Making the decision to outsource HR is just the first hurdle
a company faces and many companies which have taken this route live to regret
it. Keith Rodgers examines the most common reasons for doomed partnerships and
offers advice on avoiding the risk
If you have any lingering doubts about the merits of outsourcing, listen to
Geoffrey Moore, management guru and author of Crossing the Chasm. CEOs, he
argues, should be concentrating on their ‘core’ activities – those that really
build competitive edge and add shareholder value. Everything else is ‘context’
– tasks that should be carried out as efficiently as possible, because they
don’t need to be differentiated. Third-party service providers can provide many
of these services at a cost-effective price thanks in part to advances in
technology, says Moore – so bring in the outsourcers.
For the HR function, this kind of message is becoming a little repetitive.
Long encouraged to rid themselves of transactional tasks and focus on strategy,
the temptation to hand over responsibility to a more efficient third party is
high. Inevitably, there are both business and emotional factors – often
relating to issues about control – that cause companies to think hard about
going down the outsourcing route, but on paper the arguments are convincing. So
much of the HR transactional workload depends on economies of scale –
particularly in areas such as web self-service and call centre support – that
the logic of handing those tasks over to a larger, specialist organisation
In practice, however, many organisations that have taken the HR outsourcing
route have lived to regret it. While the theory stacks up, the realities are a
little more mundane. Managing the service provider can be a daunting task,
particularly for a function that’s traditionally internally – rather than
externally – focused.
Building a business case for a service that may stretch years into the
future is far from simple, given the complexities and variables of
fast-changing businesses. Handling the knock-on implications for the rest of
the organisation, which often come to the surface only after the agreement is
struck, is a challenge.
Dealing with the practicalities of the transition is a major test. Yes, HR
outsourcing holds forth the promise of both cost-reduction and improved service
levels – but firms need to overcome a number of major challenges to convert
that promise into reality.
Culture clash – building an effective relationship
According to a survey of 120 organisations published this spring by Reed
Managed Services, ‘cultural dissonance’ with outsourced agencies was by far the
biggest reason for problems in HR outsourcing. Comments from respondents ranged
from complaints that agency staff didn’t seem interested in the business, to
concerns that the ‘lack of match with the culture and systems of the
organisation roused suspicion in employees’.
Put simply, if the service provider fails to understand the client’s
business goals and the way it operates, the relationship is likely to come
unstuck. The difference lies between an outsourcer that offers legally based
advice to a client about a specific problem, and a provider that tackles the
issue in the context of the client’s working practices and business risks.
But in an industry where major deals can take six to 12 months to negotiate,
there are plenty of opportunities to establish the service provider’s
understanding of the business well before contract stage.
This is not just a cosmetic exercise. The provider will need to analyse the
client’s existing business processes in some depth, both to establish what kind
of cost savings can be generated and to validate the client’s claims about its
existing performance levels, which will form the basis for the Service Level
If the service provider hasn’t looked closely at the organisation, the
potential problems won’t just be cultural – the metrics that underpin the
agreement could well prove faulty.
What many organisations fail to take into account, however, is that
responsibility for the strength of the relationship lies with both parties.
Outsourcing HR processes will inevitably change existing business practices
within the client organisation, and cultural clashes can stem from other
departments that resist changes to the way that services are delivered.
Every provider stresses that client project champions will play a critical
role here – not just in the HR department itself, but at board level where the
knock-on repercussions of the outsourcing agreement will need to be tackled.
"To make it work requires a cultural shift on behalf of the
client," says Malcolm Howard, chief sales officer at e-peopleserve.
"If the rest of the board is not behind it, it won’t work. It requires a
different method of working within most organisations."
Much depends, too, on the personal relationship that develops between the two
individuals who manage the outsourcing relationship day-to-day – the service
provider’s account manager and client’s supplier manager.
For million-pound contracts that affect an organisation’s entire HR service,
it is unfortunate that so much pins on the chemistry between these two
individuals and their willingness to solve problems pragmatically rather than
point to small print in the contract. That, however, is the only way to build a
business relationship. "Once you get to the stage of involving the legal
profession, you’re half way to failure," says John Ainsby, instructor for
QA, which provides training services in managing outsourcing.
"These big deals do require a high level of trust – the documentation
and the contract is critical, but they won’t save you if you don’t trust one
another," says Penny de Valk, group director for Ceridian Centrefile.
"It’s so different to the classic vendor/customer relationship – you have
such a mutual interest."
The contractual details
Striking an effective Service Level Agreement is a difficult balancing act
for the client and a potential source of future conflict. On the one hand, the
customer needs to pin down the service provider to deliver against
clearly-defined goals; on the other, it requires flexibility within the
contract to cater for future, as yet unforeseen changes to its own business.
"There’s often a tension between cost-effectiveness and quality,"
says Ceridian Centrefile’s de Valk. Organisations need to establish from the
outset what their priorities are. An organisation which demands 99 per cent
effectiveness in recruitment, for example, may find that it can cater for a
reduced level of service in terms of the speed with which vacancies are filled
in return for a lower price.
Many of these issues only become apparent as the relationship beds down, and
suppliers often propose a contract review period after the service has gone
live. Ceridian, for example, keeps the relationship flexible for the first 180
days, then goes through a formal reappraisal process, continuing to adjust the
agreement where necessary. "What are you trying to achieve – you have to
keep going back to that," says deValk. "Is the SLA still supporting
the business? Are we measuring the right stuff – is it the ‘doable’ things or
the things that will deliver value?"
This ability to handle change works both ways. Andrew Buggy, business
development manager of integrated HR solutions at Capita Business Services,
advises clients to ensure the service provider is capable of adapting to changing
business requirements, either with their own resources or through a backfill
agreement with another suitable service provider. In particular, outsourcers
need to be able to make changes quickly – they can be very small iss- ues,
"but they can really irritate", he says.
While many clients look for punitive measures to reinforce the agreement,
QA’s Ainsby discourages clients from imposing penalty clauses unless the
contract also provides for bonuses where performance exceeds expectation. These
don’t have to be financial – they can be service credits committing to
Finally, although it’s an uncomfortable area of negotiation at the start of
a business partnership, contract discussions should also include the exit
strategy. Sue Wotruba, principal consultant at Penna Change Consulting, has
personal experience of how difficult a process that can be in her previous role
at an outsourcing service provider. "Once you’ve got reliant on an
outsourcer, it’s quite a lot of work to bring things back in-house without
losing the levels of service."
This is particularly true if staff have been transferred to the service
provider and need to be brought back, throwing forward a host of contractual
and career development issues. "Like any change project, it takes time –
you’re ultimately trying to retain service levels while dealing with the
complexity of what it involves." Exit issues that should be ironed out in
advance include questions of intellectual property rights, particularly in
instances where the client and outsourcing provider have worked together on IT
The business case
If SLA negotiations are all about managing service expectations at the
outset, the decision to go down the outsourcing route requires a comprehensive
understanding of the provider’s economic model. The key point to bear in mind
is that the service provider makes its money through economies of scale and
effective pro-cesses, particularly through HR self-service and the use of large
call centres located in cheaper geographical regions. Only when those
efficiencies can be brought to bear on the client site can the real financial
benefits kick in.
According to Penna’s Wotruba, while organisations can make immediate
headcount savings, it can be up to three years before the real cost savings
come through. "You’ve got to invest in technology and/or process redesign
to have good levels of service," she argues. Buggy of Capita warns that
organisations shouldn’t over-simplify how cost savings can be achieved – for
example, by overestimating the importance of installing HR self-service systems
in a company where a large number of staff have no desktop access.
Service providers offer a range of different options from fixed-priced
contracts to billing per employee or per transaction. Malcolm Howard, chief
sales officer at e-peopleserve, suggests that many HR departments will be
nervous of a transaction-based pricing structure, particularly in instances
where they have not thoroughly documented their business processes and have no
clear understanding of how many transactions actually occur. E-peopleserve
typically builds a mixed pricing structure, incorporating a price per employee
served and a price per service (depending on business volumes), while factoring
in the size of the client organisation.
The knock-on impact
While the decision to outsource any business activity is usually taken at
board level, there’s a tendency for the focus to fall at a departmental level –
it is an HR outsourcing agreement, so the challenges are HR’s. In reality,
however, the impact of the decision to outsource individual HR activities – or
the whole function – will be far reaching. The roots of potential failure lie
in decisions taken at a tactical level without regard for the bigger picture.
These issues arise at the technical, process and – as outlined above –
cultural levels. Technically, if outsourcing is carried out piecemeal, integration
problems will emerge further down the line – a decision to pass over payroll,
for example, should not be taken without regard to interfaces required to other
HR systems that may be managed by different providers further down the line.
Likewise, from a process perspective, if parts of the compensation process
are passed to third parties, the interaction to performance management systems
needs to be fully understood.
Howard at e-peopleserve argues HR needs to understand the scope of the
services it is handing over and expect at least two-thirds of the HR function
and its associated workload to transfer to the service provider. "The real
benefit is in integration, not standalone silos. If you start fragmenting
things, you end up with too many hand-offs. If people are not prepared to be
bold, I guarantee they will never be happy."
The transition period
The real test of a relationship in any service contract comes when the
talking stops and the execution starts – and HR outsourcing is no exception. In
some respects, the impact of change can be even higher than the outsourcing of
other functions because of the sensitivity of HR’s role, and the change
management process is critical. As Howard warns, organisations underestimate
the impact at their peril: "If you think you can turn on self-service e-HR
without significant transition, you will be in a mess," he says.
Key to the transition process are the client’s employees, who have
experience and knowledge that the service provider simply can’t replicate at
the outset of the contract. Whether key members of staff move to the service
provider or stay as a client employee, it is essential they remain part of the
picture. Building plans to retain staff – from career development opportunities
to loyalty bonuses – is essential if the transition is to go smoothly.
As Ceridian’s de Valk says: "Outsourcing looks like a threat to many
employees – but it’s not, because it specialises in what they do. We work at
making it beneficial for employees to share their knowledge." Howard
points out that in instances where staff are given the option to move to the
provider or stay at the client’s, many have chosen to keep the environment they
know. As a result, the client finds itself paying high service costs on top of
its HR payroll. In particular, he argues, the HR leadership has to make the
move to the outsourcing provider.
It is during the transition period that the finer details of the outsourcing
agreement, and ability of the two organisations to work round problems, will be
tested. From a contractual point of view, QA’s Ainsby recommends that clients
don’t even sign the final version of the SLA until the transition of services
to the outsourcer has taken place.
Above all, client organisations need to be realistic that transition will
bring major challenges. "It will be bumpy, certainly for the first
year," says de Valk. "If the provider says it will be smooth, be
Managing Outsourcing:Managing the Working Life Cycle, published by Reed
Managed Services, cost £150. Telephone 020 7616 2311 or www.reed.co.uk/client