The potential benefits of Human Resource Outsourcing (HRO), have been well documented but not always delivered. These include reducing cost, avoiding HR technology investment, re-aligning HR towards delivering more strategy and improving HR services. (see Top 5 Benefits of HR Outsourcing). Choosing a vendor that matches your requirements and will work with your culture is difficult enough, but it also important to take a view on who the likely ‘winners’ will be in the HRO industry.

At the moment, in supporting our clients as they look at their HR Transformation options, we think one of the biggest challenges is that of ‘picking winners’. Whether considering HR Outsourcing for the first time, re-energising an existing contract or simply bringing the whole show back in-house. A wrong decision now could mean you are lumbered with the wrong vendor, solution or the wrong technology platform for the next 7-10 years. This has always been a challenge, yet is more significant now with big changes in the HRO industry. Nothing distracts the vendor’s senior management team more than mergers, acquisitions and a major change in direction.

Lessons have been learnt since the first generation HRO contracts of ten years ago, such as BP/Exult (for an interesting account, see The Great Vendor Bender free login required to HRO Today website) which has renewed its contract with Hewitt, following an ‘about-turn’ of its plans. As David Ulrich, a professor at the University of Michigan’s Ross School of Business reflected, ‘Often the first pancakes or first batch of cookies do not come out well.’

The giant HRO deal between Accenture and Unilever in 2006 has now been ‘digested’ following some implementation challenges. Since then, the HRO market has fragmented with some big players moving back to their ‘comfort zone’, focusing on their core markets and strengths, for example, Hewitt.

Other major changes in the industry include acquisitions such as ACS/Xerox, more ‘best-in-breed’ deals and the rapid rise of Recruitment Process Outsourcing (RPO), see for example, RPO ends 2009 with a big bang and begins 2010 on a high note. Buyers are now more likely to have a HR Operating Model with multiple HR vendors covering areas such as HRIS, Payroll and RPO. In fact increasingly more and more is up for grabs in HR outsourcing, see the People Management Guide to Outsourcing – Out of the Ordinary, including our thoughts on what should be outsourced and what should be retained.

As we predicted in our attempt to peer into the future of HR in our ‘Glass Bead Crystal Ball’, Future of HR Operating Models, there is still more consolidation to come in this $6 Billion Global industry. For more info, see HRO provider acquisitions on the rise from HR Outsourcing insights blog.

Hot off the press, Northgate Arinso have acquired the HR Management Services of Convergys. This is a bold bet on the future of the HRO market, and should combine the HR Service Delivery capability of Convergys US and European HR Service Centers, with Northgate Arinsos innovation and technical strengths. See Horses for Sources, the new Analyst firm in the starting stalls, with their take on the deal NorthgateArinso buys its way to top spot in Enterprise HRO and it only cost them $100m.

In picking a vendor, ‘financial stability’ has always been important in our Glass Bead Consulting weighted evaluation criteria, but now this has a much higher rating than 4 or 5 years ago. The rare AAA credit rating of ADP has a bigger pull than ever before.

Many organisations are attracted to the ‘on-demand’ HR outsourcing model with a view that there is no need to host the technology yourself with employees accessing services over the internet. This reduces some of the risks of picking the right technology platform, as it’s taken out of your hands. See for example, Northgate Arinsos 7 year HRO contract with Astra Zeneca, in 105 countries and 65,000 employees, based on their ‘euHReka platform’.

So the HRO market is changing all the time and the benefits and risks of HR Outsourcing will vary for each organisation, its requirements and context.

To minimise your risks in choosing a HRO vendor, consider the following :-

1. Think carefully about your Sourcing Strategy, will you put all your eggs in one basket or go for a best-of-breed approach with HR Processes? Make sure that the different vendors will be able to work with each other culturally and operate with compatible technology.
2. Establish your vendor evaluation criteria up front, work out as an organisation what are the relative weightings and identify any ‘deal-breakers’.
3. Work with your legal team to develop flexibility into the contract, including break-clauses and allowing interfaces with other vendors.
4. Consider using an independent HR outsourcing advisor who will know the market well and take you straight through to the Request for Proposal short-listing based on your requirements.
5. In your vendor evaluation, listen carefully to the vendor’s answers on their long-term strategy for HR Outsourcing.

Finally, there are great benefits for HRO as part of a broader strategy of transforming HR or to reduce costs, but keep an eye on the marketplace and picking a winner will pay a healthy return.

There are more useful HR Outsourcing resources in the HR Transformation Knowledge Bank

Photo Credit :- Andy Spence – Brighton Races – October 2004

In the UK Civil Service, there is 1 Human Resource professional for every 50 employees. In other sectors with some degree of standardisation, larger organisations should be achieving a ratio way beyond 1 HR professional to 100 employees. The report indicates that HR in the UK Public Sector is about half as efficient as it should be.

The UK Government has presented its strategy for delivering efficiency savings in the Public Sector, Putting the Frontline First – Smarter Government and states that “This plan delivers better public services for lower cost”. The report refers to a range of tactics including strengthening the role of citizens and civic society, accelerating the move to digitalised public services, allowing local authorities to create further commercial opportunities and streamline central government for sharper delivery. The report also highlights the objective of improving back office processes to the standard of the best.

To make the proposed Public Sector changes, and make them stick, requires effective people management and HR has a key role to play in this. As “Next Generation HR” – the Civil Service wide employee framework recognises, it is key that performance improvement, engagement and wellbeing, competencies and skills and smarter workforce deployment are delivered more effectively. The key to “Putting the Frontline First” is “Putting employees first” – they ultimately will deliver these changes.

In the report Benchmarking the Back Office IT, Finance and HR metrics have been published for Government departments. The tactic of “Naming and Shaming” with benchmarks can be a useful and powerful technique when used appropriately. However benchmarking alone should never be used to size any function, it is a crude yard-stick. Sizing HR functions should be linked to the wider organisational goals. The question should not be “how do we achieve 1:77 or 1:150?”, rather “what are the goals of the organisation and what HR capability and resources do we need to deliver them?”

Armed with this benchmark data, Click here for spreadsheet with HR Benchmark Data (with Glass Bead Consulting Ranking), the HR Transformation Analyst team at Glass Bead Consulting were let loose for some initial number crunching. The data, at this stage, has too many questions and gaps to be analysed in a meaningful way, but here are some comments and observations.

Comments on HR Benchmarking Data

1. 1. The data shows ‘% Cost of HR Function’ (against total running cost) and ‘Ratio of Employees (FTE) to HR Staff’, plus Average Working Days Lost to Sickness (AWDL).
   
   
2. 2. Using Benchmarks is a minefield with many reasons for anomalies. It is often a more productive use of time to work out why there are differences within an organisation. The metrics chosen have their flaws, for example the Ratio of Employee (FTE) to HR Staff might show variations due to degree of outsourcing and definitions. ‘% of Cost of HR function’ will vary considerably depending on the type of expenditure i.e. running Embassies around World or calculating benefits payments.
   
   
3. 3. In terms of HR metrics, we prefer the ‘Total Cost to Serve per employee’ metric as it reflects 3rd party spending and relative salary costs. E.g. the HR : Employee ratio might be very high because 50% of HR is outsourced, however the ‘Total Cost to Serve per employee’ allows a better comparison.
   
   
4. 4. It would be useful if the report published “number of employees” and “number of HR Staff” – then the departments could be grouped into similar size. An organisation with 500 employees clearly has less options for economies of scale and skill, not to mention investments, than one with more than 20,000.
   
   
5. 5. Why are there gaps in the data? These are the most basic data elements you would look to in a HR Assessment. How many employees do you have and how many HR staff? Why is this so difficult?
   
   
6. 6. The document mentions, 1:77 (see graph below), as an private sector industry median performance. However, in a recent discussion in the CIPD LinkedIn community, there was general agreement that 1:100 is a sensible starting point. Larger Private Sector top performers are way beyond 1:100, with the use of shared service centres, Employee & Manager Self Service tools, effective use of 3rd parties, and re-allocation of people management responsibilities.
   
   

   

   
   
   

7. 7. Why include Sickness (AWDL) as a metric here? Although there are correlations between effective HR and this is an important metric, it is one of many goals. Managing sickness is not solely HR’s job – it is also the mangers responsibility. However important Sickness is, it is a distraction in this context.
   
   
8. 8. Where is the NHS data? The NHS should be much further ahead than other Government departments following the large investment in ESR (HR Oracle based system) which has now been implemented. Having a common HR System is a key building block for more efficient Shared Services. It is important that NHS data is included to get a baseline from which regional shared services can now start to be planned.
   
   
9. 9. Our HR analysts had some issues with the data, but highlight some of the ‘HR : Employee ratios’ that stood out were as follows :-
   
   

21 – Northern Ireland Office

25 – Ministry of Defence

28 – Department for Transport

33 – HM Treasury

37 – Cabinet Office

38 – Department of Business, Innovation and Skills

Even with a target of 1:77, the figures above show there is a long way to go.

(For readers from the Private Sector, how does your organisation compare?)

As Rick, from Flip Chart Fairy Tales asks, in Government support functions: over-spending and over-staffed, what does this tell us about the efficiency of the Civil Service as a whole?
If an organisation is delivering at 1:20 or even 1:40, it is not delivering HR effectively. I would go as far as saying 1:100 has been the litmus test for organisations if we are going to use crude benchmarks. The scope of the report doesn’t tackle how well HR does in terms of helping organisations achieve their objectives (which is why HR exists). Better links need to be made between progress on ‘Next Generation HR’ and ongoing Benchmarking reporting.

Any plans to transform UK Public Sector needs strong leadership, robust performance management, employee engagement and the right competencies and skills deployed at the right time. In other words a well functioning, modern HR department. Reporting the key HR Metrics is a fine idea and good starting point. However it is important that the right metrics are assessed and any decision-making framework includes a much broader set of a data so that meaningful targets are set and delivered.

Are UK HR professionals the ’social butterflies’ of the online World? Researchers monitored 2000 online conversations in the UK over September and October as part of their research. The conversations included employers, consultancies, and employees discussing HR related topics. The interesting report from CHA, the workplace communications consultancy, was based on research by online specialist Pass It On Media. It found that the tone of conversations was mainly neutral to positive which surprised the researchers who expected more ‘angst’ in the current economic environment. The report is worth a read with innovative research, case-studies from Virgin, E.ON UK and Dell, and some very useful and practical tips for employees and employers alike. Download the PDF "Conversations at your fingertips – How HR professionals score as social networkers"

The findings that stand out for me :-

1. 1. The key venues for conversation are message boards or forums, which account for 54%, followed by social networks such as LinkedIn (23%) and blogs (23%).
2. 2. Broadly, the themes covered are: the working environment & friendship at work, salaries & related issues, how people are feeling, and work/life balance & holidays.
3. 3. The top five are LinkedIn, Facebook, iVillage, Netmums and UK Business Labs.
4. 4. Busiest day for social networking about employment issues are Thursdays and Fridays.
5. 5. Social Networks are now more popular than personal emails.
6. 6. The term ‘human resources’ has been used only 13,000 times on Twitter "HR" has been used a staggering 323,000 times in the life of Twitter.

For trends in UK Social Media usage, the map below comes from Are you LinkedIn in London or Bebo in Belfast? and show the regionalisation of various social networks, as of September 2009. With Facebook and Twitter’s growth leveling off, and Bebo and MySpace continuing to lose audience it will be very interesting to run these again in 2010.

Possible questions for further research is how do other functions compare to HR and what are the trends in other countries?

General Motors have appointed Mary Barra as new Head of Human Resources (see article in ‘Workforce’ – General Motors Shakes Up HR Leadership)

Mary does not have a HR background, however has been a top executive with an engineering background. This has raised the question,

“Do you think someone with a ‘non-HR’ background can make a successful HR Director?”

I posed this question to an Institute of Directors discussion on LinkedIn (UK-based members-only group) and within 24 hours had over 20 comments, which brought out a range of strongly-held views on people management and Human Resources.

Some themes, and my commentary from the discussion :-

Can someone with a ‘non-HR’ background be HR Director? Absolutely, they could bring in real experience of the workplace, fresh innovative strategic thinking, strong stakeholder relationships (particularly for internal candidates) and bring in the real thinkers from outside HR.

What about specific HR knowledge on policies, benefits/reward, industrial/employee relations, employment law?
“It’s a positive sign they want to make deep changes in HR and don’t want to draw from the HR community” from the Workforce article.
Naturally this specialist HR knowledge is needed, but it doesn’t all need to be with the HR Director, or in some cases it doesn’t need to be within the organisation. Larger organisations can afford to employ specialist direct reports, and all organisations can go outside the organisation for specialist HR services. The HR Director is still ‘accountable’ for decisions made on employment law, but that doesn’t mean they need to know the latest directives in minute detail.

The context is key. The range of competencies and experience required for a particular HR Director role is varied and will depend on the circumstances. From major transformation to taking over a ’steady ship’, the skills needed to ‘transform’ an organisation are very different to those needed to ‘manage’ an organisation. (see article HR Transformation Highlights Skills Gaps in HR.)

Who is responsible for ‘People Management’ anyway? Well everyone actually – from the CEOs to managers and employees. HR does have a key role, but it is not their sole responsibility. People solutions come not just from the HR Director, but from a collective team of specialists.

Do organisations need a HR function, if most services can be outsourced? There is a market for HR outsourcing (see article on Top 5 Benefits of HR Outsourcing) which vary in maturity from Payroll and Benefits Administration to end-to-end HR services (for large global players like BP, Unilever etc). If someone else can deliver a particular function ‘better and cheaper’ then why not outsource? My recommendation is not to outsource strategic functions which should be delivered by those ‘close to the heart’ of the organisation. Or better than outsource, why not eliminate unnecessary HR administration or utilise ’self-service’ software applications where appropriate.

Why are we not having this discussion about Finance and IT, what makes HR different? A great question from @bncarvin on Twitter, and also from the LinkedIn debate. My view is that we are having this debate about HR, simply because in many areas HR is not delivering on ‘talent and people issues’ attracting, retaining and developing employees. In some cases, HR is not responding to the strategic agenda because it is bogged down in important operational work, mergers, restructures etc. In other cases, it is because the transformation skill-set is missing. Many of the Chief Executives current issues are ‘People issues’, for example improving performance of employees, developing the talent pool, fostering innovation. If these are not delivered by HR, then the CEO will look for radical solutions such as bringing in talent from outside HR.

My hope is that HR will develop the transformational skills required to allocate more resources to strategic issues, utilise appropriate HR service providers and benefit from the renaissance in HR software solutions (see article 5 Future Trends in HR operating models). With mounting pressure to deliver, HR has to transform or bringing in HR Directors from ‘outside of HR’ will be more common. However if HR does respond, the current question will change from,
“can people with ‘non-HR’ backgrounds become HR Directors?”
to
“can HR Directors become Chief Executive Officers?” (see for example the article Making the step up from HR to the CEO )

For those in HR who can rise to the challenge, the prizes are high indeed.

Does the shoe have to fit? I would be very interested in your views.

Finally I wish Mary Barra good luck in her new role!