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Laying the Groundwork for HR Outsourcing

January 12, 2010
The past 10 years have been an epic journey for companies outsourcing HR and for the providers of those services. Both endured significant challenges as they labored to find formulas that worked. In the end, the struggles yielded two important truths:

• After years of technology implementations and process improvement efforts, most HR functions still are far from operationally efficient,

• The benefits of HR outsourcing will not be fully realized without at least some degree of functional transformation, such as process optimization, role redesign or other service delivery improvements.

As we enter the second decade of HRO, it is clear outsourcing is here to stay: It has become a critical component of a cost-effective delivery strategy. By building outsourcing efforts upon the above truths, HR will be better prepared to navigate the challenges of implementation and create a model for improved operational effectiveness.

A short history of HR outsourcing
Although the modern era of enterprise HRO began in 1999 when British Petroleum agreed to outsource almost all of its HR processes to Exult, HR outsourcing itself was not new. Organizations had outsourced payroll and benefits administration services for decades. The processes were mature, well-standardized and easy to parcel out to an outside provider.

As we approached the 21st century, three technology and management trends converged to launch the modern era of HRO, propel the broader application of outsourcing across all of HR and define the cornerstones of HR operational transformation:

1. In the late 1980s, HR technology progressed from cumbersome data repositories to powerful engines for holding, accessing and reporting HR data and information. No longer was HRIS a glorified filing cabinet, but rather user-friendly and supported by relational databases that made it easier to manage and manipulate data with greater flexibility.

2. The 1993 publication of Reengineering the Corporation by Michael Hammer and James Champy launched the process- improvement revolution, creating efficiency efforts within corporations that eventually made their way to the HR department. More important, HRIS vendors integrated the capability into their tools, so HRIS did more than manage data; it helped manage HR process.

3. With the addition of Web technology, data-entry tasks and other transactions could be pushed to managers or employees without having to train them how to operate HRIS software.

These enablers drove efficiency and made it possible for businesses to restructure and, ultimately, to outsource. Now HR could bundle up all of the data-entry tasks for recruiting or learning management, for example, and move them from a $40-per-hour generalist to a $7-per-hour clerk. The notion of shared services was born as organizations evaluated which HR processes could be moved to lower-cost internal or external providers.

Enterprise HRO (the outsourcing of six or more processes at one time) was seen as a dream solution because it was designed to accomplish all the objectives of HR transformation simultaneously: drive down burgeoning HR costs, bring needed improvements to HR technology and process, and take HR transformation to its next and most strategic level.

The dream, however, quickly turned into a nightmare as organizations experienced extreme implementation challenges. Enterprise HRO initially employed a “lift and shift” model that moved the existing data structure, processes and components of staff of an HR function to a single provider. This model proved disastrous because even the “best in class” HR functions were still far from streamlined. Providers underestimated the extent of the decentralized, tailored processes and, as a result, struggled significantly with service delivery.

When HRO providers tried to create the efficiencies required to achieve profitability, they arm-wrestled with buyers who resisted change from the tailored models. Once deals were signed, buyers no longer proved as willing to standardize process or use offshore data entry and call centers. Although HRO did eventually bring cost savings and needed technology, the implementation exhausted project teams and made it difficult to maintain day-to-day operations.

By the spring of 2008, industry surveys reported that:

• 70 to 80 percent of outsourcing agreements required some sort of restructuring during their contract term.

• Only 30 to 35 percent of companies planned to renew their contracts with their initial providers.

• 5 to 12 percent of companies that outsourced changed their minds and decided to terminate their contracts and build internal HR capability

• 50 percent of buyers planned to change the mix of outsourced and insourced capability.

As buyers and providers begin to rethink enterprise HRO, single-process outsourcing—such as total benefits outsourcing or recruitment process outsourcing—continues to grow at a healthy rate. Single-process outsourcing has had its challenges too, but the focus on outsourcing a single, repeatable transactional process has minimized complications and created higher levels of buyer satisfaction.

Where to go from here: five steps for better HRO
We begin the second decade of HRO with a much more balanced perspective of outsourcing and a clearer understanding of its strengths and limitations. But if the promises of outsourcing are to be achieved, there are a few important considerations that should guide its use.

HR outsourcing requires transformation: According to Towers Perrin’s 2008 study “Progress and Performance: The Continuing Evolution of HR Outsourcing Effectiveness,” buyers that invested the greatest effort in transforming HR before outsourcing achieved the greatest total satisfaction with the outsourcing process. This does not mean that HR transforms completely before implementation, but rather that it transforms just enough to take advantage of the outsourcing capability. Put simply, mend it before you send it.

When organizations transform HR, they make changes to HR’s operating model in order to improve the function’s ability to deliver required services. For example, business growth may require HR to fill open positions more rapidly, or competition from lower-cost competitors may require HR to reduce the cost of operations. In response, HR might apply a new technology or outsource specific activities. It also might streamline processes or redefine structure and roles.

HRO, and the resulting HR transformation, require a variety of integrated initiatives that can change people, process, structure, technology and governance. These changes must be supported by well-designed change management processes focused on the HR organization that is retained and the “customers” of HR: executives, managers and employees.

Outsourcers are at their best when they are left to provide technology and inexpensive labor and to manage processes efficiently. They are not at their best in helping organizations decide how they want to transform. It’s true that a good provider should have best-practice recommendations that maximize the capability of the technology. But navigating organizational politics to determine, for example, whether all 527 management reports are really needed or whether 150 would do, is best achieved when the buyer has thought through these issues prior to an HRO implementation.

Recognize also that while outsourcing and transformation are inseparable, they may have contrasting objectives. Outsourcing’s overriding purpose is to use technology, process standardization and labor arbitrage to provide a low-cost, scalable platform to manage HR operations. Transformation, while it may be in part about improving operational effectiveness, usually aims to provide something of greater value to the organization.

For the outsourcing effort, be mindful of what you want to deliver strategically, but stay focused on the drive to execute operationally. An organization can survive without a succession plan, but it will shut down if employees go unpaid. Managers will eventually figure out how to develop a talent forecast, but can’t function if they don’t have a pipeline to fill vacant positions. Operational effectiveness is where HR and providers earn their credibility. And ultimately, it is operational effectiveness that provides the data and information required for strategic insight.

Identify the right scope: It is less likely that buyers and providers will undertake the enormous effort of enterprise HRO now that its challenges are better understood. Nonetheless, it is important to identify the right scope for your outsourcing efforts, even if the focus is limited to a single process, such as payroll or recruitment process outsourcing.

The right scope, and whether a process lends itself to outsourcing, can depend upon a number of factors. Does the technology match your needs and preferences? Will business-unit and country requirements allow for standardization? Are the benefits sufficient to offset the business disruption during the transition, or will the gain be too little to offset the investment? Will you be able to commit full-time resources to each component of the implementation?

Asking the tough questions will ensure the implementation and corresponding transformation are well-focused and achievable.

Understand the gaps between the current and future state: Once you have identified the scope of the outsourcing project, you will have a clear picture of your desired future state. At this point it is essential to work backward to identify the gaps between where you are headed and where you are now. This calls for a warts-and-all assessment of your current capability to ensure you manage risk associated with the areas of your organization that will be affected by outsourcing.

For example, a new self-service onboarding technology will replace a current paper-form process and allow new hires to complete all benefit sign-ups from their home computers. This not only will change how data are collected, but likely will change the data requirements as well as. The revised process will remove tasks from some jobs (generalists) and add tasks to others (HRIS). This, in turn, may change the skills required for jobs or may eliminate jobs altogether. In addition, all the changes will require communication to managers and HR staff, and potentially require training for those who may be called upon to answer questions.

Understanding the gaps is not just about grasping the technical specifications for the software or mapping the knowledge transfer required for an HRO provider to take over a process. It is about understanding all of the business transformation requirements—the areas outsourcing will affect—and building a plan to address them.

Manage the change: Unlike other functional areas, HRO affects the entire organization rather than just one functional department. Even when well-planned, this complexity requires more effort than is typical of most organization change initiatives.

This point was underscored by an HRO project leader for a global pharmaceutical firm who said, “We started this initiative with textbook change-management support. But when we started to see both technical hurdles and push back from the divisions, we were caught by surprise. We missed important cues along the way because we were too focused on executing the technical plan. We thought the people challenges would work themselves out and we didn’t react fast enough.”

Because HRO fundamentally changes the way employees receive HR services, it is extremely visible within the organization. That visibility affects managers, business unit leaders and project team members whose jobs may change or be eliminated. As a result, HRO change-management efforts must not only address the needs of end users, but also the concerns of all stakeholders touched by the transformation.

Establish partnerships with your providers: Because HRO affects the entire organization, the relationships require an approach similar to merger integration, rather than the arm’s-length interaction that is more typical of buyers and providers. So while it is important to apply good governance to administer the contractual and business performance of the relationship, it is equally important to integrate culturally to manage the emotional aspects of the relationship.

Providers become your HR organization. Their call-center employees are the first point of HR contact for your employees. The look, feel and functionality of their technology set the tone for your organization’s HR culture. Consequently, culture match should become part of the criteria for selecting a vendor. Cultural integration must become an objective once the relationship begins.

The challenges, innovation and research over the last 10 years of HR outsourcing have taught us a great deal about how to make it work. It is an exciting time because these lessons teach us how to implement outsourcing so we can include the capability in our strategy for service delivery. Most important, by paying careful attention to the requirements for successful implementation, we will be able to help organizations achieve the promise of HR transformation and deliver the insight, tools and services to manage talent more effectively.