Making the business case for outsourcing, often hinges on such issues as the level of expertise required. Many firms outsource pension administration, for example, because they don’t have the specialist knowledge to manage this area in-house. Others outsource recruitment to cope more easily with seasonal ebbs and flows in demand. A shortfall in skills provides a clear-cut business case for outsourcing, but companies that are looking to outsource more than one or two HR functions need a systematic approach.

Companies need to look very carefully at the activities that their HR staff currently handle and then seek to retain those where staff genuinely add value. Areas where the HR department does not add value – where it can’t tell the board that it increases organisational effectiveness or does the work involved better than anyone else – should be candidates for outsourcing.

Assessing which areas of HR might be outsourced involves an array of factors, including carefully reviewing how efficiently HR services are being delivered currently, the relevance of each activity to the firm’s overall aims and the question of whether carrying out a particular task adds competitive advantage. For instance, if you can recruit good people speedily and if you can retain them more effectively than your competitors, then you help secure competitive advantage for your organisation.

40% of European organisations outsource their pension administration and 25% outsource their payroll, both areas that are readily defined and transaction-based. Other areas, such as relocating staff, coaching employees and recruitment scored less highly: 34%, 25% and 9% respectively.

Outsourcing providers range from niche firms to large players, looking for clients who want to hand over virtually all of their HR functions.

Many buyers now opt for a “cost-plus” arrangement, where the plus is an agreed margin for the supplier. Alternatively, deals may be structured around shared savings, where the supplier agrees to carry out functions more cheaply than would be possible in-house, and splits the saving with the client.