By Ruth Ladner
Reprinted from IHRIM.link
Ever tried to stop a speeding train?
Likely not - most of us would instantly recognize the futility of such an action and focus on quickly getting out of the way. The trend to outsource HR services has been compared by some to a locomotive gathering steam. In June 2003, Gartner Research stated that revenue related to HR BPO was expected to reach US$51 billion in 2004. That's more than a 25 percent increase over the US$39 billion reported in 2002. Gartner also calculated that revenue related to HR BPO represented 39 percent of all BPO revenue, with payroll and benefits being the most commonly outsourced services.
Up until recently, HR business process outsourcing was primarily an option for larger companies, primarily because vendors offered service and pricing packages that favored organizations with large employee populations. However, over the last year or so, we've seen a distinct movement among small- to mid-sized companies to seek outsourcing solutions. Correspondingly, vendors are offering services tailored specifically to the needs of organizations with fewer than 2,500 employees.
In
fact, the advantages of outsourcing could be greatest for small- to
mid-sized companies, which typically outspend large companies when
it comes to per-employee HR investments.
So, given the undisputed trend toward HR BPO, is your only option as an HR manager or director to get out of the way?
Quite the contrary. The option I recommend is that you lead the way! By seizing control of the train, you can directly influence its speed, route and final destination.
Understanding the Business of HR
It's the responsibility of every HR executive to understand the business of HR. You need to know the detailed costs involved in running the department and providing employee services, as well as the quantitative and qualitative returns on your organization's investment. Additionally, you should have an understanding of the cost and ramifications of unmet business needs, potentially the result of staffing and time constraints.
But analyzing the current business status of your department is only half of the job. You also need to evaluate all alternatives - and their associated costs, risks and benefits.
No matter how busy you are, no matter how long your to-do list, performing this business analysis must be one of your top priorities. I can guarantee you that if you don't tackle and lead this project, your CFO, COO, or CEO will more than likely get it done. Taking this initiative will help establish you as a business-savvy manager. From a career perspective, you're much better off to be among the decision makers - no matter what the outcome - than to be on the receiving end of someone else's decision.
Getting Executive Buy In
Conducting an HR service analysis can tread on many sensitivities. If you have department staff members, you certainly don't want to alarm them unnecessarily. You'll also need the cooperation of business unit managers and the C-level team in order to get all the information you need. For instance, information on your company's projected IT budget and planned hardware/software purchases is directly relevant to the technology analysis you'll need to perform for your department.
When presenting your proposed project to your manager, you'll want to obtain his/her buy-in on the value of such a project, its scope and ongoing support for its completion. You should emphasize that you're not conducting this analysis to support any previously formed conclusions or recommendations. The analysis you're proposing is to get a realistic and business-focused assessment of your department, your organization's actual requirements and all alternatives. You want to make sure your own mind - as well as those of your management team - remains completely open in order to objectively evaluate the results.
The success of the project is also dependent on getting detailed specifics on your organization's business strategy, short- and long-term objectives and revenue expectations. You'll need this information in order to prioritize and weigh different options that may come to light before making any recommendations.
The Analysis of Current Business Status
The first step in your project is to assess the current business status of your HR department and the services it provides. The foundation of this assessment is a proven analysis template. Such a tool will save you many hours and ensure that your evaluation is comprehensive.
A robust analysis will assess actual and burdened costs of all HR staff members - that's the easy part. You'll also need to calculate the cost of all services provided by your department: HR, benefits administration, payroll, employee self-service, data management warehousing, and risk management. A template can help you include all tasks in each of these areas and identify all hidden costs, such as those related to technology support and services.
An analysis template should be very detailed. For instance, in the area of data management and warehousing, a template can guide users to calculate costs associated with:
- Maintenance and upgrade to client software;
- Staff headcount and turnover trends analysis;
- Workforce planning and reporting;
- HR budgeting and forecasting (dollars, hours, FTE, headcount);
- Budgeted vs. actual costs by position and/or business unit;
- External/internal training requirements reporting including training history, success rates, course attendance, and unfulfilled requests;
- Compliance reporting;
- Vacation usage tracking;
- EEO/affirmative action/disabled employee reporting;
- Absence and leave accrual tracking;
- Wage and salary costs data tracking, with detailed breakdowns for earnings, deductions, and disbursements;
- Vacancy reporting, with associated information on time to fill positions, cost per applicant, and average retention time for position; and
- Competency profiling for employees, with aggregated information for departments and overall company.
What-If Analysis
Once you've done a comprehensive analysis on the cost of providing HR services internally, the next step is to obtain projected costs for performing current and other desired services using outsourcing alternatives. You'll need these projections in order to compare current costs with alternative methods for providing the same services.
It is recommended that you select one or two HR service providers that specialize in serving companies of your size. Use the same task list and time estimates that you used for your assessment of internal costs as the basis for estimating outsourcing costs. It's important to compare "apples to apples." A vendor providing estimates should be willing to work with your template - after all, it is your business. And in fact, the vendor may be able to point out other considerations that should be included in both the internal and external analyses, based on the vendor's past experiences with other companies.
Make sure the vendor you work with provides services on an a la carte basis. That is, their clients can choose which services to outsource and which to retain internally. Should you decide to outsource, you'll want to work with a vendor that gives you maximum flexibility in meeting changing service needs.
We also recommend that you make clear to the vendor you approach that this analysis is not an RFP. Don't hesitate to make it clear that you've made no decisions about whether to outsource HR services at this point. You want to make sure that everyone involved in the analysis process keeps an objective viewpoint and that no decisions are made informally, without careful review of all information.
Analyzing the Analysis
After you've compiled all cost data, you're ready to evaluate the data and begin drawing some conclusions and recommendations.
Your evaluation should include:
- Comparing costs for providing various services with your current internal staff against those of an outsourcing provider.
- Identifying those service areas with the biggest cost variances. For instance, are representative outsourcing costs for administering payroll far less than current internal costs for the same level of service? Are outsourced costs for recruiting markedly higher than internal costs?
- Determining which, if any, current HR-related tasks and responsibilities are strategic for your company. In some companies, the recruiting of employees for specialized jobs is a core function of the HR department. Managing employee skill development and certification, along with overall employee retention, might be other areas.
- Identifying any needed tasks and responsibilities that are unfulfilled today. An example could be performance management or competency-based training. You should estimate what the cost of providing such services would be internally, as well as externally. And, you should estimate the qualitative and/or quantitative benefits of performing these tasks.
- Finally, calculating what percentage of your company's HR budget is being spent on transactional and administrative tasks, and what percentage is being spent on core functions and strategic initiatives.
Recommendations and ROI
Most likely, you'll begin to see potential actions and recommendations as you work your way through the above evaluation. Areas for cost savings will be revealed, as well as functions and services that could be offered - internally or externally - with significant positive business impact.
HR managers are surprised with the findings of this type of evaluation. For instance, most realize that a majority of their companies' HR budgets are spent on transactional and administrative tasks, not those that are strategic.
You may see services that could be performed more efficiently through outsourcing. These "saved" dollars could be used to cover the cost of providing new services or functions that are currently not being done, without an increase in budget. You might determine that by outsourcing payroll and benefits administration, your department could take on the responsibility of implementing and managing a formal performance management program with associated training linked to development gaps
Indeed,
you may also see the need to make some staff changes. Those individuals
on your staff who are open to change, are strategic thinkers, and
possess business savvy will likely adapt to and even welcome new,
more important responsibilities. Those who are comfortable doing repetitive,
transaction-oriented jobs may need to move to other positions.
As a business manager, you must be objective in identifying how your company's assets can be most effectively invested. By getting the most service, with maximum benefit, for the available dollars, you'll not only be doing your job—you'll also be earning yourself a place at the executive conference table.
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