Smart Moves

Companies are increasingly focusing on their core competencies and outsourcing other business process to cut costs and drive transformational change. Research by Yankee Group shows that enterprises can reduce their total HR costs by 20% with HR Business Process Outsourcing (BPO).

The challenge for European organisations is to transform HR processes quickly and effectively, with minimum disruption to the business and at minimum cost. The solution is now clear: outsource HR business processes if you are large enough and have conducted a thorough review of your HR needs.

Outsourcing HR can not only provide the resources and skills your organisation is lacking but also reduce the overall cost of HR provision from external suppliers and substantially alleviate the internal administrative burden.

UNDERSTANDING BPO

The Yankee Group defines HR BPO as the outsourcing by an enterprise of most or all of its HR management and administration to a single third-party service provider.

The service provider is responsible for the aggregation of multiple HR processes in addition to managing most or all of the HR function in conjunction with an HR governance body within the enterprise.

However, most HR BPO contracts typically involve the vendor managing and delivering a range of standard HR transaction-based services through an employee portal.

What many HR BPO third-party providers look to offer is additional expertise, including performance management, regulatory and compliance services, and consultancy services centred on the management of information and HR strategy.

NEXT-GENERATION OUTSOURCING

The global market for managed HR outsourcing services – encompassing HR BPO – exceeded $50bn in 2005, with European spending accounting for nearly half of that figure. European HR BPO contracts point towards a significant uptake of HR BPO services in the next five years as next-generation outsourcing takes hold in the enterprise.

European organisations generally spin off sub-processes within HR to third-party providers and retain the strategic pieces within their organisations.

Rather than procure end-to-end HR services with one vendor, most prefer a staged approach via shared service centres or by outsourcing specific sub-processes in one region or country.

New providers and partnerships have emerged to win the sub-processing opportunities now on offer.

The EU's recent expansion incorporated a host of new territories offering themselves as low-cost, highly skilled shared service locations or 'near shore' service providers.

DIFFICULT DECISION

Enterprises clearly need help to select the right service provider and create a successful strategy. Identifying business needs, pinpointing suitable service providers and then undertaking benchmarking is no small undertaking. Yankee Group offers the following advice:

REWORK YOUR HR STRATEGY

Many organisations are reworking their HR strategy in the light of Europe's ageing population, predicted skills shortages and comparatively low worker productivity.

HR must take centre stage, with strategy focusing on how to organise people, and how to plan and manage corporate capabilities and competencies. HR BPO can help by removing the administrative burden.

COST CUTTING DRIVES HR BPO, BUT SEEK OUT OTHER MEASURABLE BENEFITS

Yankee Group research reveals potential savings of 20% from HR BPO, depending on how efficiently internalised HR process are currently managed. And in addition to operational savings, savings in capital costs can also be achieved.

However, many European organisations use HR BPO for other reasons – from realigning business objectives to transforming functions. Expect to see varying levels of cost savings from modest to more dramatic reductions (as high as 50%).

Take advantage of the lower costs, but take time to investigate whether the third-party service providers you consider can deliver strategic solutions to your business. The best suppliers understand this and will build your HR BPO relationship into something manageable.

CONSIDER A STAGED APPROACH

Most European organisations do not outsource all HR business processes end-to-end. A staged approach would see specific sub-processes move across to a service provider as a trial. You'll face a confusing array of third-party service providers looking to win these sub-processing opportunities.

Your needs determine what works best for your businesses, but beware: outsourcing failures occur because organisations rush into picking a provider and don't deploy effective benchmarking.

DEVISE METRICS TO MEASURE A SERVICE PROVIDER'S CAPABILITY

Financial indicators such as operating profit, revenue per employee and EBITDA can only tell you so much about a potential service provider – and they can also be distorted.

Maintain a set of Key Performance Indicators (KPIs) to measure, monitor and, ultimately, grade a service provider's HR BPO capability.

KPIs provide invaluable metrics to assess prospective suppliers: they compare and benchmark national versus international reach, quality of partnerships, infrastructure and applications expertise, consultancy, integration and change management and ability to process volume-based HR transactions.

Standardising these frameworks with metrics - described in layman's terms - are crucial tools.

ENSURE SCOPE, SPONSORSHIP AND CONTROL

Implementing a successful HR BPO strategy demands a clear scope, effective sponsorship and good control. Set the scope by taking the time to really examine the processes you will outsource against what service providers say they can do.

Ensure your expectations are clear when assessing your internal needs, and that these expectations are accepted across the organisation. Build a set of focused, measurable objectives and a well-defined timetable for action.

Make sure your potential service provider understands them. In addition, bind any processes left behind in-house to the new model and manage them closely.

APPOINT AN HR BPO CHAMPION

The HR BPO project needs a senior-level champion in the organisation to drive development and alignment of organisational goals, metrics and consensus across business units.

Assigning this role to a member of junior staff presents a risk to the project's success.

LEARN FROM THE MISTAKES OF THE EARLY ADOPTERS THROUGH THE EYES OF YOUR PEERS

The best way to develop the right outsourcing strategy is to spend time engaging with peers in other organisations. Understand where they went wrong and how to leverage their best practices.

Industry organisations, such as the Shared Services and BPO Association, are excellent forums to learn from other enterprises' experiences, receive advice on which outsourcing consultancy adds value in the decision making process, and pinpoint the strengths and weaknesses of various HR BPO services vendors through the eyes of the customer.

You will soon recognise that, while many early contracts became successes, many resulted in lawsuits, terminations and chaos.

START PLANNING FOR NEW SKILLS

Recognise that different skills are required to make outsourcing really work for your business.

The next generation of outsourcing contracts will combine business process (HR) and IT expertise, and will place a premium on HR professionals that bring superb communication and multi-vendor governance skills to the table when transactional jobs migrate near-shore or offshore.

DON'T BE FOOLED BY A BRAND

When seeking advice from third parties and selecting a services provider, it is vital to look beyond brand names.

Look beyond cost reduction, ensure that vendors understand your business and have the necessary investment in their own resources to cater and respond to your needs.

USE RESEARCH AND USER DATA TO HELP SELECT YOUR SUPPLIER

There is detailed analysis available that delves deeply into the minds of other users that will help you determine which provider to engage.

Investigate third parties that specialise in HR outsourcing, but ensure you use a flexible, pragmatic approach to aligning your objectives with the potential offerings.

You will find many vendors competing for your business, and differentiating one from another can be difficult.

* This editorial was written whilst Euan Davis was an analyst at Yankee Group.