Tough economic climate can’t stop the trend for outsourcing

The outsourcing market looks set to rise to £50bn this year
as more organisations enlist outside bodies to take on HR functions. But
experts warn contracts must not be seen as a panacea. Ben Willmott reports

The HR outsourcing market in both the private and public sector is set to go
from strength to strength, despite the increasing threat of a major recession
since the US terrorist attacks.

It has been estimated that the value of the outsourced services market has
increased to £50bn this year and this is set to expand further following the
Government’s pledge to increase the private sector’s involvement in the
delivery of public services.

Over the past 12 months, major HR outsourcing deals in the public sector
have included a £205m deal between Blackburn and Darwen Council and Capita and
a £300m public-private partnership between Liverpool City Council and BT.

HR outsourcing deals in the private sector include a £50m contract between
Nortel Networks and Pricewaterhouse Coopers and £100m agreements between BAE
Systems and Xchanging and BT and Accenture.

Andrew Buggy, business development manager for HR partnerships solutions at
Capita, believes outsourcing will become increasingly attractive as
organisations seek to cut administration costs.

"Increasingly HR directors are looking to service partners to provide
complete solutions for a genuinely fully integrated HR/payroll system allowing
them to focus on delivering their business plans," he said.

"Capita is seeing a much higher level of activity in the HR outsourcing
market across both the public and private sectors.

"This activity is certainly set to continue, with new HR managed
service models continuing to emerge and organisations increasingly looking to
adopt service strategies supported by e-HR technology."

Buggy thinks that companies that are looking to introduce the latest
technology to carry out the more basic HR functions are increasingly likely to
choose an outsource provider.

He said, "Many organisations are rightly questioning whether they want
to go through a lengthy system procurement, take on the risk around system
implementation and use a lot of resources to concentrate on the transactional
activities such as recruitment administration and payroll when they would
rather concentrate on organisational strategy."

Jane Hawkins, of outsourcing specialists PricewaterhouseCoopers, agrees that
the recession will encourage more companies to contract out part of their HR
function.

She said, "I think it is likely because of the cost of trying to do
everything in-house. It is about economies of scale, it allows organisations to
invest in state-of-the-art technology, which probably could not be justified by
a single organisation.

"It also gives HR people more of an opportunity to develop some sort of
career path. It helps them make a difference rather spending their time on the
more mundane aspects of personnel."

But Hawkins stresses that outsourcing should not be seen as a panacea and
partnerships must be thought through carefully or they could end up being
counter-productive. "Many organisations are considering outsourcing, not
only the public sector.

"In our opinion, however, it is one of a range of options that might be
considered, for example the introduction of a new HR technology platform or a
move to a shared service centre.

"The decision to move to outsourcing is a journey requiring
considerable deliberation and careful planning, rather than a knee-jerk
reaction.

"Any outsourcing of a function requires careful planning, and if done
well it delivers the anticipated benefits. If done badly it is of no benefit to
anyone. This applies to any organisation, public or private.

Brett Walsh, partner at Andersen and head of the UK human capital practice,
told Personnel Today that he believes the outsourcing market will continue to
expand as economic conditions become tougher.

"Despite a 40 per cent increase in technology spending since 1998, HR
costs for the average company have risen by 16 per cent. With the current
economic downturn, organisations are looking keenly at the potential for cost
savings of 20 to 40 per cent of cost base from outsourcing," he said.

The CIPD does not oppose the growth of HR outsourcing, but it urges
organisations to be very clear about what they want to achieve and to choose
their partner carefully.

Karen Giles, adviser on organisational development for the CIPD, said,
"There is no doubt that it is a growing activity, but it is still only a
small proportion of organisations that have outsourced their HR.

"The key thing about outsourcing the function is that you must be clear
why you are doing it and what your business objectives are. You must have the
resources to do it effectively and you must find the right partner.

"Outsourcing can be a positive thing. There is increasing pressure to
show what value the HR function is adding to the business.

"Outsourcing tends to take care of more routine HR activities such as
payroll and so can help HR departments to become more strategic."

Francesca Okosi, vice-president of Socpo, believes outsourcing has a role to
play providing it is restricted to providing the more basic HR transactions and
does not interfere with forming an organisation’s HR strategy.

She said, "I don’t have a problem with HR outsourcing on principle.
Some HR administration can be better served through an outsourcing partnership.
It can provide economies of scale and efficiency improvements.

"But I don’t think that you can outsource HR’s other function in terms
of organisational development and its strategic role.

"HR needs to be at the heart of an organisation, and I don’t think you
can do that on an ad hoc or consultancy basis."

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