in rationalizing multiple third-party contracts and helping to harmonize terms, pricing and service levels. Employee communications can certainly be facilitated by a HR outsourcer, in terms of technology and employee communication campaigns, but it is still largely a retained function.

• The workforce planning cluster includes staffing, recruiting, expatriate administration, domestic relocation and workforce deployment. Most of these processes can be, and have been, outsourced. When mapped into the four process layers mentioned above, it quickly becomes clear that most of this cluster's activity is grouped into the technology and administrative layers, which are highly transactional by nature. What is not obvious is that a center of expertise such as expatriate administration, domestic relocation or recruiting are scalable - and inherently lend themselves to serving multiple clients instead of one. Therefore, these economies of skill can be leveraged across wider volumes than a single corporation, which much more efficiently drives unit costs down. Furthermore, HR best practices from multiple clients can be implemented more easily into its constituent clients, introducing innovation not readily possible from within a single client.

• The HRMS and HRIS cluster includes technology activities related to employee data management. This cluster includes the HRMS system (payroll, HRIS and time and attendance), employee records management, employee manager and self-service, and workforce analytics. The vast majority of this cluster can be outsourced and is analogous to IT outsourcing or technology hosting. The technology and transactional elements of this cluster are largely generic and transactional in nature, and are ideal for a third party with superior economies of scale and location.

• The compensation and reward cluster includes payroll, compensation, stock options, service awards and, in some companies, travel and expense reimbursement. Most of the administrative, technology and transactional activities (e.g., salary surveys, benefits administration and stock-option portals) can be outsourced, which encompasses approximately 70 percent of the total work of this cluster.

• The organizational and employee development cluster includes staff development, training, organizational development and succession planning. Much of this cluster consists of strategic, core and consultative activities, usually hallmarks of retained work. However, training administration and scheduling, online performance management tracking and "what if" analyses for succession planning are frequently outsourced. Typically, 30 percent to 40 percent of this cluster can be outsourced to a qualified third party.

Understanding the scope of potential work - how many HR processes there are, which can be outsourced and which should be retained - is critical. In most HRO deals to date, approximately 50 percent of the work is ultimately outsourced. After one to two years of the relationship, additional scope is usually added to the contract. It's best to initially place approximately 75 percent of the total HR work "in-scope" in order to allow HR outsourcers to be as creative and effective as possible. If the final percentage ends up lower - say 50 percent - that is fine. It is always better to start with more scope initially than the reverse. This allows clients, in conjunction with the HR outsourcers, to jointly determine the final allocation that best fits their business objectives.

This article was published in the May 16, 2003 issue of Human Resource Executive.