Carlos Cordon and Bernard Menettrier de Jollin
Will there be a Human Resources function in your company in the future, or is it likely to end up like the canteen or your olddivision -- outsourced?
Companies are generally satisfied with their outsourcing arrangements as transactional elements are most commonly outsourced, such as payroll and pension. The most cited business drivers for outsourcing are cost reduction, service improvement and resource maximization. But so far little research has been done on the ""what' and ""how"" of HR outsourcing; the decision-making process and actual implementation issues. There seemed to be very little to guide the manager on how to actually go about making and implementing the HR outsourcing decision.
The traditional view is ""we keep core competencies in-house and we outsource non-core activities."" This idea does not make much sense. It would be a patent over-simplification to divide activities of complex organizations between core and non core (like black and white). Activities range on a continuum from core to non-core. Our research found that the outsourcing process should be different according to how close activities are to the core. The closer, the more resources should be dedicated to manage the outsourcing relation.
But where do companies draw the line? Which elements should not be outsourced? Tasks seen as being critical to business success, strategic advantage and key to maintaining the company culture are less likely to be outsourced (employee communications, HR information systems, recruiting). Yet, reasons cited for not outsourcing those tasks do not appear to be as convincing as reasons to outsource.
As HR outsourcing is becoming an increasingly important issue, managers need more robust tools to make their decisions. They need guidance on the ""what' and ""how' since there seems to be a lack of logic and consistency in the decision-making process.
A new framework seems necessary to provide HR managers with robust outsourcing processes. Our research shows that companies' HR activities can fall into four different categories: 1. Corporate intimacy
""Corporate-intimacy"" covers strategic activities requiring a deep understanding of company strategy. These activities must be handled by the HR department in all cases, and can be considered as highly important from a company's standpoint. 2. Employee intimacy
These activities require a deep knowledge of employees' situations, typically people management and development. Line managers are best positioned to know their employees and the levers to influence on loyalty or effectiveness. 3. Operational excellence
Operational excellence reflects the needs for trouble-free service and total cost efficiency. HR Managers have to consider all the costs of owning and using a particular product or service. Transaction costs are part of this equation, and must not be neglected. It might be worth considering process transformation, aimed at simplifying these processes that have little value to the company before outsourcing. Total costs of services, including transaction costs, should be reduced thanks to this standardization, enabling the provision of the service through an external provider. 4. Service leadership
This includes the delivery of the best services/products (e.g. standard education) and - to a certain extent - the quest for innovation within HR, ""creating products that customers recognize as superior, delivering real benefits and performance improvements.""
HR Value Disciplines & Sourcing Strategies (Treacy & Wiersema, 1997)
As an HR executive what should I do? Restricting corporate-intimate activities within the organization is preferred by the majority of companies, an area which can be delegated to skilled line managers. Rather consider differentiated sourcing strategies for operational excellence and service leadership. Companies can benefit from applying these approaches which will impact on the efficiency and effectiveness of funds allocated to valuable activities, while improving the company's attractiveness and supporting its strategic value.
To accompany this change, strong leadership must be demonstrated from top management level, in order to gain the buy-in of the HR representatives. Employees unable to handle this change will be replaced, and their manager has to be highly skilled to handle this possibility. Like in any major business transformation, a significant effort to realize this is required from the HR management. These elements might become major obstacles, favoring a status-quo, in order to keep the internal organization in place.
HR outsourcing is possible regardless of the specific activity involved. What executives must understand is that depending on the closeness of the activity to what is considered core competence, the degree of oversight and supervision can be totally different. Therefore one must consider the expected return of such a move. In some instances, the necessary degree of supervision is so high that outsourcing does not make sense anymore. Eventually, it will be up to the HR executive to weigh the pros and cons of outsourcing.
Carlos Cordon is the Director of the Managing the Extended Supply Chain (MESC) program and teaches on the Breakthrough Program for Senior Executives (BPSE). Bernard Menettrier de Jollin is the IBM Customer Services Manager at Philip Morris International. -- IMD International
