Management guru Tom Peters is a long-time advocate of outsourcing but he’s not a fan of using it primarily as a means to cut costs. In a recent journal interview, the prolific American author argued that HR departments should keep a careful watch over their outsourcing arrangements and should not allow their colleagues in procurement to be overly influential.
“Real outsourcing is not about minimising expense,” he said. “It’s about finding a better way to do things that probably will cost you a little bit less. The definition of a losing proposition is when you do it for cost alone.”

HR outsourcing starts to become more viable when you take the overall employee costs to a business into account. Salaries, benefit packages, pension contributions, learning and training and the like mount up to a hefty 40%-60% of a business’s outgoings, so the real benefit of basic HR outsourcing is that it frees a firm’s HR professionals to address issues that can make a real impact on their organisation’s competitiveness. They can start focusing on the talent agenda – defining it, discovering it, retaining it and deploying it...

Outsourcing ought to be able to deliver cost savings, but it is still difficult to make a business case for HR because specific costs have not been analysed and isolated. Transaction-based activities, such as payroll administration, recruitment and record-keeping, lend themselves to outsourcing more readily than activities that involve one-to-one casework, such as performance management.

HR outsourcing is growing steadily but a companies shared service centres – taking out local HR offices and centralising their activities to streamline them – is also growing in popularity.

Business Case for Outsourcing

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.