role of the HR professional has changed beyond recognition in the latter part
of the 20th Century. Here we chart the way modern HR functions have evolved to
allow outsourcing to come to the fore
Over the last 30 years the HR function has evolved from being a manager of
personnel and employee information, to a department which has responsibility
for everything from standard and essential procedures such as payroll, to
complex, key strategic elements such as top management development. These tasks
have different elements, require different kinds of management, and have
varying levels of impact on the organisation. This evolution is shown in table
1, Change in HR functions.
At the same time, internal and external forces are moving HR towards a more
strategic role in the organisation. The HR function needs to become a strategic
player – to take a proactive role in planning what skills are needed, in thinking
about how best to use existing resources, and in ensuring top management
At the same time, along with other functions, HR needs to carefully manage
its cost base and ensure it provides excellent service to its customers – both
managers and employees. As Dave Ulrich, professor of business administration at
the University of Michigan, wrote in the Harvard Business Review,
(January-February 1998) "This new agenda for HR is a radical departure
from the status quo. In most companies today HR is sanctioned mainly to play
policy police and regulatory watchdog… the activities of HR appear to be, and
often are, disconnected from the real work of the organisation. The new agenda,
however, would mean that every one of HR’s activities would in some concrete
way help the company better serve its customers or otherwise increase
There are five key forces driving this change.
Force 1: Scarcity of talent
The best companies are differentiated by their talent. At companies that perform
in the top quintile of returns to shareholders, 61 per cent of top executives
strongly agree that their talent pool is much stronger than their competitors’.
In mid-quintile performing companies, only 38 per cent of executives agree with
the same statement. Yet even at top performing companies, nearly three-quarters
of managers believe that their talent is either insufficient or chronically
short of where it should be to seize available opportunities.
Changing demographics mean that the availability of European management
talent in the key age zone of 30-to-44-year-olds will decline over the next 20
years (McKinsey War for Talent research, 1998) . In addition, changing forms of
competition and increasing job mobility mean that top management talent,
already scarce, is simply becoming scarcer. This shortage applies both to
general management, and to the management of the HR function.
To rescue companies from this talent trap, the HR function needs to be proactive
in supporting senior management in their attempts to attract, develop and
retain top talent, and in improving the leverage of existing talent. But this
is not yet happening. While 78 per cent of corporate officers strongly agree
that HR should fulfil this function, only 27 per cent actually believe HR
performs this role now.
Force 2: HR has become a dumping ground of activities
A key reason for this gap between expectations and reality is the
time-consuming nature of the more standard procedures senior HR management
needs to oversee. HR staff spend up to 85 per cent of their time on supervising
standard processes such as compensation administration, but only 15 per cent on
strategic activities such as career planning. In best practice HR organisations,
these figures are almost reversed. Only 20 per cent of time is spent on
supervising standard procedures, and the remainder is spent on the execution of
more strategic activities.
To perform their role adequately as a key player in the organisation, senior
HR managers must spend the bulk of their time on the core goal of attracting,
developing, and retaining top talent for the company. As Russell Eisenstat,
author of Organisational Dynamics (1996) writes, "The fundamental
challenge facing HR [is] how to contribute to competitive success through
improving the organisation and management of a firm’s human resources."
Force 3: Cost pressures
As competition has become global, rather than local, and the capital markets
in the US and Western Europe have facilitated the rise of small and
medium-sized companies able to challenge established players at their own game,
the pressures on large companies to reduce costs and keep reducing them have
intensified. Research by the Conference Board in 1999 shows approximately 80
per cent of all companies targeted their overhead functions, including HR, for
cost reduction during the 1990s.
A spate of mergers and acquisitions has also put pressure on companies to
reduce costs through synergistic benefits. HR needs to be at the forefront of
this activity, reducing its own costs, participating in the due diligence
period, and facilitating post-merger integration in other areas of the
HR costs are an appreciable proportion of a company’s cost base, typically 4.5-7.5
per cent of overheads. However, HR in many organisations still has some way to
go to become completely competitive on cost. Although best practice HR
organisations approach dictates one full-time HR employee for every 300 staff
members, for ex- ample, very few firms are close to this goal. For HR to fully
contribute to competitive advantage, continuous improvement on cost reduction
must be a core goal.
Force 4: Improved service requirement
Companies are also demanding more customer focus from their internal
services. Of 314 companies in the process of redesigning their HR function,
more than 40 per cent indicated that a key goal of the reorganisation was to
make HR more responsive to the needs of the company or more able to add value
to the organisation. The HR function must be constantly looking for ways to
improve the services it offers to employees and management, while operating
under cost constraints.
Research by the Saratoga Institute suggests line managers are generally
dissatisfied with HR service levels. Line managers were asked to rank the key
HR processes in levels of strategic importance and value it against HR
effectiveness. The results are shown in Table 2, Balance between HR
effectiveness and its strategic importance.
The mean performance score was 3.7 out of 7, or "satisfactory",
indicating that HR needs to improve its service offering. In particular,
resourcing, and training and development, are perceived to be "very
important" to business strategy, yet have low ratings for HR performance.
This finding could be a consequence of HR resources being spread too thinly, or
a result of HR being focused on other areas. This lack of congruity needs to be
Force 5: Influence of technology
Internet and intranet technologies are enabling companies to improve
information flows both externally and internally. Internet technology is
revolutionising the human resources department by changing the nature of HR
processes, delivering improved customer service by giving employees access to
and control over their information, and dramatically reducing costs and cycle
times. However, research in 2001 has shown that investment in Enterprise
Resource Planning (ERP) and large HR information systems have not delivered the
expected payback. Broad functionality has been paid for but very rarely
utilised. HR departments will need companies such as Xchanging to realise the
value of technology.
An HR intranet dramatically changes the nature of work for an HR
professional. Rather than spending a significant amount of time moving and
approving paper forms, an HR professional may focus on the higher value-added
parts of human resources. For instance, an HR Intranet can integrate employee
information management, career development, and performance management for
current employees, and recruitment for new employees.
Wide dissemination of external recruiting information can create a large
pool of potential candidates while rapid online response reduces recruiting
cycles significantly – and speed is crucial in the "talent war." This
integrated internal and external recruiting approach is key to managing rapid
human resources growth. Cisco Systems is a prime example of online recruiting,
with 66 per cent of employees hired via Internet recruiting in 2001. By giving access
to and control over information, an HR Intranet delivers enhanced customer
service to employee hired via Net recruiting.
An HR intranet typically holds information relevant to employees, including
general information (contact details, title, compensation, holidays, etc.),
benefits information (health, pension, car, etc.), career planning and
evaluation, and recruiting details. In short, it contains all information
relevant to employees, as well as discussion groups and communities that can
enhance employee relationships. Employees are empowered to access and manage
Giving employees control over information significantly reduces operating
costs and cycle times for the HR department. HR professionals formerly burdened
by processing changes can focus on higher value-added processes.
Instead of spending hours or days processing changes in benefits enrolments
for every employee, an HR Intranet puts the responsibility in the employees’
hands to manage this enrolment. In addition to reducing errors, it greatly
reduces cycle times by making a formerly parallel process simultaneous.
The HR professional can then spend more time selecting the appropriate
benefits provider or negotiating a more favourable agreement.
The top five tips for implementing HR outsourcing
– Ensure access to the Board. A
service provider needs clear access to the Board, to best understand the
business drivers and strategy.
– Focus on long-term strategy. Many issues can be resolved in
the short term, for example, updating a staff handbook. However, an
organisation also needs to commit to building a long-term relationship and
strategy with an outsourcing provider as business direction will inevitably
change over time and the outsourcing provider will need to adapt to and support
– Recognise and understand the cost of investing in HR.
Organisations should not expect an immediate monetary return on investment. A
longer-term investment outlook is necessary to see the benefits both of the
cost invested as well as the costs avoided (e.g. avoidance of going through an
– Be honest. An organisation needs to be honest with itself,
its service provider and its staff about the issues it is facing
– Communicate the changes to all the staff
Other reasons for outsourcing HR
– High turnover of HR staff
– No HR function/support needed at certain levels
– To take the risk away
– Take advantage of leading technologies
Outsourcing Service Providers deliver
a consistent service. Companies do not
need to worry about issues such as HR staff turnover.
Outsourcing is a viable alternative to recruitment. For companies who are missing a certain
level of HR personnel in their team (e.g. an administrator or director), the
role can be outsourced to a service provider as an alternative to recruiting a
person to do the job in-house.
When outsourcing HR to a service provider, the risk of
inconsistent advice and lack of knowledge become the responsibility of the
service provider. The service provider
is fully accountable for any advice given to the client.
Outsourcing service providers often provide state of the art
technology to support their clients, for example web-enabled packages,
intranet-based access to personal records, on-line facilities to request
holidays and copy payslips.
at a crossroads
HR managers are overwhelmed with the
need to manage a vast array of tasks, all with different core skills, staff
needs, and management requirements. Senior HR managers need to be increasingly
focused on the key issue of talent management while also ensuring execution,
improving customer service and reducing costs. This is a challenging task.
The separation of utility services from the strategic
challenges of HR has one key benefit. It creates a model that enables HR
Managers to focus, and to make the best use of scarce HR management talent.
Strategic and utility tasks require very different employee
skills, and very different styles of management. Utility tasks require
supervisory management to ensure that established procedures are followed and
that essential services are consistently provided.
Staff performing utility tasks need clear guidelines and
procedures, but should also be empowered to take the initiative to improve
these processes where possible, within given limits. Strategic management tasks
require individuals with creative skills, who should be allowed to manage their
own activities, and should be encouraged to take risks to improve what they do.
Separating these two staff groups is thus key to providing best practice in HR.
The future of outsourcing HR
HR outsourcing is top of the agenda
at many organisations. However, it is still early days and likely developments
– More organisations will take the decision to outsource in
their HR function
– HR outsourcing will become increasingly strategic
– The HR professional’s skill set will adapt to become more
project and change management based
– Globalisation will increase the need for outsourcing service
providers to offer an international service
– Technology will enable more solutions such as the continued
migration towards managed services
– New service offerings will be driven by employee influence