The Essentials Series: HR Outsourcing for SMBs | Article Series

The Essentials Series: HR Outsourcing for SMBs
by Crystal Rast
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	Article 1: The Business Drivers for Outsourcing Human Resources
	Article 2: Risks and Realities of Outsourcing Human Resources
	Article 3: Successful HR Outsourcing Strategies
	Complete Series (ZIP file)

Synopsis

Since the early 1990s, companies have implemented outsourcing strategies to leverage intellectual capital, decrease fixed costs, and employ a flexible labor source; however, over the past seven years, attention has shifted from outsourcing technology processes to outsourcing business processes. Initially offering transactional, task-oriented services such as payroll, human resources outsourcing companies are now providing services of greater business value in the form of training, employee selection and retention, and strategic planning. Human resources outsourcing is still a relatively new concept for many organizations, resulting in a number of perceived and actual risks; however, if these risks are understood and addressed early on, it can lead to a successful, strategic relationship between the service provider and client. From this Essentials Series by renowned business strategist Crystal Rast, readers will learn about the factors driving companies toward a human resources outsourcing model, the risks and advantages of outsourcing human resources functions and processes, and the approaches available for mitigating risk and ensuring a mutually successful partnership.

Article 1: The Business Drivers for Outsourcing Human Resources

In the late 90s, unemployment was low, and the demand for technologically savvy employees was booming. Suddenly, experience counted for less, and knowledge of Internet technologies and software drove hiring decisions. This trend continued until the post 9/11 recession, aka DotBomb, which increased the supply of unemployed workers.

Outsourcing, and even offshoring, had been a popular model, but companies faced with a skilled, affordable labor market and the need to tighten the corporate belt began pulling projects in-house. Then came the rise of enterprise resource planning (ERP) software. Demand for ERP consultants, particularly those with strong communications skills, skyrocketed as companies clamored for people to help them roll out their new software and understand how to use the data they were now receiving to make better business decisions: An unexpected benefit of ERP software was that executives were enabled to see how each of their lines of business (LOB) fed into one another, and the practice of finance and accounting outsourcing (FAO) and HRO were a logical next step. Payroll, a function often handled through HRO, ties in closely with financial decision-making, which is often managed via FAO. Once companies had outsourced one service, they became increasingly interested in outsourcing another.

Article 2: Risks and Realities of Outsourcing Human Resources

Human resources outsourcing (HRO) is still a relatively new concept. As such, there exists some trepidation against outsourcing, with a common fear being a loss of control, particularly when it comes to releasing sensitive employee information to a third party. Based upon research, however, the risks associated with HRO are not loss of confidential employee information or reduction/dilution in intellectual capital from engaging with an outside party for internal resources. In fact, the most common downside of HRO has occurred in terms of failure of the organization’s internal, retained HR executives to contribute as "change agents" or strategic business personnel—which was part of the purpose of outsourcing in the first place. This consequence is most commonly realized by midsize businesses that choose to outsource transactional and traditional functions for the purpose of moving key HR personnel further up the value chain.

A second risk of HRO results from a lack of understanding between the outsourcing provider and the client. For example, in "Making the Decision to Outsource Human Resources," Jean Woodall et al. noted, "Very few respondents admitted that they had a good understanding of the cost of delivery of their HR service to the rest of the business, and only [one company] felt confident that they were aware of this prior to outsourcing. Yet, paradoxically, a good understanding of the cost of the HR function was a necessary prerequisite for successful outsourcing, as well as being a desired outcome." Although it seems obvious that a company would understand the cost of and value delivered by its personnel prior to considering outsourcing, findings have shown that typically the cost considered was solely that of employee overhead rather than additional costs savings in terms of in-house HR information system (HRIS), project management, and more.

Article 3: Successful HR Outsourcing Strategies

It is impossible to determine whether value is being delivered by an outsourcing partner without first understanding the value delivered by internal resources. For this reason, companies must pay close attention to the full costs of and value delivered by their current operations. The most common factor for determining value of human resources (HR) departments is by examining headcount. By reducing headcount but maintaining productivity (a sign of increased efficiency), companies are able to exact greater value from their employees. However, there are additional factors to consider, such as attrition levels, employee morale, reduced litigation, and reductions in time-to-hire. Without understanding these factors, companies are unable to properly baseline in-house operations prior to shifting functions externally. Companies also need to factor in the expense of building and supporting in-house technology platforms and 24/7 benefits administration portals when considering whether to keep functions in-house or outsource them.

In looking at these factors, Linda Merritt, AT&T HR strategic planning director, states, "I advise people to think about not what you want on Day One but what do you want in Year Four, Year Five, Year Six-and think about how you're structuring the deal that will allow that to evolve or develop over time." Echoing her advice, Robert Brown, Gartner analyst, remarks, "Before companies seek bids, they should quantify their current service levels and costs" (qtd. in Henneman). These quantifications are essential to understanding how to structure outsourcing deals to ensure that companies are not disappointed in subsequent years.