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Dear Workforce HR as a Profit & Loss Center

Before you develop your a la carte menu of HR outsourcing services, use the following considerations as a guide.
November 26, 2000
Related Topics: HR Services and Administration, Outsourcing, Dear Workforce

Dear Workforce:

I have an HR friend thinking about proposing that the HR Department operateas a Profit and Loss Center on its own.

Question: Is it a viable business venture to provide HR services to theorganization as an external entity? HR services would be a business on its own.

If so, what are the key areas that external HR services should focus onfirst?

For an organization that does not want HR services in order to reduceoverhead costs as they are seen as non-core activities to its business, what isthe justification for them to be able to afford to hire an external HR servicecompany to serve their people.

-- Thiam Siew Tan

A Dear Thiam:

Without a doubt, Human Resources outsourcing is a viable business venture.For a scale of economies, last year Dataquest Inc. projected the HR outsourcingindustry to grow 170 percent from $13.9 billion to a $37.7 billion industry in2003.

Whether it’s the third-party management, operation and/or ownership of aclient’s internal business process, your focus areas depend largely on youragency’s -- or department’s -- core competencies and infrastructure.

Choices for your first steps are wide ranging. Processes varying from theentire HR function to specific practices, such as payroll, benefitsadministration, staffing, training and assessment, and retention and developmentprogramming are currently outsourced quite successfully.

Justifying an HR outsourcing model to prospects is a similar justification toother outsourced functions. The value-adds include, but are not limited to:

  • Reduced operating costs and better use of capital;
  • Improved service to end users;
  • Availability of HRIS; and
  • Freeing up of senior management to focus on core competencies and theorganization’s strategic imperatives.

Before you develop your a la carte menu of HR outsourcing services, firstcritically consider if your organization has the necessary resources and abusiness model capable of supporting an outsourcing entity. Use the followingconsiderations as a guide.

  • Does your organization have competencies that can be turned into serviceofferings?

As you review the potential list of HR services, you might ask yourself,"Can we truly manage the specific process more efficiently than ourpotential customers and/or competition?"

  • Can you demonstrate your ability to reduce costs, improve service or theproductivity of potential clients through current client referrals,documented success stories and/or case studies?

Ahhh…the old Catch 22. If you’re not in the business today, how can youhave case studies or references? Although it’s ideal to have objective,external data points, you can build credibility and demonstrate positiveresults via your current internal customers. Analyze your department’spast-project list and develop those case studies and seek those referencesthat bolster your department’s strengths and wins, like lowering turnover,improving productivity or reducing the time to hire. If you’re not currentlymeasuring your impact on your customers’ businesses, start.

  • Does your sales force possess the skills to sell to executive leveldecision-makers? Do they have a strategic, conceptual and consultativesales approach and a good baseline understanding of business processes?

If the answer is "no," you’ll need to invest significantly --perhaps in training or additional team members. If the answer is"yes," advise your current sales people that if they’re used toquick hits and instant wins, they may have a difficult time adjusting to alonger and more complex sales cycle -- which could grow to as long as 18months.

  • Can you acquire the "technical" expertise necessary to offeran outsourced services package? And will these resources be readilyaccessible to the sales and service delivery teams at all times?

They had better be. As "technical experts" are your primarycommodity of exchange, they must be involved in the sales, implementation andmanagement processes on an on-going basis. For example, if you decide to enterthe benefits administration segment, you will need an individual who is wellversed on benchmarks, best practices and current technology and who hasoperational expertise and experience. This individual should also bring to thetable a strong network of contacts and pre-established relationships. Yourtechnical experts are central to establishing credibility -- and business.

  • What will the service delivery structure look like?

Your current HR department might not have the skills, experience and/ortime required to manage these complex customer and employee relationships. Newpositions and reporting relationships must be developed.

  • Can your current front- and back-office systems handle this newbusiness?

Payroll, billing, financial reporting and client reporting must be flexibleto allow for various pricing formats including hourly, monthly andtransactional billing. This does not mean that you will need to invest inentirely new systems. If your current systems do not provide thesecapabilities, your internal operations management and staff must be educatedon the needs of the outsourcing unit and must be flexible and willing tocreate special manual processes, if needed, to meet your new clients’expectations.

  • Do you have the necessary tools to truly understand your potentialcustomer’s problems?

Analysis tools must be developed to accurately determine a prospect’scurrent state including the mapping of current processes, the identificationof hard and soft costs, the possible risks involved in assuming the functionand the establishment of benchmarks. Not only must you have the toolsavailable to conduct such an analysis, but you must also have a field staffwith skills and competencies to interpret the findings. If your current fieldteam can’t do this, consider developing a team of business support servicesmanagers from your current organization who have the process and analyticalskills required.

  • How will you price this business and manage the risks?

Pricing and profitability models must be created and a review processdeveloped so that you and your senior management team can accurately evaluaterisk and predict return on investment, return on capital, etc. If such a processis put in place at the outset, you can significantly reduce the risks associatedwith outsourcing and ensure that you are in a win/win relationship with yourclients -- and executive team.

  • How do new client relationships differ from current internalrelationships?

Typically, client relationships are constantly changing and evolving. At thesame time, performance penalties and incentives are built into almost everycontract. On-going communication -- daily, weekly and monthly -- as well asclear documentation, are some keys to success. A quality program must be clearlyarticulated and documented and regular goal-oriented reviews should be conductedwith each client. It’s also important to gather the original purchasing teamquarterly to review changes, results, deliverables, action items and futureinitiatives. The sale doesn’t stop once the contract is signed.

  • Will you need to change your compensation structure?

Compensation and incentives for the service delivery teams should be tied tothe client’s specific delivery expectations and performance metrics. For thoseemployees who are living with your customers, service and satisfaction are themeasures, not profitability or sales revenue.

  • When can you expect the outsourcing unit to be profitable?

Be patient. As discussed earlier, the sales cycle is long. The return cyclefor a new outsourcing business unit can take up to two years.


SOURCE: Benchmark HR, Salem, New Hampshire.

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 The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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