Outsourcing is a term that is being used more frequently as increasing numbers of organizations are exploring this as a potential delivery option for some of their activities. It can be defined as the delegation of one or more business processes to an external provider, who then owns, manages and administers the selected processes based on defined and measurable performance metric.

HR Outsourcing

The recent surveys identified that 29% of respondents are outsourcing some of the HR function. The most commonly outsourced activities reported are legal activities (69%), payroll (66%) and pensions (64%).

To outsource or not?

When considering HR outsourcing, an organization needs to ask at the outset why it needs to change the way the HR function operates at present. In other words, what aspects of the existing HR provision are not satisfactory or would benefit from improvements?
By probing these responses HR can then focus on the scale and type of changes that may be required and these will help decide whether HR outsourcing might be an appropriate response. Creating a business case for HR outsourcing is an important step.


Potential benefits

When organizations put forward a business case for HR outsourcing there are a number of potential benefits that many cite. Commonly mentioned benefits include:
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  • Reduced cost;
  • Increased efficiency;
  • Access to improved HR IT systems without capital outlay;
  • Improved people management information (including human capital metrics);
  • Access to HR expertise not available internally;
  • Increased flexibility and speed of response to HR problems;
  • Part of an overall strategy (for example the organization is outsourcing a number of its support functions, of which HR is just one part);
  • Reduced risk as it is possible to scale up and down more efficiently;
  • HR resources can operate more strategically.
The top 3 reasons cited for undertaking outsourcing in our 2009 outsourcing survey (see above) are access to skills and knowledge (71%), quality (64%) and cost reduction (61%)

Potential challenges

From a practical point of view, there are also a number of potential pitfalls that it is useful to bear in mind when considering outsourcing. Some of the main ones are:
  • Don’t outsource what you don’t understand. The outsource provider will only have to subsequently solve the problem (at a cost) and the provider’s solution might not be most suitable from your organization’s perspective.
  • Outsourcing does not absolve the organization of good people management practices nor of overall responsibility for the provision of HR services.
  • Increasingly, outsourcing arrangements are often long term.
  • Loss of local knowledge and processes which instead reside with the outsource provider.
  • Standardization of processes in line with the provider not organizational preferences.
  • The need to constantly review the success of the outsourcing arrangement against specified metrics.

Selecting a provider and managing the transition

A number of actions and decisions must be made when selecting a suitable outsource provider – many of these will be similar to those made when entering into any contractual arrangement with a third party. For example:
  • Understanding the existing HR service provision;
  • Understanding of your own future requirements, for example in terms of level and type of service;
  • Establishing a shortlist of preferred suppliers;
  • Speaking with other organizations that the outsource providers currently have contracts with;
  • Consideration of ‘fit’ with provider organization which might include cultural as well as geographical factors;
  • Identification of the ‘actual’ person who will be the key relationship manager;
  • Determining preferred contract length;
  • Building in contractual flexibility where possible;
  • Staying involved in the contracting process;
  • Identification of metrics (including benchmarks of what unacceptable and acceptable ranges are).
With regards to managing the transition from in-house to third-party service, a lot of the considerations will be similar to those required when managing any large-scale organizational change.

In addition, an outsourcing arrangement will often also include significant changes to HR processes, in a few cases, including HR self-service systems and/or a formalized HR call centre provision for staff and managers. An open dialogue is needed between the outsourcing company and the provider.

Outsourcing is one example of how the shape of HR is transforming. It is one way to meet the increasing demands being placed upon HR functions to deliver greater levels of transactional efficiency at the same time as raising the level of other HR activity to focus on ‘strategic’, ‘value adding’ service.

By http://www.cipd.co.uk/subjects/corpstrtgy/general/hroutsourcng.htm