· Features

Can outsourcing really deliver cost savings?

The expectation has never been greater for outsourcing to deliver on its promise of cost savings. But is desire for guaranteed results too much pressure for outsourcing to shoulder?

At the height of the recession, when expenditure of any type was frozen, outsourcing took a pounding. During 2009, the number of outplacement projects fell by 35% and, according to the UK Management Consulting Association, the outsourcing advisory sector was the worst-hit specialism in the consulting world.

Today, though, there are signs outsourcing is once more back on the agenda - not least because of its potential to create future savings. Even for cash-strapped organisations, the 'spend to save' argument makes the capital outlay seems justified.

But while this might be welcome news to suppliers, some are saying this could be a potentially dangerous double-edged sword. From a client's perspective demand has never been greater for outsourcing to 'work'. But it is precisely because businesses are in such a state of heightened expectation that this could not be a sensible thing. Just at the point where it is make-or-break time for outsourcing, because too often in the past it has fallen short of expectations, there is potentially an unrealistic expectation of what outsourcing can deliver. Is this a recipe for disaster rather than one that will bring confidence back to the sector? Are HRDs' expectations simply too unrealistic, or is the outsourcing sector still over-selling on what it can achieve?

There is clearly evidence to suggest HRDs do have an over-developed expectation of what outsourcing can achieve. A 2009 survey for recruitment process outsourcing specialist Ochre House, covering more than 100 companies, found the main reason HRDs wanted to outsource their recruitment functions was specifically to reduce costs. But, on average, organisations expected to make a saving of 37%. In practice this turned out to be closer to 20%. So does this mean that this time around a revived outsourcing market will still fail to deliver what is expected?

According to Simon Patton, former HRD of supermarket chain Somerfield (now part of the Co-operative Group), many are still likely to fall into this trap. "You can make cost savings through outsourcing but it shouldn't be your major driver, because if you are focused purely on the bottom line you risk being disappointed. Efficiency, simplification and added value are the areas where you can make real wins."

More detailed examination of the research suggests that the real problem lies not in a failure to deliver but in a lack of understanding of the real benefits of recruitment process outsourcing (RPO). Not one of the organisations questioned rated their outsourcing decision as 'successful' or very successful,' when they had rated 'cost savings' as the most highly important criterion.

"One of the most notable aspects of outsourcing is that people rarely like to talk about the success stories, of which there are many, in the HR outsourcing industry," says National Outsourcing Association chairman Martyn Hart. "It's sometimes much more newsworthy when projects fail, which is why outsourcing can sometimes get a bad reputation. The truth is, thousands of companies outsource successfully each year, but it's worth remembering that each and every outsourcing deal is only as good as the planning that precedes it."

Fear of failure certainly heaps pressure on the shoulders of suppliers and this is exacerbated if what is expected of them is not totally clear. "The main point I would make is that effective outsourcing is more and more recognised to be a partnership, albeit underwritten by a rigorous contract, between client and supplier," says Rick Simmonds, partner at outsourcing adviser Alsbridge. "One of the problems with HR outsourcing in the past has been that clients have tended to abdicate responsibility for the overall success of the arrangement and have 'thrown process over the wall'. Suppliers haven't helped because in a nascent industry they haven't had the confidence to be clear about what they need from the client in order to succeed."

In some quarters, HR outsourcing has a regrettably bad name, mainly due to being over-hyped by providers, consultants and by early adopting companies alike.

"HRO has been a good vehicle for individuals to make their name as innovators, but has been a relatively bad place to be if you want to demonstrate the perfect business model," says Tim Palmer, the lead in HR transformation at PA Consulting Group. "The honest truth about HR outsourcing is that the financial business case is poor and so tight finances lead to perceptions of under-performance."

Yet HR outsourcing will not go away. For many it is the continuation of the evolution of a business process outsourcing model that is a logical part of the toolset for any business.

Palmer holds the view that, despite its reputation and limitation, HR outsourcing works, and on a number of different levels: delivering transformation, improving services, providing access to new capabilities - such as multinational service centres and HR systems - and even, in some cases, providing its own business case. But HR directors need to know how to assess and use this tool. If they don't ask the question about whether they should use a third party for some parts of their service delivery, the chances are that someone else will do it for them.

"While the HR function has had years of underinvestment relative to its finance and IT colleagues, it is possible to achieve a great deal with HRO," says Palmer, "but not everything at the same time. You cannot outsource your risk, purchase new software, implement new processes to fit your organisation, build in flexibility and deliver tangible savings simultaneously. But you can get some of these things if you work out which are the most important to you."

In lots of cases, expectations and results must be in parallel. In August the Metropolitan Police Authority/Police Service re-awarded business and technology service company Logical a three-year, £10-million extension to its pay and pensions outsourcing contract originally signed in 2005. "Typically to get the best out of outsourcing, clients also have to be willing to go through a process of change which is more than just having their services delivered by someone else," says Logical UK BPO director Norman Baldwin. "The willingness to undergo an appropriate level of transformation of the services is what sometimes maximises service excellence."

It's a similar story at Virgin Media, which uses Knowledge Pool as an outsourced training provider. Virgin Media's executive director of resourcing, talent, development and people operations, Jill Youds, says: "Any one of a number of outsourced training providers can provide courses for your employees but for us it was really important our supplier understood what we are about and what we're trying to achieve." It is through a depth of understanding, Youds elaborates, that Knowledge Pool has helped Virgin Media think about new suppliers and services and supported it in rationalising administrative processes and costs.

Of course, it is important to recognise that existing contracts some outsourcing suppliers are having to deal with were set up prior to 2009 against an entirely different set of expectations and economic conditions than exist today. The strongest models are those where provider and HRD can come to a mutual agreement in starting again and reworking the scope and commercial framework in order to benefit both parties.

"All RPO providers will be feeling the pressure to deliver to their clients," concludes Kay Cooper, managing director of recruitment process outsourcing across EMEA and the Asia-Pacific region for Kenexa. "As an industry, we are coming out of a challenging year, as are the majority of our clients. HRDs have every right to have high expectations but they need to clearly articulate them, and select the right RPO provider and commercial model to meet their expectations. HRDs have a right to procure a service that actually drives business outcomes, and should expect nothing less. A crucial piece of advice would be: don't have procurement drive down the margin to an unmanageable level and then expect a 'gold service'."

37% - the savings that clients expect from outsourcing

20% - the savings that clients typically get

35% - the fall in the number of outplacement projects in 2009


Conventional wisdom has it that outsourcing is for big public and private-sector organisations, while small to medium-sized enterprises (SMEs) are generally too small to go down this route. Not so, asserts Virtual Minds Outsourcing, which is positioning itself as a boutique outsourcing services provider working exclusively with SMEs and midcap companies. In August it launched a new website (www.vimios.com) offering a full range of HR, IT, payroll, finance and administration outsourcing services while claiming its flexible approach meant any size of organisation could benefit from its services.

Will cash-strapped SMEs, looking for a way out of trouble, be seduced in the same way as larger company's HRDs?

Not at all, retorts Virtual Minds chairman David Jensen (pictured). The reason few smaller companies have trodden the outsourcing path to date is a problem of perception. "Traditionally, outsourcing has been seen as something that governments or multinationals do. It means many SMEs or midcaps don't consider it. They still think providers wouldn't be interested in the sprats of business because they are after the mackerel and sharks"

Jensen says his business operates on tight margins and is structured to provide clients with the services they need in a way that can often provide them much-needed expertise at a fraction of the cost of hiring dedicated staff. "The full gamut of HR outsourcing is available," he adds. "And it's not in our interest to pursue any business we can't supply."


Signs that the outsourcing market is worried about meeting expectations can be seen from outsourcing specialist HML, a subsidiary of Skipton Building Society, which has introduced the UK's first professional outsourcing qualifications into its employee development programme. Two qualifications have been developed in collaboration with the National Outsourcing Association (NOA) and are accredited by Middlesex University: the NOA professional certificate is accredited at undergraduate level while a diploma in strategic global outsourcing at postgraduate level.

The programmes are being made available to leaders within HML who want to strengthen their understanding of financial business process outsourcing and develop into the strategic leaders. At present, 10 employees are studying for the undergraduate certificate, with eight more working towards the diploma.

The programmes were launched in June and will run until June 2011. Every three months the students meet with the executive team and the NOA and HML tutors to review their progress and share their learning so that they can contribute to the overall strategic direction of the business. "It has produced some good results so far - because we've worked out how to link business strategy with learning," says HML's director of strategy, Jeff Quilter. "People on the course effectively become internal consultants to the business."

In Quilter's opinion, the outsourcing industry as a whole would benefit if such programmes were rolled out more widely. "People who are involved in outsourcing span a range of professional fields, like operations, finance, sales and IT and this represents challenges and opportunities. The challenge is ensuring clients receive a professional service from all companies involved in outsourcing. An opportunity lies in being able to demonstrate that level of quality and consistency through a professional qualification that has the same weight as those that apply to accountants or solicitors."