Taking it outside
Like it or not, there is a growing trend to outsource the HR function. Margaret Harvey, who oversaw the BP/Amoco contract, reviews the background to the current growth in the HR outsourcing market and examines the key issues HR directors should consider before embarking on an outsourcing strategy
HR outsourcing is a hot topic in many boardrooms. Last year revenues generated by HR outsourcing projects exceeded growth predictions, while the size and nature of the deals demonstrated that the HR outsourcing market is coming of age.
Traditionally customers have parcelled up discrete areas such as recruitment, benefits administration or training, and outsourced these to service providers with reputations as specialists in the niche service areas.
The next generation of HR outsourcing will be characterised by customers taking a more strategic, integrated approach and the advent of new providers offering "life cycle" services, which handle all employee issues, from recruitment to retirement and beyond. Technology will also play a large part in shaping HR outsourcing.
Landmark HR deals
A number of the landmark HR outsourcing contracts that were signed in 2000 reflect a move towards an integrated approach. Some include HR as one of several outsourced business processes, for example, Pricewaterhouse Cooper's global contract with Nortel Networks, which includes Nortel's human resources, training and finance functions. Other contracts relate exclusively to HR functions, but on a grand scale, such as Exult's $600m (£430m) contract to outsource British Petroleum's entire global human resources function.
Catalysts for change
Achieving cost savings is often cited as a reason for embarking on an outsourcing programme. However, in the HR environment, cost reduction alone can rarely justify the fundamental change that HR outsourcing involves. Anticipated savings as a result of HR outsourcing are typically in the 10 per cent to 20 per cent range over the life of a multi-year contract, but this rarely represents a major percentage of a company's overall cost base.
For some companies a major structural event, such as a merger or acquisition, may bring about wholesale changes. In these circumstances outsourcing may be seen as an effective means of harmonising a number of different legacy HR systems.
Other organisations consider outsourcing as an alternative to making a capital investment in the new technology required to support the HR function. Investment drivers of this kind often play a part in decisions by public sector bodies to outsource.
Some companies have progressively outsourced more and more non-core activities, and as the HR outsourcing market matures, outsourcing will increasingly be seen by these organisations as a viable option for the HR function. BP is a good example of a company which has, since the late 1980s, championed outsourcing as a business model and progressively outsourced various activities, including IT, telecommunications, finance, accounting, procurement and, in 2000, HR.
Another reason for outsourcing may be when a customer forms a joint venture with a service provider to develop a HR share service centre. The joint venture can deliver services back to the customer as well as offer services to the wider market on a commercial basis. An example of such an HR-based joint venture approach is BT's alliance with Andersen Consulting/Accenture.
The impact of technology
Many companies have historically under-invested in the technology used to support their internal processes and HR is no exception. This has led to reliance on labour intensive manual systems for generating, processing and storing the significant volumes of paperwork involved in many HR processes. In decentralised organisations there are often many different systems used by HR professionals in various business divisions or geographic sites, leading inevitably to the duplication of effort and inefficiency.
The advent of modular software applications, such as SAP and PeopleSoft, which are specifically designed to integrate a range of HR processes, has had a major impact on the role of the HR function. It has liberated HR staff from the routine of low value tasks and has allowed resources to be focused on more strategic matters, such as the development of policy. It has also allowed companies to standardise their HR processes, sometimes into shared service centres, and gain economies of scale as a result.
The development of the Internet has also had a major influence on the change in the HR outsourcing marketplace. It has encouraged people to think imaginatively about radically re-engineering the HR function. In companies where employees have computer facilities, such re-engineering results in a "self-service" approach which allows employees to have direct access via an employee portal to information on employee benefits, training, internal job vacancies and so on, as well the ability to update personal records on-line and carry out other routine transactions.
The role of the contract
An outsourcing contract, whether for HR or any other business process is the permanent record of the commercial deal between the parties. It must therefore be a clear and unambiguous reflection of that deal. The contract must accurately record each party's rights and responsibilities at any given time during its term. It must also anticipate and cater for the many events that will occur during the life of the contract, including changes in the customer's business needs. The contract must be a living document and the tool used by the parties to monitor performance. It must provide a framework for resolving disputes and ultimately legislate for how the relationship can be "unwound" on the termination or expiry of the contract.
The contracts needed to support a joint venture approach will differ from those supporting a traditional customer/supplier relationship. Equally a contract for the outsourcing of a company's global HR requirements will have a different order of complexity to a contract for a limited number of HR processes in a single jurisdiction. However, the following issues should be considered in relation to every HR outsourcing contract.
Selecting a service provider
It is vital that an effective long-term partnership can be established and maintained between a customer and a service provider. Selecting a provider that is financially stable and has a proven track record will obviously be key.
Cultural compatibility between a customer and supplier organisations is also likely to be a core reason for selection. Although this is difficult to legislate for in the contract, it is possible to focus attention on cultural issues by aligning the personal objectives/ reward plan of the provider's key employees with the desired culture.
Scope - strategy v process
Establishing a clear idea of the service levels is fundamental to the success of any outsourcing arrangement, which in relation to processes such as HR, is not easy. Many organisations do not document their HR processes or measure internal performance against pre-defined service levels. You need to factor sufficient time into your procurement process to develop the scope of the service levels, which will then form the backbone of the ultimate outsourcing contract.
Service levels and service credits
A contract should include terms that relate to monitoring the delivery of services. The parties should also agree on key measures or service levels to which financial service credits are attached. If the provider fails to meet the agreed service levels it should be liable to pay (or credit) you with service credits. Service levels must be set against measurable, objective criteria, by focusing on aspects of the services that could have a material impact.
Benchmarking and audit rights
The contract should allow you to review the provider's performance and the costs associated with the services on a periodic basis against an appropriate external benchmark. The precise terms of any benchmarking clause will inevitably be the subject of negotiation. If the benchmarking exercise reveals over charging or underperformance, the benchmarking provisions should force changes in the service levels, charges and any other key aspects of the contract.
People issues
Staff transfer is a major issue in most outsourcings. In the UK and other EU member states the Acquired Rights Directive (Council Directive 77/187/EC) and its local implementing legislation will dictate whether the customer's existing HR team will transfer to the service provider. Managing the issues associated with personnel transfers will be a key issue, particularly given the HR expertise of the employees involved!
Protecting data
The protection of sensitive employee related data is naturally of major concern when outsourcing HR services. You must ensure that your organisation is in a position to comply with its obligations under the relevant data protection legislation. The outsourcing contract will therefore need to contain detailed provisions relating to the supplier's handling of data, including your rights to monitor the supplier's compliance with these obligations.
Planning for change
A customer's HR needs will change over the life of the outsourcing contract and there will be improvements in the processes and technology used to deliver the HR services. You must ensure that the contract is flexible to manage this change and reap its benefits. The contract must also provide the way in which the services can be transferred from the original service provider to a successor provider or back to the customer on its termination.
Does outsourcing deliver?
In December 2000, IDS analysed nine examples of HR outsourcing projects in both the commercial and public sectors. In the resulting publication, Outsourcing HR Administration, IDS concluded that while a number of high profile contracts have recently been signed, it is not yet known whether the customers' objectives have, or will, been achieved over the longer term.
Some organisations, such as BP and BT are keen to be at the forefront of developments in the HR outsourcing area. Others are adopting a more cautious approach, preferring to gain the benefit of others potentially hard won experience.
Margaret Harvey is a partner and outsourcing specialist at Addleshaw
Booth
Growth forecasts
2000 may well have been a breakthrough year, but it does not represent a
blip, it is indicative of a significant trend. In a report produced last year
by Morgan Stanley Dean Witter, the market for HR outsourcing was forecast to
grow from $1bn (£712m) in 1999 to $12bn (£8bn) by 2003. This mirrors a general
growth in the overall business process outsourcing market, which Gartner
Dataquest estimates will generate revenues in excess of $500bn (£356bn) by
2004.
