To outsource, or not to outsource?

There is no question, says Phil Fersht, Vice President of Research for Everest Research Institute – outsourcing is a “no-brainer”. Here he explains why…

“It’s a no-brainer to out-source. Let’s focus seriously on what HR should be doing”
-Phil Fersht

HRO growth
Growth will come more in the middle market than the high end of HR outsourcing because it is less complex. One of the big issues with HR outsourcing in general, particularly at the high end, is it affects everyone in the organisation; all management, all staff, everyone gets affected.

The whole HR outsourcing industry has been taking a thorough look at itself. We have to get these deals priced better and we have to set customer expectations more effectively, and I think it is going to be more profitable for vendors in the middle-market because they can start to build a platform for all customers rather than taking a customised, one-to-one type approach. The idea being that you take a platform, look at ADP for an example, and bring multiple customers onto it. Then the only customization you need is at the call center level, rather than having to customize at the software level.

Combating the negative
There is a negative view of outsourcing where the customer or the employee has to have direct contact with offshore staff to get things done and the offshore staff does not speak very good English or handle their enquiries very well. That brings immediate stigma.

Having said that, the permission to offshore has become much more widely accepted in the last couple of years: two years ago people were up in arms about using offshore locations, but we have seen how quickly it is becoming accepted. It is no surprise when you call up your bank and someone might be in Bangalore or South Wales, it’s just offshore, or near-shore.

You may be seeing a lot of new things coming into play, like home-shoring. For example, my own company is using a telemarketing agency to do a sales campaign and we use lots of homeworkers, like stay-at-home mothers and the elderly, who work from home for relatively cheap prices. And I think there is an industry-wide move towards this in a very acceptable manner.

HR and HRO
I think we need to get the story straight between HR and outsourcing. The first things you can outsource are the transactional types of work, the stuff that is often low impact and can be done reasonably well elsewhere. The high-tech stuff where people get involved in strategy, and I think that something like recruiting is absolutely core to a company’s success, will not be outsourced on a grand scale. That said, I do feel that the whole process of HR outsourcing is headed towards “let’s start thinking about what our staff are going to do”, as opposed to “we are going to push out the payroll and benefits and pensions administration”.

The talent war
We hear a lot about the talent war. I think a lot of it is pushing talent management and some recruitment process outsourcing-type things.

I believe that HR outsourcing should enable a company to focus more on its core goals in HR and to the acquisition and management of its talent, and in many cases you need to use some external services to help you do that. You can use some types of third party service to help acquire talent but ultimately you want to have your HR internally, managing the process and bringing on board the right people for the company.

The talent war is really the ability to get better quality staff quicker through the use of more sophisticated technology search tools, and having third party companies to help you do that who are specialised in your industry will help.

Getting it right
Building metrics into contracts is extremely important and I believe that contracts should be more outcome-focused than short-term-focused initially. I think one of the biggest problems is that people go into outsourcing with a short-term approach.

Today, the average ‘lifespan’ for a CIO is eighteen months! If they are compensated on taking a big hit off bottom-line costs – and they can do it through outsourcing – their goal might just be “what we can shave off next year”. An HR outsourcing deal should be looked at over ten years. You should be thinking about the whole growth path and management of your most valuable assets: your staff. So building in metrics is absolutely vital.

Recruitment process outsourcing and talent management type services are moving in a slightly different direction from classic HR outsourcing. I see classic HR outsourcing as payroll, benefits, that sort of thing. Talent management and recruitment process outsourcing really impacts the whole business – how you can get the right sales staff in place? How can you get the right development people? I believe that we will start to see specialist recruitment process outsourcing contracts separate to major HR outsourcing contracts. I don’t think that, in many cases, people will combine the two.

HRO: life lessons
Make sure you know whom you are dealing with. A large number of HR suppliers are gunning after the mid-market space and we expect a lot of consolidation in the next 24 months. You want to make sure that your provider is on a solid footing and that any contract caters for the possibility of your provider getting acquired or merging with other providers.

Look at the lessons people have learnt who have gone through the HR outsourcing process because, to be quite frank, there has been a lot of pain. Look at HR outsourcing over a five-year period and not a one-year period and understand that the first 18-24 months are going to be a little painful. There’s going to be a lot of change in the company, cultural change.

Think: we can get better – better technology and better processes. We can get the ability for employers to serve themselves, which is often better. You can start to administer your own benefits, your own travel expenses, your own payroll and invoicing and that sort of thing. Use HR outsourcing as an opportunity to focus on your retained HR organisation, to say: “We can get someone else to do the transactional processes at half the cost and just as effectively.” It’s a no-brainer to out-source. Let’s focus seriously on what HR should be doing.

Phil Fersht is Vice President, Research for Everest Research Institute. He is a highly respected and recognized industry analyst and advisor across Business Process Outsourcing (BPO) towers worldwide, having lived extensively in Europe, North America and Asia as an analyst, advisor and practitioner in BPO sourcing to both service providers and buy-side communities for 11 years.

Phil has received several significant industry accolades, including being named HRO and FAO Superstar by HRO Today and FAO Today magazines for both years 2005 and 2006.