Out is back inOn 18 Apr 2001 in Personnel Today Previous Article Next Article Comments are closed. Soit’s no use lamenting the demise of the traditional role of the HR manager.Instead we provide a guide to the new skills and competencies you need toacquire, By Jane LewisOutsourcingis back, big time. Not, of course, that it ever went away – it is always theresimmering away somewhere in the background – but we have reached another ofthose points in the business cycle where the outsourcing model is under intensescrutiny once again. Management consultants are openly referring to this newwave of activity as the second or even third-generation of outsourcing. The difference this time around is that theactivity has acquired a near-fanatical following in some quarters, perceivednot just as a practical answer to issues of cost, speed and efficiency, but asa key indicator of strategic intent. Outsourcing, or “partnership” as itnow known, has become an essential requirement of the horizontal business modelproposed by such prophets of new economy thinking as William H Davidow andMichael S Malone in The Virtual Corporation (1992) and Don Tapscott in DigitalCapital (2000), to name but a few.MostHR departments have long been keen outsourcers, at least in terms of certainspecific functions. In a recent survey, European Trends in HR Outsourcing,jointly conducted by researchers at the Cranfield School of Management andWilliam M Mercer, 77 per cent of respondents claimed they regularly outsourcedtheir training and development, and 59 per cent said the same of recruitmentand selection. Butfew in the profession will be unaware of the more wide-sweeping changes afoot,encapsulated perhaps by a new breed of provider – Exult, Xchanging,e-peopleserve – all of whom make a virtue of offering a “cradle tograve” service, incorporating the bulk of the HR administrative functionthroughout the employment cycle. And all of whom major on the strength of theirtechnological offering.”Theterritory for outsourcing in HR is expanding very quickly. It’s bigbusiness,” says Richard Finn, director at Penna Change Consulting.Andthere is evidence that even smaller, specialised outsourcers are seeking tocapitalise on the trend by moving into more general provision on the back ofarguments about the strategic gain of partnership.Certainlythe market is ripe for such exploitation. One of the most interesting points tohave emerged from the Cranet survey was the ad hoc nature of most HRoutsourcing in Europe. “Organisations are simply responding to immediatedemands by using providers more extensively in the areas that are directlyimpacted by [organisational change], such as recruitment andoutplacement,” it claimed. “This reflects a picture of shortshort-term opportunism…rather than long-term strategic sourcing.”Ifthe strategic gains of partnership are becoming firmly entrenched in the HRpsyche, it is likely that a secondary consideration will also spur the shifttowards outsourcing – namely the growing sense of economic uncertainty on bothsides of the Atlantic. “Ifwe do see a recession, I think many companies will look more closely atoutsourcing,” says Tony Green, a management consultant at Collinson Grant.Companies will be looking to find better ways of cutting costs. And one ofthose is moving into shared services.”Otherproviders are equally optimistic about the market’s potential for growthwhichever way the wider picture pans out. “We get business volume whenbusinesses are growing, and when they are contracting, because both meanincrea-sed movement,” says Andrew Finney, managing director of relocationspecialist HCR Countrywide Mobility. “Which-ever way the economic cycle isswinging, there’s potential for growth.”Nonetheless,the whole issue of outsourcing raises some difficult questions for any HRdepartment – not least because the historical instances of spectacular failureare at least as common as any out-and-out success story you may hear. One needonly look at the series of debacles that afflicted the UK public sector in the1990s – from botched systems at the DSS to that long hot summer of queues atthe Passport Office – to get the point. Fora more recent example of the damage that a poor “partnering” strategycan wreak, look no further than Railtrack, which outsourced the bulk of itstrack inspection and repair remit to outside contractors.Althoughit’s been some time since anyone compiled a really comprehensive report ofoutsourcing practice in the UK private sector, the results of a survey compiledby PA Consulting in 1996 speaks for itself. PA found that over half thecompanies it studied had not achieved their expected gains from outsourcing.And 39 per cent showed mediocre results. Only5 per cent achieved “outstanding success” – demonstrating thatoutsourcing is either not all it’s cracked up to be, or that it has beenmanaged ineffectively in most cases.Whatis clear is that outsourcing is no cop out. To work successfully any long-termpartnership needs careful consideration, constant monitoring and a very clearidea of where it is headed. AnyHR department contemplating the move will have to pose and answer some verytough questions about the future of the function in their own organisations,and whether they have the skills in place to manage this change. Herewe list some of the main new skills HR managers need to embrace if they are tomake a success of a partnering strategy. Even if you are currently unsure ofthe way forward your own company will take, it is worthwhile considering atleast some of these disciplines. You can’t begin to outsource until you have aclear idea of exactly where the department is now, and where it should be inthe future in relation to the rest of the business. But this is equally true ifyou decide to keep the bulk of HR services in-house.Eitherway you cannot lose by undertaking some of the preliminary spade work now. 1.Situation auditorThekey to any successful outsourcing strategy is self-knowledge. Yet, as ProfChris Brewster of Cranfield Management School, and co-author of the Cranetsurvey reports, “One of the clearest things we found is there is verylittle strategic thinking. It is easy to go into an outsourcing relationship onan opportunistic basis – to cut costs, say – but that says something fairlysignificant about HR. Of course there are cases where outsourcing has beenachieved coherently and sensibly, but in a lot of cases, companies are juststumbling in.”Thecardinal rule, therefore, is never to assume that outsourcing brings automaticbenefits. The business case for each outside contract has to be carefully made,with the cons studied as rigorously as the pros. Don’t saddle yourself withunrealistic expectations. It is the failure to be rigorous about this that ledto so many of the disappointments in outsourcing reported by the surveys.Asa preliminary step, you need to be in a position to define your requirementsvery tightly, and you cannot do that unless you have a clear understanding ofthe strengths and weaknesses of the HR operation as it currently stands. Youcannot expect to be able to monitor and assess an external partner’s record onperformance before you have ascertained your own.Whatis your argument for outsourcing? Is it economies of scale, or the need forspecialisation? Would outsourcing boost your company’s capacity for growth?Would it lead to a damaging internal brain drain? “Whenpackaging up stuff for outsourcing, there’s an issue about knowing where todraw the line,” says Angela Baron, policy adviser at the CIPD. “Eventhings that initially look easy to package, training and recruitment forexample, can be problematic. We know these are critical contributors tobusiness effectiveness, so if you do outsource them, you must be in a positionto give the outsourcer a very good brief. Be quite clear about what you want,otherwise you’ll end up with a standardised, one-size-fits-all service.”Thenassess the risks inherent in the move. As one commentator remarks: “Thereis a risk that by losing control of key activities, the company will restrictits capacity to exploit new opportunities in the future. In a fast-changingindustry, the definition of core business must be revisited on a continuousbasis.” But consider that this need for flexibility has to be balanced againstthe clear productive advantages inherent in striking long-term relationshipswith suppliers.Thebottom line, says Brewster, is that you need to ask if partnership is right foryou. “People are right to be sceptical about the notion of longer-termpartners. The danger is you find yourself in a partnership that isuncompetitive. Particularly when (as is happening more frequently), you end upsharing the same partner as a competitor.”Aboveall, retain control of the decision. Another interesting finding of the Cranetsurvey was the extent to which HR has allowed itself to be walked over in termsof outsourcing strategies. “Outsourcing is often a business decision madeby senior management, and is outside the control of the function impacted. Itappears that where top management actively evaluates the performance of the HRfunction, outsourcing is more common.”Finally,you must have vision. As Finn at Penna Change Consulting remarks, “Theoutsourcing process is about understanding where HR will be in the future. Youdon’t outsource until you know the HR strategy. And that’s a lot more thansaying we add value to the business. You have to ask, ‘How are we best going tomanage for value in HR?’”2.NegotiatorRoutineoutsourcing contracts either run out, or can be terminated with relative ease.But this is not what we’re talking about here. Strategic, long-termpartnerships, often involving millions of pounds, need very carefulconsideration. If you are to be locked into a relationship for some time youneed to be absolutely sure it is the right one. Consequently, negotiationskills – and the ability to second-guess and make provision for potentialdisaster – are critical.But,as Green suggests, these kind of hard-nosed skills are not common in theprofession. “The negotiating skills in a purchasing environment are verydifferent to negotiation skills needed in other areas of HR,” he says. Asa preliminary step, therefore, it might be a good idea to take advice from otherdepartments. Thenget yourself a good lawyer. “The key thing to any successful relationshipis a real understanding of the contractual issues,” says Margaret Harvey,partner in technology at solicitors Addleshaw Booth & Co – and Exult’sadviser during its negotiations with BP Amoco. Her advice is to ensure youunderstand the objectives before you even think about putting a contracttogether, work out how the arrangement will be managed, and think about theend. “A lot of companies don’t do this, but the end is as critical as thebeginning,” she says.Outsourcingproviders will be quick to offer their own advice about the detail of yourcontract, but you’d be foolish to rely on that alone. “The onus is on youto mitigate all the risks you can think of by putting a good contract togetherwith a supplier,” says one commentator. “I am not talking about afive-page contract. It needs to be more like a five-book contract.”Areasyou need to focus on include: setting clear performance criteria, drawing upcomprehensive service level agreements, and clearly assigning liability. Youmust be prepared to ask any potential outsourcer “to provide illustrationsof how the model will work, and what the cost/benefits would be”, he adds.You also need to be able to negotiate internally. According to one commentator:”I would walk away from a deal that did not have the support of seniorleadership.”Harveysuggests that a degree of tactical finesse is necessary in any contractualnegotiation. “There are some issues about handling the negotiations to getthe best deal and make sure you’re not hoodwinked – and then also managing therelationship. You need to think tactically about how you divide up those roles.It’s very difficult when you’re the relationship person, and you also have tobe the tough one doing the negotiation, building all the rigour and disciplineinto the relationship.” Although you would be foolish to make price theultimate factor in any negotiation, you must be prepared to argue for value formoney.Finally,consider the Armaggedon situation. Build into the contract provision for ifyour supplier goes out of business, is bought by another, signs up one of yourcompetitors, and so on. Keep yourself in the picture. Insist on ongoingreporting, the right to go in and audit your outsourcer, and the right todevelop and maintain procedures.3.Performance manager/ Information analystOneof the best things about outsourcing is that it forces companies to adopt goodpractice that might otherwise be lacking – and performance management is aclassic example of this. The Cranet survey found clear links between the twodisciplines: companies that use outsourcers extensively also tended to haveestablished clear measurement systems for their HR function – assessing performancein terms of business scorecard similar tools. As a result, they were muchbetter informed about their own cost structures on process basis. “Ifyou’re going to make these things work, you need to be able to combine closepartnership with a very cool, hands-off approach to performance issues,”claims Brewster. “You’ve got to be able to manage the matrix of usingsuppliers,” adds Green at Collinson Grant. “It’s not simply aquestion of reducing costs, but also of managing the quality of the service onan ongoing basis. Unless the resident HR manager has got some kind of plan formanaging that, he/she’ll be lost.”Butthis is no easy feat to get right. One of the main difficulties facing any HRfunction is deciding exactly what you plan to measure in the first place. AsGreen points out, “You’ve got to find a way of measuring the outsourcer’sperformance by certain fixed criteria, but also at looking at how they manageperformance measurement in terms of assessing your own staff.” And it’s importantto enshrine what ever you do decide into the terms of the SLA. “Place inthe contract an obligation to provide the information you need, on apredetermined regular basis, and in the format you need it,” is Harvey’sadvice. Oneof the main problems thrown up by outsourcing is knowledge management. And eventhe most ardent proponents of outsourcing advise that you proceed with care onthis point. “If it’s true that the skills in an organisation are the keyto competitive advantage and that knowledge management is the way forward, thento put all that in someone else’s hands is decidedly dangerous,” saysBrewster at Cranfield. “You may end up totally dependent on these peopleand their goodwill and capacity.”Considera company like BP, which now outsources some 70 per cent of its total costs. Asone commentator remarks, “That means the ‘loss’ of one hell of a lot ofknowledge and information, so you’ve got to be able to manage the situation oryou risk disaster.”Certainly,you could take the view that it is better to keep in-house the skills andknowledge you consider critical to your organisation’s strategic way forward,and/or competitive edge. But in many cases, that would defeat the entirestrategic object of the partnering arrangement. Consequently, many organisationsattempt to strike a compromise, balancing trust with eternal vigilance and aconstant flow of accurate information about the fulfilment of yourrequirements.4.Customer serviceBythis we mean how you go about ensuring the move into outsourcing HR service isachieved with minimum disruption to your own workforce – a process whichexperience suggests can be fraught with difficulty. “Most HR departmentshave a fairly shrewd idea of what line managers want,” claims Brewster.But that could be in active conflict with what you hope to achieve with yournew partnership arrangement. It goes without saying the attitude of your ownemployees will be critical to the success of the venture, and that internaldivision needs to be avoided. But that is easier said than done.Althoughmany HR departments have coped with successive waves of outsourcing, few haveactually had to manage the process with reference to their own departments. Andthat can pose problems in its own right. As Finney at HCR Countrywide Mobilitypoints out, “The most difficult thing emotionally for people in HR isletting go. There is a perception that in outsourcing something, you’rethreatening your own job.” Or, if not your own, then certainly that ofsomeone else close to you. To many people outsourcing is synonymous withoutplacement – and with good reason. Thebest means of tackling the issue, as with any in which personal security is atstake, is to be as open as possible about the arrangements you intend to make.Spell out exactly why you intend to outsource a particular function and whatyou hope its benefits will be to the overall organisation – but don’t shirkfrom addressing exactly what effect the move will have on individuals. In otherwords, boost morale, but don’t do it at the expense of the truth.5. Culture/brand managerAcommon worry afflicting those embarking on full-scale outsourcing is the movewill in some way dilute or change the culture and brand of their organisation.It would be foolhardy to deny that any deal you strike won’t have some impact –particularly given the blurring of the boundaries that management experts claimis critical to a successful partnership.”Theproblem with outsourcing is encapsulated in the question ‘Whose brand are youlooking at?’ The outsourcer will have their own. To what extent do you takethis on board?” claims Brewster. Thereclearly needs to be someone in the organisation capable of taking an overallview, someone who understands the prevailing culture and internalinterdepartmental workings. This role naturally falls to the HR manager. One ofthe main risks of outsourcing is a lack of internal focus and communication –particularly in terms of ensuring continued communication with otherdepartments (often themselves outsourced). This, with hindsight, is one of themain problems that afflicted an organisation like Railtrack.Whenit comes to cultural issues, the actual choice of partner is clearly critical.Although many successful arrangements have been struck between organisations that,on paper at least, look markedly different, they have all been characterised bya certain common purpose. “You need to ask, is this company sympathetic tothe aims and visions of your organisation and, most importantly, do you feelcomfortable working with them,” says Angela Baron at the CIPD.Interms of branding, many experts suggest that if the relationship is intended tobe long term in scope, you make a virtue of your common links. In defining hisvision of internetworked business webs of separate companies, Tapscott talksabout the importance of establishing a shared set of values and brand. The carmanufacturer Ford and its dealers are a good example of this. Moreover,sometimes the addition of an outsourcer’s brand can be a very positive thing. Considerall those PC manufacturers who did very well out of the “IntelInside” campaign.Thebottom line is that, before embarking on any relationship, you need to identifyand spell out to the supplier which aspects of your company culture andbranding you consider critical to retain. It might be soft, but it could makethe difference between make or break.BPAmoco’s decision to outsource a major part of its global HR operations has beenwatched with interest by the industry. So how has this symbiotic relationshipof two companies with very different cultures worked out? See The odd coupleproduce model for HR outsourcing. And in a second case study, energy servicingfirm PIL takes a very hard-nosed attitude to finding an outsourcing partner.See PIL gets tough over outsourcing partnership with Capita. Jane Lewis reportson both cases at:www.personneltoday.com/features Related posts:No related photos.