Expanding The HR Horizon Through Outsourcing

Published by MBA Skool Team, Published on June 21, 2012

Traditionally Outsourcing revolved around certain business processing services and was termed as Business Process Outsourcing (BPO). Later, expert or advisory services termed as Knowledge Process Outsourcing (KPO) and legal support services termed as Legal Process Outsourcing (LPO) were added to the outsourcing market.

These outsourcing services were majorly offshore activities that a firm outsourced to an entity based in another country, primarily to save costs. But today Human Resource Outsourcing (HRO) has emerged, giving a whole new meaning to the concept of outsourcing (HR outsourcing (HRO) - an in-depth guide, 2008).

HR outsourcing (also known as HRO) is the process of sub-contracting human resources functions to an external supplier, who usually, is from the same country (Sanders &Sansbury, 2003). HR outsourcing was seen as an efficient and effective answer to handle the transactional HR function. But today HR going strategic, outsourcing has reinvented itself and it’s not surprising to see that HRO is expected to grow by 8-10 percent and reach around $3.35 billion in 2011 (Anonymous , 2011).

The rationale for adopting Human Resource Outsourcing (HRO)

Some of the reasons why organizations are motivated to outsource the HR function are:

  • To obtain a strategic focus: Ed McMahon of Watson Wyatt believes that if  the HR function has to create a competitive advantage for the firm it has to focus more on strategic ‘core’ issues and less on transactional issues, which would hence require outsourcing of administrative tasks (Watson Wyatt Canada, Novemeber 5, 2001).
  • Increased efficiency: Due to cutting-edge technology, vendors can handle time-consuming administrative tasks in a more efficient way resulting in accurate and consistent data, bringing down the transaction costs (Sanders & Sansbury, 2003). In fact the HR department may fail to respond to the needs of all employees due to the sheer volume of transactions. A vendor through sophisticated systems can track each request and answer them swiftly.
  • Promotes innovation: What happens when you free a person from the daily clutter? He or She gets restless to do something new. This is what makes outsourcing crucial to an innovative organization. Innovation will only develop when it’s nurtured over a period of time and outsourcing provides that much needed breather from daily tasks.

The obstacles in Human Resource Outsourcing (HRO)

So is HRO really a no-brainer? Well experts believe that there are certain risks and challenges that an organization could face when outsourcing the HR function. These include:

  • Unexpected higher costs: The basic premise that led to a flurry of outsourcing deals was the promise of lower costs. But this has rarely happened. In some cases, it has resulted in higher costs! For instance Kraft foods, North America incurred significantly higher costs to outsource than to upgrade internal HR systems (Anonymous, How to thrive, & not merely survive, when outsourcing HR , May 2003).
  • Mistrust between the client staff and the vendor: For instance, in an Organizational development (OD) programme outsourced to a vendor, there is a high possibility that the vendor will recommend significant changes that calls for a drastic overhaul in current organizational processes, systems etc. This could mean a loss or division of control in certain activities that were only carried out earlier by the internal HR staff. Now if there is lack of trust among the staff about the intentions of the vendor, the outsourcing deal could fail midway.
  • Unwillingness to change: Any outsourcing deal involves substantial change for any employee. Fear grips the mind that there could be job losses, a significant pay cut, increased working hours etc. For those who are used to face-to-face communication, the switch to the phone and Intranet may not be easy. They will resist any attempts by the management to bring about change.

Avoiding the bumpy road

So as seen earlier there will be hiccups when going in for HR outsourcing. So following are some of the measures a firm should implement to make the path towards outsourcing clearer:

  • Measure the vendor’s performance: One of the problems mentioned earlier related to the failure of outsourcing in lowering costs. Most vendors talk in the air about the potential savings that a firm can obtain through outsourcing without demonstrating how this will be achieved. Hence specific performance measures needs to be developed to measure the vendor’s performance. The concept of benchmarking can be used. For instance, if a recruitment drive was undertaken recently by Company XYZ through its outsourcing partner B, hiring metrics (for example cost per hire, time to hire etc) would give XYZ exact data on B’s performance. But was the performance good or bad?  This information would be obtained when B’s performance is benchmarked with the industry average or with the nearest competitor of A.
  • Cultures should match: The mistrust usually develops because of the ‘culture clash’. Some of the factors could be the differences in the working style, in the kind of organization structures etc. Hence it is highly recommended that the vendor makes an on-site visit to understand the cultural differences. Next the vendor should be trained in the corporate culture of the company. This brings out the cultural nuances before the work begins and allows both the client and the vendor to work towards minimizing the cultural differences.
  • Getting the buy-in of the HR staff: Now to minimize this resistance, the HR staff should be involved in the entire process. A change agent must be identified. Such a change agent must be known to the employees and hence trustworthy. The senior management must communicate the need for outsourcing, the potential benefits that will accrue to the staff and finally what needs to be communicated and when to the change agent. The change agent will then be responsible for answering all the queries that the HR team has. All communication must be honest and accurate.

The finishing line

As indicated earlier organizations can reap significant benefits from HR outsourcing. However the organization should throw caution to this wind of change. The specific reasons for outsourcing, the benefits that the vendor is likely to provide, the costs and risks the organization could face when going in for outsourcing should be weighed in carefully.

When HR outsourcing is done right--and particularly when it involves comprehensive solutions--it has a profound impact on an organization's people, processes and the business itself (Sanders & Sansbury, 2003).

This article has been authored by Sheldon Carvalho from XIMR.

Image Source: http://moneymax101.com/news/jamaica-leads-the-caribbean-as-outsourcing-hub/

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