Outsourcing’s new wave

A new breed of outsourcers has arisen driven by the new economy’s needs.
Jane Lewis provides a guide to the new skills and competencies HR needs to

Outsourcing is back, big time. Not, of course, that it ever went away – it was
always there simmering away somewhere in the background – but we have reached
another of those points in the business cycle where the outsourcing model is
under intense scrutiny once again. Management consultants are openly referring
to this new wave of activity as the second or even third-generation of

The difference this time around is that the activity has acquired a
near-fanatical following in some quarters, perceived not just as a practical
answer to issues of cost, speed and efficiency, but as a key indicator of
strategic intent.

Outsourcing, or ‘partnership’ as it now known, has become an essential
requirement of the horizontal business model proposed by such prophets of new
economy thinking as William H Davidow and Michael S Malone in The Virtual
Corporation (1992) and Don Tapscott in Digital Capital (2000), to name but a

Most HR departments have long been keen outsourcers, at least in terms of
certain specific functions. In a survey, European Trends in HR Outsourcing,
jointly conducted by researchers at the Cranfield School of Management and
William M Mercer, 77 per cent of respondents claimed they regularly outsourced
their training and development, and 59 per cent said the same of recruitment
and selection.

But few in the profession will be unaware of the more wide-sweeping changes
afoot, encapsulated perhaps by a new breed of provider – Exult, Xchanging,
RebusHR – all of which make a virtue of offering a ‘cradle to grave’ service,
incorporating the bulk of the HR administrative function throughout the
employment cycle. And all of which major on the strength of their technological

There is evidence that even smaller, specialised outsourcers are seeking to
capitalise on the trend by moving into more general provision on the back of
arguments about the strategic gain of partnership.

Certainly the market is ripe for such exploitation. One of the most
interesting points to have emerged from the Cranet survey was the ad hoc nature
of most HR outsourcing in Europe.

"Organisations are simply responding to immediate demands by using
providers more extensively in the areas that are directly impacted by
[organisational change], such as recruitment and outplacement," it
claimed. "This reflects a picture of short-term opportunism…rather than
long-term strategic sourcing."

If the strategic gains of partnership are becoming firmly entrenched in the
HR psyche, it is likely that a secondary consideration will also spur the shift
towards outsourcing – namely the economic uncertainty on both sides of the

Nonetheless, the whole issue of outsourcing raises some difficult questions
for any HR department, not least because the historical instances of
spectacular failure are at least as common as any out-and-out success story you
may hear.

One need only look at the series of debacles that afflicted the UK public
sector in the 1990s – from botched systems at the DSS to that long hot summer
of queues at the Passport Office – to get the point.

For a more recent example of the damage that a poor ‘partnering’ strategy
can wreak, look no further than Railtrack, which outsourced the bulk of its
track inspection and repair remit to outside contractors.

What is clear is that outsourcing is no cop out. To work successfully any
long-term partnership needs careful consideration, constant monitoring and a
very clear idea of where it is headed.

Any HR department contemplating the move will have to pose and answer some
very tough questions about the future of the function in their own organisations,
and whether they have the skills in place to manage this change.

Here we list some of the main new skills HR managers need to embrace if they
are to make a success of a partnering strategy. Even if you are currently
unsure of the way forward your own company will take, it is worthwhile
considering at least some of these disciplines.

You can’t begin to outsource until you have a clear idea of exactly where
the department is now, and where it should be in the future in relation to the
rest of the business. But this is equally true if you decide to keep the bulk
of HR services in-house. Either way you cannot lose by undertaking some of the
preliminary spade work now.

1. Situation auditor

The key to any successful outsourcing strategy is self-knowledge. Yet, as
Professor Chris Brewster of Cranfield Management School, and co-author of the
Cranet survey reports, "One of the clearest things we found is there is
very little strategic thinking. It is easy to go into an outsourcing
relationship on an opportunistic basis – to cut costs, say – but that says
something fairly significant about HR. Of course, there are cases where
outsourcing has been achieved coherently and sensibly, but in a lot of cases,
companies are just stumbling in."

The cardinal rule, therefore, is never to assume that outsourcing brings
automatic benefits. The business case for each outside contract has to be
carefully made, with the cons studied as rigorously as the pros. Don’t saddle
yourself with unrealistic expectations. It is the failure to be rigorous about
this part that led to so many of the disappointments in outsourcing reported by
the Cranet surveys.

As a preliminary step, you need to be in a position to define your requirements
very tightly, and you cannot do that unless you have a clear understanding of
the strengths and weaknesses of the HR operation as it currently stands. You
cannot expect to be able to monitor and assess an external partner’s record on
performance before you have ascertained your own.

What is your argument for outsourcing? Is it economies of scale, or the need
for specialisation? Would outsourcing boost your company’s capacity for growth?
Would it lead to a damaging internal brain drain?

"When deciding what to outsource, there’s an issue about knowing where
to draw the line," says Angela Baron, policy adviser at the CIPD."
Even things that initially look easy to package, training and recruitment for
example, can be problematic. We know these are critical contributors to
business effectiveness, so if you do outsource them, you must be in a position
to give the outsourcer a very good brief. Be quite clear about what you want,
otherwise you’ll end up with a standardised, one-size-fits-all service."

Then assess the risks inherent in the move. As one commentator remarks:
"There is a risk that by losing control of key activities, the company
will restrict its capacity to exploit new opportunities in the future. In a
fast-changing industry, the definition of core business must be revisited on a
continuous basis." But consider that this need for flexibility has to be
balanced against the clear productive advantages inherent in striking long-term
relationships with suppliers.

The bottom line, says Brewster, is that you need to ask if partnership is
right for you. "People are right to be sceptical about the notion of
longer-term partners. The danger is you find yourself in a partnership that is
uncompetitive, particularly when (as happens more frequently), you end up
sharing the same partner as a competitor."

Above all, retain control of the decision-making. Another interesting
finding of the Cranet survey was the extent to which HR has allowed itself to
be walked over in terms of outsourcing strategies.

"Outsourcing is often a business decision made by senior management,
and is outside the control of the function impacted. It appears where top
management actively evaluates the performance of the HR function, outsourcing
is more common," says Brewster.

Finally, you must have vision. As Richard Finn, director at Penna Change
Consulting remarks: "The outsourcing process is about understanding where
HR will be in the future. You don’t outsource until you know the HR strategy.
And that’s a lot more than saying we add value to the business. You have to ask
‘How are we best going to manage for value in HR?’ "

2. Negotiator

Routine outsourcing contracts either run out, or can be terminated with
relative ease. But this is not what we’re talking about here. Strategic,
long-term partnerships, often involving millions of pounds, need very careful
consideration. If you are to be locked into a relationship for some time you
need to be absolutely sure it is the right one. Consequently, negotiation
skills – and the ability to second-guess and make provision for potential
disaster – are critical.

But, as Tony Green, a management consultant at Collinson Grant suggests,
these kind of hard-nosed skills are not common in the profession. "The
negotiating skills in a purchasing environment are very different to
negotiation skills needed in other areas of HR," he says.

As a preliminary step, therefore, it might be a good idea to take advice
from other departments.

Then get yourself a good lawyer. "The key thing to any successful
relationship is to have a real understanding of the contractual issues,"
says Margaret Harvey, partner in technology at solicitors Addleshaw Booth &
Co, and Exult’s adviser during its negotiations with BP Amoco.

Her advice is to ensure you understand the objectives before you even think
about putting a contract together, work out how the arrangement will be
managed, and think too about the time when the contract will draw to a
conclusion. "A lot of companies don’t do this, but the end is as critical
as the beginning," she says.

Outsourcing providers will be quick to offer their own advice about the
detail of your contract, but you would be foolish to rely on that alone.
"The onus is on you to mitigate all the risks you can think of by putting
a good contract together with a supplier," says one commentator. "I
am not talking about a five-page contract. It needs to be more like a five-book

Areas you need to focus on include setting clear performance criteria,
drawing up comprehensive service level agreements, and clearly assigning

You must be prepared to ask any potential outsourcer to provide
illustrations of how the model will work, and what the cost/benefits would be,
he adds. You also need to be able to negotiate internally. According to one
commentator: "I would walk away from a deal that did not have the support
of senior leadership."

Harvey suggests that a degree of tactical finesse is necessary in any
contractual negotiation. "There are some issues about handling the
negotiations to get the best deal and make sure you’re not hoodwinked – and
then also managing the relationship. You need to think tactically about how you
divide up those roles. It’s very difficult when you’re the relationship person,
and you also have to be the tough one doing the negotiation, building all the
rigour and discipline into the relationship."

Although you would be unwise to make price the ultimate factor in any
negotiation, you must be prepared to argue for value for money.

Finally, consider the Armageddon situation. Build into the contract
provision for the possibility of your supplier going out of business, being
bought by another, signed up one of your competitors, and so on. Keep yourself
in the picture. Insist on ongoing reporting, the right to go in and audit your
outsourcer, and the right to develop and maintain procedures.

3. Performance manager/Information analyst

One of the best things about outsourcing is that it forces companies to
adopt good practice that might otherwise be lacking – and performance
management is a classic example of this. The Cranet survey found clear links
between the two disciplines. Companies that use outsourcers extensively also
tended to have established clear measurement systems for their HR function –
assessing performance in terms of business scorecard similar tools. As a
result, they were much better informed about their own cost structures on a
process basis.

"If you’re going to make these things work, you need to be able to
combine close partnership with a very cool, hands-off approach to performance
issues," claims Cranfield’s Brewster.

"You’ve got to be able to manage the matrix of using suppliers,"
adds Green at Collinson Grant. "It’s not simply a question of reducing
costs, but also of managing the quality of service on an ongoing basis. Unless
the resident HR manager has got some kind of plan for managing that, he or she
will be lost."

But this is no easy feat to get right. One of the main difficulties facing
any HR function is deciding exactly what you plan to measure in the first
place. As Green points out: "You’ve got to find a way of measuring the
outsourcer’s performance by certain fixed criteria, and also at looking at how
it manages performance measurement in terms of assessing your own staff."
And it’s important to enshrine whatever you do decide into the terms of the
service level agreement "Place in the contract an obligation to provide
the information you need, on a predetermined regular basis, and in the format
you need it," is Harvey’s advice.

One of the main problems thrown up by outsourcing is knowledge management.
And even the most ardent proponents of outsourcing advise that you proceed with
care on this point. "If it’s true that the skills in an organisation are
the key to competitive advantage and that knowledge management is the way
forward, then to put all that in someone else’s hands is decidedly
dangerous," says Brewster. "You may end up totally dependent on these
people and their goodwill and capacity."

Certainly, you could take the view that it is better to keep in-house the
skills and knowledge you consider critical to your organisation’s strategic way
forward, and/or competitive edge. But in many cases, that would defeat the
entire strategic object of the partnering arrangement. Consequently, many
organisations attempt to strike a compromise, balancing trust with eternal
vigilance and a constant flow of accurate information about the fulfilment of
your requirements.

4. Customer service

By this we mean how you go about ensuring the move into outsourcing HR
service is achieved with minimum disruption to your own workforce – a process
which experience suggests can be fraught with difficulty.

"Most HR departments have a fairly shrewd idea of what line managers
want," claims Brewster. But that could be in active conflict with what you
hope to achieve with your new partnership arrangement. It goes without saying
the attitude of your own employees will be critical to the success of the
venture, and that internal division needs to be avoided. But that is easier
said than done. Although many HR departments have coped with successive waves
of outsourcing, few have actually had to manage the process with reference to
their own departments. And that can pose problems in its own right.

The most difficult thing emotionally for people in HR is letting go. There
is a perception that in outsourcing something, you are threatening your own
job, or, if not your own, then certainly that of someone else close to you. To
many people outsourcing is synonymous with outplacement – and with good reason.

The best means of tackling the issue, as with any in which personal security
is at stake, is to be as open as possible about arrangements you intend to
make. Spell out exactly why you intend to outsource a particular function and
what you hope its benefits will be to the overall organisation but don’t shirk
from addressing exactly what effect the move will have on individuals. In other
words, boost morale, but don’t do it at the expense of the truth.

5. Culture/brand manager

A common worry afflicting those embarking on full-scale outsourcing is that
the move will in some way dilute or change the culture and brand of their
organisation. It would be foolhardy to deny that any deal you strike won’t have
some impact – particularly given the blurring of the boundaries that management
experts claim is critical to a successful partnership.

"The problem with outsourcing is encapsulated in the question ‘Whose
brand are you looking at?’ The outsourcer will have their own. To what extent
do you take this on board?" asks Brewster.

There clearly needs to be someone in the organisation capable of taking an
over view, someone who understands the prevailing culture and internal
interdepartmental workings. This role naturally falls to the HR manager. One of
the main risks of outsourcing is a lack of internal focus and communication,
particularly in terms of ensuring continued communication with other
departments (often themselves outsourced). This, with hindsight, is one of the
main problems that affected an organisation like Railtrack.

When it comes to cultural issues, the actual choice of partner is clearly
critical. Although many successful arrangements have been struck between
organisations that, on paper at least, look markedly different, they have all
been characterised by a certain common purpose. "You need to ask if this
company is sympathetic to the aims and visions of your organisation and, most
importantly, do you feel comfortable working with them," says the CIPD’s

In terms of branding, many experts suggest that if the relationship is
intended to be long term in scope, you make a virtue of your common links. In
defining his vision of internet worked business webs of separate companies,
Tapscott talks about the importance of establishing a shared set of values and
brand. The car manufacturer Ford and its dealers are a good example of this.
Moreover, sometimes the addition of an outsourcer’s brand can be a very
positive thing. Consider all those PC manufacturers which did very well out of
the ‘Intel Inside’ campaign.

The bottom line is before embarking on any relationship, you need to
identify and spell out to the supplier which aspects of your company culture
and branding you consider critical to retain. It might be soft, but it could
make the difference between make or break.

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