CIPD - HR outsourcing

Corporate and HR strategy

Revised September 2009

This factsheet gives introductory guidance. It:

defines outsourcing and considers the different forms it might take
outlines some alternatives to HR outsourcing
lists some potential benefits and pitfalls
explores key considerations when selecting an provider and moving to an outsourced arrangement
includes the CIPD viewpoint.

What is HR outsourcing?

Outsourcing is a term that is being used more frequently as increasing numbers of organisations are exploring this as a potential delivery option for some of their activities. It can be defined as ‘the delegation of one or more business processes to an external provider, who then owns, manages and administers the selected processes based on defined and measurable performance metric’¹.

Within the context of HR outsourcing, the specific processes that are included within any outsourcing arrangement will vary from organisation to organisation. Some organisations may outsource virtually all of their HR processes where others select specific components such as payroll or resourcing.

Our recent survey HR outsourcing and the HR function identified that 29% of respondents are outsourcing some of the HR function. The most commonly outsourced activities reported are legal activities (69%), payroll (66%) and pensions (64%).

See the full results of the survey

Our recruitment outsoucring factsheet looks at that particular specialism.

Go to our recruitment outsourcing factsheet

So far, very few organisations have outsourced their entire HR function. In large organisations it is most common to have outsourced the operational elements of delivering HR activities whilst retaining control over HR strategy and decision-making. There are a number of well-publicised examples of large, mainly global organisations that have outsourced large parts of their HR operational activities, often in contracts for between five and ten years, for example BT, Boots The Chemist, Procter & Gamble and Unilever. Interestingly, small organisations often do the reverse, effectively outsourcing their strategy (to HR consultants and other professional advisers) and keeping the delivery of HR processes internal.

This picture of a somewhat complicated landscape of the extent of outsourcing was also confirmed by our 2007 survey The changing HR function in which only 4% of respondents with an HR shared services operation said that they wholly outsourced it. Around a quarter outsourced part of their shared services activities. The vast majority of organisations maintain their shared services operation in-house. Looking ahead, 11% of the survey participants expected HR shared services to be outsourced in three years, and half expect to partly outsource some of their shared services.

See the full results of the changing HR function survey

Alternatives to HR outsourcing

HR outsourcing is not the only solution that organisations might consider if they want to change the way their HR function operates. There are other options to consider either as an alternative, or as partner, to outsourcing.

Shared service centres

This refers to the creation of an internal ‘hub’ for the delivery of HR services. Two distinctive features of HR shared service centres are:

they offer a common service provision of routine administration an sometimes additional HR services
they are service focused, enabling the customers of the shared service to specify the level and nature of the service. They are therefore flexible to the needs of the business

To date, there appear to be more organisations setting up internal shared service centres rather than using an outsourcing approach. For more information, see our factsheet on HR shared service centres.

Go to our HR shared service centres factsheet

Offshoring

This is a term that can sometimes be related to outsourcing but is often incorrectly used interchangeably with it. Offshoring can be defined as the process of outsourcing business activities or services to a third party overseas and/or moving business activities or services to another country as a direct or indirect employer. In other words, offshoring does not always involve the services of an external provider.

A CIPD survey on the role of HR in offshoring finds that whilst HR professionals do often have important roles when organisations are considering offshoring some of their activities, offshoring of HR activities themselves remains relatively uncommon. Offshoring is best considered for process transactions rather than for call centres and again is likely to be driven by cost considerations.

See the full results of the offshoring survey

Employee self-service (ESS) and manager self-service (MSS) systems

Increasingly some organisations are looking to put in place comprehensive HR information systems that also enable non-HR employees and mangers to undertake a number of HR-related activities themselves via a portal or intranet, without the need for any external intervention. For example, in an ESS system, individuals may be able to update their own personal details when their circumstances alter, and in an MSS system, managers could review absence records for all their staff. This is one example of how HR can harness technology to deliver services.

Buying in consultancy services

The services of external consultants might be used to advise on specific HR issues or on the implementation of HR processes. Typically, consultants do not then manage or deliver these services once implemented – this is taken on by the internal HR team.

To outsource or not?

When considering HR outsourcing, an organisation needs to ask at the outset why it needs to change the way the HR function operates at present. In other words, what aspects of the existing HR provision are not satisfactory or would benefit from improvements? By probing these responses HR can then focus on the scale and type of changes that maybe required and these will help decide whether HR outsourcing might be an appropriate response (as opposed to some of the alternatives detailed above). Creating a business case for HR outsourcing is an important step.

There are a number of potential benefits and challenges in HR outsourcing.

Potential benefits

When organisations put forward a business case for HR outsourcing there are a number of potential benefits that many cite. In practice, these benefits are not necessarily mutually exclusive and a number of them could be achieved through some alternative solution rather than via outsourcing. Commonly mentioned benefits include:

Reduced cost.
Increased efficiency.
Access to improved HR IT systems without capital outlay
improved people management information (including human capital metrics).
Access to HR expertise not available internally
increased flexibility and speed of response to HR problems.
Part of an overall strategy (for example the organisation is outsourcing a number of its support functions, of which HR is just one part).
Reduced risk as it is possible to scale up and down more efficiently.
HR resources can operate more strategically.

The top 3 reasons cited for undertaking outsourcing in our 2009 outsourcing survey (see above) are access to skills and knowledge (71%), quality (64%) and cost reduction (61%),

Potential challenes

From a practical point of view, there are also a number of potential pitfalls that it is useful to bear in mind when considering outsourcing. Some of the main ones are:

Don’t outsource what you don’t understand. The outsource provider will only have to subsequently solve the problem (at a cost) and the provider’s solution might not be most suitable from your organisation’s perspective.
Outsourcing does not absolve the organisation of good people management practices nor of overall responsibility for the provision of HR services.
Increasingly, outsourcing arrangements are often long term (five to ten year contracts are not unusual). An understanding of the organisation’s current and future business strategy and potential changing business (and hence risk) profile by the outsourcing provider is important before entering into any contractual arrangement. This helps to avoid being tied into unfavourable contractual arrangements.
Loss of local knowledge and processes which instead reside with the outsource provider.
Standardisation of processes in line with outsource provider not organisational preferences.
Fragmentation of the service provided means that day to day operations are split from strategy and policy direction.
The need to constantly review the success of the outsourcing arrangement against specified metrics. The need for outsourcing services may change as the business environment changes, and there are instances of services being brought back in-house.

Selecting a provider and managing the transition

A number of actions and decisions must be made when selecting a suitable outsource provider – many of these will be similar to those made when entering into any contractual arrangement with a third party. For example:

Understanding the existing HR service provision, for example the cost base, responsibilities, level of service. These will all provide useful baseline information when comparing provider offerings and costs.
Understanding of your own future requirements, for example in terms of level and type of service.
Establishing a shortlist of preferred suppliers.
Speaking with other organisations that the outsource providers currently have contracts with to understand how satisfied they are with the provider.
Consideration of ‘fit’ with provider organisation which might include cultural as well as geographical factors.
Identification of the ‘actual’ person who will be the key relationship manager.
Determining preferred contract length.
Building in contractual flexibility where possible.
Staying involved in the contracting process. Particularly in some larger organisations there might be a procurement (or other) function which normally takes care of all contracts. It is important not to abdicate everything to such a function as it is unlikely to have the necessary expertise in HR matters.
Identification of metrics (including benchmarks of what unacceptable and acceptable ranges are) to be included as part of any service level agreement.

With regards to managing the transition from in-house to third-party service, a lot of the considerations will be similar to those required when managing any large-scale organisational change. For more information on managing change, see our factsheet on managing change.

Go to our factsheet on Change management

In addition, an outsourcing arrangement will often also include significant changes to HR processes, in a few cases, including HR self-service systems and/or a formalised HR call centre provision for staff and managers. It is therefore important to make sure that sufficient HR leadership and expertise remains internally to manage these changes as well as providing on-going leadership and strategic direction. Being clear about who is accountable for solving problems during the transition is another important consideration - is it the outsource provider or the outsourcing organisation? The original HR management cannot simply delegate to their provider. In practice, good relationship management should contribute to a smooth transition, but a good understanding of what is involved by both parties will also help to ensure misunderstandings are minimized. An open dialogue is needed between the outsourcing company and the provider.

Finally, it is possible that there will need to be a number of changes made to the roles and skills required of the remaining internal HR staff as well as other employees and managers. This may well involve re-deploying certain staff as well as providing additional training to many others. It is important to recognise that these might take time to introduce and that this needs to be factored into any change programme. Open and ongoing communication to staff about the whole process is important.

Our practical tool for CIPD members only offers a framework for making HR outsourcing decisions and a separate factsheet looks at outsourcing the recruitment function.

CIPD viewpoint

Outsourcing is one example of how the shape of HR is transforming. It is one way to meet the increasing demands being placed upon HR functions to deliver greater levels of transactional efficiency at the same time as raising the level of other HR activity to focus on ‘strategic’, ‘value adding’ service. The CIPD believes that HR functions need continually to improve the efficiency of the administrative services they deliver, as part of their shift to a more strategic and influential future.HR outsourcing is one potential means of doing this. However, HR should also continually review decisions as to whether to outsource or not, and which parts of the HR service might be best suited to outsourcing. In this way they can ensure that they provide best service to their organization and help to contribute most to organisation performance.

References

Outsourcing: 14 critical success factors. (1995) Business Issues. February.

HR outsourcing