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.

This is the second of a two-part discussion on Future Trends in HR Operating Models, click here for Part 1 Future Trends in HR Operating Models (Part 1 with Slides)

(3) HR Outsourcing market will restructure to deliver standardised services

The HR Vendor landscape is evolving all the time (slide 8), we have HR Technology vendors, HR Outsourcing (HRO) providers, single process vendors and HR consultants. HR vendors are also impacted by current economic changes, with cost pressures and streamlining. The market will look very different in two years time with more mergers & acquisitions, see for example Towers Perrin and Watson Wyatt merger.

There have been less huge, multi-year HRO contracts such as Unilever/Accenture or Convergys and Johnson & Johnson. 10-year HRO contracts are more difficult in the current environment. It is difficult enough to predict the needs of your own organisation, yet alone where a supplier will be in 5-10 years time, so HR buyers are more cautious. However, single process outsourcing is booming – RPO, Learning & Development outsourcing or see recent examples of large “Payroll Plus” contracts. The ERP providers are now developing and providing SaaS models – see Wipro and Oracle example and if successful this will indeed ‘blow-up’ the HRO/BPO service model.

The HRO model will change to provide lower cost services to a broader range of organisations. For buyers to benefit from cost savings to achieve their strategic agenda, they will need to accept more standardisation of services. Industry consolidation, technology innovation, economic pressures and a drive to deliver HR strategy will all help to make this happen. Those vendors who provide tools and services that help address organisations key Talent Management issues will thrive.

(4) HR as a corporate function will be leaner, with Employees and Managers doing more

Organisations need to improve productivity in a competitive globalised environment and HR needs to demonstrate ‘value for money’ like every other function. This will encourage ‘leaner’ central HR functions, pushing out more “people management” to managers enabled with much better skills and tools.

Current HR operating models need to change (slide 10). The ‘Ulrich Model’ promoted ‘economies of scale’ and ‘economies of skill’ with the adoption of Business Partners . However, the implementation of the model has had mixed results, including adoption of Business Partner model, questions about whether HR Technology has been a barrier rather than an enabler, and gaps in HR skills required to implement the changes needed.

Business Partners – working within HR or the business with participation in strategic decision-making. This is currently a weak spot in many HR Operating Models, for different reasons including HR Generalists struggling to operate at an Executive level. A key challenge for HR will be to enable Managers to manage their staff more effectively, with less reliance on central HR support. There will be ‘Business Partners’ in future HR Operating Models, but fewer and operating in a different way.

Centres of Expertise – providing policy design and case support, responding to changes in external market or legislation. A big question is can COEs provide best practice at a competitive price?

(5) HR Skills will develop in Change Management, Project Management, Vendor Management and Technology

In allocating more time to delivering HR solutions, HR must review the skills it really requires. Delivering change requires different skills to managing day-to-day operations. Key skills gaps include Vendor Management, Change Management, Project Management and business transformation skills.

Vendor management is an increasingly important specialist skill in HR. (see this useful guide from CIO magazine Vendor Management Guide) With less end-to-end HR Outsourcing deals, and more single process contracts – managing vendors effectively is a fundamental. Building mutually beneficial relationships with effective Account Management, Service Level Agreement management, continuous improvement, negotiating and contracting adds real value.

Project Management – with so much change in mergers, acquisitions, restructuring and technology, HR needs to be in a position to lead large-scale change programmes. HR professionals bring great experience and understanding of the people aspects of change which is so crucial to delivering successful change. Simply put, organisations should be coming to HR when they require project and change management expertise.

And finally, after reflecting on what might be on the horizon, here are some steps to get started (in addition to slide 13) 10 steps before starting your HR Transformation project

This is the second of a two-part blog on Future Trends in HR Operating Models, click here for Part 1 Future Trends in HR Operating Models (Part 1 with Slides)

As they say prediction is very difficult, especially about the future. At the EMRG BPO Conference in London Sheraton Park Lane Hotel on 22nd June, we had a panel discussion on the ‘next generation’ of HR Operating models. My thanks to the other panel experts and audience for providing the stimulating discussions.

(1) Workforce and economic changes will require HR to allocate more resources to delivering HR Strategy

We are living with unprecedented economic change and the long-term implications for industries and economies is unclear. What is clear is that organisations need to be quick to adapt and at the same time improve productivity. A key challenge for HR leaders is providing a Human Resources Strategy aligned with Organisational Goals, however for many organisations these goals are still in a state of flux.

There are also major changes in the workforce (slide 4). For example, since the mid 90s there has been a dramatic decline in the birth rate in the UK – there will be 60,000 fewer people reaching working age each year from 2010 onwards. This might be a good thing with a ‘contracting’ economy however there will be problems during the upturn. Better health, huge pension deficits and no radical changes in taxation will probably mean that we will need to work longer than previous generations. (See report from Bupa, The Oxford Alliance, RAND Europe and The Work Foundation Healthy Work: Challenges and opportunities to 2030)

In a recession, there are still talent management challenges, (slide 7), in attracting and retaining high performers and planning the next generation of leaders with the right skills. HR will need to allocate more resources to delivering the Talent Strategy to ensure organisations flourish in the future.

The diagram on slide 11 shows a ‘typical’ HR function with the majority of work (60-70%) estimated to be transactional or administrative. One key objective for HR Transformation is to allocate a larger proportion of resources to ’strategic HR’. There has been an interesting debate about why HR has struggled to move from the “Pyramid” to the “Diamond”. This is a complex picture, but factors include skill gaps in HR Transformation, HR technology not delivering and simply too much going on with running increasingly complex organisations.

(2) New tools will enable improvements in collaboration, productivity and managing the workforce

We are using a variety of social media and other tools from Twitter to Google to LinkedIn. Different groups use different tools in not so predictable ways, see article about Social Networks around the World.

In HR, according to research by Communications Management, 8 out of 10 HR professionals belong to online communities or social networking sites in their daily work. One in three (32.3%) have already asked for supplier recommendations through this medium. (See 52 ideas on using social media in HR with thanks to Michael Specht.)

Tools such as Success Factors can help actively manage talent in the workforce. The emergence of Software as a Service (SaaS) and its impact on HR, (read Steve Boese’s view on
“Does HR need IT?”) will bring more options and reduce the need for HR to make a massive up-front investment with a painful ERP business case. This will make talent management tools ubiquitous for most employees, rather than just those with more than 20,000 employees.

Although technology will help us collobarate, research, communicate and network, the biggest impact on organisations will be to radically change our expectations about what we need from organisational tools. Not only do we expect tools with fast access at all times, great content and global coverage. As Web 2.0 develops into Web 3.0, there will be a demand for more semantic tools that enable us make more meaningful connections with others and become more productive.

We are still in the early days of the web, it is impossible to predict the technology we will be using in 2020. To add even more value HR must understand these trends and support the workforce to become more productive. The technology we are now using every day outside the organisation is influencing the tools we use at work. HR should move towards becoming ‘technology champions’ as the potential benefits are huge.

See also Future Trends in HR Operating Models (Part 2)

The HR Outsourcing market has its problems like every other market right now. On the supply side, there are too many providers, with some running ‘loss-making’ HRO contracts over 7-10 years. On the demand side, a larger range of organisations urgently require HR solutions that allow them to provide better and more cost effective HR solutions. The HRO market is still maturing, 2009 will be interesting with large contracts signed and further HR provider consolidation. Why is there increasing demand from organisations to outsource their non-strategic, transactional HR processes? The benefits of HR Outsourcing include:-

1. To reduce the cost of HR, and to better manage the cost of HR. Many organisations have achieved savings greater than 20% by standardising HR processes, utilising self-service tools and outsourcing. The extent of savings depends on willingness to standardise and transformation of the “retained” HR function. When the HR cost base is more tightly controlled and better managed then decisions can be made about the relative allocation of resources. In sectors with mergers, acquisitions and rapid changes in employee numbers a goal is to provide more variable costs linked to employee numbers which can push clients towards using more specialist 3rd parties.
2. To avoid major investments required in HR technology. That multi-million dollar SAP/Oracle upgrade is much harder to justify in this economic environment. Some HRO providers can provide their own HR platform and offer the latest upgrades and services that your organisation probably can’t.
3. To realign HR to focus on delivering HR Strategy and support its core business. A typical goal of HR Transformation is to increase the proportion of HR cost allocated to strategic HR and reduce the proportion allocated to HR Administration. With non-strategic HR processes outsourced, HR is better able to respond more quickly and more effectively to organisational changes.
4. To improve the quality of HR Services delivered to employees and managers – using service management techniques, self-service tools or best-of-breed suppliers. To achieve this requires excellent change management skills with policy harmonisation, standardisation and changing HR customer interactions. This is difficult work, however the advantage of a legally binding contract and go-live date really can focus the mind.
5. Controlling the legal risks and improving compliance will be more rigorous when there are external contracts with providers – this will become increasingly important in an era of increased regulation.

See also HR Outsourcing – The Challenge of Picking Winners