Outsourcing: It’s touted as the business solution of the decade, a trend that was bound to find its way into the HR suite. But it’s also a concept that initially sent many HR professionals into instant anxiety over whether or not they’d ultimately be replaced by third-party vendors.
Now after the dust has settled from the initial outsourcing landslide, HR professionals are left wondering: Where exactly does HR stand? Are entire human resources departments being sent packing because management views this function as “noncore”—a department that’s more easily and efficiently managed by an outside supplier?
That was the projection of many outsourcing proponents who thought the HR function was one of the most logical areas to outsource, mainly because it couldn’t quantify the “value-added” benefit.
In fact, some prophetically suggested it would make perfect sense to encase the entire in-house HR function in cement and dump it into the proverbial black hole; the suggestion being that outside vendors could (with eyes closed no less) perform the same functions better, faster, and more cost-effectively.
The outcome of the outsourcing trend, as usual, is somewhere on middle turf. Outsourcing has neither totally replaced HR functions, nor has it left most HR departments untouched. In the end, it has become an HR tool that helps HR departments get rid of what’s not strategic to their role while keeping what is.
Outsourcing strategy supports HR’s role, but doesn’t replace it.
Few people would argue with the steam behind the outsourcing trend. After all, outsourcing revenue, in general, is skyrocketing. This was evidenced by the March 21, 1997, edition of the Staffing Industry Report published by Los Altos, California-based Staffing Industry Analysts Inc. It projected that annual outsourcing revenue would take a 35 percent jump over 1996 figures, exceeding $108 billion by the end of 1997, and there appears to be no end in sight to this record-breaking growth.
And although it’s true that organizations are increasing their outsourcing activity in the human resources area, the HR function is far from extinction. A recent survey conducted by the New York City-based American Management Association indicates that roughly 75 percent of the more than 600 respondent firms outsource at least one or more HR activities. But what’s being outsourced are segments of the HR function, such as benefits administration, payroll, EAP services, recruiting, temporary staffing and training—rarely the HR function in total—a fact that indicates the outsourcing phenomenon has hit a speed bump at HR’s door.
Outsource the entire HR function? Most find that thought absurd, especially in a business world where change is rampant, competition is ferocious and human assets are sacred. No, HR’s role today is more important than ever, and HR outsourcing rationale supports the fact that there’s a renewed, and perhaps unprecedented, appreciation for HR’s contributions.
Just look at the “why” behind most HR outsourcing decisions. Certainly some of the appeal this option offers is related to the cost-savings factor and the opportunity to buy external expertise. But one of the main reasons companies are outsourcing segments of the HR function is to allow human resources staff more time to focus on core activities that are strongly linked to key organizational goals.
And hand-in-hand with these core responsibilities comes a more meaningful role for HR professionals, one that positions them as tough but judicious keepers of organizations’ conscience and guardians of the corporate culture. Facilitating major change efforts such as mergers, acquisitions and restructuring, and shaping culture through effective communication and workforce development, are critical activities that are at the heart of HR today. Most experts agree these strategic activities shouldn’t be managed through a third-party relationship.
HR’s leadership role also has become increasingly more important because of the level of organizational change that’s running rampant in today’s work environment. Paul Simoneau, HR manager for The Gillette Co.’s North Atlantic Group, is one who agrees that HR outsourcing decisions should be made with careful forethought. Simoneau says his organization outsources relatively few HR functions (temporary staffing, matching-gifts programs and EAP services) because he believes HR’s role is too vital to the success of the company to outsource on a large scale.
Simoneau feels the level of change taking place in most organizations today calls for HR to provide an important and irreplaceable link between the workforce and management. Simoneau, based in Boston explains: “HR needs to be at the table when decisions are being made about major change initiatives, because for the workforce to support the change, it has to understand the ‘what’s in it for me?’ HR has to be there to give [employees] that answer and help them through the transition. [HR’s] no longer there just to plan the company picnic.”
Simoneau adds: “Our role is to figure out how to leverage our HR talent and do an even better job supporting the business by adding value and playing a more significant role in meeting corporate objectives. In a way, we’re competing with outside suppliers, because if we’re not adding value, and we’re not providing extremely high levels of service and doing it cost effectively, the company may look to outside suppliers through an outsourcing plan to meet those goals.”
Simoneau says he feels strongly that HR also plays a major role in supporting and shaping the culture of his organization by serving as communicator and interpreter of the corporate message. He says, “Whether it’s good news or bad, it’s up to us as internal HR professionals to put the right spin on it and make sure the message is consistent across all divisions.”
Some HR skeptics still hold on to the idea that HR belongs in the background, maintaining that the primary responsibility of managing the human assets rests with line management and with human resources playing a limited role as facilitator. But people like Gillette’s Simoneau are seeing the opposite trend. As organizational structures have become leaner, leaving fewer managers to take care of the business, Simoneau finds management staff turning to HR more often to provide strategies for dealing with difficult issues like violence prevention, sexual harassment, and the legal issues related to corrective action and employment termination.
Simoneau recently conducted training sessions on workplace violence and sexual harassment himself, and felt the training was well received because it was delivered by an internal person who was visible within the organization. “We’re addressing issues that in the past have been unspeakable, and we’re making them speakable. We haven’t sent this training outside because these are difficult issues and we want the staff to hear first hand that we support awareness and education in these areas. Some of that might be lost by bringing in a third party that doesn’t already have internal credibility and an established level of trust.”
Simoneau admits, however, that the challenge is in figuring out how to continue to keep up with the changing training needs of the staff, particularly with a workforce that’s somewhat mobile and very diverse, keeping it cost effective at the same time.
Brenda McGhee, manager of employment services for Glaxo Wellcome Inc., knows firsthand what managing organizational change is all about from an HR standpoint. McGhee, located in Raleigh, North Carolina, was on board for the Glaxo Pharmaceutical/Burroughs Wellcome merger that took place last year. She believes HR played a critical role in the transition. “We’re still in the process of building the combined culture of two large, successful companies. As we went through this merger, we in HR were as closely involved as any other group across the country. Over the last year, we’ve become even stronger partners with the business. Our line managers really view the HR staff as true experts in the field.”
McGhee’s human resources department outsources it’s company’s relocation and EAP services, as well as its onsite wellness/fitness program and temporary staffing activities. Having these areas managed through a third-party relationship allows McGhee’s organization to save money and time. “[The outsourcing vendors are] experts in these areas. We aren’t, and don’t care to be. We’re HR experts, and we want to devote our time to core functions in this area.” McGhee says these core functions are critical to the firm and have bottom-line impact that can be measured by reducing turnover, maximizing dollars spent on training and improving processes that impact productivity.
Outsourcing isn’t always the best answer.
Both Simoneau and McGhee believe a lot would be lost in outsourcing what many believe are the more strategic functions of the human resources role. According to Simoneau: “When you start outsourcing things like succession planning, organizational design, recruiting and training in its entirety, you start losing your connection to the employees, and you lose consistency of policy application, particularly in a large organization.”
In fact, some human resources executives are thinking twice before jumping on the outsourcing bandwagon, even when it comes to some of the more commonly outsourced functions. Anthony Bonno, senior vice president of human resources for Pacific Mutual Life Insurance in Newport Beach, California, says he considered sending both benefits administration and payroll functions of his 1,800 employee organization to outside vendors, but abandoned the effort mid-stream. “On closer examination, we [in HR] found some of the alleged benefits of outsourcing these functions were misrepresented. Reporting information couldn’t be done on a timely basis, and we would have had to add more and more services to the initial agreement to meet current service levels, something that became more and more expensive. And there were requirements we had with our multiple locations that would’ve been left unmet.”
About a third of the way into the conversion, Bonno said it became clear he’d be sacrificing both service and cost levels, defeating his initial purpose and leaving his internal customers dissatisfied. His goal, Bonno explained, is always to maintain or improve service levels, and to have cost reduction, criteria that outsourcing arrangements sometimes have difficulty meeting.
Determine the value-added benefit.
Bonno does agree, however, that the outsourcing option can play an important part in augmenting the HR function. According to Bonno, “If we don’t have the functional expertise in a certain area, like outplacement for example, we’ll go outside, but only if that service adds value to the organization and service levels are higher than what we can provide internally.”
Bonno believes a service adds value if it proves to be a better alternative to what’s available internally and offers expense control, expertise and knowledge when he needs it, especially if that need “comes and goes.” Bonno’s organization currently outsources outplacement and EAP services, some soft-skills training such as communication and project management, computer training, and 401(k) record keeping. He states: “It’s more cost effective for us to buy these services. They don’t fall within our core competencies, and in each case, we can meet our goals for high service levels and cost effectiveness.”
Outsourcing suppliers agree the intent behind outsourcing HR functions is, for the most part, based on efforts to buy external expertise and to free up HR professionals to spend more time on core activities that are bottom-line related, which means the company can quantitatively measure the return on investment of time or effort in dollars and cents. These efforts might involve improving a business process that results in increased productivity and ultimately more sales, or improving employee satisfaction through new programs and contributing to reduced turnover—things that can impact the financial performance of an organization.
HR executives are thinking twice before jumping on the outsourcing bandwagon, even with the commonly outsourced functions.
Distinguishing core from noncore functions can be different for every organization.
Most HR professionals feel certain functions are more easily outsourced than others. But what’s considered “noncore” can be different for every company. Functions such as temporary staffing management, basic skills training, EAP programs, relocation services and benefits-related record keeping are areas that are frequently outsourced, but to some organizations, those areas may be so essential to the business, they should remain in house.
Joe Melanson, vice president of national outsourcing company Strategix, based in Peabody, Massachusetts, feels his organization serves as an important arm to the human resources function. “We’re brought in to support HR, not to replace it. I still see a lot of HR professionals bogged down with labor and time-intensive activities like background and reference checks, activities that are nonvalue-added in nature. The day-to-day work is still very reactionary, and it makes it difficult for the HR staff to focus on the strategic initiatives that are most pressing. Outsourcing those low-return activities can go a long way in helping HR get to the more critical functions like long-term planning.”
Melanson says he believes one of the core functions of HR professionals today is determining how to recruit and retain qualified staff. “An organization is only as strong as the talent it can recruit and hold on to,” he says. “Some of that work can be outsourced, but when you’re talking about high-level recruiting and managing sensitive employee relations, those things should be managed in house, because the internal staff has a unique understanding of the people involved and the organizational culture.”
Bonno echoes this philosophy and explains: “Whatever the bottom-line issues are, they always include an employee group. The internal HR staff must have an eye toward employees to make sure their issues are on the table.” Bonno also feels the internal staff can suffer when a third party is brought in to manage high-impact issues like employment termination and performance management. “Outside suppliers don’t have the same tie to the organization. The internal [HR representative] always has a stronger relationship which allows [him or her] to operate at a different level. A third-party supplier can’t operate at the same level.”
Susan Casey, senior vice president of HR for Fidelity Investments in Boston, feels the outsourcing solution makes sense when organizations want to buy knowledge and competencies they don’t want to invest in internally. Casey’s HR department has established partnerships with outsourcing vendors to manage relocation services, and benefits and 401(k) administration. She’s considering expanding her use of outside consultants to other areas, such as compensation.
Casey says her outsourcing philosophy is to maximize time and cost-effectiveness, and to also “access the best thinking available in the areas that are critical to the business.” However, Casey points out that although she supports the third-party strategy, she also agrees organizations should keep the core functions of human resources in house. Casey says “HR is a viable operational process. It’s important that those processes be integrated into the business strategy, someone from HR has got to be part of the management team to make sure that happens.”
Organizations are turning to outsourcing providers to give them access to competencies they aren’t cultivating internally.
Outsourcing can help build internal competencies.
David Burleigh, director of marketing for Arthur Andersen Contract Services in Chicago, sees little evidence of companies outsourcing entire human resources functions. “We certainly are seeing an upsurge in outsourcing trends in the HR area, but relatively few companies are sending the entire function out to be managed by a third party, with the exception of very small companies.” Burleigh indicated these smaller organizations tend to gravitate toward a PEO arrangement (professional employer organization), or staff leasing arrangement, a form of outsourcing in which the supplier provides a variety of HR functions, usually offsite.
What’s more common, Burleigh explained, is organizations turning to their outsourcing providers to give them access to competencies they might not otherwise want to cultivate internally. Establishing an international HR function is one trend Burleigh sees emerging as more businesses expand globally. According to Burleigh, few companies have experience in this area, and she says it can make sense to buy this competency initially, rather than trying to develop it in house. “Expertise is usually the key to the outsourcing decision. If you haven’t got it and you need it, go to someone who can put you in touch with the best practices out there.”
Organizations increasingly turn to third-party vendors to gain exposure to an area of expertise they don’t currently have internally, but eventually might want to build. The outsourcing partner can offer exposure to that area, preparing the organization to eventually build that competency in house, if desired.
Most experts agree the outsourcing option for human resources continues to be a viable long-term business solution. The key is figuring out what human resources activities are core, and which are noncore. If HR professionals focus their outsourcing strategy from a strategic-partner perspective, their plans won’t conflict with efforts to support high-performance HR systems, but will in fact, support those efforts by leaving human resources to do what’s most important, managing and supporting the organization’s most valuable capital—its human assets.
Workforce, January 1998, Vol. 77, No. 1, pp. 40-45.
