The role of human capital management (HCM) in the organisation has always been difficult to define, ranging from grooming top managers to checking holiday entitlements. The more ambitious HR executives see themselves, rightly, as a natural part of the company’s senior echelon, since so much of global competitiveness depends the ability to attract the right talent, to train, deploy, motivate and retain it.
But the administrative chores have to be done. The payroll, remuneration and benefits, records, pensions, the car pool, travel and entertainment, employee training and communications, expatriate concerns, and a host of other functions are vital in a large multinational organisation, but have long bogged down HR managers and blunted their enthusiasm for the strategic issues.
Modern IT systems may be part of the answer but HR tends to come some way down the pecking order for the expenditure required. Outsourcing the functions to specialists equipped with the latest technology is a way round that, and if moved to countries where wages are low and educational levels are high, the cost savings can be considerable.
Payroll is the most commonly outsourced HR function because it is largely transactional, and is easily quantifiable when measured against targets of speed and accuracy. But succession planning, performance assessment, management training and so on demand quality rather than quantity, and do not yield to the same treatment.
A few companies have opted to outsource virtually the whole of the HR function, reserving to themselves only a few roles such as senior management appointments, development, remuneration and so on. At defence and aerospace company BAE Systems, for example, management selection of all but the top 600 managers, training and development, payroll, remuneration and benefits, expatriate services and so on are handled by Xchanging, an outsourcing specialist.
Xchanging recently floated on the London stock market, indicating its confidence in the outsourcing future. But HR outsourcing accounts for only about 10 per cent of its business, and CFO Richard Houghton does not expect this proportion to grow.
He is happy with the BAE contract, which was recently extended for a further six years, and explains: “We’ve learned a lot from it, enabling us to move from a fixed to a more variable price structure.” But there are few if any other all-encompassing deals of that sort in the offing, and large-scale HR outsourcing has not lived up to the exciting future many experts were predicting only a few years ago.
In 2002, the market research specialist IDC forecast that the European market for HR outsourcing services would grow by 27 per cent annually over the subsequent five years. The actual result was nearer 10 per cent.
A more recent survey by the HR Outsourcing Association found that while half the respondents expected to spend more on HR outsourcing over the next three years, a third expected to spend less. Three-quarters of their budgets were for less than $10m.
There are good reasons to be cautious. Some early HR outsourcing contracts went seriously wrong, either because the specialist was unable to maintain the specified standards of service in all territories or the client faced radically changing market conditions but was tied to a rigid 10-year contract.
Expectations and regulations can differ widely from country to country, and that is one reason why Xchanging’s contract with BAE does not include the US. Groups that have a tradition of local autonomy will have a lot of groundwork to do before they can pass even the most routine HR operations on to a single specialist. HR is an expression of the soul of the company, and outsourcing such a significant function demands a close understanding of the culture as well as the mechanics of the organisation.
It follows that for outsourcing to be successful, the HR team must itself be expert in the processes and strategies involved. “Don’t outsource what you don’t understand” is the advice from one battle-hardened HR director. But in many companies, line managers and directors, too, do not understand what good HR processes can, and cannot deliver.
When the scope of a contract is defined, and performance measures attached, as they have to be before the contract and price can be fixed, the room for misunderstanding is wide, and executives with exaggerated but vague expectations are liable to be disappointed. In the view of Richard Sandwell, leader of the finance and performance management practice at Ernst & Young, HR outsourcing is where IT and finance outsourcing was 10 years ago: the pain of long, inappropriate contracts with no break clauses has still to be endured.
Wiser companies, particularly those with many disparate units still using their own legacy systems, first pull the basic administrative HR functions into shared service centres, gradually reducing the number of centres to an economic minimum.
This policy has two advantages. First, it enables managers to understand every detailed step of the processes and the problems caused by different systems, different legal requirements and so on. Further acquisitions can be relatively easily absorbed, and areas exposed where exceptions need to be made.
Second, it builds volumes to a point at which cost savings become worthwhile – if not, perhaps, quite as large as the goals. The HROA’s survey showed that cost reduction targets averaged 30-40 per cent for outsourcing programmes, but 20-30 per cent for shared services or a mixture of both. The actual achievement appears to range from 11 per cent to 50 per cent, although Mr Sandwell’s experience is that the lower figure is more likely.
But cost reductions are only the beginning. “Transformation of HR”, the current fashionable term for a decades-long ambition, implies that as well as lower costs, the standard of service to the organisation will improve as a result of the outsourced shared-service process. More powerful, state-of-the-art IT systems mean that mistakes on pay cheques will be fewer, training programmes more relevant and closely monitored, recruitment and assessment more effective. Individuals can see on their computer screens what opportunities are available elsewhere in the group, and what qualifications are required. Top management will be equipped with more accurate, prompt and comprehensive information, based on common definitions of everything from competences to employee costs.
At the corporate level, strengths and weaknesses can be assessed, and related to the demands of the corporate strategy. Gaps can be anticipated and filled, and the group’s underlying strengths better exploited. For most HR directors, this is still a distant dream, but if he or she can make even part of it come true, a place in the boardroom awaits.
