Posts tagged ‘outsourcing’
My second prediction – in this series of five predictions for where HR is moving (se #1 here) – I predict that HR will outsource a lot more in the future. A lot more.
There are three primary drivers for this:
- Technology will make new solutions possible by vendors. Technology will be a major driver for productivity, service quality and efficiency within HR for many years to come. Thus, it will in many cases be more cost effective and better from a service quality point of view to let vendors who specialize in this area to do the job for two reasons; firstly because it is more cost effective
- The need for more specialized knowledge and services. It will require significantly more specialists to deliver HR in the future. Many companies will not find it possible to attract those profiles or find it cost effective if they can. So they will instead hire from the growing support of specialist consultants to help them with those specific projects. This is for most companies the best way to deliver service excellence in the most cost effective way.
- The continued focus on driving costs lower. If you are in HR you will have noticed the relentless focus of top management on your costs. You may secretly hope that this is just an adjustment period and that the good times (like 2006) will return. They won’t. In many ways, that’s a good thing. HR will therefore continuously need to focus on how to drive cost down. Outsourcing will be an obvious way.
Whenever it comes to outsourcing, the trend starts in US, then UK, later Asia then then finally Europe. This is true for IT, Facilities Management, Business Processes and other areas where US is 5-8 years ahed of Europe (where I am located). My experience is that this prediction therefore is not a surprise in US where outsourcing has been on the agenda for many years and where vendors and suppliers are aggressively pushing for this to happen (surprise). Here in Europe this prediction is still greeted with some skepticism.
What will this mean for HR going forward? I see three impacts:
Firstly, HR will need to fully understand what is core and what can be outsourced. The easy answer is to outsource all the transactional and operational stuff such as recruitment for simple replacements, payroll, surveys, basic reporting, IT to support most processes, most training and the kind. However, in reality it is more complex than this. Much of the tactical stuff such as some performance management processes, talent processes, leadership training and more are also candidates for outsourcing whereas some of the tactical stuff may be considered to be out-of-scope. It will vary from company to company. But HR must ask itself, what is my core business and what can I outsource?
Secondly, because what will be left (which is still a lot) will be what I call ‘an intelligent client’, the composition of who works in HR will be different. They will be required to have a more strategic and business focused mindset to a much larger degree than today. Much more. More people from business schools and fewer with “I am in HR because I like to work with people” profile. Hopefully there will be plenty of room for both profiles, but relatively more will be of the former profile.
Thirdly, the in-house HR will need to articulate much clearer why the top management team shouldn’t outsource the whole HR department. I don’t think they ever should, but there will be vendors who at some point will offer that to the CEO. HR must then respond with a clear business case of why this shouldn’t be done.
When confronted with the question “what is the total cost of your HR?” most CEO’s and HR directors come up short. They will either look at the HR budget and say it represents the total costs or they will tell you that they don’t really know.
Why does it matter? Well, by understanding the true cost of a service it will help the leadership making better economic decisions. Should some of our HR services be outsourced? What is the ROI on our HR services? Such questions are almost impossible to answer if the true cost of the service is not understood.
There are different ways of measuring the true cost of HR. Activity Based Costing (ABC) is in my view the best. ABC attempts to assign overhead based upon the activities that case the overhead rather on a pro-rate basis or any other arbitrary method. ABC examines each activity and establishes the cost drivers behind each activity.
ABC will include costs such as administrative costs, building costs, IT spend and management time in the equation and come up with a number which show the real cost of HR. ABC can be a tedious task and at some point a cut-off must be made and assumptions be made for the rest. But it is worth it.