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Outsourcing: To make money rather than to cut costs?

Rob Gray , 18 Nov 2011

outsourcing

Outsourcing has attracted plenty of controversy over the years. To some, BPO (business process outsourcing) may as well read OMG, as it summons up negative connotations such as service cuts, budget savings, redundancies, off-shoring and the like.

The furore surrounding some unwise moves has undoubtedly caused perception issues that impinge on all significant BPO decisions, no matter how prudent or painstakingly thought through they may be.

But while cost-cutting is an important dimension to numerous outsourcing initiatives, it is not always a vital factor and sometimes does not figure in the thinking at all. For some organisations, the core question is not how BPO can be implemented to save money, but rather how it can help in making money for the business.

Where companies are pursuing a clearly defined expansion strategy, HRDs may well explore how BPO can help deliver that desired growth. This is particularly true when building a business abroad. Faced with an often daunting array of foreign legislation and regulations, employers may feel, rather than investing in the nuts and bolts of creating the necessary infrastructure in-house, money would be better spent on outsourcing, thereby giving HRDs and other directors more time to focus on the important decisions that will drive business growth.

There is a compelling argument that not only can outsource providers support clients in new markets, where they lack infrastructure, but also that they can help companies 'up-skill' specific segments that may drive growth, by recruiting the right new staff and developing the skills of existing personnel.

"Moving to a global delivery model and implementing proven, effective processes can deliver business benefits beyond cost reduction," says Jill Goldstein, senior manager of HR outsourcing at management consultancy Accenture. "HR business process outsourcing can help organisations improve workforce performance, measured by revenue increases of from 1% to 2%.

"It can also help clients create competitive advantage by forecasting and fulfilling talent needs and aligning talent plans, workforce capabilities and employee performance with business strategy."

Expanding globally brings great challenges and can be a drain on management resources. While any final decision will always lie with the business itself, outsourcing can provide infrastructure and services to support the process while freeing up capacity, and ultimately allowing directors to focus on the operational side of expansion.

Jason Gregory, global HRO service line lead for Capgemini, says working with a company such as his gives clients access to a global capability that would otherwise be difficult to replicate on a country-by-country basis. "Not only can this reduce setup timeframes and costs, but it can also ensure consistent service experience, regardless of geography," Gregory elaborates. "Indeed, Capgemini's global process model was developed with this in mind, as it provides a process blueprint for HR services, which can then be used across all geographies by incorporating any country-specific regulatory needs or tax differences. This enables new geographies to be added seamlessly, as and when required."

Certainly among large multinationals the trend is clear. KPMG research identifies a distinct move to globally integrated shared services. In fact, KPMG believes that more than 80% of large companies have adopted shared services – and of these, almost two-thirds have done so with a model that is multi-functional and globally integrated.

What KPMG means by 'globally integrated' is the skilful management by HRDs of a portfolio of internal and best-in-class providers able to bring benefits through service excellence. Naturally, technology is playing an increasingly significant role in delivering these services.

"Taking into account all areas of outsourcing demand, HR accounts for around 8%," says KPMG principal advisor Karene House. "Shared services is shown to be a proven model for support services and is actually influencing what is outsourced in the first instance."

But how exactly are companies using HRO to drive growth? And how successful are they in this respect?

HR outsourcing provider Ceridian says it works with a number of companies that have used outsourcing to grow. For example, UK leisure and hotels operator Whitbread has used it to deliver an HR transformation project successfully, dealing with the way it interacts with its people. This has reduced the administrative burden on line managers, allowing them a better focus on running the business. The outsourcing arrangement has also allowed the company to reorganise its management structure completely.

Ceridian also works with Canadian multinational IT firm, Research in Motion (RIM), which manufactures the BlackBerry.It has used outsourcing as a simple and easy way to grow quickly, by not having to worry too much about the ins and outs of setting up businesses in new countries.

But would it not be a better option to work with individual consultants when expanding abroad, rather than larger outsourcing providers? While this is of course entirely possible, and can work well in some cases, often the local legal, cultural and language barriers conspire to make it a much longer and more expensive process.

The way of doing things in other countries may be very simple to those used to it, yet opaque to the buyer of services. This may lead to organisations believing they have secured a great deal on something, bought comparatively cheaply, only to find out subsequently that things they thought were included are not.

Also, it can be hard to ascertain in advance the number of consultants required to help achieve goals in many geographies. This problem is magnified the larger the number of countries and size of contracts involved.

It is unusual, not to say foolhardy, for a company to outsource something that is core to its business, particularly HR strategy. Less clear-cut, having outsourced something, is if and when it should be brought back in-house. Ceridian UK chief commercial officer Nick Laird says recruitment outsourcing is often "time-bounded". When starting up, he explains, organisations need close control; while during a huge growth spurt, outsourcing can help with capacity that businesses could not deliver themselves.

Once in a more mature phase, companies often wish to retain better control over elements in the process themselves, so bring some of these back in-house. But, Laird adds, even at this stage, the sophisticated ones can blend the best of outsourced activity with some element of internal control.

Among the interesting market trends Laird pinpoints is a move towards outsourcing for corporate mergers and acquisitions. "In our experience, the business case for an acquisition based on quick integration and cost reductions means there is an imperative for pace, and this can only really be delivered by an outsourcer, which has a much larger bench of subject matter skills," says Laird. "A corollary of this is that, during periods of rapid organic growth, we have sometimes seen companies lose control of non-core activity, as local subsidiaries or affiliates 'do their own thing'. Almost always when this happens, the solutions that evolve are of the 'quick and dirty' variety, and not the sort of conclusion that the head office might like.

"We find in our smaller – but rapidly growing – international clients, this danger of loss of control is a key reason to outsource. In these circumstances, the burden of maintaining consistency, reporting and control is down to the supplier to drive, rather than the local management. We have one financial services client that is growing at 20% a year, in a 'land grab' strategy. It has outsourced payroll internationally for this reason of maintaining control."

Consistency and control may also be viewed in the context of company culture. Ensuring company culture is not diluted while the business grows overseas is an important consideration.

Does outsourcing risk undermining the company culture? Accenture says not, arguing that outsourcing HR processes can reinforce company culture in three ways.

First, capturing, 'scrubbing' and giving access to workforce information regarding risks and opportunities providing credible and actionable data for decision-making.

Second, empowering employees and line managers with access to information and the ability to initiate transactions in an easy and intuitive way - reducing time spent on back office administrative activities.

And third, allowing the HR team to focus on strategic initiatives and empowering the workforce, moving less strategic, admin-heavy processes to the outsource provider.

"Ultimately, communication is key," says NorthgateArinso HR solutions director, Sue Rippin. "Transition should begin with an intense internal communication strategy and be accompanied by increased staff understanding of what the changes are and how these will benefit them going forward. The supplier needs to understand the company culture before beginning its operation. Not only is every company different, but how that company operates in other countries differs too."

For company ISS Facility Services, outsourcing some areas of HR to Ceridian has given flexibility, enabling it to concentrate on its core business and helped in delivering growth in a business where margins are tight.

"ISS' decision to outsource was all about risk management," says ISS HR operations director, Richard Bishop-Laggett. "Before Ceridian, we had responsibility for the building, for the people, for keeping the systems statutorily compliant; for the hardware and the software. Risk is not eliminated with outsourcing, but it is substantially reduced and mitigated. Ceridian's offshore capability spreads the risk even further."

So, while outsourcing may still be seen as controversial in some quarters, in others it is viewed as a means of reducing risk and enhancing growth.

Case study: Quickstart Global

Quickstart Global practises what it preaches with outsourcing. When considering expansion into eastern Europe, it turned to consultancy firm MBA & Co to analyse and report on the cost of labour, the potential drop in productivity, the potential recruitment costs, rent and government support in each of the six countries on its shortlist and recommend the most suitable country.

The Quickstart model is to provide organisations with quick and easy ways to establish their own operations around the world. Clients choose their own staff, then direct and control their day-to-day work in one of the Quickstart client centres in Argentina, Bulgaria, India and China. Each centre provides clients with office space, recruitment, HR, facilities and IT support.

Training, recruitment, profiling and pre-employment checking and payroll are all functions that can be successfully outsourced, believes Quickstart, but eventually be brought back in-house if the company reaches critical mass in a location.

"Management focus should be on establishing business momentum and market traction," says Quickstart CEO, Neal Gandhi. "Too often, the important strategic task of setting up an offshore office is given to senior management - often with a business development background - who then struggle to deal with property leases, telecoms and HR in an unfamiliar territory. As going into a new geographical location is an important strategic business decision, the more that can be taken off their shoulders and outsourced, the more likely the venture is to succeed. The biggest cost is failing to deliver on a strategic decision to establish in a new market. Outsourcing to a local HR organisation will protect you from potential costs and litigation."

Facts and figures

  • Outsourcing generates revenue of £207 billion a year for the British economy (roughly 8% of UK GDP), putting it just behind financial services, according to Oxford Economics research in May.
  • More than 80% of HR executives across Asia Pacific are considering HRO as a solution to "key challenges", finds a Talent2/Galaxy Research Market Pulse study released in July.
  • KPMG's report, HR Shared Services and Outsourcing, identified the following areas as "hot" in HRO: Software as a Service; platform BPO; hybrid delivery models; single process deals; global sourcing; customer service orientation; renewal with extensive restructuring.

Case study: Liberty Wines

Liberty Wines is an import business that supplies a wide range of premium wines to regional wine merchants, restaurants, multiple grocers and specialist retailers. By 2009, the company had grown to 65 people and HR and payroll tasks were becoming increasingly complicated and time-consuming.

After reviewing several options, the company decided to take up an HR outsourcing package for SMEs provided by plusHR. An assigned HR professional handles Liberty Wines' day-to-day HR tasks, including issuing employment contracts, checking right to work, administering the pension scheme and maintaining the HR database.

Employees are able to book holidays and submit timesheets online via self-service, and managers can view employee information and live absence reports for their teams. Payroll is entirely outsourced.

Outsourcing has freed up management time - previously the company had devoted a "disproportionate" amount of time to HR, as there was concern about not making a mistake with salaries or personal information. Additionally, the HR information required by managers is now securely available online, easy to access and up-to-date, again reducing management time spent on non-value-add activities.

"We also have access to more senior HR expertise as needed, which means we can handle more difficult HR issues in a very cost-effective manner," says Liberty Wines chief operating officer Gary Wyatt. "The rigour of having to deal with the deadlines of a third party and the ownership of data from managers and staff have professionalised our HR function and I feel it was an important step in the growth of our company."

That growth has resulted in Liberty Wines expanding in two years from 65 to 80 staff.

 

3 comments on this article

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Revenue generation not clearly articulated

Leona Wilson, CHRP CEBS CMS 18 Nov 2011

I read the article with interest and am very clear on the arguments for outsourcing transaction elements of HR along with the use of local talent. I read the article as the notion of making money through outsourcing is unique. Ultimately the cost benefit analysis showing how money is made through outsoursing is not clearly articulated in this article from my perspective.

More evidence of customers seeking innovation through outsourcing

Bob Scheier 18 Nov 2011

At the recent Sourcing Interests Group meeting in Seattle, the desire to get innovation (and low just lower prices) from service providers was a key theme. The consensus was this will require different, and improved, governance of outsourcing deals, ranging from requirements through measurement through compensation. More details at http://globaldeliveryreport.com/what-customers-want-from-outsourcers/. Good story!

One of the same thing....

Harry 29 Nov 2011

I think that if business are cutting cost by outsourcing their business to external companies that perform tasks that can save a lot of time, money and also serve you with great quality. And i agree that they make money as well because for a simple calculation "Money Saved is Money Earned" Regards, Harry http://www.headfield.com

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