Understand the principles of shared services, how they work, and the benefits they can bring to an organisation
According to CIPD research, the main element of HR that organisations outsource is payroll, followed by the provision of complex advice (including case management). Outsourcing can offer benefits, such as increased efficiency and access to expertise; however, it can also present challenges, such as loss of local knowledge and processes, and fragmentation of the service provided.
This factsheet introduces HR outsourcing and its use across organisations, outlining some of the alternatives to outsourcing, including shared services, employee self-service, and buying-in consultancy services. It highlights the need to consider the business case for outsourcing HR work and the questions to ask in deciding whether HR outsourcing is the most appropriate solution. Finally, the factsheet offers guidance on selecting a provider and sets out some of the issues to consider when managing the move from in-house to third-party service.
We believe that HR needs to continually improve the efficiency of the administrative services they deliver as part of the shift to a more strategic and influential future. HR outsourcing is one potential means of achieving this as it may help meet the increasing demands placed upon HR 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.
However, there's a need to carefully consider the challenges as well as the potential benefits of outsourcing any HR services to decide whether or not this approach suits the organisation. Where such arrangements are adopted, it's also important to formulate a clear strategy for managing the change process from in-house provision to an outsourced service. There's also a need to 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, HR can ensure the provision of effective and efficient HR services that help to support organisational performance.
What is HR outsourcing?
The practice of outsourcing involves the purchasing from an external provider of one or more business services, which could include HR and/or other services such as IT. The specific processes that are included within any HR outsourcing arrangement will vary from organisation to organisation – some may outsource virtually all of their HR processes while others select specific components such as payroll or recruitment.
In our HR Outlook Winter 2014-15: views of our profession survey, we asked HR professionals whether their organisation outsources HR activity.
- Nearly four in ten HR professionals in the UK reported that their HR function does not outsource any work. This is a fall from almost half who reported this in a similar survey in 2012. Interestingly, outsourcing of HR work is consistent across organisational size.
- Just over four in ten HR professionals said that the amount of work being outsourced in their organisation has stayed the same, with some saying it had increased and a smaller proportion that it had decreased. Payroll is the main area outsourced, followed by providing complex advice (including case management). Other elements outsourced include recruitment and legal advice.
- A third of SMEs outsource complex advice (including case management), a significantly higher proportion than the large organisations. SMEs are also more likely to outsource specialist advice. Large organisations are significantly more likely to report that they don’t outsource any HR work.
- Only a few respondents said they have a small, central HR function with largely outsourced HR activity which suggests that very few organisations have outsourced the majority of their HR work.
Alternatives to HR outsourcing
HR outsourcing is not the only solution that organisations might consider if they wish to change the way their HR service operates. There are other options that can work either as an alternative to, or in conjunction with, outsourcing.
This term refers to the creation of an internal ‘hub’ for the delivery of HR services that are shared across an organisation (or sometimes, a range of organisations). Two distinctive features of HR shared services are:
they offer a common service provision of routine administration and sometimes additional HR services
they are service-focused, enabling the customers of the shared service to specify the level and nature of the service, and are therefore flexible to the needs of the business.
Currently, more organisations appear to favour the setting up of internal shared service centres rather than the adoption of a full-scale outsourcing approach.
See more in our HR shared services factsheet.
The practice of offshoring may sometimes relate to outsourcing, although the two terms are often incorrectly used interchangeably. Offshoring may 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 necessarily involve the services of an external provider. ‘Nearshoring’ is a term sometimes used when services are moved to countries close to or bordering the country of operations.
The adoption of such arrangements is likely to be driven by cost considerations, although some commentators believe that offshoring may be best considered for process transactions rather than for more personal services such as call centres.
Employee self-service (ESS) and manager self-service (MSS) systems
Increasingly some organisations are looking to put in place comprehensive HR information systems that enable non-HR employees and managers 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, while in an MSS system, managers might 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 (for example, the introduction of flexible benefits). Typically, consultants do not manage or deliver these services once implemented – this is taken on by the internal HR team.
Benefits and challenges of HR outsourcing
Creating a business case for HR outsourcing is an important initial step for any organisation considering such a move. 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 unsatisfactory or would benefit from improvements? By probing such issues, HR can focus on the scale and type of changes that may be required, to help decide whether HR outsourcing might be an appropriate response (as opposed to the types of alternatives detailed above).
A number of potential benefits and challenges are associated with HR outsourcing.
When organisations put forward a business case for HR outsourcing, a number of potential benefits are frequently cited. In practice, these benefits are not necessarily mutually exclusive while conversely a number could be achieved through some alternative solution rather than via outsourcing. Commonly mentioned benefits include:
access to improved HR IT systems without capital outlay
improved people management information (including human capital metrics)
access to HR expertise that is not available internally
increased flexibility and speed of response to HR problems
ability to support or fit well with an overall strategy (for example where 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
capacity for HR to operate more strategically.
There are also a number of potential challenges and considerations that it is useful to bear in mind when considering outsourcing, including the following:
‘Don’t outsource what you don’t understand’ - the outsourcing provider will only have to subsequently solve the problem (at a cost) and the provider’s solution might not be most suitable from the 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 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 crucial 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 the preferences of the outsourcing provider rather than the organisation.
Fragmentation of the service provided meaning 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 rationale for outsourcing services may change as the business environment changes, and there are instances of services being brought back in-house.
In our Changing HR operating models report, various experts including Dave Ulrich, discussed the changing nature of HR operating models. Most agreed that while the Ulrich model can be a useful starting point, there is clearly not one model for delivering HR that is suited to all organisations. How an organisation should structure its HR should be based upon its organisational strategy, wider organisational structure and the current needs the organisation it is supporting.
Selecting a provider and managing the transition
Selecting a provider for HR outsourcing
A number of actions and decisions must be taken when selecting a suitable HR outsourcing provider – many of which will be similar to those undertaken when entering into any contractual arrangement with a third party. For example:
Understanding the existing HR service provision including the cost base, responsibilities and level of service - as these will all provide useful baseline information when comparing provider offerings and costs.
Understanding the organisation’s own future requirements, for example in terms of level and type of service.
Establishing a shortlist of preferred suppliers.
Communicating with other organisations with which the outsourcing providers currently have contracts, to establish how satisfied they are with the providers.
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 that normally takes responsibility for 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 acceptable and unacceptable ranges) to be included as part of any service level agreement.
Ensuring a clear ‘statement of work’ is produced that clearly sets out the responsibilities of the service provider.
Defining a clear governance process, so that the impact on the outsourced service is considered when any internal decisions are made and there is a clear decision making process with the outsourcer where required.
Managing the transition to HR outsourcing
When managing the transition from in-house to third-party service, many considerations will be similar to those required when managing any large-scale organisational change. See our factsheet on change management.
In addition, an outsourcing arrangement will often include significant changes to HR processes, in a few cases including HR self-service systems and/or 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 ongoing leadership and strategic direction.
Clarity over who is accountable for resolving problems during the transition is another important consideration - is it the outsource provider or the outsourcing organisation? The outsourcing organisation’s HR management cannot simply delegate to the 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 minimised. An open dialogue is needed between the outsourcing company and the provider.
Finally it is possible that a number of changes may be required to the roles and skill sets 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 processes 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.
INCOMES DATA SERVICES. (2011) Outsourcing HR. HR Studies. London: IDS.
SCOTT-JACKSON, W., NEWHAM, T. and GURNEY, M. (2005) HR outsourcing: the key decisions. Executive briefing. London: Chartered Institute of Personnel and Development.
GLAISTER, A. (2014) HR outsourcing: the impact on HR role, competency development and relationships. Human Resource Management Journal. Vol 24, No 2, April. pp211-226.
MCIVOR, R. and MCCRACKEN, M. (2013) Transforming the HR function through outsourced shared services insights from the public sector. International Journal of Human Resource Management. Vol 24, No 8, April. pp1685-1707.
REICHEL, A. and LAZAROVA, M. (2013) The effects of outsourcing and devolvement on the strategic position of HR departments. Human Resource Management. Vol 52, No 6, November/December. pp923-946.
ROPER, J. (2016) HR's hokey-kokey. Human Resources. March. pp26-31.
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This factsheet was last updated by CIPD staff.
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