Outsourcing the recruitment process: quality gains over quantity
Although few employers have transferred responsibility for their entire recruitment process to a third party, outsourcing is now an accepted practice. We examine the pros and cons.
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Human resources managers are wise to approach outsourcing with care. It is an over-hyped activity, often promoted by those with a vested interest in winning new business.
Stories of employers making savings of millions of pounds a year through the outsourcing of their recruitment process naturally attract considerable press attention. But most instances of transferring responsibility for one or more parts of the recruitment process to an external supplier reveal modest financial gains, at best.
The reality, according to our research, is that outsourcing recruitment can produce good results, but these are often related to quality rather than quantity. Outsourcing can help employers improve the standard of their recruits, tackle skills shortages and reduce time to hire. It is less frequent for outsourcing to cut costs to an appreciable extent.
Deciding what and how to outsource represents the key to success (see checklists in box 1). In particular, outsourcing is a state of mind. Nothing as central to an organisation's success as its recruitment can ever be truly outsourced, in the sense of completely transferring responsibility to another company.
Business rationale for outsourcing
"Outsourcing" is a term that crops up regularly in the pages of HR and management journals. The concept of delegating responsibility for the delivery of a business activity to an external provider was first applied to service functions such as IT, finance and accounting. HR turned to outsourcing relatively late. The overarching rationale for streamlining the administrative responsibilities of HR via a third-party route is to pave the way for the function to fulfil its vision of performing as a business partner.
The theory is that HR should be in a better position to focus on its strategic, value-added activities if it is freed from the more routine, transactional elements of various processes.
Outsourcing is highly flexible
Outsourcing comes in a variety of shapes and sizes, and varies according to the extent and nature of the outsourcing arrangement. Relatively few organisations have yet to outsource their entire HR function to an external supplier.
One recent development has been the government promoting "public-private partnerships" between the two sectors as a sophisticated form of outsourcing. A "shared-services model" is another variation on the outsourcing theme. A prime example is the London Borough of Sutton's innovative work to develop a common framework for recruitment administration across several London boroughs1.
Under a shared-services model, the routine administrative aspects of HR are provided through a service centre that can be resourced internally or outsourced to a specialist supplier. A third option is a combination of internal and external provision of services.
Outsourcing is still limited
More than three-quarters of employers have not yet outsourced any aspect of their recruitment process2, according to our research.
In our study of 182 employers conducted in 2005, we found that just 22.5% are outsourcing. This finding was based on asking about recruitment activities that the employers must have carried out themselves before they were handed over to a third party. This was intended to exclude the exaggerating effect of counting employers' use of normal external job market services, notably employment agencies, as a form of outsourcing.
Among the one in four employers in our study involved in outsourcing, there was no single model or approach being used. Many employers use outsourcing in a very limited way, such as moving their recruitment advertising out of house, but their practices vary widely.
Often, a specialist area of recruitment, such as psychometric testing, is outsourced because a supplier can deliver it with greater levels of expertise or economies of scale. In some cases, the transfer of such activities has enabled an organisation to redeploy the member or members of their staff who were performing the role internally, or to make them redundant.
In many cases, some of the administrative or transactional aspects of recruitment are outsourced. Our research shows that there is no pattern to this. The recruitment and selection activities that are outsourced span the breadth of the resourcing cycle.
For example, many of the employers we contacted have preferred to focus on the initial stage of candidate attraction. They have outsourced some of the work involved in recruitment advertising.
Moving on through the hiring cycle, some employers prefer to outsource the work involved in handling enquiries from potential candidates and managing the applications that they submit.
Others have outsourced the subsequent stage where the applications receive their initial sift or shortlisting (often known more accurately as "longlisting" in the public sector).
Outsourcing needs clear objectives
There is often an assumption that outsourcing should lead to cost savings. Recruitment is a time-consuming and expensive process, and it is natural to conclude that any change in its delivery will achieve economies.
The media hype surrounding some cases of significant savings being made, running to several million pounds a year, has not helped to shift the focus away from hard cash. However, most outsourcing ventures produce little in the way of financial savings, and it would be unwise to base a decision on this premise alone without doing some very careful calculations and research of the outsourcing marketplace. Most HR managers do not fall into the cash-saving trap, and take a level-headed approach to outsourcing. Our 2006 HR Prospects study3 confirms this.
We contacted 221 HR managers who had been given the task of making cuts in their organisations' recruitment budgets. We found that just 2.3% of them have turned to outsourcing as a means of reducing their hiring overheads. In contrast, nearly three times as many - 6.8% - have actually brought some functions back in-house in the pursuit of cost savings.
Shared services provide a warning
Shared services represent one way in which employers can outsource recruitment, as noted above. Even though their use by the public sector is being encouraged by the government, their track record is not good. In fact, the experience of the shared-services model illustrates the potential pitfalls of using outsourcing as a cost-cutting measure.
A study by professional services consultancy PricewaterhouseCoopers4 shows that transferring recruitment functions to shared-services arrangements involves a good deal of patience. They typically take four to five years before they produce any cost benefits over in-house recruitment functions. Commenting on its survey results, the consultancy says that the latest data "continue to raise questions about the efficiency and effectiveness of outsourcing recruitment". Many shared service departments find it difficult to achieve lower costs and better service delivery than the in-house recruitment functions that they have replaced.
While some shared-services operations spend an average of £700 to recruit each external candidate, others - worryingly - spend almost three times this amount.
Decision-making factors
An organisation should ask itself some searching questions when it weighs up the pros and cons of outsourcing, advises the Chartered Institute of Personnel and Development (CIPD)5.
The CIPD says an organisation should ask why it needs to change the way in which its HR function operates, and which aspects of its existing HR provision are unsatisfactory or would benefit from improvements.
We asked an HR outsourcing consultancy to identify the issues it considers to be important when employers take outsourcing decisions. According to Abi Staines, service delivery director for Capital Consulting, factors include:
- do not outsource a problem - if it was a problem beforehand, it will still be a problem when it is outsourced unless significant changes or improvements are made;
- timeframes - the outsourcing process typically takes many months to come to fruition and it is vital to lay proper foundations;
- clarity of ownership - the outsourcing organisation should appoint a senior figurehead as champion to ensure that the contract is taken seriously;
- clarity about aims - it is important to establish a baseline in order to set goals;
- cultural alignment between partners - approach the outsourcing contract with a partnership mentality; and
- clarity of roles and responsibilities - the devil is in the detail.
In terms of which aspects of recruitment and selection lend themselves to outsourcing, Staines says there are two approaches. An organisation can identify those parts of the hiring process that would benefit from specialist expertise, or it can focus its outsourcing on the aspects that are labour-intensive and more routine.
The benefits of outsourcing
Employers can benefit from outsourcing, even if significant cost savings are not the most likely outcome.
Some of the most commonly cited advantages include: improved efficiency; access to sophisticated technological systems; and greater flexibility and responsiveness.
Almost half (46%) of the HR managers we contacted in 2005 for our research into outsourcing said their organisation's outsourcing of recruitment has been successful.
Only a small percentage of respondents (3%) believed that using a third-party provider had not been at all successful.
The greatest benefits from outsourcing, according to our research, are:
- shorter time to hire, a benefit cited by 59% of our contacts; and
- being able to recruit better-quality candidates, cited by 45%.
The unpredictability of outsourcing is well illustrated by the second finding above. While 45% of the HR managers we contacted told us that outsourcing has helped their organisation to find better-quality recruits, a slightly larger proportion (54%) contradicted this. As far as they were concerned, the standard of recruits has been unaffected by the implementation of outsourcing.
Staines comments: "One potential benefit, that is sometimes hard to quantify, is the 'soft time' that can be released back to the business. Outsourcing can also enhance consistency in recruitment and the employer brand, reduce time to hire and cost per hire, and improve line manager and candidate satisfaction. And an outsourcing provider has market and specialist expertise that can raise the recruiting organisation's game when competing for talent."
Problems to avoid
The CIPD warns that there are a number of potential pitfalls that should be borne in mind when considering outsourcing:
- do not outsource what you do not understand - the outsourcing provider will only have to solve the problem later on (at a cost) and the provider's solution might not be the most suitable one;
- outsourcing does not absolve the organisation of good people-management practice nor of overall responsibility for the provision of HR services;
- the outsourcing provider, rather than the client employer, becomes the custodian of knowledge about the recruitment process and the local labour market;
- recruitment processes are standardised so that they follow the outsourcing provider's own routines instead of the client employer's preferences; and
- business strategy can change, while the employer remains locked into what may have become unfavourable contractual arrangements with its outsourcing provider.
The CIPD explains that outsourcing arrangements are increasingly based on long-term contracts of five or 10 years. The client's business strategy could easily change within such a timescale to the extent that its outsourcing contract is no longer relevant.
The best way of reducing the risk this poses, the CIPD says, lies in improving the breadth and depth of HR managers' understanding of their organisations' business objectives - particularly the direction they are likely to take in the future.
"Lack of buy-in on the part of the client organisation is one of the main pitfalls," Staines adds. "Another is the perception that outsourcing is a panacea. It will work only where there is commitment on both sides to make the venture a success. Trust and control can also be problematic. It can be hard for the outsourcing organisation to let go. And if the two businesses are not joined up properly, a lack of communication can hamper the supplier's ability to deliver solutions."
Retention expert Stephen Taylor does not come across as a proponent of outsourcing6. He highlights a number of potential problems, such as legal disputes over the meaning of contractual terms. "The reality often disappoints," he says. He adds that when contracts are for five years or more "it is not easy, in practice, to ditch one contractor and immediately employ another."
Managing suppliers
The manner in which an organisation approaches the outsourcing process will be a significant determinant of its eventual success. For example, taking the time to select a suitable supplier at the outset is vital.
Staines says: "There are a number of factors to take into account, such as cultural congruence between partners, the provider's agility, ability to provide bespoke services and proven expertise. It is important to consider any conflicts of interest - for example, what if the third party provides services to a competitor? Value for money is obviously important, as is the level of commitment to people's development. If the provider's people are fresh, the proposition will be fresh."
Another key success factor is ensuring the effective monitoring of the outsourcing contract. The development of an open and productive relationship between the outsourcing organisation and its provider is paramount. Taylor warns that developing "a really fruitful, high-trust relationship between the two parties" is one of the most challenging aspects of outsourcing.
He also cites poor performance standards as another difficulty. It is vital that clients keep a close watch over their outsourcing provider's levels of service.
For example, the London Borough of Sutton had already developed a framework and "hundreds of key performance indicators" to support the monitoring process before it began the tendering exercise to find a provider. This was because the council's project board views close monitoring of the service-level agreements as being pivotal to ensuring clarity and quality of service.
Staines stresses the importance of a "two-way service-level agreement", with clear guidelines and accountability on both sides of the partnership. Regular review meetings with a senior stakeholder in the outsourcing organisation are also vital to keeping the contract on track, she adds.
Global communications and information technology provider Verizon Business outsourced recruitment for its retail sales division three years ago.
"We needed to enhance our resourcing capability," Trevor Severgnini, vice-president, international HR, says. "At the time, we had many different relationships with a number of commercial suppliers and we needed to enhance our control over recruitment."
In 2003, after a robust tendering process, Capital Consulting was engaged to provide a "tailored direct hiring solution". The key aim of the contract was to deliver "the best in people, process and technology".
According to Severgnini, the company's outsourcing partner has done just that, and to such a degree that the company has engaged Capital Consulting to provide further resourcing services. He says: "The relationship has moved on significantly, with Capital Consulting willing and able to change with the evolving needs of the business."
Success leads to expansion
Capital Consulting is now fully embedded within Verizon Business in Europe and is responsible for areas such as:
- candidate attraction;
- management and payment of third-party suppliers;
- psychometric assessment - verbal and numerical reasoning and personality profiles;
- reference and pre-employment checks; and
- management of all internal and external recruitment activity.
Capital Consulting also has direct involvement at the early stages of the resourcing life cycle through workforce planning and, in some cases, at the job design stage.
At the other end of the recruitment spectrum, Capital Consulting also sends out offer letters and employment contracts - a task it has been performing for the past year. Severgnini explains: "Often, the relationship with the candidate can falter at this latter stage when, typically, the outsource provider hands over responsibility to the client organisation. Delays or mistakes can ensue that leave a bad impression with the prospective employee. Allowing Capital Consulting to prepare the offer letters means that there is continuity in the relationship with the new employee and that linkage is working very well."
Capital Consulting has also designed a core assessment toolkit, which has been translated into French and German. Its recruitment reach on behalf of Verizon Business will extend further with the opening of an office in Asia.
Recruitment infrastructure
One of Capital Consulting's first steps was to ensure that the technology was in place to build a proprietary candidate database. By consolidating the different routes for sourcing candidates, the e-platform enables the company to funnel candidates through its recruitment website and into the system.
Severgnini says that most people in Verizon Business are not aware that the recruitment function is outsourced to Capital Consulting, because the service is so integrated with the business.
"The outsourcing arrangement is also usefully adaptable," he adds. "For example, if there is a particular campaign under way requiring more resource, there will be more Capital Consulting people on site to ensure it happens seamlessly."
The advantages of a flexible partner
In Severgnini's view, there are few providers of outsourced recruitment processes that excel in supplying the range and level of service provided by Capital Consulting. He says: "The success of the contract relies on a partner approach, and the Capital Consulting team is very 'open book' with exactly how much effort has gone into each small part of the process."
The benefits of outsourcing recruitment go beyond enhancements in time to hire and cost per hire - although substantial improvements have been made on all such performance measures. Another success is the improved brand recognition of Verizon Business as a potential employer. The company benefits from bespoke management reporting and a more robust assessment programme. The proportion of job offers accepted by candidates has increased by nearly one-third in three years.
Pharmaceuticals company GlaxoSmithKline (GSK) has a sales force of around 1,000 in the UK. Even with natural attrition alone, this means that the company could need to recruit around 100 new sales representatives each year.
Two years ago, GSK took the decision to use a third-party provider to carry out specific elements of its recruitment and selection process. This included applications management, sourcing candidates and arranging interviews.
Outsourcing was favoured because of GSK's limited internal resources for recruitment, and its desire to speed up its hiring process and make it more efficient.
A seamless process
Iain McLaughlin, resourcing manager, dislikes the term "outsourcing" because it suggests that the client organisation is transferring responsibility for the activity or function to a third party. He comments: "For a third-party venture to succeed, it is essential that the supplier is regarded as a partner. The employer should not devolve any responsibility for the process. When it works well, the recruitment partner is viewed as an extension of the recruitment team."
McLaughlin explains that the process is designed to function as a seamless whole, with the third-party provider picking up the facilitation or administration at the appropriate points and working in close partnership with GSK managers on a day-to-day basis.
Some of the aspects of recruitment that have been transferred to GSK's external partner require specialist expertise, while others are more process-driven.
He says: "Many of the recruitment activities involve a lot of administration, such as getting candidates and assessors in the right place at the right time. But it is crucially important that this is done well because it is the reputation of the company at stake."
Another area of expertise provided by GSK's external supplier concerns assessment centres. As well as being responsible for the detailed organisation of these selection processes, GSK's recruitment partner provides trained facilitators to ensure that they are administered effectively.
Facilitators work in partnership with hiring managers to ensure a level of rigour and consistency in scoring, as well as coaching "first-time" assessors in the correct process.
Recipe for success
Outsourcing parts of recruitment and selection to third-party suppliers has proved to be a real success for GSK. According to McLaughlin, the time to hire has improved, which in turn has reduced recruitment costs. Line managers' satisfaction with recruitment has risen.
Importantly, the quality of new recruits has improved. "We are now quicker at getting to the most suitable candidates," he says. "There have been other changes to our resourcing approach, but using external providers has contributed to the overall improvement. For example, outsourcing has freed up the internal recruitment team's time to review the process overall and make adjustments."
The outsourcing arrangement provides GSK with valuable management information. This regular flow of data covers every aspect of the recruitment process. The information enables GSK to analyse precisely the parts that are working most effectively, and also those where there is room for improvement.
"The management data have enabled us to manage our agencies more effectively," McLaughlin says. "Until we had access to these metrics, we did not have this level of knowledge. For instance, we discovered that one agency was not consistently sending out interview reminders and some candidates were therefore not attending - it may be a simple thing but it is very important in terms of overall impact."
McLaughlin has this advice for organisations considering outsourcing recruitment: "Outsourcing is sometimes feared by many in-house recruitment organisations and this need not be the case. If done properly, with clear expectations set and monitored, the advantages can far outweigh the drawbacks - such as too many points of contact. Outsourcing is often misunderstood to mean losing control and accountability - but often the opposite is true. If done well, the business simply views the third-party service as an extension of the recruitment team."
Taylor Woodrow is a leading developer of new homes across the UK and in selected markets in North America, Spain and Gibraltar, and employs just under 5,000 people in the UK. Three years ago, the company outsourced responsibility for recruitment to Parc Resource Management. Its main impetus was to improve efficiency, quality and cost-effectiveness.
The Parc response centre manages Taylor Woodrow's recruitment from the point it receives a vacancy authorisation form and starts sourcing candidates, to initial screening and assistance with job-offer letters.
The company retains responsibility for selection, although Parc manages the associated administration, such as arranging interviews. At any one time, Parc is handling around 100 permanent job vacancies, and up to 400 temporary vacancies a week. Its team is not responsible for graduate recruitment.
Working in partnership
Justine Brown, head of resourcing and contracts at Taylor Woodrow, says strong working relationships have been built between Taylor Woodrow, as the client organisation, and its outsourcing provider. Although Parc's dedicated recruitment team is offsite and based at Parc's London office, there is almost day-to-day contact with its client. The head of resourcing and contracts has monthly meetings to monitor progress against the service-level agreement and there are also formal quarterly review meetings.
The service-level agreement between Taylor Woodrow and Parc contains a wide range of key performance indicators, such as cost and time to hire. However, Brown believes that a strong partnership approach is vital to making a success of the outsourcing contract. The recruitment advisers also have a close working relationship with line managers.
The outsourcing venture has so far been very successful. This is in the context of Parc having filled around 400 permanent vacancies as well as a high number of temporary vacancies. This meant that Taylor Woodrow's three-year cost-saving target was exceeded within six months. Other tangible benefits include:
- implementing standard terms and conditions across the agency supply chain;
- reducing the proportion of managers who were not using agencies on the company's preferred suppliers list from 60%;
- introducing new management information and rigorous reporting arrangements;
- reducing the recruitment cycle time from 13 weeks to five weeks;
- cutting staff turnover by 3.5%; and
- reducing the average cost per hire from around £5,500 to £3,800.
Parc has added over 100 new agency suppliers to the preferred list, thereby enhancing its client's recruitment reach, but has managed them within a strict set of terms and conditions.
Brown says: "Aside from the improved speed, quality and efficiency of service, we have also gained a sophisticated database management system that helps inform the resourcing process. When we were responsible for recruitment internally, we did not have the time to make proper use of unsolicited applications. Now, all applicant details are stored electronically on a central system where we can fish for future talent."
Learning curve
Outsourcing responsibility for recruitment has had a positive impact on both recruitment and the business. As with any organisational change, there are still learning points for the HR team.
"I don't think we quite appreciated beforehand the scale of the change process and the impact on line managers," Brown comments. "People had established relationships with agencies and their own ways of doing things, so we spent a lot of time over the first year explaining the new approach. After the first year, we were able to point to the significant cost savings and positive effect on the business."
Another point concerns the name of the recruitment team. With hindsight, Brown thinks it should have been called the "Taylor Woodrow recruitment team" to underline the fact that it is fully integrated with the business. "I view the recruitment team as an extension of my own HR team. Giving them the company name would have removed any kind of 'them and us' approach from the start, although there is now a close partnership working with Parc across the company."
1Partnerships in recruitment: using a shared-services model, Employment Review 855.
2Outsourcing recruitment: a minority pursuit?, Employment Review 830.
3Managing resourcing pressures: the prospects for 2006/07, Employment Review 847.
4"Shared HR services can mean big savings for UK companies", press release, PricewaterhouseCoopers, 10 October 2006, www.ukmediacentre.pwc.com/Content/Detail.asp?ReleaseID=2054&NewsAreaID=2.
5"HR outsourcing", Factsheets, CIPD, September 2006, www.cipd.co.uk/subjects/corpstrtgy/general/hroutsourcng.htm?IsSrchRes=1.
6People Resourcing, Stephen Taylor, CIPD, third edition, 2005, www.cipd.co.uk/Bookstore/_catalogue/HRPractice/1843980770.htm.
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1. External resources
2. Internal resources
Source: IRS. |
