The practice of outsourcing is the purchasing of one or more services from a third party. This could include HR and sometimes other services such as IT. The specific processes included within any HR outsourcing arrangement will vary between organisations and the levels of processes outsourced may differ such as some organisations may outsource all of their HR processes, whilst some may select specific areas. It needs on the needs of the organisation.
When an organisation is creating a business case for outsourcing HR, there are important steps which need consideration and that is why do we need to change the way our HR function is operating and what aspects of the current offering are unsatisfactory or require some improvements? By exploring these issues, focus can be given to the scale and type of change required before moving to consider whether outsourcing a HR function is the correct route. However, there are benefits to outsourcing the HR function.
When a business case is put forward for outsourced Human Resources solutions, the potential benefits may be achieved:
- Reduced costs
- Increased efficiency
- Access to improved HR IT systems
- Increased flexibility and quicker response times
- Ability to fit well with an overall strategy
- Reduced risks – scalability becomes more efficient
- HR operating more strategically
Where there are benefits there will also be challenges and these could be:
- The solution may not be the most suitable for the organisation
- Outsourcing does not absolve the organisation of good people management
- The outsource provider may not understand the business strategy or profile
- Loss of in-house knowledge
- Processes may be standardised in line with the outsource provider
- Service provided may be fragmented
- Need to constantly review the outsourcing arrangements against specific metrics
Selecting an outsourced Human Resources solutions provider
When the decision is made to outsource the HR functionality, a number of actions and decisions need to be taken to ensure the selected HR provider will work with the organisation in a collaborative manner.
- Take time to understand the current provision including the cost base as this will provide useful baseline information when comparing providers. There is no point outsourcing a service if it is going to cost more.
- Understand the organisations future requirements, especially in terms of level and type of services required. Consider the cultural and geographical factors. Will the outsourced provider “fit” with the organisations culture and values.
- Determine the contract length. Is it worth considering a short term contract or even a pay as you go arrangement to begin with? Then as the relationship develops a longer term contract can be arranged.
- Identify metrics and benchmarks to measure the provider against. Set service level agreements. Implement a clear statement that outlines the responsibilities of a service provider.
Managing the transition to an external HR provider from an in-house function
When transitioning the HR function from in-house to third-party organisations should give consideration similar to those required for managing a large scale organisational change.
Clear understanding by both parties of what’s involved, who is responsible/accountable will mean misunderstandings are kept to a minimum. Clear, concise and open dialogue is required between the organisation and the third party.
Key steps in the transition process are:
Evaluation and planning – identify the needs by assessing the current function including recruitment, payroll and performance management. Research and evaluation potential third party providers based on their offerings, price and alignment with the organisations culture, and define the scope of the services, the key performance indicators and termination clauses in the contract.
Communication and change management – communicate with all employees, clearly explaining the transition period and how the processes may potentially change and provide training for employees on the any new HR systems and processes.
Transition implementation – if necessary, accurately transfer any data to the new provider, documenting any existing HR processes to ensure a smooth and efficient handover of responsibilities. It may be useful to run any new systems alongside the existing for a period to identify and resolve any potential issues.
Monitoring and optimisation – following completion of the transition, regularly review the KPIs to assess the new providers performance, feedback any issues or concerns and collaborate with the third party to refine any processes to optimise service delivery.
Engaging an external HR provider
An effective HR function is essential for any organisation, although sometimes it may be difficult to manage this in-house, and companies may find it more beneficial to engage the services of an external HR provider. Some of those advantages may be:
- Efficiency – companies can focus on their core business process rather than human resources when they outsource their HR.
- Reduced costs – hiring an HR adviser can often result in a high cost, in comparison to hiring specialist companies.
- Saving management time – the expenditure of management time alone in dealing with, for example, a troublesome employee, is wholly disproportionate in most cases.
While the above does sound great, there are also some disadvantages to outsourcing too. Some of these include:
- Giving up control – small business owners who are used to managing everything that goes on in their company may find it difficult to let go and not take complete control of their staff.
- Impersonal – an HR adviser from outside of the office may not be able to offer the same level of personal attention to issues that may have been handled a little more sensitively in-house.
- Distance – using an offsite company to deal with everything HR-related may make it more difficult for employees to communicate with them.
In conclusion, effective HR management is crucial for the success of any organisation. By understanding the benefits and challenges of outsourced human resources solutions, selecting the right provider and evaluating their performance you can ensure your HR function is optimised for success.
We encourage you to consider these strategies and explore how they can be applied within your organisation. Stay tuned for more insights on HR trends and best practices from The HR Office.
