HR Outsourcing is the delegation of one or more HR business processes or functions to an external provider who in turn, owns, administrates and manages the selected process(es) or functions, based upon defined and measurable performance metrics.
Typically, small companies (which do not have the competency to staff a full-fledged HR department) and very large companies (who wish to outsource all routine HR processes so that they can concentrate on core issues), are the ones that have been using HR outsourcing in a significant way. The focus for them is enhancing internal competence and is not just driven by cost.
However, there is a strong business case for all Companies to seriously evaluate the role of HR and take a hard look at the activities that can be outsourced. The need to outsource non core HR activities is supported by a growing awakening about the need to renew and strengthen the employee relations role and function and focus on business partnering.
As per Sloan School of Management, HR performs three basic roles in the Company:
- Basic Administrative Services and Transactions role involved with compensating, hiring, training and staffing where the emphasis is on resource efficiency and service quality
- Business Partner Services role involved with developing effective HR systems and helping implement business plans, talent management. Here the focus is on knowing the business and exercising influence--solving problems, designing effective HR systems to ensure needed competencies and talent.
- Strategic Partner Role contributing to business strategy development and implementation based on considerations of human capital, organizational capabilities, and readiness. The intent would be to develop HR practices as strategic differentiators
Why outsource HR functions?
Generally 50 to 60 per cent of all HR activities are rules based, repetitive and voluminous and thus ideal for outsourcing. Thus, large parts of the basic administrative services & transaction role of the HR department can be effectively outsourced and the company can hope to reap the benefits from:
- Improved cost-effectiveness of transactional services
- Increased flexibility/ scalability to handle peaks & troughs of activity
- Access to world class capabilities & Implementation of best practices to handle complex HR processes & requirements
Despite the benefits, there seems to be some apprehension amongst the HR professionals regarding whether widespread use of outsourcing will obliterate the HR function? The dilemma is due to what constitutes HR outsourcing. The commonly outsourced HR activities of 401(k) program management, pension benefits management, health benefit management, stock options administration and payroll administration are all part of the so called ‘time office’ functions or ‘personnel administration’ functions or what we can also say are accounting transactions related to employees.
Therefore, outsourcing of these activities will actually free up the department's intellectual resources to concentrate on employee relations & business partnering and help the HR function to actually move up the value chain. HR managers can then become business partners by shifting their focus from administrative output to outcome and results, The decision is supported by the various benefits that can accrue and the metrics can be reduced costs, improved service and better expertise and at the same time do away with non-core work and free up time of HR to focus on more strategic issues.
How to outsource HR functions?
To ensure the success of the HR Outsourcing decision, it is necessary that the outsourcing decision should always be preceded by a comprehensive analysis of the reason why the Company wants to outsource, how it will benefit them and how will it be implemented. Taking cue from the 5 W’s & 1 H of Rudyard Kipling’s ways to be effective, the Company should come to a consensus about the following issues:
- Why is HR outsourcing the best solution?
- How will outsourcing meet the overall HR objectives? Why can’t the Company do it in-house?
- Which HR activities will we outsource – all or some?
- When & how will they be delivered?
- Where will we outsource – on site or off site?
- What metrics or service level agreements will be used to measure the performance of the Vendor?
In addition, the company intending to outsource has to pay particular attention to the people issues. The three pronged communication challenge would be to communicate early, often & consistently with the affected people. In addition, sharing the technical, service level and financial data will get the buy-in from the leadership and will help to keep morale & productivity high.
Thus, as a result of outsourcing of the routine administrative functions, which presently takes up around 50-60% of the HR professional’s time, there would be more time and focus on core activities that will add value to the role that HR plays and provide better quality of service to its internal customers. The HR professional will now be able to provide better support for business growth, influence the change management process and thereby increase its strategic role in the Company.
Dr. Nirja Sharma
The author is the Vice President, Human Resources at Motif, Inc., a specialized BPO (Business Process Outsourcing) company providing rules based and decision intensive back office transaction processing services, customized email response services and internet research & analysis.
(www.motifinc.com)
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