The three pillars of human resource outsourcing

Outsourcing a strategically important business function such as human resources is a difficult business decision to make, says Riaan Terblanche, the Managing Director of HRO, an EOH company.

"Companies are concerned about aspects such as losing control over knowledge and processes ranging to the pitfalls surrounding total quality management."

Recent statistics show that more and more companies ranging in the 1 000 to 20 000 headcount bracket are outsourcing their human resource activities in an effort to cut costs, says Terblanche.

"Human resources, as a non-profit cost centre, is an ideal candidate for outsourcing, given the state of the global economy. The incidence of large multinational organisations outsourcing their HR administrative functions such as payroll, recruitment or benefit administration to off-shore locations is also increasing."

Almost 10% of Fortune 500 companies have some kind of HR business process outsourcing (BPO) agreement in place that covers full spectrum outsourcing. "These are typically multi-year agreements that span a multitude of processes such as core human resource management record-keeping, payroll, benefits administration, employee self service and call centres," explains Terblanche.

HR BPO is the fastest growing segment of the overall business process outsourcing (BPO) market. "This statement is further underscored by the increasing number of middle-market BPO agreements that are being signed that do not necessarily have the level of complexity that a Fortune 500 company has. I define the middle-market segment more in terms of its complexity factors than by its revenue or headcount," says Terblanche, further adding that the middle-market seems to be expanding into the HR BPO market.

From the many functions in human resources, it is typically the non-strategic and burdensome administrative functions that are shipped off to third-party suppliers of BPO. This trend is however changing to include more strategic functions such as organisational design, talent and performance management. The three pillars of outsourcing do however form a strong platform to work from to ensure the success of a BPO agreement:

1) Cost Gains: More often than not, the primary reason behind outsourcing is cost savings. If this is the only reason, and the outsourcing decision is based on cost savings in isolation, there is little guarantee of success. In fact, an analysis of the typical risk clauses in SLAs governing this space clearly shows that cost savings alone are unable to guarantee outsourcing success.

2) Efficiency Gains: This is undoubtedly a key driver in the outsourcing environment. Where third-party suppliers of BPO are innovators and are doing things smarter, the chances of successful outsourcing is greatly improved. Often, this is a function of the outsourcing partner`s ability to innovate with technology as an enabler as opposed to simply employing standard human capital management platforms and traditional technology.

3) Transformation Gains: The SIPP (Standard Integrated People Practices) model in human resources, in addition to a `right first time` methodology, inevitably leads to cost savings and innovation on standardisation. Often, the correct approach and definition of `work` as opposed to `people` is what confuses HR`s capability to drive the organisation`s strategic outcomes.

"Recent case studies indicate that where the three pillars of outsourcing are involved on an integrated basis, the potential success of HR outsourcing is increased significantly. It is therefore in the company`s best interest to keep these factors in mind when deciding on an HR BPO agreement," concludes Terblanche.