An overview of HR outsourcing, its use within organisations and its alternatives
Organisations use shared services as a way of organising their HR activities, typically concentrating administrative activities into a centralised and commonly shared function. The shared service model can help businesses reduce costs, avoid duplication of effort, and allow a greater focus on HR strategy. Often shared services are seen as part of Ulrich’s three-legged model, supporting strategic business partners and centres of expertise in HR.
This factsheet outlines how shared services work and the benefits of introducing them in an organisation. It takes a closer look at the typical tier structures and provides guidance on how to plan for and implement shared services across an organisation. Finally it highlights some considerations for HR when implementing shared services.
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Shared services is one of the models that organisations can adopt to deliver their HR, but organisations may choose to adopt this model in different ways. The adoption of HR shared services may realise a number of benefits including increased efficiencies in the handling of routine HR administrative processes and potentially higher value services such as workforce planning or analytics. Such arrangements may be introduced as part of a wider change (sometimes including an overseas element) and/or process of HR transformation.
When contemplating a move to shared services, how key aspects of the change management process are handled, is important, including the decision-making process over which staff will be located in the shared services, how their career progression will be managed and which type of training provision is required.
It’s essential to put in place robust measures of performance to ensure the delivery of efficient and high-quality HR services. Finally, implementing shared services requires HR to change its mindset about how it views employees and line managers, treating them both as ‘customers’ of the services delivered.
What are HR shared services?
HR shared services are a way of organising activities within a wider HR operating model. The term tends to refer to the concentration of administrative HR activities into a centralised, commonly shared, function. The origins of shared services can be attributed to finance, but there are many different models of providing corporate services that are required across an organisation (or sometimes, across several partner organisations) for individual functions, for example, just HR, or across multiple services for example, finance, IT and HR.
The different models of HR shared services can be defined by their ‘sourcing’ and ‘shoring’ design, that is whether they are resourced internally - ‘in-sourced’, or externally - ‘out-sourced’, or whether they are located ‘on-shore’ or ‘off-shore’.
Within organisations there are also options around whether the service is provided to multiple business units and, for multinational organisations, how many countries are within the scope of the services provided. HR shared services are mainly found in large organisations.
Why introduce HR shared services?
Traditionally, the benefits realised by the use of HR shared services include:
Reducing costs and avoiding duplication of effort - achieving economies of scale and eliminating duplicated effort can streamline and simplify services, also reducing costs. For example, the potential to exploit common buying power from shared services for example, training and development providers. Cheaper relative wage costs are also a factor contributing to the establishment of shared services in certain offshore locations (for example, the Indian sub-continent and Eastern Europe).
Improving quality of service to customers - the use of more efficient processes can deliver greater consistency, and more timely and accurate information and advice to the service centre's ‘customers’ (for instance, individual employees or line managers). With the increasing requirements for organisations to fully understand, measure and manage their human capital, such improvements in information availability are of increasing importance. For more information on the measurement and management of human capital, see our factsheets on human capital and HR analytics.
Greater HR focus on strategy - greater structural flexibility, improving organisational learning, and freeing up HR from the more day-to-day routine enquiries are seen as an important levers for re-positioning the contribution of HR as a business-driven function, focused on its strategic role in facilitating and supporting organisational change. More information on strategic HRM is available in our factsheet.
Shared know-how - a centralised provision facilitates the pooling of knowledge about what works across different parts of the organisation and different geographical regions, and the sharing of insight about customers and markets.
As a precursor to outsourcing – it might become easier to argue the business case for outsourcing when it is possible to clearly demonstrate initially the maximum efficiencies that can be achieved internally by the adoption of shared services. For more information, see our factsheet on HR outsourcing.
As a possible profit centre – organisations sometimes actively seek to become a shared service provider for other third party organisations. In this way they can potentially take advantage of their own shared services expertise and /or any spare capacity within their own service.
Coverage and operation of HR shared services
Scope of services
HR shared services typically provide routine administration of HR processes such as recruitment, new starters, payroll, the administration of changes to roles/contracts, process time in organisations where relevant, administration of leavers and absences and/or L&D procurement, although the exact nature of the services will vary between employers. In some organisations, a shared service might provide services ranging from lower-level administrative duties to supplying specialist HR information and advice on HR policy and practice.
Some organisations using HR shared services to drive value might also include more strategic services such as workforce planning. The increasingly important role of analytics in HR could also see a greater role for shared service teams who have extensive access to HR data.
HR shared services are typically organised around a number of ‘Tiers’:
- Tier 0 is typically a HR portal/intranet where employees and line managers can ‘self-serve’.
- Tier 1 is a contact centre where employees and managers can access the services provided via email or telephone.
- Tier 2 would have teams typically aligned to specialisms such as recruitment, performance management, payroll and benefits, administration etc.
- Some organisations have a Tier 3 ‘process owner’ who has overall responsibility for a particular process area and can be a final point of escalation. In organisations that have chosen to outsource their shared services, the Tier 3 ‘process owner’ will typically be internal and the model will include people focused on vendor management.
The introduction of shared services is frequently just one element of a wider change to the way that HR operates and is structured. One driving force is the ‘three-legged model’ of the HR function, developed by US business academic Dave Ulrich, based on the deployment of higher-level strategic ‘business partners’ and centres of expertise in HR, backed up by shared services to carry out more routine HR administrative duties. See more on the Ulrich model in our factsheet on HR business partnering.
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.
The decision to implement shared services is often as part of a wider restructure of HR; it’s also often accompanied by the implementation of new technology which typically enables self-service by employees and managers and often centralised or integrated HR systems that hold HR data.
To enable the smooth running of the shared services, customer relationship management technologies will also often be deployed. These keep a record of the customers’ (employees and line managers) interactions with the service to ensure a quality service is provided.
The shared service is typically measured through the use of service level agreements (SLAs), particularly when the service is outsourced to a third party. These SLAs are defined and agreed measures that are reported on regularly to ensure that the quality of service remains at the level required. These are often embedded into a contract and penalties can be applied if the SLAs are not met over a period of time.
Planning for and implementing HR shared services
Some specific components for successful implementation of a shared HR services include:
Clear objectives and a view on how its success will be measured.
Explore options for the structure. Establish the model best suited to the organisation. Multinational organisations, for example, need to decide whether the shared service is most effectively delivered through a number of centres based on business groups and /or regions or through a global shared service.
Specify the scale of capital and the nature of the resources required to get the right technology and organisational infrastructure in place – taking care not to underestimate.
Leadership sponsorship is important for managing the change that will impact the rest of the organisation as well as for those moving into the shared services.
Project teams with the required capabilities to design, deliver and run the shared services. Ensure there is broad agreement about the role, scope and accountability of the centre and the resources required for delivery. Process owners and also HR business partners have been identified as resources critical to a successful implementation.
Review and redevelop HR processes. Simply pulling processes together in a central hub in itself is unlikely to deliver a more streamlined, customer-driven service. Moving to a shared service provision requires a fundamental re-engineering of HR processes.
Clarify the role, responsibilities and accountabilities of the HR shared service between administrative and more value added services.
Piloting and phasing the transfer of activities can help to keep up the momentum for change, minimise disruption to the business and identify early problems. This is also a key opportunity to validate existing data before transferring to the new system.
Recruitment and training. The skill set required will depend on the range and level of roles in the centre, for example customer service and call handling are often seen as the minimum requirement for routine administration. Where the centre provides more specialist services, sound HR knowledge is clearly also essential.
Communication and involvement before and during the implementation both play a key part in:
- gaining support for the HR shared service, especially from line managers and HR staff
- informing customers of the services available from the service centre and encouraging them to use it. It is important that this is ongoing so that those new to the organisation know what services are provided from the shared service.
Ongoing knowledge development. The quality of the services provided will be directly related to the quality of the information it receives from the rest of the organisation on the policies and processes. It is quite likely that there will be unexpected demands for information or clarification, so setting in place channels for ongoing communication and training are an important consideration in the period after the initial implementation.
A number of more general change management issues need to be considered when implementing any major change initiative within an organisation.
Issues in HR shared services management
Career paths. Transferring HR activities to shared services can have knock-on effects on existing career paths. Involving staff in the design of the service and being explicit about career development and opportunities can help to prevent some of the resistance that may arise in transferring some HR activities to shared services. While some organisations have opted to keep their HR service centre separate from the wider HR function, others have encouraged those wishing to develop a career in HR to acquire wide-ranging HR knowledge in the centre through, for example, rotating around different business streams, and then moving to line or specialist roles in HR or elsewhere in the organisation. For many, HR shared services is emerging as a new area of specialism.
Skill requirements. In addition to the need to re-define career paths, the skill requirements must also be clearly defined. Traditional HR skills will be supplemented by requirements for project management ability, contracting skills and an aptitude for customer service, which may not previously have been in the domain of HR professionals.
Job design. It is important to maintain a level of skill and variety in the design of the jobs in the shared services, particularly if people working in the service centre have previously undertaken a wide range of tasks. Read our factsheet on job design.
Maintaining close relationships with the business. Shared service delivery can result in fewer opportunities for face-to-face contact and more remote relationships with the business. It is critical to ensure opportunities for fostering close relations with the business are built into the management of the shared services and wider HR.
The ‘them and us’ attitude. It's important to try to build a cohesive relationship between the shared services and other parts of HR to develop a ‘one HR’ team mentality.
HOLLY, N. (2010) HR models: lessons from best practice. Henley: Henley Business School.
INCOMES DATA SERVICES. (2009) HR service centres. HR studies. London: IDS.
HOWCROFT, D. and RICHARDSON, H. (2012) The back office goes global: exploring connections and contradictions in shared service centres. Work, Employment and Society. Vol 26, No 1, February. pp111-127.
McIVOR, R. and McCRAKEN, M. (013) 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.
MEIJERINK, J., BONDAROUK, T. and LOOISE, J.K. (2013) Value creation through HR shared services: towards a conceptual framework. Personnel Review. Vol 42, No 2. pp154-175.
ULRICH, D. and GROCHOWSKI, J. (2012) From shared services to professional services. Strategic HR Review. Vol 11, No 3. pp136-142.
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This factsheet was last updated by CIPD staff.
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