Outsourcing human resources

HR administration, for example pensions, payroll and recruitment, has typically been outsourced. But more specialist aspects have been subject to outsourcing too, such as training and legal work. IDS (2003) argues that the delivery channels for outsourcing HR administration involve e-HR and HR service centres. We will deal with these separ­ately, while recognising that there may be some overlap in approach.

The drivers for outsourcing HR are frequently quoted as reducing costs and improv­ing service delivery. Outsourcing appears to encourage the measurement of the value of HR, and IDS (2003) suggests that this comes about through the need for service-level agreements and key performance indicators with a greater focus on customer satisfac­tion. Cooke et al. (2005) in the USA identify a wide range of benefits from outsourcing such as allowing a firm to concentrate on its core business; gaining from the specialist supplier’s economies of scale and learning from them; shifting the burden of risk and enabling greater numerical flexibility; and the ability to keep costs down due to competitive tendering processes. Outsourcing has also been introduced as a vehicle for effecting changes that would be hard to implement internally. For example in large organisations outsourcing has been used to bring different parts of the organisation together to reduce costs, apply common standards and share best practice (see, for example, Pickard 2002), and to provide access to innovative IT solutions. A further advantage that is claimed is that the internal HR function can now concentrate on driving the direction of HR rather than carry out more mundane tasks.

However, time is needed to select and develop a relationship and trust with a service provider. Rippin and Dawson (2001) also identify the importance of fit with the service provider and warn that organisations choosing to outsource in order to save costs should not expect immediate returns. Outsourcing the whole of HR (sometimes called end-to-end outsourcing) is also a very different proposition from outsourcing differenti­ated activities, which has been happening in an ad hoc manner for a much longer time. Blackburn and Darwen Borough Council, for example, has outsourced all its HR to Capita, including strategic HR (IDS 2003), which is the one part that most organisations retain in-house. Main (2006) suggests the lack of success of some outsourcing experi­ences is due to the fact that outsourcing is seen as a way to get rid of a problem (such as cost and inadequate computer systems) and the view that once activities are outsourced management responsibility for them ends. He suggests all this has hampered the devel­opment of end-to-end outsourcing, and that, as an alternative, companies have gone for shared service centres and have outsourced separate HR functions such as training, administration and payroll to separate providers.

Some organisations have clearly experienced advantages from outsourcing, although many of these are based in the USA and there is a question as to the extent to which such an approach should be applied in the same way in the UK. Hammond (2002), using sur­vey evidence, reports that firms in the UK are resisting outsourcing. He argues that BP experienced only limited success when it outsourced to Exault, and that outsourcing is a different proposition for such big companies as opposed to smaller organisations. This same survey found that managers have a number of fears about outsourcing HR, such as loss of control, loss of the personal touch and doubts about the quality and commit­ment of external staff. However, the research reported was commissioned by Northgate Information Solutions and this fact needs to be taken into account when interpreting the results, as this company has a product to sell. John Hofmeister, director of HR at the Royal Dutch/Shell group, attacks outsourcing as leading to the corrosion of HR departments, and he argues that only high levels of internal HR staffing can lead to and maintain high levels of HR practices (People Management 2002). In a slightly different vein Gratton (2003) argues that outsourcing combined with other trends such as devolu­tion fragments the HR function, and she identifies a growing alienation between dif­ferent providers (outsourcing agencies, line managers and remaining specialists in the HR function). She argues that HR would provide greater added value as a unified whole than when broken down into different fragments. Gratton proposed four mechanisms through which the function can be integrated to provide greater added value. The four mechanisms are: operational integration (e.g. using standardised technology to present a consistent front to the employee); intellectual integration (through a shared knowledge base); social integration (meaning that the function has a clear sense of where it is going and there is collective buy in to performance); and emotional integration (using bonds of friendship and reciprocity and a sense of shared identify and meaning). One of the major challenges is for the HR function to pull together the separate outsourced and segmented elements (CIPD 2006a).

Such outsourcing has been dogged with many problems, to the extent that some organisations have brought HR back in-house (see, for example, CIPD 2006a), and Brockett (2006b) quotes Marcia Roberts (Chief Executive of the Recruitment and Employment Confederation) as saying that as a potential outsourcing agency for recruit­ment ‘you often find yourself replying to tenders and dealing not with HR but with the purchasing department – which is more likely to be concentrating solely on cost’. In terms of possible adverse consequences Cooke et al. (2005) identify the potential loss of skill, knowledge and capacity, a reduction in the quality of services, the loss of employee morale, short-term disruption and discontinuity, and damage to long-term competitiveness. It has been suggested by a senior HR practitioner that outsourcing is ‘not a threat for the function or the business, but a threat to the individual’ (CIPD 2006a, p. 5).

In spite of these concerns, it is predicted that outsourcing will continue to increase, in particular outsourcing overseas – sometimes referred to as ‘offshoring’, although in some cases this form of outsourcing may be to wholly owned subsidiaries or may be the movement of an internal service centre (Crabb 2003). India is a favoured destination but Eastern Europe is also popular. However, cultural and legal differences will inevitably restrict the range of activities that can be successfully outsourced in this way. The popu­larity of the outsourcing idea is underlined by the fact that the CIPD now runs a course entitled ‘Outsourcing HR’ to help specialists understand the procurement process. According to a recent survey (CIPD 2006c) there is only a minor interest in offshoring HR compared with other functions, with just seven per cent claiming to have done this or to be planning to do this.

Key issues for implementing the offshoring of HR include a careful choice of partner so that there is sufficient fit, clear performance specifications, IT system compatibility, reassurance regarding the impact on HR staff, line managers and employees, promotion of new arrangements, good contract management and monitoring of performance.

Case 32.2 on this book’s companion website, www.pearsoned.co.uk/torrington, focuses on HR outsourcing.

Source: Torrington Derek, Hall Laura, Taylor Stephen (2008), Human Resource Management, Ft Pr; 7th edition.