In Most Cases, Outsourcing Just Makes Sense
In the course of conducting an HR Audit, once you’ve ensured that your organization has met – or exceeded – all state and federal compliance requirements (and, thus, insulated your organization from potential liability), the next step of the assessment is an analysis of the current HR functions.
It’s important to evaluate each HR function and rate them according to:
- Overall Costs – do you send your benefits out for bid each year? Are you getting the most bang for the buck?
- User friendlinesse. do the employees know where to go if they have a question about their benefits and do they understand them?
- What internal resources are supporting each of the functions? e. for small to medium size organizations, it’s generally not cost effective to employ someone whose job it is to manage the benefits portfolio.
- What HR functions are outsourced already and what functions might be more cost-effective to outsource?
Generally speaking, when talking about small to medium size organizations, the HR team is lean; therefore, the most efficient and beneficial use of those limited resources should be spent developing business partnerships with the leadership team and not pushing papers behind a desk (that 70’s & 80’s model is out). In order for the HR team to be an effective business partner it’s more cost-effective to outsource many (or even most) of the administrative tasks associated with managing the benefits and responding to inquiries about their 401k, stock and/or COBRA
By structuring your HR function as business partners, the staff begins to view HR that way as well (and not administrative function). Furthermore, from both a cost and user friendliness perspective, it makes sense to have a subject matter expert – whose sole job it is manage COBRA for multiple organizations – respond to inquiries from staff as only they are able to stay in top of all regulatory changes that take place each year.
The third phase of the audit will look at what other functions throughout the organization have been outsourced, as well as looking to see whether the staff is pleased with the level of service being provided? And, is the vendor offering you at a competitive rate?
Outsourcing is by far not limited to HR or even administrative functions. For example, it would be senseless for an XYZ Company to employ its own computer guru when it only runs five computers. In this type of situation, the function is outsourced because it wouldn’t be practical or economical to hire someone internally.
Outsourcing as a Cost Control Measure
However, when a large company makes plans to outsource an entire department, the incentive may be quite different.
In this instance the motivation is usually one of cost control or cost reduction. It doesn’t take a mathematical genius to see that off-shoring to perhaps India or China is going to be attractive to anyone examining the base costs of the exercise. People cost money wherever you are in the world, but in some places they cost much less money.
Maintaining Quality of Service When Outsourcing
Okay, what about quality? The education systems of India and China turn out a good product, young people rising to the challenges of global competition in a very competent fashion. Companies based in these countries use this raw material specifically to penetrate commerce on a global scale. Yet, for the western business world, outsource and off-shore solutions using the same raw material are riddled with issues and often end in complete disaster.
This can only be the result of failures at a very basic level with regard to the management of expectations for both outsourcing company and outsourcing client.
The Cost Effectiveness of Outsourcing
Perhaps a good rule of thumb would be to accept that you only get what you pay for, and sometimes not even that.
It’s always worth remembering that the responsibility for the execution of any function within a business remains the responsibility of the business. This applies whether the function is performed in house or by an external agency.
Explore that a little. If you outsource your IT function and the quality of service falls it will be the users in your business or your customers who suffer the consequences. This includes any resultant rise in business cost or fall in productivity. It may be someone else’s fault, but it is your shareholders who will require the explanation. And it will be you who has to deliver it.
Level of Service versus Savings
While you may trade a fall in performance off against other savings, or you may levy penalties against your IT provider in order to balance the books, but let’s be honest – the delivery of IT service is meant to smooth the flow of business, not hinder it. The same can be said of any outsourced function.
A better position would be if the level of service didn’t fall. Ah – now there’s another problem. How do you know if the service provision is a success or a failure?
The answer of course is that you measure it. How? Well, you need to know exactly what you want from the provider and then you need to test the delivery by metrics.
The Main Reasons for Outsourcing Failure
The principal cause of most outsourcing failure stems from businesses farming out functions that have not been properly quantified. How can the success or failure of a process be measured if there is no definition of what is supposed to be accomplished or how?
The second biggest reason for outsourcing failure is the deadline. Most outsourcing projects are given a deadline that is way too short. The reason is obvious – outsourcing is all too often seen as a cost cutting measure. And there is nothing wrong with that – except the necessary steps are frequently left too late. The exercise is driven forward by financial necessity with complete disregard for the required control measures.
Ensuring Outsourcing Success
Given these two areas of probable failure, what steps should you take to ensure that your outsource project is successful?
- Make sure that the function is fully defined. In this, process documentation and technical writing can work for you.
- Make sure you allow sufficient time to complete the definition process before obtaining quotations for service provision.
- Prior to outsourcing, quantify the costs, as well as the level of satisfaction being provided; then, after a year – and each subsequent year thereafter – go back and conduct a cost-benefit analysis using the same metrics and determine whether things need to be changed or tweaked to ensure costs remain competitive and that the client satisfaction (whether we’re talking internal clients/employees or external clients/customers) remains consistent and/or increases.
- Should it decrease however, even though the cost savings are on target, client satisfaction (or rather dis-satisfaction) can and will be a problem for you long-term.
Mike Russell is a seasoned professional with three decades of experience in the fields of HR and OD. In addition to having a career trajectory of HR Generalist to a VP within ten years, Mike also has a long and successful background as a Consultant/Business Partner to CEO’s, Presidents and Executive Directors in both the private and non-profit communities across a wide spectrum of industries.
As the sole-proprietor and owner of Organizational Development Solutions (ODS), Mike partners with business leaders committed to insulating their organization(s) from potential liability, increasing organizational effectiveness and adding shareholder value.