End-to-end outs

Outsourcing HR has not produced the desired results and
companies are stalling on implementing programmes. But all that could change in
the coming year, says Caroline Horn 

When HR outsourcing mega-deals first started hitting the headlines three or
four years ago, the market anticipated that many more would follow. The new
contracts, termed ‘end-to-end’ HR outsourcing programmes, included Exult’s
£430m contract to outsource British Petroleum’s entire global human resources
function, and BAE Systems’ joint venture agreement with Xchanging, worth more
than £1bn, to manage its procurement, HR and other administration functions.

Such mega-deals are now valued at more than £5bn according to TPI, a
Houston, US-based outsourcing advisory firm, but the outsourcing market has not
performed quite as well as had been expected.

Gartner Dataquest reckons that by 2005, the worldwide outsourcing market
will be worth some £37bn, but this has been downgraded from an earlier forecast
of £42bn – and there are no guarantees that we are on track for the latest
forecast.

Philip Vernon, European partner at Mercer HR Consulting, says: "The
market has not grown or taken off in the way that people expected. It is still
in the early adopters stage – but it was there four years ago and the challenge
is, when does it cease to be at that stage?"

Outsourcing is nothing new to HR – payroll, pensions and recruitment have
been outsourced for years. But for many HR directors, the case for the
‘end-to-end’ outsourcing of HR departments has still to be made. Although a
number of such deals now exist, Howard Spode, director of HR outsourcing for
RebusHR UK, says: "A lot of people are standing back and waiting to see if
it works."

The new providers in outsourced HR have yet to demonstrate a successful
track record, says Vernon. "It will need one of them to say, ‘look what I
have done for organisation X, see what I have achieved across four countries,
and the cost savings have been Y’. When they can say that, they will have a
strong proposition."

Anthony Hesketh, lecturer in management at Lancaster University, points out
that the US is further down the line with outsourcing than Europe but even
there, the jury is still out.

"There are cases in America where HR has been outsourced and
streamlined, and there have been huge benefits. When it works it works well,
but maybe it will only work well in particular organisations."

There are a number of reasons why HR directors remain nervous of outsourcing
a significant part of their services, not least of which have been the teething
problems experienced in the early projects undertaken by the likes of BP, BAE
and Cable & Wireless. Given the history, HR directors must feel they would
be taking a huge personal risk in encouraging an organisation to outsource.

The risks, they say, are not just associated with the costs, although those
can be high in the initial stages of outsourcing. There is also concern within
HR departments about loss of control over HR services, the question of how
staff will react to using an outside provider, and anxieties over the removal
of in-house HR expertise. A company could also find itself handing staff over
to a third party with subsequent morale and legal issues.

Shell, which has been standardising its HR processes globally across all its
businesses, chose not to use an outside supplier to provide its shared
services. John Hofmeister, group HR director for Shell Group, says he remains
open to the idea of outsourcing and that the main reason for not doing so was a
business-driven decision (Shell Group wanted the savings that derived from that
standardisation to go directly to its shareholders).

There were other issues stemming from the relative youth of the market.
"I have not yet met an outsourcing operation that could meet our needs on
a regional, never mind a global, basis," he says.

But he also maintains that large-scale outsourcing has long-term risks.
"I’d worry that major outsourcing is a long term dilution of the HR
capability in a company that outsources it. I cannot see how a company that
outsources can sustain sufficient HR capability to handle, over the long-term,
the range of HR responsibilities within a company."

Removing administrative burdens from your HR department is one thing, says
Angela Baron, adviser for organisation and resourcing at CIPD, but there are
other HR activities, such as performance management systems, company culture
and managing change, that are more difficult to outsource as they impact on
HR’s broader role. "Some of that could also be outsourced, but how can HR
then make a success of strategic planning?" she asks.

The question of corporate culture and how well that is absorbed and
reflected by a supplier is another significant issue, says Baron. "HR
staff are strong communicators of company culture and if HR is outsourced to an
unsympathetic supplier there will be a clash."

A negative impact on company culture could have broad implications, says
Hofmeister. "HR has a huge impact on the culture of a company, and
ultimately, what differentiates one company from another is the strength of its
culture to create and deliver value to shareholders. If you outsource HR, you
lose that."

But while the question of outsourcing does raise genuine concerns in the HR
community, it is also suggested that by rejecting outsourcing, HR management is
simply protecting its territory. As one consultant put it, expecting HR to
happily adopt outsourcing ‘is like asking turkeys to vote for Christmas’.

This is because the likely result of outsourcing is a dramatic reduction in
the size of the HR department, and the requirement for very different business
skills on the part of the remaining HR team.

The argument about whether to outsource also depends on HR’s ability or
willingness to approach outsourcing from a broader perspective and to really
consider the business arguments for outsourcing.

BAE is a firm proponent of outsourcing and its HR agreement with Xchanging
is part of an ongoing pro-outsourcing policy. Chris Dixon, HR director of
Shared Services at BAE Systems, says there are clear business reasons for doing
so.

"We set ourselves a five-year target, and I believe that by the end of
this year [the second year] we will have substantially completed the
programme."

Having reached this stage, and with an accompanying 15 per cent reduction in
HR costs, the company is now looking for productivity improvements.

Dixon argues that it is the emotional argument – handing over the control
levers, and anxieties about staff reactions – that is preventing other
companies from benefiting from outsourcing, and he agrees that such issues are
harder to resolve.

He also warns: "Don’t kid yourself that by switching to an outsourcing
provider, they will give you everything you demand, or that your internal
activity will transform itself. This is as much about mindset as a physical
change programme, and you have to work at both."

Strategic focus

It is easy for companies to underestimate the changes required to make HR
more strategically focused, says Alan Bailey, head of business process
outsourcing at Xchanging HR Services. HR departments will be used to managing
resources, not to thinking about what services they want, and senior management
may not have been trained to think about strategy.

Bailey says: "HR directors might need senior coaching and training in
strategic issues – or a company might actually decide it needs a different
person to do that role."

To hone its in-house HR strategic skills, BAE is sending 70 of its top 100
senior HR specialists to the University of Michigan (UoM) to develop strategic
skills and knowledge.

Suppliers are working harder than ever to convince their audience of the
merits of outsourcing, and to show that they provide a good service and high
standards of technology, as well as proving the business case for outsourcing.
But given the market’s continued wariness, suppliers are also becoming more
flexible in their approach and with their product.

As Vernon points out: "It’s not all about the organisations with 25,000
employees, but those with 5,000 employees. There are a few providers operating
in that smaller market but the problem in both is to provide a business model
that works effectively for both client and provider. You need to drive the
business case for both organisations."

Xchanging appreciates that some companies will want to start small and grow,
and it is focusing on offering transactional services as well as an HR advisory
service. Oracle is another provider helping clients to outsource their business
systems side initially, and then encouraging them to consider other HR services
further down the line.

At this level, providers can offer many skills and resources that companies
might not have in-house. Sharon Douglas, HR director of outsourcing provider
Ceridian Centrefile, says: "Employers need to understand the true value of
outsourcing – it is not just about cost reduction but having access to world
class resources and knowledge."

Outsourcers can also offer reliability and predictability, coping with the
peaks and troughs in the business.

And far from having a negative effect on strategic development, she says
that outsourcing can play a crucial role. The starting point is to understand
the value of HR, says Douglas.

"What we have to do in the outsourcing business is to talk about
outsourcing at a strategic level – from the processes around recruitment to
performance management and training and reward."

Understanding how HR impacts on the bottom line will help organisations to
understand the benefits of outsourcing. Hesketh says: "Board rooms are
only just starting to look at the HR function and are starting to ask some very
serious questions about bottom line productivity from HR. That is making HR
more performance-oriented."

And, he adds: "Organisations that want to think seriously about added
value from HR, and whether they are getting a good return on their investment
from HR, should look at outsourcing."

Despite the difficulties experienced in the last few years, suppliers are,
on the whole, optimistic about the long-term trends in outsourcing. Bailey
suggests that a handful of FTSE 250 companies will embark on outsourcing
relationships this year. But by the latter end of next year, he predicts a
rapid rise in the number of organisations wanting to outsource.

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