Much of the potential for HR outsourcing still remains unfulfilled, according to research. Will that change once economic recovery and public spending cuts kick in? Guy Sheppard reports.
The promise of reduced costs and improved performance could have made the recession an ideal time for HR outsourcing (HRO) providers to attract business. But activity in the sector remained patchy, with potential clients often wary about committing to contracts.
Aaron Albury, director of HR transformation at accounting and consulting firm Deloitte, says previous downturns significantly boosted demand. In the latest one, he says, organisations have focused on cutting larger back-office costs such as IT and procurement, rather than HR.
According to John Willmott, managing director of outsourcing analyst NelsonHall, a decline in recruitment and training during the recession provides an alternative explanation for a lack of activity in the sector. He also believes there is a persistent scepticism about suppliers’ ability to deliver.
This stems from the first generation of contracts, when providers tried to take over HR operations in their existing form and subsequently discovered there was insufficient control over the cost base to make them pay. “The bigger picture on HRO is that people were asking questions as to whether the multi-process stuff really worked,” Willmott explains.
But there is evidence to suggest HRO will make inroads once economic recovery takes root. Last year’s Chartered Institute of Personnel and Development (CIPD) survey into HRO concluded that it “represents a very strong opportunity for the HR function that is still yet to be recognised by the majority of HR outsourcers”.
Research into HRO trends in the US market, published last year by Hewitt Associates, IBM, Accenture and NorthgateArinso, found one-third of companies were more likely to outsource than two years earlier.
The US is a more mature market than Europe and, as a result, NelsonHall’s research into payroll outsourcing, published in January 2010, predicts there will be double the rate of expansion here over the next four years.
In view of their earlier experience, bigger HRO players are now focusing on the easier processes of HR such as payroll, according to Willmott.
Will Durston, Hewitt’s European vice-president for HR BPO, agrees. He says: “If I go back five years, our offer was very broad. What we have done is identified a core offer that includes payroll, workforce administration and benefit administration. Clients are saying ‘let’s buy payroll and so on and then build on that’. The big, mega deals have typically gone away.”
This seems to be in accordance with what the BBC wants, having outsourced many of its HR administrative services to Capita HR Solutions four years ago.
John Vickerman, BBC HR shared services director, says being a fast-changing organisation means more strategic services need to stay in-house. “Outsourcing suits stability and needs to stay fairly consistent for long periods of time,” he says.
Vickerman says the Capita contract is on target to achieve £50m worth of savings over its 10-year life after initial difficulties caused by the BBC’s lack of preparation for the transition were overcome.
Despite a general lack of growth in HRO, Tim Palmer, a member of PA Consulting’s management group, believes demand for stand-alone requirements is buoyant. This is partly due to the growth of outsourcing in non-HR areas of an organisation that has enabled the use of existing software as a platform to run services such as payroll.
“What I’ve seen quite a bit of is smaller organisations taking advantage of that type of approach,” says Palmer. He attributes the growth to a maturing of the market rather than simply the need to cut costs due to the recession.
Deloitte’s Albury says bigger organisations are also interested in stand-alone deals, using different providers for areas such as payroll, benefits and recruitment. “You create almost a patchwork of outsource providers to give the best value.” He argues this approach makes it easier for a client to renegotiate HRO services, provided it retains control of the core software systems on which they operate.
One area of potential growth for HRO is in the “mining and analysing” of HR data, according to Peter Brown, global HR outsourcing lead for Accenture. He says the rewards of using third parties for this are becoming increasingly apparent, post-recession: “A lot of organisations have displaced a lot of people and lack that kind of skillset. The outsourcer can bring that capability very quickly.”
Brown adds: “This idea of using and exploiting the tremendous amount of data that organisations have to drive strategic decisions is probably the most important thing on HR directors’ agenda today.”
HR outsourcing: an HR director’s perspective
International law firm Freshfields Bruckhaus Deringer has cut its recruitment costs after outsourcing to Alexander Mann Solutions (AMS) two years ago. The decision was largely prompted by the volatility of recruitment in professional services and the need to centralise the recruitment process.
HR director Kevin Hogarth says that with few people in the HR team assigned to recruitment, it was proving hard to manage the fluctuations in staff numbers in its London office, which employs around 2,000 people.
He says: “Through centralisation, we were able to negotiate more advantageous arrangements with our recruitment agencies and search firms through preferred supplier agreements.
“By far the most important aspect that has driven the financial benefit is that we have significantly changed the mix in terms of where we source candidates.”
The number of job applicants referred by existing employees has grown significantly, along with candidates accessed through internet job boards specialising in the legal sector.
But Hogarth does have caveats about outsourcing, admitting that managing the relationship with AMS takes up considerable time. He says: “I think it is an area under-emphasised by outsourcers who are keen to underline the amount of time that management is released from.”
Although not a serious problem for his firm, he says inconsistency in the personnel who handle the contract should also be guarded against.
Gill Hibberd, Buckinghamshire County Council’s corporate director for people, policy and communications, expects the number of contracts to increase post-election. She says: “You will see a very clear focus on back-office functions that is driving outsourcing more strongly than in previous years.”
But there are obstacles to overcome. Hibberd says sovereignty was an issue in her own council’s failed attempt to share HR services with neighbouring councils, because of “different political and financial priorities”.
Alan Bailey, managing director of Capita HR Solutions, blames long-winded tendering processes for limiting expansion in the public sector. He also argues that contract specifications are often unrealistic, saying: “I think there’s an element of misunderstanding or lack of education about what is possible when buying services.”
If HRO is on the brink of significant expansion, then the nature of the HR profession is bound to change. As well as fewer jobs overall, Hibberd predicts the emergence of “some very interesting new career pathways” into the profession as more traditional ones disappear.
Palmer warns that crucial gaps in organisational experience could emerge in the longer term if just the transactional parts of HR are outsourced. This is because they provide a useful starting point for juniors before they progress up the career ladder. But the BBC’s Vickerman disputes this, saying his own organisation is working closely with Capita to give internal HR professionals experience of its outsourced services.
Bailey argues that outsourcing actually expands career opportunities.
“In my division, I have 1,000 HR professionals, which means there are lots of opportunities to do all kinds of HR jobs. If you go into a company, you’ve only got a handful of HR people,” he says.