Human Resources Outsourcing Strategies by B_Gjas



              Human Resource Outsourcing:
      A Strategy For Gaining Competitive Advantage

                              n the present global com-    placed on idea generation         ing, or off shoring is the ‘new’
                              petitive     environment     and idea selection than on        business wave that has tran-
                              there is increased pres-     implementation. Generally,        scended geographical bar-
                          sure on growth through new       the cost constraints, lack of     rier of trade and commerce.
                          breakthrough product lines       sufficiently, skilled human       Off shoring activities in the
                          and new business models or       resources and the inability to    industrial and IT sectors
                          on achieving differentiation     free key staff from the cur-      have been going on for some
                          through higher performing        rent workload are the primary     time but it is the recent high
                                                                                             growth of new service-based
                                                                                             categories with the accrued
                                Until quite recently, outsourcing was about getting out-
                                                                                             benefits which is causing a
                            side experts to do things an organisation could not do – or
                                                                                             shift in the global outsourc-
                            could not do efficiently – on its own. With the advent of IT
                                                                                             ing sweepstakes. The latest
                            enabled services (ITeS), many large organisations were more
                                                                                             challenge for business tech-
                            willing to outsource more strategic, core business processes
                                                                                             nology managers is coming to
                            than ever before. Today the issue is not so much about what
                                                                                             terms with a new competitive
Dr. Malayendu Saha          you could not do yourself efficiently, but what you do not
                                                                                             reality: how to achieve lower
                            want to do, for whatever business reason. The human re-
 (The author is Reader,
                                                                                             costs, high quality, rapid in-
  Department of Com-        source management field presents a particularly interesting
  merce, University of                                                                       novation and change, as well
  Calcutta. He can be       arena for outsourcing. Much attention has been given to the
reached at m_saha2@                                                                          as manage complexity while
                            growing use of temporary workers provided by the “staffing”                                                                          offering customers person-
                            industry but alongside it, and much less noticed, has been
                                                                                             alised experiences. Global
                            the growing Human Resource Business Process Outsourcing
                                                                                             competition has forced com-
                            industry (HR-BPO) – which takes over whole HR activities.
                                                                                             panies, large and small, to
                            This article provides a peep into the fast emerging phenom-
                                                                                             compete differently and
                            enon of Human Resource Outsourcing (HRO).
                                                                                             search for ways to manage in
                                                                                             this environment calls for new
                          core processes such as distri-   barriers to implementing in-      capabilities— ones embedded
                          bution, customer relationship    novation. However, now the        primarily in managerial pro-
                          management, logistics and        companies have other options      cesses, decision analytics, and
                          branding- all of which lead to   to help manage their inno-        behaviours. The search for
                          innovation. There is no doubt    vation muscle shortfall. For      new skills cannot be confined
                          that regardless of industry or   instance, new approaches to       to one country or a region.
                          company size, innovation is      learning allow rapid skill de-    Though China, India, the
                          one of the most important        velopment at point of needs.      Philippines, Thailand, and
                          factors in gaining competitive   Companies can also collabo-       other countries endowed with
                          advantage for an organisa-       rate with customers, suppliers,   an abundance of talent at low
                          tion. Companies’ efforts at      and a specialist service pro-     cost are currently prominent,
                          building innovation structure    vider to boost their own ex-      the focus may shift in the fu-
                          show success – at least with     ecutive capabilities. However,    ture to some other, as yet un-
                          regard to generating promis-     perhaps the most intriguing       known, region. For the time
                          ing ideas and selecting ideas    of all is how outsourcing hu-     being, India is the hotbed.
                          to implement. However, on        man resources can help free
                          occasions, there seem to be      resources for innovation.         Perspectives on
                          an imbalance –far more at-           Business Process Out-         Outsourcing
                          tention and importance is        sourcing (BPO), outsourc-            Outsourcing can be de-

866 The Chartered Accountant December 2005
fined as the situation where                      cent of the car’s value goes to   and development to market-
‘an external vendor provides,                     Korea for assembly, 17.5 per-     ing, distribution, and after-
on a recurring basis, a service                   cent to Japan for components      sales service. Some firms have
that would normally be per-                       and advanced technology, 7.5      gone so far as to become “vir-
formed in-house’. In other                        percent to Germany for de-        tual” manufacturers, owning
words, outsourcing is a process                   sign, 4 percent to Taiwan and     designs for many products
in which companies concen-                        Singapore for minor parts,        but making almost nothing
trate on those aspects of their                   2.5 percent to the United         themselves. Nike was one of
business , which give them a                      Kingdom for advertising and       the first to embody the con-
competitive advantage (core-                      marketing services, and 1.5       cept of the “virtual” firm by
business) and contract out                        percent to Ireland and Barba-     concentrating on design and
the more peripheral or non-                       dos for data processing. This     sourcing every other key ca-
core aspects for other firms.                     means that only 37 percent of     pability from outside. It was
Faced with increasing global                      the production value is gen-      a manufacturer that manufac-
competition, businesses have                      erated in the United States.      tured nothing, but who made
come to look to outsourcing         The pro-      The process of BPO creates        sure that “its” manufacturing
as a means of gaining a com-        cess of       an operating environment          process were the best. Out-
parative advantage over their       BPO cre-      that is substantially more        sourcing offers the potential
competitors. Outsourcing is         ates an       conducive to change. It pro-      advantages of specialisation.
thought to benefit a business       operating     vides a balance of improved       When a firm finds a special-
by allowing it to focus on its      environ-      product quality and service       ist who can be more effec-
“core competencies” or “core        ment that     delivery through access to        tive in providing a service or
activities.” In this way, the       is substan-   best practices, technology and    component that was previ-
business can shift its energy       tially more   professionals. BPO acts as a      ously handled in-house, then
away from peripheral activi-        conducive     catalyst for change to help       both the firm and its supplier
ties that lie outside of its true   to change.    stimulate company growth by       can focus on what they do
area of expertise, and instead      It provides   achieving unique competitive      best, and thus more rapidly
concentrate more energy on          a bal-        capabilities.                     improve their performance.
what it does well in order to       ance of           Outsourcing creates tre-      Much attention has been paid
differentiate itself from com-      improved      mendous value and gives           to the growing use of tempo-
petitors. By outsourcing non-       product       companies the ability to be       rary workers provided by the
core activities, the business       quality and   more productive and create        “staffing” industry; but along-
may also be able to reduce          service       significant business impact.      side it, much less noticed has
operating costs by reaping the      delivery      Companies gain competitive        been the growing human re-
benefits of a supplier’s lower      through       advantage by exploiting an        source business process out-
cost structure, which may re-       access        outsourcing service provider’s    sourcing industry (HR-BPO)
sult from economies of scale        to best       advantages such as economies      – which takes over whole HR
or other advantages associated      practices,    of scale, best-in-class process   activities.
with specialisation in the out-     technology    execution, better and cheaper         Starting with humble
sourced activity. Over 85 per       and pro-      labour, and capital at more       payroll processors, HR-BPO
cent of companies realise that      fessionals.   competitive rates in order to     providers now offer to take
outsourcing critical support                      customise offerings more ef-      over virtually any HR activity
services can enhance their                        fectively and efficiently. In     or even the entire function.
competitive edge through ac-                      doing so, they generate tre-      Experts today suggest that
cess to a wealth of intellectual                  mendous value for customers       in a few years, up to 90 per-
capital, without the need to                      and wealth for shareholders.      cent of the HR function will
invest in infrastructure. The                     Outsourcing manifests itself      be fully automated – bringing
bottom-line is that the com-                      in every aspect of business       huge savings for both the firm
pany can concentrate on core                      today.                            that is outsourcing and the
operations and let a third par-                                                     firm providing the outsourced
ty devote time and resources                      Human Resource                    services. Supporters say that
to providing non-core func-                       Outsourcing : The Issue           offloading the things that are
tions.                                               We live in an age of out-      not core to any business is all
    A recent annual report of                     sourcing. Firms seem to be        part of the process of a com-
the World Trade Organisation                      subcontracting an ever-ex-        mon sense of organisational
(1998) details, for example,                      panding set of activities,        streamlining, leaving one to
the production of a particular                    ranging from product design       concentrate on what it does
“American” car: Thirty per-                       to assembly, from research        best. Detractors say that it is a

                                                                        December 2005 The Chartered Accountant   867
                                                               Figure: 1
                                   Examples of Some Human Resource Outsourcing Deals
      Date                     Partners                                         Terms of the Deal
 October 2000 Exult, Bank ofAmerica                 Companies are still negotiating a $1 billion, 10-year deal. Bank of
                                                    America will acquire 5 million shares of Exult stock and an option
                                                    to purchase another 5 million shares. About 800 to 900 of the 1,000
                                                    people working in the bank’s human resources department will have
                                                    jobs at Exult.
 April 2000            Nortel Networks,       PricewaterhouseCoopers manages payroll, human resources, accounts
                       PricewaterhouseCoopers payable, employee training and other operations in a five-year deal for
                                              an undisclosed amount. About 1,000 Nortel Networks’ employees were
                                              transferred to PricewaterhouseCoopers’ BPO service centres.
 N o v e m b e r General Motors, Arthur Arthur Andersen was awarded a $250 million deal to manage admin-
 1999            Andersen               istrative accounting duties and help GM upgrade its legacy payroll
                                        systems to PeopleSoft Human Resources. Four hundred GM employ-
                                        ees were given the option of working at an Arthur Andersen service
 N o v e m b e r BP Amoco, PriceWater- BP and PricewaterhouseCoopers signed a $1.1 billion, 10-year deal
 1999            houseCoopers          to outsource accounting and SAP financials; the consulting firm also
                                       acquired BP’s application systems group. About 1,200 BP employees
                                       joined PricewaterhouseCoopers.
 Source: Adler, 2002
                       little like cutting off pieces of   ·       A transparent process       Why Human Resource
                       one’s own body. They point                that allows both human        Outsourcing ?
                       to the IT disaster in the mid             resource system manag-            It is perceived, from the
Compa-                 and late 90s, which proved                ers and employee-users        literatures on HR outsourcing,
nies use               to be a costly move for many              facile access to required     that companies use HR out-
HR out-                multinationals; as IT costs               information, usually e-       sourcing for both operational
sourcing               fell, technology improved and             enabled.                      and strategic reasons that can
for both               they were left with long-term,      ·     Processes that are linked     enhance the HR value chain
operational            non-negotiable contracts with             across the human re-          as well as support the develop-
and strate-            outsourcers.                              source programme spec-        ment of human resources as a
gic reasons                 Today’s corporate business           trum through creat-           business partner and strategic
that can               world is a network of alliances,          ing the ability to use an     contributor to the organisa-
enhance                partners, distributors, suppliers         ‘event-based’ approach        tion’s goal. The literatures also
the HR                 and customers. A company’s                where all relevant human      suggest the five competitive
value chain            intellectual capital and perfor-          resource responses are        forces that are driving more
as well as             mance capability is the sum               provided to the employee      companies to outsource some
support                of this network. As human                 in a comprehensive and        or all of their HR activities.
the devel-             resource outsourcing began to             non-friendly manner.          These forces are downsizing,
opment of              include more functions, lead-       ·     An integrated method of       rapid growth (or decline), glo-
human re-              ing service providers moved to            service delivery for human    balisation, increased competi-
sources as             the next level, called ‘process           resource programmes so        tion, and restructuring. Over
a business             integration’, by linking more             that employees will see all   the past decades, these forces
partner                and more of the many discreet             human resource-related        have significantly altered the
and strate-            human resource sub-processes              responses to a work/life      strategy and structure of many
gic con-               in ways that provide better               event.                        firms. During this time, firms
tributor to            control and cost effectiveness.     ·     A ‘single platform’ concept   have attempted to refocus
the organ-             Current human resource of-                of integrated technolo-       their businesses, lower their
isation’s              ferings by outsourcing com-               gies, resulting in end-to-    costs while increasing ser-
goal.                  panies are becoming standard-             end administration and        vices, and improve capabilities
                       ized and increasingly effective,          processing of data from a     to respond to future business
                       and are characterised by:                 variety of sources.           challenges. By refocusing the

868 The Chartered Accountant December 2005
HR function, executives hope                    helps them to avoid the cost of     from economies of scale, along
to achieve a closer alignment                   continually keeping abreast of      with the efficiency derived
of HR practices with busi-                      developments in technology          from specialisation, reduce the
ness strategy. HR managers,                     and training. There are also        company’s operational costs
in turn, acknowledge collabo-                   better professional opportuni-      and thus provide a clear com-
rating with line managers to                    ties for professionals that join    petitive advantage.
deliver more value-added ser-                   up with an outsourcing sup-         Accessing resources not available
vices at a lower cost and to re-                plier.                              internally
examine if, in fact, some HR                    Freeing up resources for other          Companies resort to out-
activities are needed, and if so,               purposes                            sourcing because they do not
who can be able to deliver the                      Every organisation faces        have the resources they need
best.                                           limited resources. HR out-          internally. HR outsourcing
    Increased      competition,                 sourcing allows an organisa-        provides a viable alternative
both domestic and interna-                      tion to redirect its resources,     to build up the capacities they
tional, emphasises the value-                   particularly people, from lat-      need from scratch.
added role of products and          Companies eral activities to those with         Freeing up financial resources
services. Firms that subscribe      resort to   superior ‘added value’. People          HR outsourcing can re-
to the Balanced Scorecard ap-       outsourc-   whose energy is focused inter-      duce the need to invest capital
proach of measuring the ef-         ing be-     nally can shift to a more exter-    funds in non-core business op-
fectiveness not only look at fi-    cause they nal focus on the client.             erations. Instead of acquiring
nancial measures of the firms’      do not      Commitment to the technological     the resources by using capital
success but also customer and       have the    evolution                           funds, these can be contracted
employee measure of service         resources       In order to be success-         whereby they are paid per ser-
quality. If HR departments          they need ful, an outsourcing agreement         vice. HR outsourcing can also
are to be responsive to both        internally. should be based on a relation-      improve certain financial ratios
internal and external custom-       HR out-     ship of deep trust, between the     for the company in eliminat-
ers, they must look for ways        sourcing    service supplier and one’s own      ing the need to demonstrate a
to improve the quality and          provides    staff. This closeness, linked       return on capital investments
responsiveness of their ser-        a viable    to contractual conditions that      in non-strategic areas.
vices. Outsourcing offers HR        alternative demand technological updat-         Risk reduction
an option to satisfy competing      to build up ing, ensures the ongoing sat-           The investments made by
demands for improved ser-           the capaci- isfactory development of all        any business entity also reflect
vices and responsiveness at a       ties they   technological infrastructure.       the risks due to the constantly
reasonable cost.                    need from Improving the company’s focus         changing markets, competi-
                                    scratch,        Outsourcing allows the          tion, standards, financial cir-
Benefits of Human                   in order    company to focus on its core        cumstances or its own tech-
Resource Outsourcing                to access   business, in delegating op-         nology. Staying up to date
    The essential logic behind      external    erational tasks to a third party.   is very risky in the face of all
human resource outsourcing          resources. HR outsourcing implies there         these changes, particularly
lies in the fact that the compa-                is an exclusive contact point       those that necessitate a sudden
ny can focus on its “core busi-                 for operational questions re-       transition requiring substantial
ness”, delegating specific areas                garding the starting point,         investments. The outsourcing
to external experts and thus                    whereby numerous supervisors        suppliers make investments
freeing up resources that can                   are involved who are dedicated      on behalf of various clients
be dedicated to core aspects of                 to managing the relationship        simultaneously. In sharing the
its business.                                   with suppliers and internal         investment, the risk is appor-
Accessing top-level capabilities                staff, planning, etc. These su-     tioned, thus significantly re-
    The major service sup-                      pervisors can now concentrate       ducing the risk to each of the
pliers are making important                     on increasing the business.         companies involved.
investments in technology,                      Reducing operating costs            Improving management of op-
methodologies and people.                           Companies that try to do        erations that are complex or dif-
They are gaining experience                     everything themselves often         ficult to control
working with many clients                       incur substantial costs for re-         HR outsourcing does not
that are confronting common                     search, development, market-        imply the withdrawal of fi-
problems. This combination                      ing and implementation, which       nal responsibility for the pro-
of specialisation and experi-                   they end up passing on to their     cesses or operations subject to
ence provides the clients with                  clients. The external supplier’s    the service agreement. When
a competitive advantage and                     smaller cost structure resulting    there are confrontations with

                                                                        December 2005 The Chartered Accountant   869
an operation that proves dif-              whole premise of transac-                               of HR functions. Changes in
ficult to manage or that is out            tions cost theory is that                               the broader business environ-
of control, the organisation               internal transactions are                               ment are altering how firms
should carefully analyse what              less costly than external                               are managing their human
is causing the problem.                    ones, which is why firms                                resources and affecting nearly
                                           arise in the first place, to                            every aspect of HRM.
The Costs and                              internalise and coordinate                                  Labour markets: Over the
Disadvantages of HR                        market transactions;                                    past decade, conflicting pres-
Outsourcing                          v     Costs of monitoring are                                 sures in the labour market have
     For every study of HR out-            an important issue as,                                  brought the role of HR to the
sourcing showing its advantag-             with all contractual rela-                              fore. Intensifying competitive
es, there are studies pointing to          tionships, the client firm                              pressure has also forced firms
its failure or actually increasing         may need to intensify the                               to be more aggressive in cut-
costs. Studies have led to some            monitoring of the con-                                  ting costs and headcount. HR
instances in the way outsourc-             tracting firm’s perfor-                                 functions have learned to be-
ing is conducted. Some out-                mance in order to mini-                                 come “world class” in manag-
sourcing consultants now pro-              mise the latter’s incentive                             ing downsizing. At the same
mote ‘co-sourcing’, where the              to shirk or cut-back on                                 time they become more inno-
client company keeps respon-               quality and service;                                    vative in attracting and retain-
sibility for the management
of the outsourced activity, but                                                     Figure: 2
the outside provider supplies
consultancy services and expe-           A Step Forward
rienced personnel on a ‘needs’           True Global resource leverage will result when businesses step up
                                         from the most basic goals to the most advanced benefits
or ‘projects’ basis. While tra-
ditional outsourcing may be                    Advanced
suitable for low risk peripheral                                                                Analytics and
activities like cleaning or car                                                                 product innovation
fleet management, compa-                                                                   Process innovation
nies want to retain more with
higher risk strategic functions.                                                 Quality
However, the problems and                      Basic
disadvantages associated with                                           Cost arbitrage
                                      Data : G. K. Prahalad
HR outsourcing include:
v Co-ordination costs re-
                                     Source: Prahalad and Hamel, 1990
      late to the increased costs
      and difficulties of coor-
      dinating production and        v     Loss of Control is an-                                  ing scarce talents.
      exchange with several                other worry factor that                                     Costs pressures: As the do-
      external service providers           may hit a client firm over                              mestic and global competi-
      rather than in-house con-            key areas, including the                                tive pressures intensify, firms
      trol;                                employment relationship                                 pay increasing attention to
v Quality and service issues               and the management of                                   their costs --- operating,
      arise when there is an in-           employees.                                              overheads and capital costs.
      centive for the contractor                                                                   In many firms, HR depart-
      providing the service to       A Changing Environment                                        ments are regarded as a target
      renege on quality, espe-       for HRM and its                                               for efficiency improvement
      cially where quality is dif-   Functionality                                                 efforts. A growing number
      ficult to verify;                   In most companies, the                                   of firms are discovering that
v Costs of transacting refer         human resource function has                                   HR-BPO providers are more
      to search and selection        little strategic importance.                                  efficient in providing spe-
      costs to find out an appro-    The HR staffs spend 70%-                                      cialised services to stay ahead
      priate contractor. Con-        80% of its time in adminis-                                   in the present competitive
      tractors can often extract     tration and clerical activities                               environment.
      post-contractual revenue       – activities that are not seen as                                      Legal and regulatory
      in the event of unforeseen     very critical, and certainly not                              environment: The legal envi-
      circumstances due to bar-      as core. Nevertheless, there                                  ronment of HR has grown in-
      gaining advantages. The        are signs of a shift in the role                              creasingly complex. HR man-

870 The Chartered Accountant December 2005
agers have been struggling to       is perhaps the most impor-            provide more value at lower
stay abreast of these regulatory    tant. On the “demand” side,           cost. The key, many argue, is
changes. An increasingly com-       many employees today are              to focus on activities that are
plex regulatory environment         accustomed to working with            “truly strategic” and outsource
drives demand for outsourced        PCs on their desks that allow         the rest. Study shows that
employee services. Many HR          self-service information ac-          there are significant changes
specialists feel that an out-       cess. On the “supply” side, the       in the activities performed by
sourcing vendor can perform         Internet and new generations          HR professionals during the
the more heavily regulated          of software systems have revo-        last decade. Reflecting both
functions better, cheaper and       lutionized human resource in-         technology-enabled internal             Studies
faster than in-house staff can.     formation systems (HRISs)             efficiency gains and outsourc-          show that
    Mergers and acquisitions:       and significantly improved            ing, the amount of time spent           there are
Recent years also saw increas-      HR productivity and cost-ef-          in maintaining employee re-             significant
ingly frequent mergers and          fectiveness.    GE estimated          cords and ensuring compliance           changes
acquisitions. These created         annual savings of $ 2 million         with internal policies and gov-         in the
huge challenges for the HR          when 25,000 calls per month           ernment regulations has de-             activities
function. Globalisation rep-        were diverted from HR staff           creased, while there has been           performed
resents a comparable need           to their HR portal. Micro-            a significant increase in the           by HR
for employees in, and moving        soft saved about $ 1 million          amount of time spent design-            profession-
between, different countries.       in labour costs using portals.        ing HR systems and practices.           als during
Companies confronted with           These various environmental           The trend (Fig: 3) in HR dur-           the last
the challenge of merging het-       changes have led to different         ing the 1990s seems to have             decade.
erogeneous HR technology            HR activities. Under conflict-        been a move towards increased
and infrastructures into one        ing pressures, companies have         involvement with the organ-
cohesive programme often            abandoned promises of career          isation’s management team
find outsourcing appealing.         employment and shifted to             – developing human resource
    Technology: Of the vari-        more market-oriented em-              strategy, designing organisa-
ous forces affecting HR, the        ployment practices. HR func-          tional structure, and imple-
development of technology           tions are looking for ways to         menting strategic changes.
                                                   Figure: 3
                             Recent Trends in Human Resource Management Practices
                               TRENDS IN THE BUSINESS ENVIRONMENT

                                             Labour              Technology                 Globalisation
 EFFECTS ON             Compensation         Increased com-      HRISs have increased       HR must coordinate activities across
 HRM ACTIVI-                                 plexity of pay      control     of benefits,   countries to insure consistency with
 TIES                                        systems (options,   streamlined compliance,    present company as well as local val-
                                             individual   and    and enabled employee       ues and practices. Compensation of
                                             group incentives,   self-service.              expatriates require special attention.
                        Organisation and     Employees have Employees self-service Increased diversity in local workforce
                        People Develop-      higher expecta- and distance Education. presents challenge.
                        ment                 tions due to mo- online job search.
                                             bility and tight
                                             labour market
                        Workforce Plan-      Scarcity of talent Online job posting, re- HR must carefully select, train and
                        ning                 encourages ucces- sume matching, candi- evaluate experiences.
                                             sion planning      date tracking increase
                        Workforce Services                       Increasing demand by New opportunities for outsourcing
                                                                 employee for more user- as emerging economies participate in
                                                                 friendly service delivery markets for IT enabled services
                        Employee Data                            Automated collection of
                        Management                               regulatory compliance
 Source : Adler, 2002

                                                                               December 2005 The Chartered Accountant          871
Operational rationales for         ing, “What is it we will never         HR Information Technol-
HR outsourcing                     be experts at or shouldn’t spend   ogy: Innovations in HR infor-
     HR outsourcing is some-       time doing?” These questions       mation technology are another
times driven by the evolution      are to be regarded as the most     rationale driving outsourcing
of the HR function within the      frequently cited rationales for    practices. Many outside ven-
organisation. Small compa-         outsourcing HR activities. As      dors are installing integrated
nies pursue outsourcing where      companies require more spe-        or enterprise software with
the HR function is relatively      cialised HR, their next best       human resource information
undeveloped. Extensive out-        alternative is to hire external    system (HRIS) components.
sourcing is used to quickly fill   HR vendors to perform ac-          These systems provide the
voids in critical HR companies     tivities that were formerly per-   capability for HR executives
by purchasing services from        formed in-house. In addition       to make informed business
outside the organisation. In       to expertise, outside vendors      decisions on both operational
such circumstances, outsourc-      can also be more objective         and strategic issues. HRIS
ing has the critical advantage     than internal staff members.       implementation is one of the
of providing HR capabilities       For example, companies hire        driving forces for restructuring
while not adding to HR head-       outsourcing firms to conduct       jobs, processes, and entire de-
count.                             training program evaluations.      partments, including the HR
    Need for Specialised Exper-    Furthermore, when the HR           department.
tise: As one highly respected      function lacks credibility with        Time Pressures: HR out-
senior HR executive stated:        the company’s senior manage-       sourcing enables HR execu-
“You outsource when someone        ment, evaluations or research      tives to cope with time sensi-
else can perform the activity      performed by outside vendors       tive and competing demands.
better than you.” Another said     provides needed credibility        The training function provides
that companies should make         because of perceived expertise     another example in which time
outsourcing decisions by ask-      and objectivity.                   pressures often do not allow

                                                                                 Lamiya Lokhandwala

872 The Chartered Accountant December 2005
internal development of trainers or program design. Vendors
can supply generic programs that can be customized and de-
livered quickly, such as diversity training.
    Cost Savings: It is argued that expected cost savings was
an initial rationale for outsourcing. Such cost reduction ra-
tionales are consistent with the strategic management view of
competitive resource allocation. Hence, all activities, except
for those related to strategic core competencies, should be
outsourced if vendors can perform them more economically.
It was observed in a survey that because of the magnitude of
their internal HR operations, specialised vendors were un-
able to achieve greater economies of scale and cost savings.
One interviewee observed that outsourcing produces no cost
savings when only two or three vendors dominate a special-
ized market. As noted, cost savings are often an important
rationale for outsourcing, but as another interviewee warned,
“Don’t let cost be the absolute driver!”
    Vendor Efficiencies and Service: For some activities, the
decision to outsource is straightforward. For example, large
mutual fund or financial services companies can administer
retirement plans competently and at very low cost. Decisions
are similarly straightforward. For specialised vendors these
activities are their core business and comprise their strate-
gic focus. On the other hand, for other HR functions some
executives hold a very different opinion about the level of
service available through outsourcing. They claim that better
service could not be obtained with most outsourced services.
Moreover, these executives also argued that the pursuit of
cost savings often resulted in the loss of service quality.
    Firm’s HR Capacity: HR activities are occasionally out-
sourced because of extraordinary circumstances, such as when
the activity level is too overwhelming for in-house person-
nel to perform. In addition to extraordinary circumstances,
outsourcing is used when companies are simply operating at
full capacity and do not have additional staff to handle in-
creased activity. Because such levels of business are expected
to decline at some point in the future, companies may pre-
fer to outsource some HR activities or part of their current
load rather than hire more staff. The basis for this outsourc-
ing approach is similar to the rationale for using overtime
to handle peak workloads instead of hiring new permanent
    Reduction of Liability or Risk: In some instances risk re-
duction is a partial rationale for outsourcing an HR activity.
Liability and risk reduction is critical for smaller companies
that do not have the resources to employ staff specialists who
are fully informed on all aspects of, say, the legal require-
ments of HR programs.

Strategic rationale for competitive advantage
     The most significant shift in attitudes to outsourcing
is the fact that most companies no longer see it merely as
a cost-cutting exercise, rather than a strategic tool. While
cost-cutting is still the prime motivator for outsourcing, six
other highly strategic reasons are: (i) to improve the over-
all business performance; (ii) to sharpen business focus;
(iii) for accessing external skills; (iv) for improving quality
and efficiency of outsourced process; (v) to achieve com-
petitive advantage; and (vi) to create new revenue sources.

                                                                  December 2005 The Chartered Accountant   873
With efficient HR outsourc-          structures and extensive in-                      bidding process.” Similarly,
ing, corporate entities can          ternal networking. The com-                       because of their size and focus,
move away from rigid self-           pany, which relies heavily on                     outsourcing firms are often
sufficient organisation struc-       internal networking and de-                       more nimble and agile. As a
tures to an open entity with         partmental barriers, has a very                   result, they can often deliver
the flexibility to respond rap-      informal culture with a heavy                     services more quickly than in-
idly to new markets and new          emphasis on flexibility. The                      house HR staff.
technologies and to take plea-       combination of a decentralised
sure in competitive advantage        structure, lean staffing, and an                  Conclusion
through clear strategic focus,       informal, fast-paced culture                          Several firms in the HR
decentralised structure and          appears to be consistent with                     outsourcing industry are now
reduction of bureaucracy and         its outsourcing arrangements.                     able to provide service offerings
cultural change.                     It is opined that, except for                     that manage an increasingly
    Strategic Focus: HR depart-      benefits and compensation          In doing       larger number of processes and
ments often lack a clear stra-       outsourcing, one does not sign     so, global     sub-processes within global
tegic focus because they are         contracts with the HR out-         corpora-       corporations with increasing
preoccupied with operational         sourcing vendors but instead,      tions are      speed, accuracy, and cost re-
activities. In essence, it is be-    relies on trust in established     discovering    duction. However, new vistas
lieved that HR departments           relationships. In addition to      both the       of need are emerging. Cor-
should outsource many of             heavy reliance on outsourc-        desire and     porations are looking beyond
their non-strategic activities.      ing, the company uses vendors      the need to    the traditional process man-
Outsourcing permits HR de-           that operate internationally       outsource      agement service offerings and
partments to move away from          to supply the same service to      their entire   are seeking answers to larger,
these routine administrative el-     its operations throughout the      HR func-       strategic-level questions — in
ements toward a more strategic       world.                             tion.          particular, how to manage hu-
role. Although outsourcing can           Decentralisation of the HR                    man capital in light of the need
be used to sharpen the strategic     function through redeploy-                        for flexibility, accuracy, and
focus of HR, it is but one com-      ment of some of its assets to                     predictability. With the ever-
ponent of the strategic trans-       operating units is another stra-                  increasing speed of business
formation process. One Senior        tegic rationale for outsourcing.                  activity and market changes
Vice President for HR provid-        By outsourcing specialised                        throughout the world, the
ed perspective by advising that,     services, the HR function can                     ability of a company to adjust
“It is difficult to change your      redeploy HR expertise from                        continually its staff functions
role to strategic by dumping         the corporate level to provide                    in the light of business exigen-
activities via outsourcing. It is    HR services at the operational                    cies is a primary focus, and,
easier if you are already in the     level.                                            not incidentally, is redefining
strategic role.” Numerous ex-            Reduction of Bureaucracy                      the human resources function.
ecutives noted how their goals       and Culture Change: HR de-                        Thus, larger companies are
were to shift more of the HR         partments are often criticised                    looking for HR outsourcing
responsibilities to the line man-    for their bureaucratic process-                   offerings that combine proven
agers and to transform the HR        es and the constraints they im-                   expertise in process and sys-
staff to an internal consultant      pose on operational flexibility.                  tems with the ability to serve
role. By considering any aspect      Thus, an important rationale                      as service integrators, link-
of the “old” HR function as a        for outsourcing is to develop a                   ing process management with
candidate for outsourcing, the       less bureaucratic HR function.                    strategic human capital. In
executives were explicitly re-       As it is stated, successful out-                  doing so, global corporations
defining the roles of their HR       sourcing vendors emphasise a                      are discovering both the de-
staffs. As another HR execu-         customer-service orientation                      sire and the need to outsource
tive stated, HR departments          that, in turn, permits the HR                     their entire HR function. The
are more likely to “stick to their   executive to address, with re-                    companies they turn to in or-
knitting” when they perform          duced HR headcount, only the                      der to do so will be those that
only those activities related to     most extreme cases that need                      are creating the service-inte-
the implementation of their          his or her attention. In addi-                    grating strategies of the future,
companies’ strategies rather         tion, outsourcing replaces bu-                    and who also understand the
than less essential functions.       reaucracy with market forces.                     role of human resources as it
    Decentralised       Structure:   As one senior vice president                      is changing and taking a new
HR outsourcing is associated         stated, outsourcing allows us                     place at the centre of corporate
with decentralised or matrix         to “harness the power of the                      management. q

874 The Chartered Accountant December 2005

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