The future of HR outsourcing

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To me, a lot of the pendumum swinging described here is just poor organisation design and implementation ie we decide to outsource, centralise to centres of expertise of whatever but we forget that ...


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HR can't seem to decide whether outsourcing or keeping things in-house is the best way to go

If you want something done properly...get someone else to do it. Not quite the oft-cited maxim as we all know and love it. Yet according to the latest figures on outsourcing activity this is exactly the ethos many companies are currently living by.

The last Arvato quarterly UK Outsourcing Index revealed that total outsourcing spend more than trebled in the third quarter of 2015 compared to the second quarter. The index also found that the average contract length grew 38% from Q2, and uncovered a trend towards more companies dabbling here, or at least forging relationships with new providers, with 55.5% of deals in 2014 being first-time outsourcing agreements, compared with 33.5% in 2013.

The index revealed the large percentage HR deals contribute. A fifth of all outsourcing deals signed in 2014 were for HR services, with Q3 2014 seeing a 24% increase year-on-year in the average value of HR deals.

Yet talk to any number of HR experts and a quite different impression emerges. Indeed perhaps the most notable outsourcing/insourcing headline of recent weeks has been the BBC’s announcement that it’s bringing all resourcing and recruitment activities –previously provided by Capita – in house.

Anecdotally there are many others ending perhaps historic, long-established outsourcing relationships and opting to in-source, reports Rob Jones, head of organisational effectiveness at Crossrail. “There was a whole raft of outsourcing in the early ‘90s and noughties,” he says. “If you look at RPOs there’s been a huge bell curve on that. Everyone went nuts on it but now people are throttling back because what they found was the quality of the experience was being lost, the employer brand was being dissipated, and it wasn’t delivering better talent it was just saving money.”

“Much of the thinking in the early 2000s was built on the concept of stripping out the non-essentials and focusing on the strategic,” group HR director of Penguin Random House Neil Morrison adds of the difference between the approach taken today compared with fifteen years or so ago. “That was embedded a lot by the Ulrich thinking around centres of excellence and shared service centres. When you’re grouping services that way outsourcing doesn’t seem intellectually that far from what you’re doing anyway.”

“I guess what we’re starting to see more and more is people saying ‘actually we didn’t get the value from that’,” Morrison continues. “We did save money but we didn’t get actual value. We, for example, did a big RPO but what we heard was issues with quality, issues with service levels, and we think we can bring it back in-house, save money by doing it that way and protect our brand better.”

A contracting contradiction

What this leaves us with is something of a disconnect. On the one hand, looking at the stats, HR outsourcing activity is booming, fuelled (according to the Avarto index) particularly by renewed post-May election 2015 confidence. On the other, it’s hard to find anyone who doesn’t cite insourcing as the latest thing.

For Jones this contradiction “might be the Pareto principle” at work. “I think 20% of the companies are using 80% of the outsourcing,” he suggests. “But 80% of companies are saying actually this represents risk, unadaptable contractual relationships and poor experience. And it’s the Unilevers and Sainsbury’s and mega employers who are doing this because they’ve got the scale to make it work.”

Rob Bolton, a partner in KPMG’s Global HR Centre of Excellence, explains that just because the outsourcing market is thriving relatively well compared to recent years, doesn’t mean we’ve returned to the homogenous picture of the late ‘90s and early 2000s. Here there was an element of fad-driven activity, he says. “The HR function does tend to follow some fashions. There is a lack of thinking through things for your own context,” he says, adding that the allure of the trendy seems thankfully to now be lessening: “I think what we’re seeing now is more evidence being applied and people making decisions about what’s right for them, which is why we’re actually seeing more of a nuanced picture,” he says. “It’s not outsourcing all bad, insourcing all good.”

“The trend that we’re noticing in HR is much less about outsourcing vs. insourcing – it’s more about choosing the right solution for your organisation to help you achieve your strategic agenda,” agrees BBC HR director Valerie Hughes D’Aeth. “We picked the right solution for the BBC, given our circumstances, both to deliver our change agenda and quickly realise significant efficiency savings.”

For the many passionate advocates of more evidence-based HR this is highly encouraging. But to summarise that today’s state of play is purely one of everyone doing their own thing, with companies diverging completely in terms of which HR areas they outsource, would be to risk overlooking another interesting emerging trend.

What this new, more evidence-based approach is leading many to is something of a reversal of the outsource-all-the-operationalelements-but-keep-the-strategic-in-house trend. Where it was previously assumed that no good would come of outsourcing strategic elements, now many are having a rethink. Which provides further explanation as to why the stats and anecdotal picture don’t seem to quite stack up.

What’s in a name

What is now emerging is a landscape for which the traditional terms ‘outsourcing’, ‘insourcing’ or ‘in-house’ don’t perhaps quite cut it. Principal of Mercer’s UK talent business Julia Howes explains that concerns over quality and representation of the employer brand are not the only motivations driving people to bring transactional operations, such as recruitment, payroll and benefits, ‘in-house’. With the advent of ever-more sophisticated HR software, people are realising they can do things more cost effectively with tech than with a traditional outsourcing arrangement.

“It’s not really bringing it back in-house as such but making it more automated through technology and self-service,” she reports. “It’s come back to HR being custodians more of a process, but the actual doing sits more with the managers rather than HR. As technology enables that more it means the traditional outsourcing of HR services is not needed as much. It’s being replaced by better processes and better technology.”

Howes confirms growing appetite among HR departments to call on the expertise of those leading their field in one very specific strategic area. Again though, ‘outsourcing’ is perhaps not quite the right term. A better one, Howes suggests, is ‘talent eco-system’, with HR departments a microcosm of the wider picture of more permeable freelance- and supplier partnership-reliant organisations.

“It’s moved away from ‘what are our core activities where we can get efficiencies?’ to businesses asking themselves ‘where are some of the core capabilities we need to develop and is it going to be more effective if we do it through this more dynamic talent ecosystem?’” she says. “My background is in strategic workforce planning; that’s an area that has really started to become outsourced.

“Another area people are looking to is the digital and analytical side,” she continues. “Most organisations are struggling to get the right data capabilities. We’re seeing a lot of organisations saying they want the internal HR analytics capability to be around business partnering, and telling the people story with data, but the actual number crunching is going to be much more effective in a pro-sourcing arrangement.

“We’re also seeing this around leadership capabilities. That’s an interesting area because I don’t think the driver is necessarily capability, but more that the external view is important.”

Neil Morrison reports that the need to make activities such as L&D, compensation and benefits, and recruitment bespoke to Penguin Random House has been the main driver for processing these in-house. “It requires a certain level of business knowledge to do those quickly and well,” he says.

Though Morrison is a fan of keeping most strategic activity in-house for the above reasons, his department conforms to some extent to Howes’ description, with rarely-used and highly specialist elements outsourced. “Where there’s a high skill requirement that you don’t use very often I think it makes sense to outsource it. For example: global mobility. Unless you process enough moves to set up a team internally you’re probably better off outsourcing. Then the expertise remains up-to-date, the costs are shared with other companies, and you get a responsive service.”

Morrison agrees that such arrangements don’t necessarily conform to what most might traditionally take ‘outsource’ to mean though. “If you look at legal services, a lot of companies outsource that but wouldn’t necessarily call it outsourcing. Or executive search. People say ‘I work with a third party’ but effectively you’re outsourcing it. It’s just a different sort of contractual relationship,” he says.

He adds: “We have an arrangement with a coaching organisation. So when we talk about outsourcing all these things they do generally happen now in organisations, we just don’t necessarily call it outsourcing.”

The BBC too still “continues to outsource some bespoke and specialist services that are best delivered by third-party expertise”, reports Hughes D’Aeth. “These include occupational health, relocation and disability access services. In Autumn 2015 we also moved our manager advice service to an outsourced provider that provides expert advice to managers on handling employee cases such as absence, disciplinaries and grievances.”

Private and public

The approach of insourcing the transactional and outsourcing very specialist strategic areas is also gaining popularity in the public sector. Head of human resources and organisational development at Warwickshire County Council and vice president of the PPMA Sue Evans explains that the scale of cuts in recent years has forced the sector to become leaner than it ever thought possible. Few private providers can compete with this, she says.

“Over the last eight years we’ve taken money out of the budget year-on-year-on-year. We took £90 million out in 2010-14, from 2015-18 another £92 million has to come out, and the next round will be £60 million,” she says. “So we’ve done all of the work to streamline processes at point of use. A private company hasn’t the opportunity to do that.”

“Because we’ve made so many efficiencies in our transactional processes even when we go out to market to test them no-one can deliver them any cheaper,” agrees Gillian Quinton, director of HR and organisational development at Buckinghamshire County Council. She explains how cost pressures also mean it doesn’t make sense to have experts in every strategic HR field sitting in-house.

“The austerity measures have meant a dramatic decrease in the size of the HR team. As a consequence you don’t have those experts in your team any more; you can’t afford to keep really niche experts,” she says. “So we tend to have people who are a bit more multidisciplinary. We now outsource the high-end recruitment – all of our executive search. We recently implemented massive change in our whole reward system, so we worked with Mercer and brought in niche expertise there.”

Adding further to the current mixed bag picture of HR outsourcing, however, are the many who still maintain that strategic HR activity is far too complex and business-specific to outsource.

Evans is one such practitioner. “I think sometimes we underestimate just how complex some of the work the public sector is engaged in really is. We underestimate that at our peril… My view is that HR is something so central to the business that you want to keep it close,” she says, adding: “The biggest stumbling block for me is ethos. There is a public sector ethos that is about service and commitment and responsibility, which is not always present in the private sector offer.”

Private sector companies should also assess very carefully whether outsourcing strategic HR is the best option, feels Crossrail’s Jones. “I’m still not convinced that what you might term the strategic HR function can be that far outsourced without losing real value to the business,” he says.

However, Jones says that Crossrail’s HR team does enlist the support of an organisational design consultant. The organisation’s set-up is a complex, interesting one, and a perfect example of the emergent talent ecosystem. Of the 1,600 people providing client and delivery functions at Crossrail, only 750 are actually employed by it, meaning some HR support is provided by the partner organisations and some more over-arching support by a centralised Crossrail team. OD is inevitably one of those centralised functions, and the need to call in strong expertise on the design front for such a complex set-up is clear to see.

Again though, Jones sees this less as outsourcing and more as an example of the kind of partnering that the wider organisation is engaged in operationally. “I use consultants quite significantly to ensure we deliver our OD requirement, and the phrase I use is they’re the ‘sixteenth man on my team’, in rugby terms,” he says.

For this to work the term outsourcing should perhaps be banished from people’s minds, says Jones. It has to be about ongoing, close collaboration he says, “not pushing [the service] away but partnering with people to ensure you’re always delivering the best for the business.”

Indeed a partnership approach is certainly gaining traction in the public sector, with councils increasingly combining back office functions, including HR, to cut costs. Evans reports that this can sometimes take on a quasi-outsourcing model. Her take is that not only can her organisation perform both transactional and strategic HR better and more cost effectively than a supplier, it’s actually become so adept here that the council should be the ones generating and maximising revenue by outsourcing its expertise. “Across the county council, not just in HR, traded services are worth just over £2 million pounds a year to us,” she says. “We trade everything from catering to cleaning to HR to finance. So why would I want to give that profit to someone else? Why wouldn’t we want to have that profit in the county council?”

A grey area that similarly complicates the outsourcing picture, this time in the private sector, is the increased ubiquity of global business services; a variant of the shared service centre. “What we’re seeing certainly from the large organisations is growing interest in global business services,” reports KPMG’s Bolton.

“This isn’t necessarily outsourced. It’s a pulling together of a range of functions in one global back office entity, often lead by someone with the title chief admin officer, or CAO. As far as the HR function is concerned it’s kind of outsourced but still in-house.”

A nuanced picture

So to identify definitive, over-arching trends of organisations all outsourcing or insourcing the same areas of HR is something of a fool’s errand. While the numbers may suggest the kind of outsourcing of 20 years ago is still alive and well, in fact the activity is much more variable between organisations.

And while insourcing of transactional and ‘outsourcing’ of strategic could be cited as the next big thing, this seems an over simplification, with as many rejecting the idea that strategic activity can ever be truly outsourced as advocating it.

Organisations are increasingly assessing the bespoke approach right for them on both fronts, reports Morrison: “It’s about what kind of employment experience you want and the nature of your business,” he says regarding the decision of whether to outsource or keep in-house more transactional functions. “If you’re working in 500 or 600 locations around the country, because you’re a retailer or leisure provider say, then there could be some benefit [to outsourcing]. Because if you’re dealing with a head office there’s no real difference to dealing with an outsourced service provider.”

What this increased activity around partnering with external suppliers and consultants – and indeed the insourcing of operational services through automation and the cloud – throws into relief is the grey area between outsourced and in-house. HR should be no stranger to the growing fluidity of organisational boundaries and the need to partner with those in the wider talent ecosystem. And this is a phenomenon they will need to embrace within their own departments, as well as helping the wider company to do.

The future of outsourcing would seem to be one much more of partnering, rather than handing one area of HR over, wholesale, to an external supplier. There are certainly still plenty benefitting from such a set-up, particularly where transactional processes are involved. But for many others the terms ‘outsourcing’ and ‘insourcing’ have become obsolete. Instead ‘collaboration’ and ‘partnering’ may soon be the words du jour.

Comments

To me, a lot of the pendumum swinging described here is just poor organisation design and implementation ie we decide to outsource, centralise to centres of expertise of whatever but we forget that each choice about our organisations have consequences - both positives and negatives. We chose for the positives but forget to handle the negatives. These get larger over time and eventually take over and we change the OD the other way. But unless we manage the trade-offs we'll end up swinging back again. Ie the most important thing often isn't the actual choice of outsourcing etc but the way this is implemented - reducing the negative consequences of which ever decision we take - in or out. I'd agree that focusing on collaboration in an outsourcing arrangement is a big part of this and should definitely be encouraged.


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