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

This is a summary of an original article published by Strategic HR Review.

In an economic downturn and subsequent recovery, change is inevitable for every organization. Effective Change Management is often a mix of the strategic and the practical. It can encompass everything from ensuring strategies are aligned, to making sure your weekly bulletin goes out on time, on message and to the right people. From a HR perspective, it is important to provide leadership and guidance by example and the following actions can help HR executives to lead the way during the change process.

1. Define and deliver your HR strategy

Make sure that HR strategy is consistent with the overall business strategy, and where necessary provide input and ideas into the overall business strategy. Make sure you achieve buy-in from key stakeholders. This can be achieved by clearly outlining your proposed improvements and delivering on project ideas early on. Part of aligning HR strategy with the overall business strategy will be achieved by sharpening your HR operating model and asking how each HR role will support your organization in the next 12 months. You will be better able to respond quickly to organizational changes with better HR systems, more effective processes and better aligned capabilities in place. This allows HR to deal with the next new change more effectively.

2. Understand HR cost drivers

It is vital to know what drives HR costs. If you know your key performance metrics and what has an effect on them, you can quickly demonstrate that you understand the cost, service and risk implications of any proposed organizational changes on your own department. A good grasp of the cost implications of strategic decisions and the analysis to back it up – really helps when it comes to making changes. By conducting an assessment of the HR department, you get a better understanding of your internal benchmarks. A key metric for HR to understand is the HR “Cost to Serve”of each employee, including staff, systems and third parties. This can vary widely between businesses and geographies and it is important to know why.

3. Take a lead on sourcing options

Take the outsourcing decision to your board – do not let the board take it to you. Be proactive and do the research into how outsourcing could benefit your department (see article Top 5 Benefits of HR Outsourcing)and bring about positive change, as well as cost-savings. Show that you have been actively looking at alternative ways to provide better and more cost-effective HR services in payroll, IT, recruitment, training, HR administration and benefits. Develop your own “build or buy” criteria to help gradually improve HR services. Demonstrate that your business case takes into account the benefits of moving from fixed cost to a more variable cost (that will help in the downturn and the subsequent upturn).

4. Lead by example

There is a balancing act that good HR directors need to master. Often, HR directors are so outwardly focused on supporting the organization that they can neglect the day-to-day workings of their own department. When aligning HR strategy to the wider business strategy, HR directors need to focus on the internal working of the HR department, and most importantly, the people within the HR department. Show leadership through developing your talented team members, and use this as your core team to lead change. Retention strategies start at home, so show the board what you are doing to keep and develop your most talented team members. Be innovative. The organization will look to the HR department to lead on this – secondments, project roles and recognizing excellent service are all initiatives that can inspire people within the organization.

5. Implement change decisively and calmly

All executives in the organization must demonstrate leadership by managing change in a calm and decisive way. HR can stop the organization making “knee-jerk” reactions – more than ever, this is the time to make the right decisions for your organization. Implement changes calmly, effectively and consistently.

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 biggest barrier to transforming Human Resources is the lack of appropriate skills in HR, according to the 2008 Global HR Transformation Report (conducted by HROA in association with ADP).  This is the 5th annual survey with 129 executives around the globe in varying stages of HR Transformation.    DOWNLOAD 2008 GLOBAL HR TRANSFORMATION REPORT HERE

The survey defines HR Transformation as – “any concerted effort to change and improve HR operations, whether through outsourcing, shared services, internal reengineering, or a combination of these strategies”.

We use a broader definition. Successful HR Transformation needs to align all the components in the HR operating model including Business Partners, Service Centres, Centres of Excellence, HR Strategy, Managers and Employees.  Sometimes there is too much emphasis on implementing Shared Services or HR Outsourcing at the expense of actually delivering the HR Strategy.
(see comments by Jason Geller “HRO does not equal HR Transformation”)

The survey points to some interesting trends in HR Transformation :-

“The biggest ‘chronic hurdle’ that impedes transformation is the skills of existing HR staff.”
This is cited by over 60% of respondents.  The skills needed to manage HR are very different to the skills needed to transform HR.  The survey doesn’t mention which skills, but experience is required in Change Management, Process Design, Organisation Design, Project Management, Business Case Management, and HR Technology.   So what can you do? Consider these steps before starting your HR Transformation project, utilise transformation experience in other areas of your organisation and use HR professionals as ‘content’ owners.

“Most organisations are meeting or exceeding their cost savings targets.”
Sounds impressive, but of course this depends on what the cost savings targets are.  Some projects aim to break even, but allocate a larger proportion of their cost to strategic objectives rather than administration.

“Past HR Transformation lessons don’t appear to filtering out.”
Each organisation will have different goals, a different workforce and different starting points. But there are themes and lessons learned – so why aren’t they being shared in this digital age of collaboration?  Joining networks such as the HROA help.   Conferences are dominated by vendor/sponsors rather than providing HR transformers with real ‘independent’ lessons learned.  With more sharing and online networking things should improve, see for example initiatives such as our own  HR Transformer Blog and DiscussHR.

“Only 48% engage consultants or sourcing advisors.”
Some organisations are getting external support which is an obvious solution to the skills gap. On business cases which involve large IT transformation and cost savings, a review from an experienced, independent consultant can be money well spent.  There are still objections to using consultants who are perceived to push ‘pyramids’ of junior consultants and lack independence.  Do advisors need to up their game or do they need to market their benefits more effectively?

“66% plan to outsource some HR processes.”
Payroll is outsourced in nearly 90% of cases. End-to-end HR Outsouricng contracts are being signed (see recent IBM Unilever deal) , and buyers do see the benefits of HR Outsourcing, however buyers are even more careful in this environment. With major economic change there is less appetite for 10 year contracts and more examples of tactical sourcing.

“Price is most significant in provider selection.”
It is interesting that Financial stability has risen up from 12th most important factor in 2006, to 6th in 2008.  This will be Top 5 next year with much more detailed financial checking of potential vendors.

The ADP/HROA survey has provided a useful barometer of HR Transformation, it will be interesting to see whether more progress has been made on the barriers next year.

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

According to Everest, HR Outsourcing (HRO) buyers are now looking increasingly at the “Lift and Shift” model to provide early cost savings by transferring HR processes to suppliers.
Lift and shift has its place in HR Outsourcing for processes that are non-strategic, highly transactional, less complex and working pretty well already.  In these examples, cost savings with similar service levels are achievable.  Avoid transferring your problems to a 3rd party vendor as it will be more expensive to fix and reinforce the other name for this type of outsourcing -  “your mess for less”.  Do consider more transformational solutions as you develop your business case.

Some points to consider when thinking about “Lift and Shift” for HR outsourcing or offshoring :-
1. Develop a set of sourcing criteria around decisions to help focus on which processes to keep ‘in-house’, outsource or offshore.  Typical criteria include :-
o Strategic vs Non-Strategic processes
o Market competition for services
o Realistic cost and service benefits
o Complexity of the process
o The overall change impact
o Process readiness

2. ‘Transition first then Transform later’ probably won’t happen in the planned timescales.  After you have achieved the difficult transition and stabilised the process, priorities for investment will have moved on.  It is well worth spending the time up front on process redesign as you might find that the root cause of your problems is harder to fix after outsourcing.

3. Do as much process standardisation and policy harmonisation as possible.  This will involve extra time in getting your internal customer groups to agree to a standard, common level of service, but will be worth it 6 months after go-live with better service levels and lower costs.

4. Spend adequate time on data cleansing – again this will take more time up front but the payoff will be avoiding the extra ongoing management costs of fixing service issues – which are more expensive when 3rd parties are involved.

5. Expect the length of service stabilisation to be between 3-18 months following ‘go-live’,  this will be influenced by many factors including the state of the processes you are transitioning.

6. Think about your longer term HR Operating Model and HR Technology Infrastructure.  Have a clear view of what is required from HR in the future – especially in the current environment.  Make sure no doors have been closed by outsourcing HR processes.

7. With a lift and shift business case, also develop a more transformational solution alternative in addition to your “as-is” or baseline case.   Ask an independent expert (not the HRO vendor) on what the realistic cost and benefits will be.

The HROA World Europe, now in its 5th year, is the largest and most comprehensive HR Transformation conference in Europe. Held in Brussels with sponsorship from the likes of Accenture, and ADP, and attended by HR Transformation buyers, suppliers and consultants/advisors.

The big news this year was the number of delegates – with only about 130 compared to about 350 last year. The economic slowdown has kicked in and hit the HRO industry directly with travel bans and budget cuts for all.

Always of interest is the “Buyer : Supplier : Consultant” ratio which was about “30:40:30”. Half the buyers were presenting their sponsor’s case studies, which left only a small number of genuine HRO buyers (about 20 people) who must have felt pretty special!

The conference picked up on the themes of (1) the economic slowdown (2) changes in the HRO industry, and (3) Economic Protectionism.

There were some interesting presentations – from one of Barack Obama’s economic advisors and the resident “HRO academic”, Dr. Anthony Hesketh, from the Centre for Performance Led HR, School of Management, Lancaster University, who presented a new method of assessing ROI from HRO.

For those too busy managing large change programmes (or suffering a travel ban), here are my notes:-

•HRO vendors are suddenly getting very busy with 3 or 4 big RfPs out there…..watch this space….

•Economic protectionism could rear its ugly head and make life difficult for industries that rely on globalisation such as HRO

•For those in HR who like measuring things, a new method for measuring ROI in HRO is proposed, called ROIT (where T=Talent). This will be of interest to academics – but less so to HR Execs who will want stronger levers to get their HR transformation plans approved. The research also struggles with causality – i.e. do companies show better results because of outsourcing or because they are the type of company to use innovative business techniques such as outsourcing?

• “Single” process outsourcing is moving from strength to strength, particularly RPO. IBM have ramped up their Learning and RPO capability. Will their competitors put their hands in their pockets for acquisitions or has the money run out for the industry?

•There were very few new ideas at the conference. To hear the leading Global technology companies talk about old ideas such “improving work-life balance”, “the war for talent”, “the paperless office” and informing us that Generation Y use Facebook was disappointing.

•When there is a void of ideas in an industry then bring in McKinsey to ask the difficult questions. They shared findings from a recent study and presented practical approaches to reaching operational excllence in Shared Services. The study was not HR specific, but highlighted the importance of talent management on performance. Some interested anomalies emerged from their study including the efficacy of “round tables” in offshore centres – but not too much to get HR Execs excited.

In general, a little too many sponsor friendly case-studies and not enough content to appeal directly to the HR Execs’ current agenda :-

“How do I reduce my costs, improve my service and support my organisation through the biggest downturn in living memory?”

The question for next years conference is – were the delegate numbers low because of Travel cuts or is the content of the HROA conference not particularly relevant to the key group of people who fund the industry, namely the HR Executives ?
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Glass Bead Consulting announce ‘HR Transformation Workshop’
Institute of Directors, London – March 5th 2009

Glass Bead Consulting have announced an advanced HR Transformation workshop designed to give HR Executives a headstart in transforming the HR function. The one day course will be held at the Institute of Directors, Pall Mall, London.
Click here for more details about the course and how to book.

Glass Bead Consulting announce ‘HR Outsourcing Workshop’
Institute of Directors, London – March 31st 2009

Glass Bead Consulting have announced an HR Outsourcing Workshop ‘Delivering the benefits and managing the risks’ – a workshop designed to give an overview of what HR outsourcing can do for your organisation. The one day course will be held at the Institute of Directors, Pall Mall, London.
Click here for more details about the course and how to book.

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