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When Does Outsourcing Make Good Financial Sense

October 1, 1999
Related Topics: Outsourcing, Featured Article
If you believe last year’s figures that the outsourcing industry in NorthAmerica racked up close to $141 billion, and that 12 percent of that came fromhuman resources activities, you’ve doubtless come to the conclusion that aninvestment in such functions as the administration of pension plans, recruitmentand relocation requires financial savvy. Yet how many of you have been trainedto not only identify your outsourcing needs, but to put together an analysisthat meets your company’s financial goals and objectives?

As human resources managers, you naturally strive to give your company acompetitive edge, and sometimes that requires the use of an outside provider.Senior management expects you to provide good data for making these decisions,and to deliver innovative solutions -- as well as control costs. To that end,you need to understand how pivotal your own role is in selecting and thenpitching to your CEO/CFO a "business case" that can successfullyaccomplish your company’s objectives.

To learn more about how HR managers can make financial sense of outsourcing,Workforce interviewed Pete Sanborn, principal with the Lincolnshire,Illinois-based Hewitt Associates.

How do you assess if outsourcing is a financially smart business strategy?
There are a number of different factors you should consider when assessingoutsourcing. For openers, you should take into account both short- and long-termcosts and benefits. The costs, for example, might include one-time set-up feesand ongoing fees.

You should also consider the financial benefits of moving to an outsourcingapproach -- things like internal staff savings and the opportunity to save on HRtechnology. Given how fast technology is changing, you need to ask yourself,"Am I going to be able to keep pace with the constant demands andopportunities of technology?" When developing a business case, you need tolook at strategic, as well as financial factors.

What type of financial information can HR managers gather to make thatdetermination?

A business case should balance both the cost of the outsourcing arrangements-- set-up fees and ongoing fees -- and your internal structure, such as the costof technology, the cost of recruiting and training people, the cost of space. Isone strategy more expensive than the other? Whether or not outsourcing makesfinancial sense depends on a number of differing factors. For example, are thereopportunities to create efficiencies through the use of technology? Will movingfrom a decentralized to a centralized outsourced approach free up significantinternal resources?

Where does one go to acquire this type of information?
It’s important to state your objectives upfront. What exactly are youtrying to accomplish? As you look at what’s important, you start collectingdata -- whether it’s performance data or external benchmarking. Many companiesconduct an activity-based costing analysis -- an analysis that looks at howpeople are spending their time. Also, you need to capture labor costs, and costsfor technology, recruiting, turnover and training. This information can bederived from financial reports.

Should HR managers make a request for proposal (RFP) for different companiesto bid on the project?
RFPs can be helpful in the final selection process, but the first step is tounderstand who’s out there. It could be in the form of simply acquiringinformation regarding what service a company provides and who are their clients.Based on this list, you should be able to determine which ones meet your needs.Then you can either conduct an RFP or have direct discussions to negotiate amutually beneficial agreement. The most important step is to understand who theplayers are and how well they meet your needs.

How should HR managers present their "business case" to thepresident and/or CFO?
They should put together a succinct business case that states the objectivesand evaluates the different alternatives from a cost, customer, technology andstrategic perspective. There should also be a recommendation with a rationalebehind it. You should make sure the proposal speaks to the financial issues inways that the company evaluates its financial decisions.

It’s important to conduct the financial analysis over a five to seven yearperiod, reflecting the cost savings of not needing to continually invest ininternal delivery. One key element is to emphasize the opportunities for savingsin using the outsourcing company’s technology. The needs for technology areincreasing -- self-service, information 24 hours, etc. And while the demand fortechnology is increasing, the supply of technology resources is scarce. In theirbusiness case, it’s incumbent upon HR managers to emphasize that technology isa critical component in improving cost effectiveness and service.

What questions should an HR manager be prepared to answer before sitting downfor the discussion?
If we didn’t spend this money on outsourcing, what would be theimplications? I should mention, you should also have talked with your linemanagers for their input, just to prove it’s not just a decision made withinthe vacuum of HR.

How important is it that HR be more proactive in some of these businessstrategies?
It’s a critical area for human resources. What outsourcing allows HR to dois remove itself from much of the transactional work in areas that don’tsupport the business and focus more on issues such as employee engagement,leadership development, workplace planning, and total compensation planning.Outsourcing is a strong trend in the global industry, and unless HR analyzesoutsourcing options, they end up being reactive instead of proactive.

Workforce, October 1999, Vol. 78, No. 10, pp.130-131 -- Subscribenow!

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