HR is going from in-house to out-of-house

What are the benefits and challenges of outsourcing?

As the old sports chant goes: This is our house. And it was true for HR departments, too…once upon a time.

A 2008 Society for Human Resource Management (SHRM) survey showed that, of more than 4,500 SHRM members polled, 43% voiced preference for developing expertise in-house, instead of outsourcing. Another 54% wanted to maintain face-to-face contact with employees, and 42% didn’t want to lose control of their HR functions. Fast-forward to 2015. More and more companies are emptying their houses, outsourcing transactional HR tasks to focus on activities they deem more important: like acquiring talent.

“We’re seeing organizations that are undergoing a substantial change, such as rapid growth or a merger,” says Virginia Brailey, vice-president, marketing and strategy, with ADP Canada. “That puts pressure on the managers and their HR teams. Outsourcing is a good way to shift the administrative burden to a third party.”

It’s the transactional tasks—such as pension administration, benefits, revising workplace policies— that HR professionals spend the most time on. PwC’s 2011 HR Outsourcing 2.0 report showed that more than 75% of HR work hours are spent on these tasks.

It’s these tasks HR professionals want to get rid of—and it’s typically done through outsourcing. Almost three-quarters (73%) of respondents said their main goal of outsourcing was to reduce administrative clutter, according to a 2009 Towers Watson study.

And, Deloitte’s 2014 Global Outsourcing and Insourcing Survey shows 30% of companies outsource payroll time administration, with 36% of firms that don’t currently do so saying they plan to outsource that function. The survey also finds 13% currently outsource HR administration, and 38% say they plan to.

Decision Drivers

Why, exactly, do companies outsource? Jeff Williams, executive vice-president, outsourcing, with Aon Hewitt, says companies evaluate several factors when deciding whether or not to outsource.

72% strongly agree and 18% agree that HR professionals are facing an increasing workload

Source: 2015 ADP Canada survey

One is technology. An upgrade of an old system likely costs a lot of money, he says. So a company will look for ways to discontinue investing in technology, having staff to support it and being responsible for fixing it.

For example, CIBC outsourced in the late 1990s to enhance service delivery and fix technology issues. “We had reorganized CIBC into one organization, yet we were managing it as basically three organizations,” says Phil Wilson, chief human resources officer with DST Consulting Engineers Inc. (Prior to the outsourcing decision, he was senior vice-president, shared services, human resources division, with CIBC.)

Each division—commercial banking, world markets and the corporate group—used its own technology process, he says, and it was difficult to pull information and track analytics with the plethora of HR systems.

“We were trying to bring the HR department and CIBC into a position where they’d have one system to manage all people services.”

After considering several options—including creating an interface between existing systems and replacing those systems with something brand new—CIBC settled on a third-party vendor to take on all aspects of operational service delivery. “We would have very clear service level agreements in place. But the risk was we wouldn’t be managing the system anymore,” Wilson says, adding that CIBC managers were concerned about the level of service they’d experience from a third party. “We were looking at a system supporting 40,000-plus employees, plus another 10,000 pensioners.”

Top reasons for companies to consider outsourcing the HR function

  • stabilize costs – 39%
  • lower risk – 28%
  • increase employee productivity – 27%

Source: 2011 ADP Research Institute Study

CIBC signed a seven-year deal with EDS Canada for $227 million, effective March 2001, which outsourced 30 HR systems: call-centre operations, manager support, technology, payroll, benefits, pension administration and even employee relations. (To Wilson’s understanding, the contract was extended for another three years.)

CIBC’s case was slightly different. The outsourcing agreement let the bank transfer 200 of its employees to comparable jobs at EDS. “That was an important thing for us because there were no lost jobs and a real continuity of service,” Wilson says.

Wilson says this is rare, but CIBC was able to get them to agree, in part, because EDS was looking to expand into the HR process outsourcing business.

Other HR drivers include departures of people who traditionally took care of HR staff, and the hiring of new workers who had positive experiences with outsourced HR at their other jobs.

Still another driver is a company’s desire to focus on its core business.

“Many organizations are going through some sort of HR transformation,” Williams says. “Companies are evaluating what their core is and trying to get their HR departments focused on the talent agenda. No senior HR leader ever got promoted for delivering quiet payroll cycles,” he continues, adding that HR transactional activities are best handled through outsourcing, in many cases, allowing HR to focus on strategic areas such as leadership and developing talent.

Anyone Can Outsource

A company doesn’t need 40,000-plus employees to benefit from outsourcing.

Consider these issues

Hidden costs – Research from Robinson and Kalakota in 2004 showed outsourcing may come with hidden costs.

Remaining employees – A research project by Kessler et al. in 1999 showed companies should not neglect their remaining HR employees, once they’ve outsourced. Research by Kakabadse and Kakabadse a year later showed these neglected employees can have a negative effect on company culture. The researchers suggest the remaining in-house HR employees may suffer from the following: job insecurity; decreased productivity, morale and loyalty; and increased absenteeism and employee turnover.

Information loss – Research from Grauman and Paul in 2005 showed that, during a changeover to a third party, confidential information such as audit trails and personal data could be lost in the transition.

Take Techtronic Industries Canada Inc. The marketer and seller of power tools, outdoor equipment and floor-care appliances started out with 50 employees in 2007. Over the last seven years, it has grown to more than 200.

“Rather than invest in a system internally, we went to [an outsourcing firm] that already had the knowledge that could handle our data requirements,” says finance director Marco Moreal. “It made sense for us to outsource because we didn’t have the knowledge, and it allowed us to manage our employees better and have the data in one spot.”

Outsourcing also made sense from a data backup perspective, particularly with payroll, because the manager had no backup, says Moreal. Before the outsourcing and even now, the company’s HR department consists of just two employees. “From a stability point of view, if she’s very sick or goes on vacation, the payroll still gets done.”

Another outsourced area is timekeeping and vacation. The outsourced system lets Techtronic track vacation requests online. “With the new system, [an employee] can also approve items on [a] smartphone,” he says. “I found that’s been very helpful because you don’t have to wait until you’re at a computer to look at it—it’s instantaneous.”

Even Techtronic’s annual performance reviews are outsourced. “Previously, we had it in a manual paper format. We’re not completed yet, but we’re working toward it.

The trouble with outsourcing

Outsourcing can free up time for HR professionals to focus on a company’s more important initiatives, but its perception has been negative.

KPMG International Research found 52% of respondents said outsourcing providers lack knowledge, 47% said providers are nonresponsive and 35% said providers have low performance standards.

Whether respondents based their answers on experience or perception, sentiment doesn’t differ from past research, which has shown outsourcing has its problems.

“It makes for better recordkeeping and better sharing of information through managers—rather than having it all on paper copies,” he says. “Having it automated and through a system makes it easier to distribute.” Handing off these transactional activities has freed up the two-person HR team to focus on the “value-add activities,” as Moreal puts it. “Recruitment is one of the big things,” he explains. “They can spend more time recruiting quality individuals.”

Moreal adds HR can also focus on retaining existing staff, and ensuring the morale and motivation of employees is where it should be.

Challenges of Outsourcing

While outsourcing can help to free up much more of the HR department’s time, it can also remove that personal touch and flexibility. For example, in a company that manages its own employee vacation days, the HR professional can allow an employee to use his or her next year’s leave early. In an automated, outsourced system, this kind of accommodation for an employee may not be possible.

Similarly, employees can quickly get frustrated with an automated system, or if a third party doesn’t pay attention. “Where satisfaction gets low, and gets low in a hurry, is where I put my problem into this unit and don’t get called and [the problem] doesn’t get resolved and I don’t know who to talk to,” says Williams. “Those are the real dissatisfaction drivers: taking too much time, not following up, even completing without following up.”

Brooke Smith is managing editor of Benefits Canada.

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