Hr Outsourcing – Balancing the Value Equation

Whether for specific processes, or across the fullThe quickest way to cost reduction might be a
range of Human Resources (HR) activities, outsourcing‘lift-and-shift’ of the current HR delivery model,
is a proven and viable strategy to increase thebut this is unlikely to maximise the long term cost
performance of the HR Function.  However, there isreduction opportunity and will do little to address any
no single formula that applies to all organisations; HRfundamental HR service issues.  Transformation of
Outsourcing (HRO) is being used to address varyingthe service model provides an opportunity to gain
strategic objectives and its scope will differ in terms ofadditional efficiency savings and also improve the
HR processes and geographies involved. quality and timeliness of HR services.
Organisations need a framework to help themGlobal and multi-national organisations will also need to
consider the value of HRO to their organisation andconsider how to service the ‘long tail’ of
their specific circumstances.countries where there are relatively few employees
The HRO Value Equationand hence insufficient scale of HR activity to drive a
Traditionally, business processing outsourcing is seenfinancial case for outsourcing.  One approach is to
as a means of driving efficiency through costoutsource global, common HR processes that can be
reduction.  Whilst the financial business case isdelivered from a centralised off-shore location and to
important and should always be understood, forwardretain local HR processes where there is less scale
thinking organisations will consider other factors, inand more local content.  A hybrid HR Service Model
addition to cost reduction, when evaluating andsuch as this might see all countries served by
designing HRO solutions.  HRO value can becentralised and outsourced HR Data Management and
considered to be a function of a number of interrelatedPerformance Management Administration and
factors.  Different organisations will have differentInternational Assignment services, with other services
drivers and choices for each of these factors, resultingsuch as Payroll and Benefits Administration being
in different HRO value propositions.  We can refer toretained for countries with fewer employees and
this wider view as “Balancing the HRO Valueoutsourced only for larger populations.
Equation” to provide the specific HRO valueBusiness Flexibility
proposition that is right for your organisation.Moving to outsourced HR delivery can turn relatively
fixed HR costs into variable costs that can scale with
Figure 1 - The HRO Value Equationbusiness changes such as acquisitions, divestitures,
Figure 1 sets out the HRO Value Equation as agrowth in new markets and contraction in times of
function of Cost Reduction, the HR Service Model,economic downturn.  In addition, the use of an
Business Flexibility, and the Retained HR Organisation.outsourcing partner can provide access to a larger
 Organisations can use this framework to developtalent pool to enable faster and lower risk delivery of
and assess the benefits side of a business case forkey HR initiatives such as the introduction of new
HR Outsourcing, but also need to recognise that thesebenefits programmes, or compliance with changing
elements are interrelated, for example, the size of thelegislative and regulatory requirements.
Retained HR organisation will influence the overall CostThe degree of individual process flexibility is also
Reduction opportunity.influenced by the nature of the HRO service
Cost Reductionprovider’s solution; a utility (one solution for many
Cost Reduction will almost certainly be a key factorclients) payroll platform will suit most organisations, but
for HRO and is generally delivered via labour arbitrageplans to introduce a flexible benefits programme could
when moving HR work to lower cost locations.  HRObe constrained if this is not offered by the HRO
should also provide efficiency savings through theservice provider.
aggregation and consolidation of work into fewerPlanning for the right degree of flexibility in an HRO
locations using specialised delivery resources.  Indeedarrangement is an important element of the overall
most HRO solutions have some elements of workvalue proposition and the need for such flexibility needs
that cannot be easily moved out of the home countryto be accounted for in contractual arrangements with
and so aggregation becomes an important source ofthe HRO service provider.
labour cost saving.Retained HR
Though less often included as hard savings in aEstablishing the right retained HR Organisation is a
business case, HR costs opportunities can also gocritical success factor for successful HRO, whilst
beyond the HR Function and into the wider businessresponsibility for specific HR services may move to an
when HRO provides an improved HR Service Modeloutsourcer, the client organisation must remain
and a more effective Retained HR organisation, e.g.accountable for the HR Function.  The challenge is to
through more effective recruiting, reduced attrition andput in place a retained organisation which can govern
more efficient Manager-Employee interaction.the outsourcing relationship using an arms-length
Organisations need to be realistic when estimating theservice management approach and which does not
degree of cost reduction that can be achieved; thisrevert to previous practices and detailed involvement in
requires a detailed understanding of the current HRHR service delivery as doing so will undermine the
baseline and the extent of the work that anvalue of using an HRO service provider. 
outsourcing service provider will take on, and also thatThe retained HR organisation needs to recognise that
work which will be retained. HR services have transferred and then focus on more
HR Service Modelstrategic support for the business, for example,
The first consideration has to be what to outsourceplanning the skills profiles required to support overall
and to whom?   For some it will be aboutbusiness strategy, managing and developing talent,
outsourcing single or specific processes to specialisedsupporting the business in deploying key HR initiatives
suppliers, e.g. for Payroll, HR Data Management,etc.
Benefits Administration, or Recruitment.  For others aRealising the benefits of a more strategic role for HR,
full-scope outsourcing to a single generalist supplier willtogether with the need for new HRO governance
be the right model.  Part of this consideration needs toactivity is very likely to require the acquisition and
take account of the extent of HR processdevelopment of new skills in the retained HR
standardisation and the how technology can be usedorganisation.
to transform HR services.