Progressive giants lead the way

Innovative firms such as BAE Systems and Baco have broken down barriers in
accepting that outsourcing is both safe and desirable in the world of HR.
RebusHRCEO Gareth Denley and Xchanging MD Richard Houghton air their views on
the state of the market.  Rob Mcluhan

The value of outsourcing has been well understood for more than a decade in
IT, accounting and payroll, but until recently was less recognised in the case
of HR. Perceptions are now changing rapidly, however.

Mega US-based deals, such BP Amoco’s with Exult which led to the outsourcing
of virtually the whole of its personnel function two years ago, blazed a trail
that other companies are starting to follow.

This is a market that is set to grow and grow. That’s the belief of other
major newcomers such as Xchanging and of well-established players such as
RebusHR, which are both rapidly acquiring new customers in this area. But
although the benefits are starting to be acknowledged, there is still some
hesitancy about letting a third party take control of what many see as a
central function.

"It is early days for the outsourcing of true business processes such
as HR and accounting, as opposed to IT and purely technical services,"
comments Richard Houghton, managing director of Xchanging. "One reason is
that it’s actually quite difficult to do successfully. We are also finding that
companies need time to get their head around the strategic implications. The
closer it gets to their core business, the longer it takes them to decide
whether they want to go ahead with it."

Despite being at an early stage of its evolution, economic trends suggest
this is a market that can only expand, he adds, as companies seek competitive
advantage by focusing on core business and letting third parties handle
day-to-day administration.

Houghton believes the companies that are making the most use of outsourcing
at present are those that are progressive and therefore more willing to take
risks. An obvious example is BP, which effectively started the process by
outsourcing its business processes to Andersen Consulting in the late 1980s,
before its ground-breaking HR deal with Exult (in the US).

Houghton also cites BAE Systems, where Xchanging has set up a contract worth
over £1bn to manage its procurement, HR and other administration functions.
"We regard BAESystems to be the leading UK manufacturing company, used to
doing innovative deals and partnerships," he says. "We saw it as a
potential partner because of its progressive nature."

The partnership has given Xchanging the opportunity to expand into other
countries too, to look for business in Europe and America.

Giant start-ups may be grabbing the headlines, but long-established
providers of outsourced payroll and HR services are also making inroads. One is
RebusHR, whose £75m turnover includes an increasingly significant outsourcing
element. The company currently has 13 clients in this market, mainly smaller
businesses such as Opus, and Baco Consumer Products.

"Companies have got used to outsourcing to a specialist provider,"
says CEO Gareth Denley. "What is new is the idea of outsourcing everything
in HR, including such things as expatriate benefits and outplacement

"That is a potential we have known about for a while, but in the last
year it has suddenly become a reality. The likes of Exult and Xchanging have
legitimised the market, with very large clients who clearly understand its
importance as part of modern business life."

But the possibilities still remain to be developed, says Denley. Outsourcing
continues to be a foreign concept to most companies. He notes that 60 per cent
of firms n the UK and in the US still handle their payroll in-house. However,
he foresees outsourcing services growing very substantially as newcomers join
the fray.

RebusHR itself expects to grow its client base, and will probably include
larger organisations than those it is used to dealing with. However, it is
unlikely to compete for top-end business with the big start-up companies, which
can transfer resources from large multinationals very quickly and so have
substantial revenues to play with.

As the main driver for growth, Denley agrees with Houghton in identifying
the value to organisations of freeing up HR resources in order to focus on
strategic initiatives.

"It’s the same story with all companies – there is so much to do and so
much administration to drive, that they find it all-consuming," he says.
"So they look to outsourcing as a way of getting best practice implemented
while retaining a team to focus on the strategic needs."

"The principles are the same," Denley continues. "It’s a
bandwidth issue. Companies all want to drive out self-service functions to
employees, and they want to provide flexible benefits and best practice,
because keeping good people is the name of the game. But they can’t do that and
worry about where the business is going strategically at the same time."

The outsourcing of finance functions has become relatively common, so HR is
the next logical step, Denley continues.

One reason why HR has not moved as quickly in this respect as other
functions is the variety of legal practices relating to global employment.

But the perception that it is a barrier to rationalisation is starting to
diminish, partly due to the example of BP, which required its outsourcing
partner to create consistency across all the territories where it has a

"It used to be thought of as being too difficult, but that’s no longer
the case," explains Denley. "That’s one reason why larger companies
are doing it and why it will eventually become the norm."

The need for companies to attract and keep talent now outweighs any worry
that change is destabilising and therefore dangerous, he concludes.

"We have jumped the hurdle. Businesses realise that outsourcing is the
way forward in achieving best practice and a focus on strategic goals."

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