HR Outsourcing

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The Essentials Series

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Crystal Rast
TheEssentialsSeries:HROutsourcingStrategiesforSMBs CrystalRast

Article1:TheBusinessDriversforOutsourcingHumanResources..................................................1

TheEarlyDaysofHumanResourcesOutsourcingEarlytoMid2000s...................................1

BusinessDriversforSMBOutsourcing.................................................................................................1

ServicesOutsourced......................................................................................................................................2

Transactional...............................................................................................................................................3

Traditional....................................................................................................................................................3

Transformational.......................................................................................................................................3

HROinaStrugglingEconomy........................................................................................................................4

ChangestoBusinessDriversforSMBOutsourcing.........................................................................4

ServicesOutsourced......................................................................................................................................5

Transactional...............................................................................................................................................5

Traditional....................................................................................................................................................6

Transformational.......................................................................................................................................6

HROutsourcingFutureStrategies...............................................................................................................6

SMBPlanningfortheFuture......................................................................................................................7

CreatingFlexibleTechnologicalandOperationalStrategies.......................................................8

Article2:RisksandRealitiesofOutsourcingHumanResources.........................................................9

PerceivedandActualRisksofHROutsourcing......................................................................................9

SmallCompanies..........................................................................................................................................10

MidsizeCompanies.....................................................................................................................................10

RealitiesofHROutsourcing.........................................................................................................................11

SmallCompanies..........................................................................................................................................12

MidsizeCompanies.....................................................................................................................................12

AdjustmentstoApproachforHROutsourcing....................................................................................13

SmallCompanyModels.............................................................................................................................13

MidsizeCompanyModels.........................................................................................................................13

Article3:SuccessfulHROutsourcingStrategies......................................................................................14

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TheEssentialsSeries:HROutsourcingStrategiesforSMBs CrystalRast

InternalAnalysisandBaselining...............................................................................................................14

UnderstandingCostvs.ValueofHR....................................................................................................15

IdentifyingCoreCompetencies..............................................................................................................15

AligningTechnologytoSupportOperationalObjectives...........................................................15

AgreeingonExpectationswithHROutsourcer...................................................................................16

AddressingPerformanceMetrics.........................................................................................................16

EnforcingPerformanceMetrics.............................................................................................................17

MethodsforShiftingHRFunctionsOutsideCompany.....................................................................17

RealignmentofInternalStafftoTransformationalFunctions.................................................18

SupportthroughTraining/AdditionalEducation..........................................................................18

Conclusion...........................................................................................................................................................19

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TheEssentialsSeries:HROutsourcingStrategiesforSMBs CrystalRast

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TheEssentialsSeries:HROutsourcingStrategiesforSMBs CrystalRast

Article1:TheBusinessDriversfor
OutsourcingHumanResources
TheEarlyDaysofHumanResourcesOutsourcingEarlytoMid2000s
Sincethelate1990s,companieshaveleveragedthirdpartiestohelpwithhumanresources
(HR)functions.Atthattime,thesefunctionswereoftenservicessuchasrecruiting
(particularlywithintightemploymentmarketssuchasinformationtechnologyIT)and
payroll.Smallandmidsizebusinesses(SMBs)inparticularneededservicesthatwould
supplementthetaskscarriedoutbytheiroverlytaxedemployees.Oftentimes,HR
functionsinsmallcompanieswerehandledbyanexecutiveorofficemanager.Forthis
reason,SMBsleveragedexternalresourcestofulfillHRfunctionseitherbecauseitwas
believedthosefunctionsdidntrequireafulltimeemployeeorthecompanywasunableto
investinaskilled,fulltimeemployee.Thus,SMBssoughtexpertiseprovidedbyHR
outsourcing(HRO)companies.

BusinessDriversforSMBOutsourcing
Inthelate90s,unemploymentwaslow,andthedemandfortechnologicallysavvy
employeeswasbooming.Suddenly,experiencecountedforless,andknowledgeofInternet
technologiesandsoftwaredrovehiringdecisions.Thistrendcontinueduntilthepost9/11
recession,akaDotBomb,whichincreasedthesupplyofunemployedworkers.

Outsourcing,andevenoffshoring,hadbeenapopularmodel,butcompaniesfacedwitha
skilled,affordablelabormarketandtheneedtotightenthecorporatebeltbeganpulling
projectsinhouse.Thencametheriseofenterpriseresourceplanning(ERP)software.
DemandforERPconsultants,particularlythosewithstrongcommunicationsskills,
skyrocketedascompaniesclamoredforpeopletohelpthemrollouttheirnewsoftware
andunderstandhowtousethedatatheywerenowreceivingtomakebetterbusiness
decisions:AnunexpectedbenefitofERPsoftwarewasthatexecutiveswereenabledtosee
howeachoftheirlinesofbusiness(LOB)fedintooneanother,andthepracticeoffinance
andaccountingoutsourcing(FAO)andHROwerealogicalnextstep.Payroll,afunction
oftenhandledthroughHRO,tiesincloselywithfinancialdecisionmaking,whichisoften
managedviaFAO.Oncecompanieshadoutsourcedoneservice,theybecameincreasingly
interestedinoutsourcinganother.

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Technologyprovidedfaster,datadrivendecisionmaking,andthroughcontinuedsoftware
advances,companieswereabletouseintelligentsoftwaretohandlefunctionspreviously
performedbyemployees 1 .However,withfiercecompetitionintheUSmarketplace,
companieshadtoconsistentlyfindadditionalwaysofsellingbetter,faster,andcheaper.
Oneofthestrategieswastoshiftcostsfromfixedtovariableaperfectoptionwasto
outsourcepersonnel,whichallowedforutilizationofhumancapitalwhenneeded.By
leveragingoutsourcers,companieswereabletocutheadcountwhilemaintaining
acceptableservicelevelsandgainingagilitytoscaleupordownasnecessary.Untilthe
economiccollapseof2008,thiswidelyacceptedpracticefitwellintoorganizationsmake
orbuystrategy.

ServicesOutsourced
TypicalHRservicesoutsourcedinthebeginningwerethosemostunlikelytoincurhigh
costsduetouncertainty,thethreatofopportunism,assetspecificity,frequency,andeaseof
measurementaccordingtoJeanWoodalletal.inMakingtheDecisiontoOutsource
HumanResources 2 .Insimplerterms,companiesoutsourcedthoseHRfunctionsthatwere
unlikelytoputthecompanyatriskyetweretiedtospecificcompanyassets,occurredwith
regularity,andwereeasytomanageandmeasure.Woodallalsofoundthatcompaniesin
theUSandEuropemostcommonlyoutsourcedoutplacement,preemploymenttesting,
training,payrolladministration,employeeassistance,[counseling],andpensionplans,
whileretainingthestrategicfunctionsofpolicymaking,successionplanning,andemployee
relationsinhouse.

HRfunctionscanbecategorizedintothreearenas:transactional,traditional,and
transformational.Benefitsadministrationandpayrolloccurwithregularityandarelargely
administrativefunctions,thustheyhavebeenconsideredtransactionalHRfunctions.
TraditionalfunctionsinHRarethoseofrecruiting,staffing,performancemanagement,and
training.Strategiesforcompliance,laborrelations,andstrategicworkforceanalysis,aswell
asoverallHRstrategyaspartofanorganizationsoverridingbusinesspracticesare
consideredtransformationalHRactivitiesbecausethesearetheapproachesthatcan
changeacompanysbusiness.Unfortunately,withinHRdepartmentsinthe1990sand
early2000s,onlyafewcompanieshadthesechangeagentsatthetopoftheHRhierarchy.
Thus,withinHRdepartmentsatthetime,mostemployeeshaddutiesthatfitwithinthe
transactionalortraditionalcategories.

1JamesH.Lee,HardatWorkintheJoblessFuture,Futurist.2012.
2JeanWoodalletal.,MakingtheDecisiontoOutsourceHumanResources,PersonnelReview,2009.

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Transactional
InTheInfluenceofBusinessStrategyontheDecisiontoOutsourceHumanResources
Activities,HaslizaAbdulHalimandNorbaniCheHacitenoncorefunctionsare
transactionalactivitiesthatareadministrativeandroutinethatcaneasilybereplicatedand
duplicated. 3 Intransactionalfunctions,smallscale,repeatedfunctionsarefulfilledbythe
individualsactingasHRagents.Thesefunctionsarenecessarytotheorganization;
however,theyarenotconsideredvalueaddingactivities.Typically,benefitsadministration
andrecordkeepingareconsideredtransactionalbecausetheyarenecessaryandhappenon
atimelybasis,but,beingmoreofanadministrativefunction,theyaddlittlevaluetothe
companyitself.Forthisreason,transactionalfunctionshaveahistoryofbeingoutsourced,
particularlywithinsmallcompanies,which,astheygrow,findtheymustleverage
additionalthirdpartyresourcestomeetinternalneedsandobjectives.

Traditional
Similartothewaytheyhavehandledtransactionalfunctions,SMBshavehistoricallyused
thirdpartiestofulfillthetraditionalHRrole:recruiting/staffingandtraining.Small
companiesinparticularhadbudgetarychallengesandweremindfulofbuildingatight
organizationoflikemindedindividualswhowouldhavelongevitywiththecompany.Thus,
outsourcingtherecruitingandstaffingfunctiontoathirdpartyproviderwasawisemove.
Byleveragingconsultantsforeithershorttermprojectsonanasneededbasisorbyusing
contracttohireemployees,SMBscouldspendtheirlimitedbudgetswiselyandbuild
relationshipswiththeirproviderthatleveragedtheprovidersknowledgeandexpertise,
particularlywithinemploymentlaw.

Transformational
AlthoughmostSMBswerefamiliarwiththeconceptofoutsourcingtransactionalor
traditionalfunctions,manyhadnotconsideredutilizingathirdpartyprovidertorealize
theirorganizationalgoalsbecauseitwasnotconsideredaninternalfunctionofHRatthe
time.Untillatein2007,whenHRObecamepopularized,fewSMBshadconsideredthe
possibilitythatHRcouldbeastrategicplayer(asevidencedbythelackofHRstaff
appointedtoboardpositions).Forthisreason,mostHRfunctionsthatwereoutsourced
weretransactionalortraditional.
Theperiodfromthe1990stothemid2000ssawtheriseandgrowthofoutsourcingfrom
ITtoHR,finance,andotherdepartments.Thisgrowthdevelopedascompaniessought
waysofleveragingoutsideexpertise,mitigatingrisk,maintainingcompliance,and
embracingaflexiblestaffingmodelthatallowedforscalingupordownallwhileshifting
laborcostsfromfixedtoflexible,therebyincreasingshareholdervalue.

3HaslizaAbdulHalimandNorbaniCheHa,ExploringtheEffectofBusinessStrategyonHumanResource

Activities:AStudyofMalaysianManufacturingOrganisations,SingaporeManagementReview,2011.

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HROinaStrugglingEconomy
Throughthesummermonthsof2008,someSMBexecutivesdiscussedpossibleincreasesin
corporatetaxesandhowtheirorganizationswoulddealwithsuchrisesincost.Atthetime,
Iwasworking120hourseachweektoprovidehundredsofcandidatestoawellknown
globalconsultingfirmfortheircollegerecruitingandERPtraininginitiative.Throughthis
initiative,theywouldrolloutERPconsultantsthroughouttheUStomeettheincreasing
demand.WithinoneweekofthestudentsbeginningtheirnewlivesasERPtrainees,they
watched,asdidtherestoftheworld,asinlateSeptember,theUSstockmarketcrashed.
AndcrashedinOctober.Thencontinuedtocrashforeightconsecutivetradingdays 4 .
AccordingtoLakshmanAchuthan,managingdirectorofEconomicCycleResearchInstitute
(ECRI),7.9millionjobshavebeenlostsince2008,andthatnumberisfactoringinnearly
600,000privatesectorjobsthathavebeencreatedsincethattime 5 .Asaresultofthe
economicinstability,capitalcrunch,masslayoffs,andsheerlackofexperienceinrunninga
companythroughsuchdifficulteconomictimes,executiveshavehadtofindwaystogetthe
greatestperformanceoutofthesmallestnumberofemployees.AlthoughtheNational
BureauofEconomicResearchreportdeclaredthattherecessionendedinJune2009,SMBs,
inparticular,arestillstrugglingtodomorewithless.Fromthissituationcomestheriseof
HRO.

ChangestoBusinessDriversforSMBOutsourcing
ThecostconsciousnessofcompaniesinastrugglingeconomyhasmadethemovetoHRO
notonlydesirablebutnecessary.Ofprimaryimportancetosmallcompaniesisthe
flexibilitytostaffupordownasnecessarywithoutaffectingservicelevels.However,both
smallandmidsizecompaniesbenefitfromthevariableversusfixedcostofoutsourcing.
Withintheirresearch,Woodalletal.foundthatHROenabledasmallfinancecompanyto
avoidtrainingemployeesinemploymentlawandatelecomcompanytocutrisksaround
contractorrecruitment.Inadditiontoreducedemploymentcostsandrisk,adesireto
achievebestpractice,toimproveservicequality,tofocusuponthecorecompetencesof
an[organization],andto[utilize]newtechnologyarealsoprominentreasonsofferedby
[organizations]forutilizingHRO.AuthorsAbdulHalimandCheHafoundthatin
consideringoutsourcing,companiesalsoarelookingatoperationalefficiency,whichties
intotheirstrategiesforeither[providing]aserviceinhouseor[buying]itfromthe
market.

4Moneyzine,StockMarketCrashof2008.
5Qtd.inChrisIsidore,7.9MillionJobsLostSomeForever,CableNewsNetwork,2010.

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ServicesOutsourced
AccordingtoAmyPenainContractingaThirdPartytoCutCosts,someofthekeyreasons
forcurrentoutsourcinghavebeentocutorcontrolcosts,focusoncorecompetencies,
accessadditionalcapabilities,andmitigaterisk 6 .AbdulHalimandCheHafoundthatafter
surveying113companies,theywereabletomatchthebusinessstrategiesofcompaniesto
theirHROpractices.Ofthefourbusinessstrategycategoriesproactive,reactive,breadth,
andqualitybased,thestrategythatmostcloselycorrelatestoSMBsisthatofaproactive
strategyinwhichthecompanyfocusesonusinginnovationandthedifferentiationofits
productsthroughuniquedesignsandfeatures.SuchwasparticularlythecaseofSMBs
engagedintechnology.
ThefindingsofAbdulHalimandCheHawerethatcompaniesusingaproactivestrategy
tendtooutsourcepayroll,HRinformationsystem(HRIS),andbenefitsbecauseitiscritical
thatthecompanymaintainastrategicfocusandconcentrateoninnovativeand
differentiatedproductsthatwillpositivelyimpact[organizational]performance.Proactive
companiesalsohadatendencytooutsourcetraditionalfunctions,suchastraining,that
requiresignificantinvestmenttotailortotheneedsoftheorganization,whichwouldtake
thefocusfromthecompaniescorecompetencies.Finally,outsourcingtraditionalfunctions
forthesecompanieswasbeneficialforthepurposeofmaintainingflexibilityduringtimes
ofchangebyallowingthemtomonitorthefrequentmodificationsofthefunctionsand
reducecapitalinvestment.

Transactional
TransactionalHRfunctionsareoftenoutsourcedbecausemaximizingflexibilityand
focusingonstrategicpracticesaremuchmoresignificantthanmonitoringdaytoday
operations(AbdulHalimandCheHa).Particularlyinthecaseofsmallbusinesses,theuse
oftheirlimitedemployeeresourcestocompleterepetitive,lowvaluetaskssuchaspayroll
iswastefulforacompanythatneedstofocusondeliveringinnovativeproductsand
servicestothemarketplace.Ataminimum,SMBsshouldoutsourcepayrollandbenefits
administrationtoathirdparty;doingsofreesupemployeesforactivitiesthatwilladd
valuetotheorganization.
TheKaiserFamilyFoundationandtheHealthResearchEducationTrustconductedastudy
in2007thatconcludedthathealthcarepremiums[havebeen]outpacingbothinflation
andemployeewageincreaseswhichhasforcedcompaniestointroducevarioustactics
forcontrollingboththecostsofbenefitsandthecostsofadministeringthosebenefits
programs. 7 Asmentionedearlier,smallcompaniesoftenhaveHRfunctionscompletedby
someoneotherthanaHRexpertwhoishandlingHRmanagementinadditiontoothertasks
thatfallwithintheirlineofexpertise.Itiscriticalthatthesecompaniesshiftthosetasks
outsidetheorganizationtoallowthatperson,beittheCFOorCEO,tofocusonactivities
thatwillstrengthenthecompanyscompetitiveposition.

6AmyPena,ContractingaThirdPartytoCutCosts,Hispanic,2001.
7CurrentBenefitsTrends:CostSavingPractices&BetterEmployeeCommunications,Compensation

BenefitsforLawOffices,2008.

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Traditional
AlthoughAbdulHalimandCheHafoundthatproactivecompaniesconsistentlyoutsourced
transactionalactivities,thesamecompanieshesitatedtooutsourcetraditionalHR
functions.Thesecompaniesfearedthatbyoutsourcingtrainingandrecruiting,theymight
drainintellectualcapital,whichisofparticularimportancetoproactivecompanies.They
alsofearedthatitwouldtakeasignificantupfrontinvestmenttoenableoutsidesuppliers
tounderstandthe[companys]particularrequirements.Althoughsuchmightbethecase
withinmidsizecompanies,whichtypicallyhavesomespecializedHRpersonnel,smaller
companiessimplydonthavetheinternalresourcestoprovidenecessaryrecruitingand
staffingefforts,andtrainingisrelegatedtoaluxuryitem.Unfortunately,thesecompanies
areillpreparedtoaddressexternalinfluencessuchaslegislationchanges,particularlywith
laborlaws.Forthesereasons,outsourcingtraditionalHRfunctionsisanecessary,astute
practice.

Transformational
AcommonstruggleofSMBsistodecidewhichfunctionstoretaininhouseandwhichto
outsource.Activitiesthatareconsideredtransformationalpresenttheopportunityto
changethebusiness.Unfortunately,whenitcomestosmallcompanies,HRfunctionsare
oftentimesnotperformedbyanindividualwhospecializesinstrategicworkforceplanning,
laborrelations,orhumancapitalmanagement.Thus,forsmallbusinesses,keepingtheHR
functioninhouseisnotanoption.Thereisnoonewhocaninternallyaddressthese
sophisticatedemploymentmeasures,sothecompanycaneithermakethedecisionto
outsourcethesefunctionstoexpertsorchoosetoignorethesestrategiesandhopeforthe
best.
Withmidsizecompanies,thereistypicallyanindividualwhosefunctionisHR,andifthe
individualisanexpertinhumancapitalmanagement,laborrelations,andstrategic
workforceplanningandanalysis,itmakessensethattheindividual(ifnotovercommitted
withotherduties)providethatexpertise.Ifsuchanemployeedoesnotexist(orifthe
employeehasexpertiseinonlyoneofthecorestrategicareas),thecompanymust
outsourcethesefunctionsinordertomaximizeemployeeengagementandperformance,
maintainregulatorycompliance,andrefrainfromcharginganemployeewithdutiesfor
whichhe/shelackstheknowhow.

HROutsourcingFutureStrategies
AfterreviewingtheriseofHROoverthepasttwodecades,itiseasytoseehowoutsourcing
hasgrowninresponsetotheneedforoutsideexpertiseinHR.However,whatstrategies
canbeenactedbycalculatingcompaniesforcompetitiveadvantage?Byspreadingriskto
theoutsourcingcompanyandbyleveraginginformationsystemsandhumancapital
expertiseofferedbytheHROprovider(whopresentsnotonlyactionableintelligencebut
anexperttoexplaintrends),SMBscanleverageHROprovidersasastrategicpartnerfor
employmentdecisionmakingandbecomeabestinclassemployerwiththeoperational
flexibilitytomeetmarketdemands.

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SMBPlanningfortheFuture
AlthoughSMBshavestartedgettingontheHRObandwagonbyshiftingmoreoftheir
transactionalandtraditionalactivitiestoathirdparty,HROprovidershavebeenlargely
untappedfortransformativeHRactivities.OnceexecutivesofSMBsrealizetheimpactof
leveraginghumancapitalexpertstohelpgrowtheircompanieswhileincreasing
productivity,efficiency,andtransparency,relianceupontransformationalHROwill
increase.
AlthoughresearchfirmGartnernotesthatcomprehensiveHROaccountsforonly15to20
percentofallHROdeals,thetrendisgrowingfromaneedtohaveaunifiedviewofthe
companyforoperationaldecisionmaking. 8 Byhavingastandardizedplatformand
deliverymodel,andbybringingmultipleprocessesunderacontract,Gartnernotesthat
employerscanthenrealizethefullbenefitsofHROintermsofcostreductionandprocess
improvement(qtd.inHansen).
AccordingtoOutsourcingtheHRFunction:PossibilitiesandPitfalls,theCorporate
ResearchForumfoundthatHR[hasfailed]toengagewithastrategicvisiontotransform
itself. 9 ThisfindingisconcurrentwiththeconclusionsdrawnbyWoodalletal.:Once
functionshadbeenoutsourced,thekeypersonnelretainedtoachievehigherorderwere
oftenunabletotransitionfromtraditionalandtransactionaldutiestothoseofachange
agent,strategist,andbusinesspartnerbecausetheylackedthenecessaryskills.One
respondenttothesurveyconductedbyWoodalletal.stated,TheremainingHRstaffare
moregeneralistandtendtogetinvolvedataleveldownfrompreviously.Asecond
respondentremarked,Wewouldliketothinkthat[HRO]freesupinternalstaffforhigher
valueactivities,butinreality,staffreductionsarethemostcommonoutcome.Becauseof
thistendency,inthefuture,SMBswillhaveanevengreaterrelianceuponHROs,asthey
focusfurtherontheircorecompetenciesandleaveHRactivitiesandstrategiestothe
humancapitalmanagementexperts.

8FayHansen,SpecialReport:MidmarketOutsourcing,WorkforceManagement,2007.
9CorporateResearchForum,OutsourcingtheHRFunction:PossibilitiesandPitfalls,2006.

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CreatingFlexibleTechnologicalandOperationalStrategies
Unlikeenterpriseorganizations,SMBshavetobeabletocopewithrapidmarketchanges
thatcouldrequirethattheyscaleupordownwithinashorttimeframe.Inresponsetothe
surveybyWoodalletal.,arespondentfromaprofessionalservicesfirmremarkedthat
theirdecisiontooutsourcewasdrivenbyaneedto[cope]withgrowth,asitsstaff
expandedfrom69to160withinasingleyear,whichcreatedsignificantcapacityissues
withtheHRstaff.Anotherrespondentremarkedthat,Thedecisiontooutsourcewas
drivenbythecollapseoftheoldpayrollsystemduetooverload.Ourinitialthoughtswere
justaroundoutsourcingpayroll,thenaswelookedatit,wesawtheotherbitsfitaround
thisanddecidedtooutsourceadministration.Wethenthoughtifweareoutsourcingmost
ofit,wemightaswelloutsourceitall.Forthiscompany,outsourcingallserviceshelpedto
scaleitssystemsandprocessestomeetthechallengesofexponentialgrowth.

AlthoughoutsourcingallHRactivitiesunderasingle,comprehensivecontractwasa
sensiblemoveforthisparticularcompany,othercompaniesengageastaggeredapproach.
Throughthismethod,theyoutsourceafewfunctionsatatime,carefullyreviewingmetrics
fordeliveryuponexpectations.

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Article2:RisksandRealitiesofOutsourcing
HumanResources
PerceivedandActualRisksofHROutsourcing
Humanresourcesoutsourcing(HRO)isstillarelativelynewconcept.Assuch,thereexists
sometrepidationagainstoutsourcing,withacommonfearbeingalossofcontrol,
particularlywhenitcomestoreleasingsensitiveemployeeinformationtoathirdparty. 10
Baseduponresearch,however,therisksassociatedwithHROarenotlossofconfidential
employeeinformationorreduction/dilutioninintellectualcapitalfromengagingwithan
outsidepartyforinternalresources.Infact,themostcommondownsideofHROhas
occurredintermsoffailureoftheorganizationsinternal,retainedHRexecutivesto
contributeaschangeagentsorstrategicbusinesspersonnelwhichwaspartofthe
purposeofoutsourcinginthefirstplace.Thisconsequenceismostcommonlyrealizedby
midsizebusinessesthatchoosetooutsourcetransactionalandtraditionalfunctionsforthe
purposeofmovingkeyHRpersonnelfurtherupthevaluechain.
AsecondriskofHROresultsfromalackofunderstandingbetweentheoutsourcing
providerandtheclient.Forexample,inMakingtheDecisiontoOutsourceHuman
Resources,JeanWoodalletal.noted,Veryfewrespondentsadmittedthattheyhadagood
understandingofthecostofdeliveryoftheirHRservicetotherestofthebusiness,and
only[onecompany]feltconfidentthattheywereawareofthispriortooutsourcing.Yet,
paradoxically,agoodunderstandingofthecostoftheHRfunctionwasanecessary
prerequisiteforsuccessfuloutsourcing,aswellasbeingadesiredoutcome. 11 Althoughit
seemsobviousthatacompanywouldunderstandthecostofandvaluedeliveredbyits
personnelpriortoconsideringoutsourcing,findingshaveshownthattypicallythecost
consideredwassolelythatofemployeeoverheadratherthanadditionalcostssavingsin
termsofinhouseHRinformationsystem(HRIS),projectmanagement,andmore.
Finally,asonewouldexpect,somecompanieshavehadnegativeexperienceswithHROs
becausetheproviderselectedwasunresponsive,didnotmeetcustomerexpectations,or
didnotfullyunderstandtheorganizationscultureandneeds.Becauseofthislackof
understandingordeliveryuponexpectations,costsassociatedwithoutsourcingwere
higherthanexpected,andinsomecases,thefunctionswerethenbroughtbackinhouse
(Woodalletal.).

10CurrentBenefitsTrends:CostSavingPractices&BetterEmployeeCommunications,Compensation

BenefitsforLawOffices,2008.
11JeanWoodalletal.,MakingtheDecisiontoOutsourceHumanResources,PersonnelReview,2009.

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SmallCompanies
AseniormanagerfromoneofthefivesmallcompaniesthathadoutsourcedHRandwas
surveyedbyWoodalletal.remarked,Therehavebeensomeinstanceswhereemployees
donotknowwhomtocontact,andsomeoccasionswherenoonewasavailabletoanswer
thephone.Particularlywithinsmallcompanieswherepersonnelareusedtobeingableto
easilyaccessoneanother,workingwithanHROprovidercanbetricky.Forthisreason,its
criticalthatexpectationsareaddressedpriortoengagementwiththeHROprovider,
metricsareestablished,andperformancereviewsoccuronaregularbasis.Additionally,
companiesneedtocloselyconsidertheirservicelevelexpectationspriortoreviewing
potentialvendorsbecausethemostcosteffectiveprovidersarenotgoingtobeableto
providethehighestlevelsofservice.
OftheHROsavailable,ProfessionalEmploymentOrganizations(PEOs)offera
comprehensivesuiteofserviceswithintheHROindustry.Bycontractuallyassum[ing]
certainemployerresponsibilitiesandemploymentrelatedliabilities,PEOsareavaluable
resourceforsmallandmidsizebusinesses(SMBs). 12 Someofthemostcommonservices
contractedthroughPEOsarebenefitsadministration,regulatorycompliance,recruiting,
andretentionallofwhichareofparticularconcerntosmallbusinessowners.InThree
MillionReasonstoAddPayrollServices,JulieLubetkinwritesthatalmost60percentof
surveyedsmallbusinesseswithlessthan20employeesstillmanuallyprocesspayroll.They
areshortontimeandresources,sooneinthreesmallbusinessesincurs[sic]anaverageof
$1,500inlatetaxpaymentpenaltieseveryyear. 13 Forthisreason,smallcompaniesare
encouragedtooutsourcethetransactionalHRdutiestoathirdpartyprovider.

MidsizeCompanies
Thedynamicsofmidsizecompaniesbeingtoolargetohavecloseinteractionwithall
employeesandtoosmalltobeabletorelyuponextensivefinancialandpersonnel
resourcesmeanthatcompanieswithinthiscategoryhaveuniqueconsiderations.Unlike
smallbusinesses,midsizecompaniestendtohaveindividualswhoseprimaryrolefalls
withinHR.Forthisreason,executiveslookathowtheycanleveragetheseindividualsin
themostcosteffectivemannerthatwillhelpcontributetothecompanyscontinued
growth.AstandardapproachistooutsourcetransactionalandtraditionalHRfunctionsbut
retaintransformationalfunctionsinhouse.ThegoalistoretainkeyHRexecutivesand
movethemfurtherupthevaluechaintobecomeadvocatesforemployees,business
strategistswithinsightintolaborrelations,andchangeagentswhoareabletohelpClevel
executivesexecuteuponcorporatestrategy.

12OutsourceHRtoAchieveValue,AccountingTechnology,2008.
13JulieLubetkin,ThreeMillionReasonstoAddPayrollServices,AccountingToday,2008.

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Unfortunately,asdiscoveredbyWoodalletal.,Oneunintendedconsequencewasthe
disappearanceofinhouseHRexpertise.Thiswasduetotheeffectofthedownsizingthat
appearstohaveaccompaniedtheoutsourcingofHRinmanyorganizations.Predictably,the
radicalchangebroughtbyoutsourcingleftproblemsintermsofknowledgemanagement
andcorporatememory.Forthisreason,itisimperativethatorganizationspursuingHRO
partnercloselywiththeiroutsourcingprovidertoensurethatthereisnotadrainon
corporateknowledgeaswellasmakingsurethatretainedHRpersonnelaretrainedand
supported.Ataminimum,midsizecompaniesneedtocloselymonitorknowledgetransfer
throughtheoutsourcingprocess.

RealitiesofHROutsourcing
Inasurveyof129companiescitedbyToddHennemaninMeasuringtheTrueBenefitof
HumanResourcesOutsourcing,thetopthreereasonsforHROweretogainoutside
expertise,improveservicequality,andfocusonthecorebusiness. 14 Thesefindingsare
echoedbyWoodalletal.whofoundthat[organizations]undertakeoutsourcingtoreduce
costs,gainaccesstoHRexpertise,achieveworkforceflexibility,andtofocusmanagerial
resourcesonstrategicmattersandalsotokeepupwithworkplaceregulation.These
findingsreflectthatcompaniestodayareusingHROinmuchthesamewaythattheywerea
decadeago.However,Workscapeanalystspresentedinterestingobservationsintheir
AnnualBenefitsStudy2008: 15
Webbasedtechnologiesaretheprimarymeansofaccessingbenefitsinformation,
buttheyareoftenusedintandemwithothertraditionalpersonnelcommunications
methodologies.
CEOsaresignificantlymorelikelythanHRandbenefitsprofessionalstosee24/7
accesstobenefitssupportasbeingimportant.
[Firmshaving]alreadyinvestedininternaltechnology[feel]nocurrentpressureto
switch.
Althoughcostsavingsfromoutsourcingcanbesignificant,thereturnisnt
necessarilyimmediate,especiallyifafirmlooksonlyatHRlaborcostsassociated
withenrollmentanddoesnotassociateotherrelatedexpenses,suchasITsupport.

14ToddHenneman,"MeasuringtheTrueBenefitofHumanResourcesOutsourcing."WorkforceManagement,

2005.
15CurrentBenefitsTrends:CostSavingPractices&BetterEmployeeCommunications,Compensation

BenefitsforLawOffices,2008.

11
TheEssentialsSeries:HROutsourcingStrategiesforSMBs CrystalRast

SmallCompanies
AccordingtoresearchconductedbyWoodalletal.,themaindifferenceinoutsourcing
practicesbetweenlargerandsmallercompaniesisthatsmallercompaniesaremuchmore
likelytooutsourcethewholeorthemajorityoftheirHRactivity,whereaslargercompanies
focusprimarilyonthemoreroutingtransactionalwork.Aspreviouslymentioned,ofthose
interviewed,employeeswithinabenefitsorHRrolewereasmuchashalfaslikelyasCEOS
tosee24/7benefitsaccessasimportanttoemployees.AccesstoWebbasedportalsfor
benefits,performancemetrics,ororganizationalinsightisnotonlycostlybutriskytobuild
inhouse,makingthisanareawheresmallcompaniesareabletoleveragethetechnologies
providedbyHROs.

MidsizeCompanies
Likemostmidsizecompanies,BusinessAdvantage,Inc.cametotheircomprehensiveHRO
decisionfollowinganinitialdecisiontooutsourcepayroll.Aftertheirinitialoutsourcing
foray,BusinessAdvantagebeganinvestigatingotherservicestooutsourcebutsoon
realizedthatwithmultiplevendors,integrationwouldbeanissue.Tryingtohandlesome
processesourselvesandsomethroughseparateoutsidevendorswasliketryingtomanage
aherdofcats,accordingtoBusinessAdvantageCEOStanleyJoseph.Aftermodifyingand
expandingBusinessAdvantagesoutsourcingarrangementfivetimesin3months,the
companyfinallydecidedonacomprehensiveHRO/financeandaccountingoutsourcing
(FAO)contractwithanestimatedsavingsof30to40percentannuallycomparedwiththe
inhousecostforsimilarfunctions 16 .SMBscanalsoleverageoutsourcingcompaniesduring
timesofgrowthandtransitionlikeexpandingintonewmarketsinordertoadhereto
localemploymentlawsandpayrolltaxregulations. 17
SimilartoBusinessAdvantage,Inc.,CatalinaRestaurantGroupisamidsizecompanythat
hasleveragedHRO.SamuelBorgese,CEOofCatalina,madethedecisiontooutsourceHRin
2002(followingaspinoff).Thedecisiontooutsourcewasprimarilydrivenbyaneedfor
standardizationandeconomiesofscalewithouthavingtoinvestalotofcapital.By
utilizinganoutsourcingprovider,Catalinawasabletokeepstrategictasksinhousewith
tacticalsupportfromtheoutsourcingvendorwhileutilizingthevendorsHRplatform
(qtd.inHansen).AccordingtoBorgese,ItsveryhardforaVPofHRtobeastrategicplayer
ifheorsheismanagingtheHRinfrastructure.Iftheyarefreedfromthis,theycan
concentrateonworkforcedeploymentandstrategicissues.
Ofadditionalnote,Catalinasexecutiveswereconcernedaboutregulatorycompliance.
Citingtaxregulationsasastrongfactorinthedecisiontooutsource,Borgesenoted,You
needtohavegreatconfidenceinyourabilitytomeetrequirements.OntheF&Aside,we
mustcloseourbookswithcompleteaccuracywithinfivedays.Asmidsizecompanies,
BusinessAdvantageandCatalinaexecutivesbothfoundthat,throughHRO,theycouldbuild
inoperationalflexibilityandefficiencywithoutthesignificantcapitalinvestmentthat
wouldberequiredtoperformthesamefunctionsinhouse.

16FayHansen,SpecialReport:MidmarketOutsourcing,WorkforceManagement,2007.
17PaulMcDougall,HelpwithHumanResources,InformationWeek,2005.

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TheEssentialsSeries:HROutsourcingStrategiesforSMBs CrystalRast

AdjustmentstoApproachforHROutsourcing
Outsourcingsignificantfunctionsiscomplicatedandbearsrisk.Thus,itsimportantthat
firmscloselyexaminewhatiscurrentlybeingdeliveredbyinternalresourcesandthefull
costsassociatedwiththoseservicelevels.Organizationscanthendeterminevaluethatcan
bealignedwiththeirexpectationsofoutsourcing.Fromthispoint,executivesmustsetclear
objectiveswiththeoutsourcingpartnerandagreeuponmetricstoreflectperformance.
Fromtheirsurvey,Woodalletal.determinedthatmanycompanieshadnotfactoredinthe
fullcostandvalueoftheirinternalresourcespriortooutsourcing.Thissituationinturn
meantthatthecostofreachingpreviousservicelevelswasmoresignificantthan
anticipated.Inreviewoftheirpractices,respondentsmadethefollowingremarks:
[abigweaknesswas]notbaseliningourownservicebeforewestarted
Nocostevaluationwasmadeagainstinternalorexternalprovidersthiswouldbe
aweakness
MostHRdirectorsonlyunderstand75[percent]oftheircostbase
Dontoutsourcewhatyoudontunderstand

SmallCompanyModels
Althoughmanysmallcompanyownersdreamofthedaywhentheircompanyexperiences
exponentialgrowththuspropellingthemtoamidsizecompanysuchgrowthcarries
drawbacks.Acompanythatcannotscalesystemsandprocessestomeettheneedsofthe
acceleratedgrowthcanfinditselfjustasquicklylosingcustomersandemployees.Forthis
reason,smallcompaniesthatareexperiencingrapidgrowthshouldconsideroutsourcing
systemsandprocessesthatfalloutsideoftheircorecompetencies.Byshiftingthese
functionsandtaskstoanoutsidevendor,focuscanremainonareasthatprovide
competitiveadvantagewithoutsacrificingquality.

MidsizeCompanyModels
Forcompaniesthathavebeenusedtohavinginhouseresources,HROcanrequireaperiod
ofadjustment.Inadditiontoagreeinguponexpectations,midsizecompaniesmustrealize
thattheyareshiftingfunctionsoutsidethecompany.Thisshiftmakesitcriticalfor
companiestothinkoftheirvendorasapartnerandengagestrategicallywiththatpartner
before,during,andafteroutsourcinginordertorealizethefullbenefitsofoutsourcing.As
statedbyBorgese,Ifthevendoristrulyresponsive,itwillbelikehavingthefunctionsin
house.Thiscommitmentmustbeconsideredlongbeforeengaginginnegotiations.
Althoughservicelevelscanbenegotiated,relationshipswithavendorshouldnotbeoneof
thosenegotiations.Executiveswillneedtospendalotoftimewiththeirprovider,sothe
rapportneedstobestrongandmutuallybeneficialfromthebeginning.

13
TheEssentialsSeries:HROutsourcingStrategiesforSMBs CrystalRast

Article3:SuccessfulHROutsourcing
Strategies
InternalAnalysisandBaselining
Itisimpossibletodeterminewhethervalueisbeingdeliveredbyanoutsourcingpartner
withoutfirstunderstandingthevaluedeliveredbyinternalresources.Forthisreason,
companiesmustpaycloseattentiontothefullcostsofandvaluedeliveredbytheircurrent
operations.Themostcommonfactorfordeterminingvalueofhumanresources(HR)
departmentsisbyexaminingheadcount.Byreducingheadcountbutmaintaining
productivity(asignofincreasedefficiency),companiesareabletoexactgreatervaluefrom
theiremployees.However,thereareadditionalfactorstoconsider,suchasattritionlevels,
employeemorale,reducedlitigation,andreductionsintimetohire.Without
understandingthesefactors,companiesareunabletoproperlybaselineinhouse
operationspriortoshiftingfunctionsexternally.Companiesalsoneedtofactorinthe
expenseofbuildingandsupportinginhousetechnologyplatformsand24/7benefits
administrationportalswhenconsideringwhethertokeepfunctionsinhouseoroutsource
them.
Inlookingatthesefactors,LindaMerritt,AT&THRstrategicplanningdirector,states,I
advisepeopletothinkaboutnotwhatyouwantonDayOnebutwhatdoyouwantinYear
Four,YearFive,YearSixandthinkabouthowyourestructuringthedealthatwillallow
thattoevolveordevelopovertime. 18 Echoingheradvice,RobertBrown,Gartneranalyst,
remarks,Beforecompaniesseekbids,theyshouldquantifytheircurrentservicelevelsand
costs(qtd.inHenneman).Thesequantificationsareessentialtounderstandinghowto
structureoutsourcingdealstoensurethatcompaniesarenotdisappointedinsubsequent
years.

18ToddHenneman,"MeasuringtheTrueBenefitofHumanResourcesOutsourcing."WorkforceManagement,

2005.

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TheEssentialsSeries:HROutsourcingStrategiesforSMBs CrystalRast

UnderstandingCostvs.ValueofHR
Althoughemployeemorale,satisfaction,andturnoveraresomeindicatorsofHR
performance,researchershaveadifficulttimeagreeingonthemostimportantHR
performanceindicators.ThereasonispossiblybecauseHRhashistoricallybeenviewedas
adepartmentthatdoesnotaddvalueintermsofcompetitiveadvantagetothecompany;
therefore,oneofthemorepopularmeasuresofitsperformancehasbeencostreduction.
ThetheoryisthatbyoutsourcingHRfunctionsandloweringheadcount,remaining
employeescanfocusonthecompanyscorebusiness,drivinggreaterefficiencyandoverall
performance;however,itisobviousthatthereisvalueinhumanresources.Thedifficulty
arisesinhowHRcancontributetothecompetitiveadvantageofacompanywhichbegins
withHRworkingalongsidecompanyexecutivestoaligncorporateobjectivestotheskills,
abilities,andmotivationsofpersonnel.

IdentifyingCoreCompetencies
ThefirstpriorityindeterminingwhetherHRoutsourcing(HRO)willhelpacompany
achievecompetitiveadvantageistooutlinethecompanyscorecompetencies.By
identifyingthoseareasthatdefineacompanywithoutthem,thecompanywouldhaveno
advantageatallexecutivescanthenisolatethoseareasascorecompetencies.Oncethose
areashavebeenisolated,allotherareasarepossibleavenuesforoutsourcing.
Inaddressingthisstrategywithmeacoupleofyearsago,aCIOfriendofmine,and25+
yeartechnologyexecutive,statedthatheconsideredalltheoperationswithinhis
departmentandwrotethemonapage.Hethendrewalinebetweenthosethat,ifheldin
house,wouldaddvalueandcompetitiveadvantagetotheorganizationandthosethat
wouldnot.Everythingthatfellbelowtheinhousevaluelinewasoutsourcedtoaprovider
thatspecializedinthatarea.Thisfocusoncorecompetenciesisessentialtosmalland
midsizebusinesses(SMBs),whichmustalwaysbemindfuloftheopportunitycostoftheir
operations.Byinvestingmoneyintoanoperationthatdoesnotdelivercompetitive
advantage,anSMBiswastingcapitalthatcouldbebetterusedelsewhere.

AligningTechnologytoSupportOperationalObjectives
AgrowingreasonforSMBstooutsourceHRfunctionsisthedesiretoleveragecurrentHR
informationsystem(HRIS)technologies.Currentplatformsareexpensivetorolloutand
maintain,andthewindowfortechnologyobsolescencecontinuestoshorten,makingit
impracticalforSMBstobuildtheseapplications.Forthisreason,itisfarmoresensiblefor
SMBstoleveragetheirvendorsplatform,theexpenseofwhichisstretchedacrossmany
clients(makingitmoreaffordabletothevendor).Furthermore,byusingavendors
technology,theSMBsareabletomitigatetheriskofbuildingsuchanapplicationinhouse.

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TheEssentialsSeries:HROutsourcingStrategiesforSMBs CrystalRast

Thetypesoftechnologiesavailableextendfromsimplepayrollandbenefitsadministration
platformstosophisticateddashboard/businessintelligencetoolsthatprovidereporting
metricsacrossthecompany.OfadditionalbenefittoorganizationsaretheHROsthatutilize
SoftwareasaService(SaaS)basedplatformsthatrequireminimalcomputingresources,
arescalableacrosstheenterprise,andcanbedeliveredinaslittleasweeksasopposedto
yearsforinhousedevelopedapplications. 19 Thecompanywillquicklybecomereliant
uponthevendorstechnology(whichmaycreateabarriertoexitfortheclientcompany),
soitisimperativethatinreviewingpotentialvendors,anorganizationchoosesacompany
thatwillbeinbusinessseveralyearsintotheforeseeablefuture.

AgreeingonExpectationswithHROutsourcer
Engagingvendorsintechnologydiscussionsoverupcomingyearsmightseemalittle
outsidetheimmediateneedsofacompany;however,itisimportantthatexecutives
understandwhattypesoftechnologiesareofferedbypotentialvendors,thecosts
associatedwiththosetechnologiesbothintermsofexternalfeesfortechnologyand
supportandforinternalmaintenance(hardware/storagerequirements)andthe
vendorsfuturetechnologyplanning.Ifthecompanysdatawillbehousedexternally,the
executivesofthefirmmustfeelconfidentthattheHROpartnerhasplanstoaddress
obsolescence,upgrades,governance,businesscontinuity,andsecurity.Theseexpectations
mustbediscussedearlywithvendorssothatbothpartieshaveaclearviewofwhatis
beingofferedandwhatisbeingrequested.
Similartotechnologydiscussions,allstakeholdersoftheorganizationneedtohaveinput
intotheHROdiscussiontoensurethatallpartiesagreeuponasetofachievableobjectives
thatcanthenbepassedontothevendor.Onceexpectationsareclearandthedealis
finalized,itisimportantthatperiodicallythevendorsperformanceisreviewedand
matchedagainstexpectations,andmeasuresaretakentobringperformanceinlinewith
expectations.

AddressingPerformanceMetrics
Inadditiontoaddressingtechnologyconcerns,SMBexecutivesneedtolayoutexpectations
fordeliveryofallfunctions.Thesemetricscanbeassimpleasresponsepoliciesthatlayout
howquicklyafirmreturnsacalltotimetofillratiosforrecruitingandselection.Increased
employeemoraleasseenbydecreasedattritionlevels(employeerelations)andincreased
jobperformancethroughtrainingareadditionalmetricsthatcanbeusedtodetermine
deliveryofobjectives.

19FenilShah,TheNewEraofOutsourcingWhyWebBasedHumanResourceshasComeofAge,Workspan,

2006.

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TheEssentialsSeries:HROutsourcingStrategiesforSMBs CrystalRast

Afterunderstandingbusinessneeds,determiningfuturestrategies,andhavingexamined
thecostsandbenefitsofkeepingHRfunctionsinternal,savvyexecutivesshouldconsider
theperformancemetricstheywillestablishwiththeirserviceprovider.Oneofthebenefits
ofoutsourcingHRcanbeaccesstobusinessintelligencetechnologythatwouldbe
otherwiseunavailabletoasmallbusiness,makingitcriticalformetricstobeconsidered
closelyandagreeduponaspartofnegotiation.In"MeasuringtheTrueBenefitofHuman
ResourcesOutsourcing,"ToddHennemannotesthatbymutualagreementofmetrics,
whichcanincludedataoncostperpersonaccuracyofwork,timelinessandcustomer
satisfaction,bothpartieswillhaveanunderstandingofexpectations,whichwillcreatea
stronger,moresuccessfulpartnership.(HennemanwasparaphrasingLarryKurzner,senior
VPwithAon.)
Bymutualagreementofmetricswhichcanincludedataoncostperperson,accuracyof
work,timeliness,andcustomersatisfactionbothpartieswillhaveanunderstandingof
expectations,whichwillresultinastronger,moresuccessfulpartnership.Afterall,the
closerthevendorcomestobeingatrustedadvisor,theclosertheorganizationwillbeto
havingthirdpartyservicesfeelmoreliketheyrebeinghandledinhousewithoutthe
hasslesofoverheadorcompliance.

EnforcingPerformanceMetrics
Oncecompanieshaveinvestedthetimeandenergyintounderstandingthebaseline
performancemetricsofinhousefunctions,theycanidentifyachievableobjectivesandthe
coordinatingmetricswiththeirHROpartner.Oncethosemetricshavebeenverballyagreed
upon,itisimportanttohaveexpectationsandpenaltiesstatedwithintheoutsourcing
agreements.Outsourcingcanbeexpensivebothintermsoftimeandcapital,soits
imperativethatallpartiesagreeuponwhatwillbemeasuredandhow,inadditiontowhen
andhowoftenthemeasurementswillbetaken.SMBswanttofeelthattheyhavesecurity
thattheirexpectationswillberealized,andvendorswanttoshowtheirclientshowthey
aremeetingandexceedingobjectives.Forthisreason,allobjectivesandpenaltiesfornon
performanceshouldbeclearlystatedintheoutsourcingagreement.Althoughitisassumed
thatthepersoninchargeoftheHROinitiativemaintainsconsistentcommunicationwith
thevendor,regularreviewsoftheexpectationscomparedagainstperformanceshould
happenataminimumonaquarterlybasistoaddressanyissuesearlyonandgivethe
vendortimetofixanyproblems.

MethodsforShiftingHRFunctionsOutsideCompany
OncethecompanyhasagreeduponitsHROpolicyandsecureditspreferredvendor,the
processofshiftingthefunctionsexternallybegins.Inthecaseofsmallcompanies,itcanbe
assimpleasaCFOhappilyturningtheHRreignsovertothevendorandrefocusinghisor
hertimeonfinanceandaccountingmeasures.Inthecaseofmidsizecompanies,therollout
canbemorecomplicated.

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TheEssentialsSeries:HROutsourcingStrategiesforSMBs CrystalRast

Midsizecompanieshavemoreemployees,someofwhichmightbeHRstaff.These
companieshaveatendencytooutsourcefunctionsthatwerepreviouslycompletedbystaff.
Thissituationcanoftentimesresultinlayoffsofnonessentialemployeesandpromotionof
thosedeemedkeyplayersintomorestrategicroles.Unfortunately,asrecentresearchhas
shown,toofewoftheseemployeesareabletomakethetransitiontostrategistandadvisor.
IfpartofacompanysstrategyistofocusongettinghighervalueoutofHRpersonnelwho
werepreviouslyperformingtraditionalortransactionalfunctions,itisimperativethatthe
companyprovideextensivetrainingandcontinuedsupporttopreparetheemployeesfor
thenewrole.

RealignmentofInternalStafftoTransformationalFunctions
InaddressingthedifficultiesofpostoutsourcingwithinternalHRstaff,SamuelBorgese,
CIOofCatalinaRestaurantsremarked,ItsaquestionofwhethertheHRexecutivewants
controlorwantswhatisbestfortheorganization.TheHRexecutivehastolookatthe
businessintelligenceandconstantprocessimprovementthatcanbeachieved,andathisor
hergoalsandresponsibilitieswithintheexecutiveteam. 20 Foranyperson,being
promotedintoanewrolecarrieswithitexcitementaswellasanxietyparticularlywhena
staffmemberhaspreviouslybeeninvolvedwiththebusinessbutnotconsideredakey,
strategicmemberofexecutivedecisionmaking.Thisevolutioncanbeadifficultonethat
canonlyberesolvedthroughextensive,continuoustrainingandeducation.

SupportthroughTraining/AdditionalEducation
ThetransitiontoHROcanbedifficultonHRstaff,makingitcriticalthatsufficienttime,
training,andeducationaregiventofostertheirgrowthintohighervalueactivities.InJean
Woodalletal.,MakingtheDecisiontoOutsourceHumanResources,anHRdirectorofa
surveyedtelecomcompanyobserved,HRstaffneedstobeupskilledtoworkasHR
BusinessPartnersandformpartoftheleadershipteam. 21 Twootherorganizations
surveyed(oneacountycouncilandtheotherafinancecompany)statedthat,since
outsourcing,theirkeyHRstaffhadmovedintochangemanagement,consultancy,learning,
managementdevelopment,andgovernanceandstandardsroles.Theresultsweremixed,
however,withsomerespondentsindicatingthatpersonnelwereactuallylessskilledin
theirnewroleandthatthequalityofstrategicinsightorconsultancyskillswaslacking.For
thisreason,companiesshouldlookcloselyatthepersonneltheywanttoelevateinto
changeagentroles,andprovideadequatetrainingandsupportforthosestaffmembers.
Otherwise,companiesmightbebetteroffoutsourcingthetransformationalfunctiontoa
companyspecializinginthesehighervalueoperations(someofwhomhavethetitlesof
HRconsultantorhumancapitalmanagementconsultant).

20FayHansen,SpecialReport:MidmarketOutsourcing,WorkforceManagement,2007.
21JeanWoodalletal.,MakingtheDecisiontoOutsourceHumanResources,PersonnelReview,2009.

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TheEssentialsSeries:HROutsourcingStrategiesforSMBs CrystalRast

TopTenRecommendationsforHRO
BeforeacompanyengagesinHRO,itshouldhave:
Identifiedhowoutsourcingfitswithstrategicobjectives
Agreedwhichcorestrategiccompetenciesmustbekeptinhouseand
whatcansafelybeoutsourced
IdentifiedacompleteviewofinternalHRservicedeliverycosts,themain
costdrivers,andthepotentialsavingsandinvestment
Assessedinternaloutsourcingandexploredhowsharedservicesmight
deliverthesamebenefitsbutwithgreaterretainedcontrol
Identifiedthetechnologicalchallengesandsolutionsaround
outsourcinghavethecostsofrunningandretiringlegacysystemsbeen
calculatedaccurately,forexample?
Developedaclearviewofthecapabilitiesandreputationofeachofthe
mainoutsourcingproviders
Standardizedandsimplifiedprocessesandprocedurespriorto
consideringoutsourcing
Discussedindetailtheconceptofoutsourcingwithcustomers
(employeesandbusinessmanagers)andotherkeystakeholdersinthe
company
Definedthekeysuccessmeasuresthatwillbeusedtojudgethe
performanceoftheoutsourceproviderandthestructureofthedeal
Consideredthehistoryoftheorganizationintermsofmanagingcomplex
transitionprocessesistherethewilltoseeanoutsourcinginitiative
throughtocompletion?
(Source:CorporateResearchForum,OutsourcingtheHRFunction:
PossibilitiesandPitfalls)

Conclusion
HROisacomplexindustrywithabroadspectrumofproductsandservicesthatcanbe
bundledordeliveredalacarte,dependingupontheindividualneedsofthecompany.
Becauseofitscomplexity,potentialrisk,andrequisitecapitalexpenditures,HROisnota
practicetobeengagedlightly.ForasuccessfulHROendeavor,companiesmustbemindful
ofthevalueofandcostsassociatedwiththeirinternaloperationsandunderstandthe
servicelevelsprovidedbythoseinhousefunctionspriortoenteringintorelationships
withpotentialvendors.Althoughdealscanbestructuredanynumberofwaystomeetthe
uniqueneedsofanindividualcompany,theoneareathatcannotbeoverlookedisthatof
theclientvendorrelationship.ForSMBsconsideringoutsourcing,particularlycompanies
seekingtoleveragethevendorsplatform,nothingismoreimportantthancreatinga
partnershipbuiltontrust,respect,andcommitmenttomeetingacompanysorganizational
goals.

19