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ISBN: 0-9553273-0-X
Anthony Hesketh
Centre for Performance-Led HR Lancaster University Management School
Corporate Research Forum, May 2006
Report sponsored by
Contents
Contents Acknowledgements Introduction 1 2 2.1 2.2 2.3 2.4 2.5 3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 4 4.1 4.2 4.3 4.4 5 5.1 5.2 5.3 5.4 5.5 5.6 6 6.1 6.2 6.3 6.4 7 7.1 7.2 EXECUTIVE SUMMARY SIZE, SCOPE AND WHOS WHO IN HRO Context of outsourcing Evolution of outsourcing Emergence of HR outsourcing HRO providers and offerings The HRO industry ISSUES FACING HRO DECISION-MAKERS M HRO hysteria Strategic debate over HRO Offshoring myths The shared services option Transforming organisations through HRO Criticisms of BTO HRO risks and the HR director SETTING THE BUSINESS CASE FOR HRO Importance of the business case Increased efficiencies within HR Increased HR effectiveness Improved strategic focus from HR HRO DEALS: MAKING THE DECISION Decision-making context Thinking strategically Identify critical stakeholders Insource or outsource? Ensuring a return on investment Financing the deal HRO DEALS: MAKING THE TRANSITION People strategies for HRO Managing your HR talent Transparency for stakeholders Managing the transition MANAGING AND MEASURING HRO PERFORMANCE Context of HRO performance Performance measurement and HRO iii v vi 1 4 4 4 5 6 8 10 10 10 13 13 15 17 19 21 21 21 22 23 26 26 27 29 30 31 31 33 33 33 34 34 36 36 36
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7.3 7.4 7.5 8 8.1 8.2 9 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10 10
Sample metrics Tomorrows HRO metrics Towards reflexive performance TRENDS AND DIRECTIONS General trends Recommendations and future directions HR OUTSOURCING - THE CRF OVERVIEW Why commission this report? Outsourcing is not new Suppliers and the HRO industry Matching needs to solutions HR capabilities and new roles The shared services option Managing internal relationships What the new HR function will look like Is HR outsourcing a healthy development? Top ten recommendations for HR outsourcing CASE STUDIES
37 38 40 44 44 45 47 47 47 47 48 49 49 50 50 51 51 53 53 55 58 64 65
10.1 Once more into the breach: the BT/Accenture HRO renewal 10.2 Manufacturing excellence: the Royal Bank of Scotlands shared services 10.3 The people behind the science: the DuPont/Convergys mega-deal REFERENCES BIBLIOGRAPHY
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Acknowledgements
The author thanks these participating organisations.
BBC BT Cap Gemini Credit Suisse CSC Deutsche Bank Gartner Ministry of Defence The Royal Bank of Scotland Standard Chartered Bank Hewitt IBM PA Consulting Royal Mail Group Shell Siemens Xchanging
I also thank the 28 interviewees for their part in this report. Not all who were interviewed have been cited, with several preferring to remain anonymous. The contribution of Nick Starritt, managing director of Sirota Consulting, Europe, is appreciated for his reflections on the original BP/Exult HRO deal. While much of what is reported here results from the input of respondents, I should note that the usual disclaimer concerning interpretation applies. The enormous support offered by Andrew Kris (chairman) and Deborah Kops (now head, program planning and development) of the Shared Services and Business Process Outsourcing Association (SBPOA), is gratefully acknowledged. Readers wishing to keep abreast of key developments in the HRO world would do well to regularly visit their web page: www.sharedxpertise.org. The author thanks Andrew Lambert and his team at CRF for their support. The Forums networks are deep and wide, representing manna from Heaven for an academic used to watching the HRO industry from the outside looking in. I also thank my editor, Chris Ashton. His work certainly moves well beyond the capabilities I have encountered in what are supposed to be some of the best publishing houses in the world. Thanks also to Louisa Mathie for work on design, Linda Breakes for layout and Artisan Studio for print and distribution. CRF thanks HRO Today and Editor in Chief, Andy Teng, for their kind permission to publish the DuPontConvergys case study which first appeared in the January/February 2006 issue. Visit www.hrtoday.com. We also thank Orion Partners for permission to publish Top 10 Tips for HR Outsourcing from their forthcoming paper, Overview of HRO. See www.orionpartners.co.uk.
Introduction
As John Sullivan noted in an article on his website (drjohnsullivan.com), CEOs are from Mars and their distant HR directors are from Pluto. Should you require any proof of this observation, a story is currently doing the rounds in the outsourcing industry. An HR director was asked by his CEO to produce a report on the implications of outsourcing for the HR function. By the time the report was complete, the deal had already been signed. Hardly surprising, then, that HR outsourcing (HRO) has been a sore point for people in HR. The subject carries a reputation akin to being the last turkey-in-the-strategy-shop. For many HR directors, HRO is often something done to you - rather than a strategic business decision taken by you. This CRF report aims to remedy such a state of affairs. In particular, it seeks to guide HR professionals in their dialogues with executives around the key talent and human capital management decisions facing them in the current business climate - and how HRO can shape these processes.
Key Questions
HR outsourcing can be framed by these questions.
What is HRO? How does it vary - by type or provider offering? What are the strategic factors driving HRO? What in HR can be outsourced? What must be retained? How do HR directors make decisions on whether to use HRO and on which HR activities to outsource? How is HRO implementation best managed - both in the transition of HR services to a provider and going forward? How can HRO performance be evaluated for the more efficient and effective delivery of HR services - and for its contribution to business transformation provided by the HR function?
Section Themes
The questions above guided the content of these sections.
Section 2 defines the relatively esoteric HRO business model and investigates the different choices from many variations on offer from the HRO market. Section 3 discusses some of the issues facing HRO decision-makers as they scope the future for HR functions - and cope with the many complexities of HRO deals. Section 4 examines three specific aspects of the business case for HRO - efficiency, effectiveness and strategic focus. Section 5 explains the key decisions around HR outsourcing, clarifies the often a long and complex process and presents the messages that HR directors should use in boardroom discussions. Section 6 covers the make or break factors and risks of many HRO deals - the transitions to be made as HR service lines are handed over to third party partners. Section 7 aims to make sense of how HRO performance is evaluated - and presents a new model for understanding performance. Section 8 draws together the findings from research and predicts what the future for HRO might look like. Guidelines are provided for HR practitioners, HRO providers and advisers.
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Section 9 is the CRF overview on HR outsourcing, along with recommendations for members. Section 10 provides three case studies - the BT-Accenture HRO renewal, shared services at the Royal Bank of Scotland and the DuPont-Convergys HRO transformation deal.
Research Process
Research for this report was conducted between November 2005 and April 2006 using desk research and face-to-face interviews with 28 senior executives in the UK, US and Europe. They represented different roles within HRO.
A number of HR professionals including global HR function directors, HR chief operating officers, HR VPs and heads of shared services, along with managing directors. On the provider side, interviewees included chief executive officers, managing directors, VPs of business process outsourcing, and account leaders on some of the world's largest HRO contracts. The research directors from two leading advisory consultancies in the global services delivery market.
Guided by independent and objective research, this report addresses a primary concern in the HRO market - that independent and objective data is lacking on which to base rigorous evaluation of the business case for HRO and its actual performance.
Additional Sources
Readers wanting to explore HRO issues in more detail might look at Outsourcing for Radical Change by Accentures Jane Linder who contributed to this report. Those seeking an authoritative HRO text with an emphasis on its evolution would enjoy Human Resources Business Process Outsourcing, co-written by Ed Lawler, Jac Fitz-Enz, Dave Ulrich and one of the HRO industry's founding fathers, James Madden, the former CEO of Exult - now owned by Hewitt. Useful sources for HR shared services include How To Get Best Value From HR: The Shared Services Option by Peter Reilly and the Royal Bank of Scotland's Tony Williams. This provides an excellent overview of the processes involved, with case studies. The former BPO team at PricewaterhouseCoopers provide a more comprehensive and technical analysis in Shared Services: Adding Value to Business Units. Academic texts are deeply theoretical and complex, drawing on transaction cost economics and institutional theories. Accessible articles can be found by Paul Adler in California Management Review (2004) and various outsourcing papers by Leslie Willcock and colleagues. A reference list and further reading appear at the end of the report.
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This report, published in June 2006 by the Corporate Research Forum, is the first independent review of the development of the outsourcing market for human resources functions.
This report
The principal author employed by CRF was Dr Anthony Hesketh of the University of Lancaster. Additional content and editing was provided by Andrew Lambert and Chris Ashton of CRF. The report was debated by CRF members at a symposium on 8 June 2006.
Report sponsorship
The production of the report was sponsored on this occasion by one of CRF's members - Accenture. Note that sponsors of CRF work have no control over the contents of CRF's publications or meetings, although they may be interviewed as part of the research if relevant to the subject material. In this case, Accenture features in a case study on BT, in their position as supplier.
1 Executive summary
A primary concern of the HR outsourcing (HRO) market has been the lack of independent and objective data for rigorously evaluating the business case for HRO and its actual performance. This report is the first of its kind to bring together different stakeholders within HRO - including practitioners, suppliers, academics and consultants - to produce an independent, objective academic research project. in their size, culture, HRO methodology and track record. However, they offer their services in three distinct ways.
Single-service or transactional solutions for a particular HR activity. Multiple HR services as part of a large-scale deal. Transformational deals which radically change the purpose and role of HR.
What HRO is
The increasing focus on HR's contribution to the performance of the wider business has led to more emphasis on cost reduction. HRO has grown out of this debate - from re-engineering and cost reduction on the one hand to a potential transformational capacity on the other. HRO is an evolving industry and can be defined as:
The purchasing by an organisation of ongoing HR services from a third-party provider that it would otherwise normally provide for itself.
Three different types of providers are active in the HRO market - pure HRO specialists, business/HR transformation firms and HR process technology suppliers.
HRO is a strategic tool aimed primarily at chief executives. Though organisations may have different strategies and performance models, all will relate in some way to HRO. These can involve the following.
Capability: for any organisation where there is a need to either improve or acquire HR capability. Scale: providing for large organisations with 50,000 or more employees well-delivered HR administration and services - and to justify the return on investment. Technology: for most organisations where technology can be acquired and leveraged through shared services or outsourcing.
While many HRO users can point to improvements in the first two points, evidence is lacking for the impacts on strategic focus and business performance. This is a major problem for the HRO industry.
HRO providers
While HRO providers may seem to offer little that is different between them, differences do occur
The difficulty that HR has in assuming more strategic or value adding roles after implementing HRO. The position of offshoring as it affects HRO decisions and raises emotive issues such as job losses and redeployment . The challenges of trying to manage HR process delivery on a global scale and across different cultures.
The HRO debate ultimately turns on the perceived quality of, and returns from, investments in the HR function. Those organisations under pressure to reduce costs are more likely to consider outsourcing at least part, if not all, of their HR administration.
The future of HR
HR itself is also locked in a debate over its future. Though some organisations have evidence that the function is an integral part of its capability to deliver business success, many view HR as
over-resourced inefficient vulnerable to the cost reduction possibilities of HRO.
HR outsourcing raises questions over HRs future skills, capabilities and career paths. Its developments are creating pressures for practitioners to shift from being reactive and administrative problem-solvers to more proactive, value-driven business partners.
Shared services
Research revealed much discussion about the definitions and position of shared services. For our purposes, it is defined as
the transfer or insourcing of HR services and their resources to a separate unit within the business and often with a separate P&L system.
Shared services is often adopted by organisations who are against outsourcing as a matter of principle - but still seek some of the transformational and streamlining advantages connected with outsourcing. Alternatively, some organisations use shared services as a halfway house to prepare the
level of the organisation, its employees, systems and at intangible levels. Strategic governance: evaluating the management of performance - including the decision rights, rules and agreed management processes defined with and before providers are engaged.
Guidelines are offered for HR practitioners, third party providers and HRO advisers. In addition, CRF's position on HR outsourcing is explained to help members come to an informed view of a crucial topic. This is supported by recommendations.
2.1
Context of outsourcing
When all is said and done, more has been said about outsourcing than done. Nowhere has the debate been as intense as in the HR functions of major global organisations. Unlike what many commentators might suggest - particularly those outside HR - the back office functions in these organisations do not amount to small beer.
Some three trillion dollars is the latest estimate of the value of a back office by Xchanging, a leading player in the HRO market. There are good reasons for this huge figure organisations are intensifying their investments in human capital management.
outsourcing various technology-intensive HR services such as pensions and payroll to large-scale third party providers to the more centralised yet devolved in-house alternative of shared services.
Despite a massive growth in the human capital management and measurement industry, the debate over outsourcing the HR function has largely taken place outside the HR profession. In part, this reflects
the failure of HR to engage with a strategic vision to transform itself, which is also threatening to some functions consulting houses choosing to take their outsourcing solutions and bids over the heads of HR directors to chief executives, chief operating officers or finance directors.
HR outsourcing is far from a passing fad. According to the latest available data from the Everest Research Institute, an advisory consultancy, some 2.75 million HR staff are currently under the direct operation of an HRO deal. And, the numbers are projected to rise dramatically.1
2.2
Evolution of outsourcing
Outsourcing has moved on substantially since 1989 when the concept was first uttered by Eastman Kodak's CEO. He announced the outsourcing of the company's computer operations as "lock, stock and mainframe, and farming them out". BP followed, stretching the concept of IT outsourcing into its financial services by transferring accounting and settlement processing for off-shore oil rigs to the then Andersen Consulting.
Claims and counter-claims now occur regularly between the HR and consulting professions as both sides attempt to fix in the minds of their paymasters the justification for their strategic alternatives. The choice for HR has been a grudging one along a continuum from
Consulting houses realised the potential of integrating the specific skills of re-engineering business processes with IT. By unbundling or scaling transactional processes in business activities, labourintensive or 'back office' administrative tasks could be executed through sophisticated software systems written by IT experts working in firms such as Accenture, CSC, EDS, IBM, etc. These developments led to the emergence of business process outsourcing (BPO) - and, by the turn of this century, BPO had become a $119 billion market.2 See the box below. According to its providers,
BPO is now radically improving business capabilities crucial to an organisation's success factors business leaders appear to be in agreement current data from TPI estimate that contracts awarded in 2004 alone amounted to a record annual high of 58 billion euros.3
outsourcing and BPO that the industry has rebranded itself as the 'global processes delivery' industry.
2.3
Emergence of HR outsourcing
The outsourcing of HR processes emerged in the late 1990s, pioneered by firms specialising primarily in IT outsourcing - although not exclusively - in the US such as ACS, EDS and Accenture. Many transactional HR processes are outsourced and are increasingly associated with electronic delivery - or 'e-HR'. Much day-to-day HR administration can now be transferred to third party providers. Payroll and benefits is widely outsourced with organisations benefiting from economies of scale and powerful Enterprise Resource Planning (ERP) solutions. Competition among HRO providers has dramatically reduced prices. Other advantages for clients include
cost reductions service improvements upgrading technology being better able to respond to business change.
These achievements have been made despite a highly circumspect position adopted by the media, which sees outsourcing and offshoring as an opportunity for large organisations to offload record numbers of workers. Such have been the negative perceptions of
BPO has been applied to many transactional processes that can be easily defined or 'scaled' and transferred to third party ownership with deeper expertise than themselves. Until recently, the management of IT systems has been the major element of the outsourcing market. An ongoing debate concerns which business processes are 'core' to organisations - in the sense of core competencies that drive competitive advantage. Any non-core - or peripheral - activities are outsourced. c
The choice for HR is whether to use comprehensive outsourcing when many HR processes are 'bundled' and managed by a third party - or whether to take a more 'silo' approach. Here, specific HR activities are outsourced to suit both function and business needs. Each option has advantages and disadvantages.
'Transformational' deals in which HR's role is significantly changed and leveraged using technologies and approaches that drive enterpriselevel performance.
The main HRO value proposition is simply to provide enhanced value HR services at a lower cost - without sacrificing speed, quality and service.
HRO terminology
It is not uncommon to find HRO being referred to as outsourcing, offshoring, BPO, BTO, nearshoring or onshoring all in the same conversation! This point alone requires that HRO is more carefully defined. An all-embracing definition of HRO is difficult but for the purposes of this report, we define it as:
The purchasing by an organisation of ongoing HR services from a third-party provider that it would otherwise normally provide for itself.
This definition can become complex because different HR processes or services are involved, such as those shown in the box on Page 4. A whole new lexicon and common vernacular is emerging within the HRO industry - in addition to what is already a complex business model. The table here provides an overview of key terms and services.
2.4
ACS
Full HRO contracts with GM Europe, Goodyear (North America) and Motorola. Claims 'HR is our core business.'
ADP
Less forthcoming about clients, but do have 190,000 employees under their comprehensive outsourcing solution and 590,000 clients worldwide. Major transactional contracts with impressive list of clients including AT&T, American Express, JP Morgan, Abbott Laboratories and Motorola.
Aon HRO
ARINSO
Claims to build more HR value at a lower cost, incorporating speed, quality and service. Primarily a transactional player. Nimble and focused.
Partners with other providers to deliver solutions. Less forthcoming about HRO clients.
Convergys
Offers increased agilty to HR functions through its solutions. Claims 'a unique combination of people, capability, scale and specialised knowledge.'
The world's largest HRO deal signed with Dupont in November 2005 with a total client value of $1.1.billion. Covers 30 countries and 18 languages. Expanding. Major player in ITO market place with major public sector contracts. Key player in armed forces. HRO contracts with CIBC, BP and BBC. Application of IT to HR major strength. HRO contracts with ABB, Agilent, Bank of America, Fleet Bank, GM and IBM. A major IT-enabler of HRO. e
Excellerate HRO
Partnership between EDS and Towers Perrin. Claims to be 'the world's most experienced outsourcing services company.' 'Knows technology and HR processes better than anyone else in the industry' Major ITO player seeking to leverage major economies of scale. Whole raft of innovative eenabled HRIS. Business model based on a true, multi-client approach. c Only pure play HRO specialist boosted by acquisition of Exult in 2002, the world's first major HRO player. Claims to be the HR expert and has 2,300 HR consulting engagements
Fidelity
Hewitt
Market Number 1 with 37% HRO market share. Over 300 HRO clients including BP, Credit Suisse, GSK, Marriott, Prudential and Safeway.
IBM
Major player in ITO but less so in HRO although clear strategy to move into HRO transformation market with its BTO and On Demand offerings. Covers whole spectrum of HR services with Abridged from TPI impressive research and consulting. Major ITO consultants now moving into e-enabled e Value Proposition HRO space. Not a significant HRO player although Accenture HR Services recent manoeuvres (white papers, for example) suggest a strategy to expand in this area. Wrongly perceived omain.' Number 2 in HROin fact 'not in the public d as HRO pure play when also a major player in the financial services market. outsourcing space. Pioneers of the transformational aspects of outsourcing to bring about radical ACS improvement through its Xcellence methodology.
LogicaCMG Provider
Major bableofficenlock capabilities withR to transform Claims ack to u payroll contract of H Metropolitan Police Authority. workforce performance, deliver strategic business value and reduce costs by 20-40%. Branded as 4 'enabling HR to deliver high performance business.' Major HROplayerBnow ystems - firstGlobal Service f Major ITO with AE S leveraging all-function mega-dealconomy K.f Otherfrom acmajorinclude d Centres. E in the U o scale HRO lients provider. Compass 'Group, LSCs,results for organizations of Provides measurable SAAB, Illium Insurance together with Deutsche Bank and Lloyds. every size.' Full HRO contracts with GM Europe, Goodyear
Xchanging Major contracts in the HR space with BT HRO mega-deal d renewal, although cost savings are
Though HRO providers may seem to have little between them, differences do occur in size, culture, HRO methodology and track record.
2.5
ADP 2% Convergys 4%
IBM
5%
Hewitt 38%
ExHRO 7%
Fidelity 7%
ACS 11%
Accenture 15%
The extent to which HRO has, in the words of Geoffrey Moore, "crossed the chasm"4, and moved from an emergent to a mature business model is a moot point. We return to this below.
Market Share
There are essentially two main players in the HRO market - see the chart above.
Hewitt is the largest provider, having acquired Exult in 2004. How far this dominance is a reflection of the HR community's preference for this provider's sole focus on HRO is unclear. Hewitt themselves certainly see this as a key business driver. Next is Accenture, combining its IT and consulting expertise in outsourcing. Along with Accenture HR BPO Services, the firm might also be described as an HRO 'pure play' - although a greater share of its overall outsourcing portfolio comprises BPO and ITO contracts outside HRO.
Market Spend
There is some debate over the extent to which demand for HRO has been supply-driven. While this issue is discussed later, we conclude here that the growth of HRO has undoubtedly been strong - as shown by the figures for Annualised HRO Spend opposite.
In part, these data on market share hide more subtle differences in the scope of the HRO market and the position of different providers. These differences are revealed in the
2.6
HRO methodology
Based on the business methodologies and
models of providers, the HRO market can be split into three categories.
Pure Plays: only one major firm fits this category the market leader, Hewitt, who focus solely on HR markets. Whether their market leadership is a cause or effect of this 'pure play strategy is a matter of debate. Transformationalists: key players here are Accenture, IBM and Xchanging who all offer a change model based on business transformation outsourcing (BTO). This combines sophisticated technology platforms with complex HR change initiatives. Technology Enablers: traditional ITO providers with major market share are now rolling out technology-enabled HR processing products on a massive scale. Key players in this market are ACS, ADP and EDS - the latter via its new brand, Excellerate HRO.
The primary justification for these different approaches is this business rationale - that the more efficient and effective use of financial resources to improve HR performance will, in turn, enable HR to drive better performance across the organisation.
970
622
3.1
HRO hysteria
It is ironic that the majority of the 18 million employees served at least once a month by HRO market leader Hewitt - whether by pay cheque, expense claim, car lease scheme or pension - are probably entirely unaware they are being serviced by the outsourcing industry. They might be among the nine out of ten who typically say they are satisfied with these services - in marked contrast to the media claims of universal dissatisfaction with the conventional HR function in most organisations. As examples:
Keith Hammond headed his now infamous Fast Company Magazine article, 'Why We Love to Hate HR'.5 Before long, he will, perhaps, write 'Why We Love to Hate Outsourcing'. a 2005 article in HRO Today magazine concluded that the three most frightening letters in the English language, next to WMD, were BPO.6 People Management rarely wastes an opportunity to throw mud at the HRO industry. The most bizarre story yet in 2005 claimed the global spread of MRSA disease might be attributed to increased labour movements associated with offshoring and nearshoring - not a word was printed about the potential impacts from the meteoric rise of the cheap airlines industry!
Despite the fact that not all HR functions follow Ulrich's original model - and that part of this remains unworkable - these developments below suggest that HR has responded to Ulrichs criticisms.
Certain types or 'architectures' of HR are claimed to release high value adding practices - enabling people and organisations to improve performance. A vast amount of published research - Ulrich's The HR Scorecard with colleagues Mark Huselid and Brian Becker, for example - has identified some key attributes of a high-performing HR architecture. This architecture, combined with employee engagement practices, helps HR to unlock latent potential in their organisations. HR can deploy itself in a more strategic and consultative role through the business partner concept - advising executives on how to align people strategy with business strategy, among other things. The belief that dispensing with HR activities and allowing a third party to look after your 'most important asset' - employees - is viewed by the HR profession as effectively abdicating the responsibilities of being a good employer. Not all business leaders agree.
Love it or hate it, HR outsourcing conjures up emotions - and none more so than in the HR community as HRO fuels the debate about what HR should do and deliver.
3.2
10
Underpinning these developments is the claim that improved HR leads to improved organisational performance. However, the causal linkages from HR deliverables can be so far downstream that connections between HR and organisational performance have not been clearly established.
branch, corporate and business banking. So you end up having a high business partner to business ratio - simply because of having to understand the key differences, and to some extent, the sheer geographical scale with 2,000 retail outlets. If you're not careful you stretch people too far. In a business that is quite uniform, like the Royal Mail, although their business units are hugely diverse geographically, what they actually do in a geography is very similar. A postman leaving a depot in Glasgow is the same as a postman leaving a depot and delivering in Birmingham. In selling retail financial services there is more of a difference. You have to reflect the [market] you are in.
Critiques of HR
This lack of an established and measurable causal link between HR and organisational performance has led to several critiques being targeted at HR. One head of shared services in financial services pointed to the problems of ratios as indicators of quality - and some of the deeper issues behind the business case for reducing headcount.
If you've outsourced shared services, 1:300 is doable, so long as you're not a hugely diverse organisation. The problem we had was that strategic drivers - such as credit cards and the mortgage business - were quite different from the retail financial
The HR Curve
High Overall HR Strategy In-Business HR B Labor Relations Strategy Compensation and Benefit Policy/Design Strategic Workforce Planning and Analysis HR Policy Laboor Relations Vendor Management Change Management Consulting Corporate Learning Management Governance Integrated Disability Case Management Services International Service Personnel Administration Recruitment, Assessment and Selection Training Administration Policy Inquiries and Resolution Relocation Services Benefits Administration Job Posting Professional Employment Changes and Advisory Payroll Employment Services Benefits Sign-up u Services Form Submission Employee Record Keeping HRIS Transaction Services High Source: http://www.tpi.net/solutions/hr.aspx Complexity of Interaction Low
Low
Value Added
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of their HR administration. This approach appears to be already wellembedded in larger organisations. Recent research from IDC suggests that 90% of the Fortune 1000 and FTSE 100 organisations have outsourced certain service lines of HR.8 The thinking here is straightforward. Outsourcing the administrative tasks of the HR function - payroll, pensions administration, some aspects of recruitment, and so on - releases crucial resources. It also enables these to be used for more strategic - and what is perceived to be more value adding - activities, which may or may not be located in HR. This also raises important questions over the future of the HR profession. Career trajectories are becoming increasingly blurred, as HR practitioners find themselves expected to shift from being reactive and administrative problemsolvers to become more proactive, value-based business partners. According to Emily Lawson and Jens MuellerOerlinghausen in The McKinsey Quarterly, 2005, Number 2.
"European companies appear to be struggling to find HR professionals with the right mix of skills to support business unit managers. A survey of HR directors at
There is considerable downward pressure on the typical cost of HR per employee - estimated by analysts to be in the region of $1,000 per FTE. A debate now concerns the costs of those activities described as administrative or transactional, and where they are located. See the diagram below, Locating Value in the HR Function. Most of what HR does - and its corresponding budget - tends to be low value process activities and their management. Those activities adding the greatest value are believed to be associated with strategy formulation which, in turn, are relatively inexpensive.
Administration Data collection, control processing, reporting, enquiries, third parties, filing, legal maintenance and IS
50%
$ 540
$ 1,200
Source: ADP
12
20 UK-based global corporations found that core HR services, such as employee data management and recruiting, are often poorly executed. The troubling gulf between the needs of the business and the ability of HR to respond, will force many companies to rethink their approach to the recruitment, training and development of HR employees."
pale into insignificance when compared to the heady days of the 1990s - then, 3,100 layoffs in the US took place daily with over 650,000 jobs lost annually.10
3.3
Offshoring myths
It is worth dealing with the three major myths of offshoring in this discussion of HRO issues. First, the myth that offshoring is outsourcing.
Offshoring is not outsourcing per se, but is based on the economic theory of labour arbitrage defined as the completion of the same task in a different location where the costs are significantly cheaper. Offshoring may involve transferring jobs to locations such as India, China, South Africa or the Philippines. But it also includes nearshoring with jobs in countries such as Poland. The UK government has sought to benefit from a 'domestic' labour arbitrage where jobs located in London are being redeployed to other regions such as Manchester and Bristol in the wake of the Gershon Report. Another HRO example is the BBC's recent announcement that it is transferring a number of jobs to Capita's HR centre in Belfast.
One experienced head of shared services, talking about a previous post at a bank, suggested the debate over offshoring could be spun whichever way people want to spin it:
"We had a serious problem finding people to take over from others and deal with complex queries. Some are in favour and some are against, and both tell you stories which confirm their prejudices. The real question about offshoring for me is this - if you have a process so simple that you can do it in India with little training, why didn't you just automate the process in the first place?"
Readers wishing to familiarise themselves with these issues would be well served by Vashistha and Vashistha's The Offshore Nation: Tata McGraw Hill, 2005.
3.4
13
Shared services is often deployed by organisations which are against outsourcing as a matter of principle - but seek to gain some of its transformational and streamlining advantages. Alternatively, some use the model as a halfway house in order to prepare the specific lines of HR they intend to outsource. Definitions of shared services, 'insourcing', 'captives', etc, are numerous, but for our purposes we define it as follows.
Shared services is a strategic tool using some of the benefits of outsourcing through the transfer or insourcing of HR services and their resources to a separate unit within the business - and often with a separate P&L system.
with HRO. While the shared services model of insourcing is seen as internal and consequently more palatable to employees and the HR media, it still involves many of the costreducing features of the outsourcing model and its potential pitfalls. Not only do organisations risk losing crucial tacit knowledge, but they also let a third party provider mop up their low-hanging fruit - the quick wins or cost reductions associated with relocating staff, streamlining and the reengineering of HR processes. See the box below.
In addition to the centralisation of HR services are these features that mirror some of the characteristics of HRO.
The 'user is the chooser', meaning that actual services and delivery methods may not be corporately determined but are shaped by customer requirements - managers and employees. Despite the customer-driven language of shared services, many analysts and organisations see it as a driver for cost-cutting. The elimination of services duplication represents one of the largest cost reductions delivered by shared services. Like outsourcing, shared services also involves dramatic headcount reductions as centralised services remove the requirement of individuals being close to the business lines they serve. Some see shared services as the first stage of a step-change model in which HR is insourced to a shared services centre in order to dramatically reengineer and quantify 'as is' processes and costs before outsourcing to a third party provider. Shared services can even be combined with outsourcing. Transactional services such as payroll and pensions are outsourced to a third party, with other HR services - perceived to be of higher value or more sensitive - remaining captive in internallyowned shared services.
Deciding on whether the organisation adopts HR shared services clearly made an impression on a number of respondents. For Luis Rojas, chief operating officer at Standard Chartered Bank, it was a case of capitalising on the wider business strategy.
"Different strategies work for different companies and insourcing was the right one for us. We have been operating in India for over 100 years so it doesn't seem foreign. Also, insourcing in HR was part of Standard Chartered's bigger plan. Right now, we have a global shared services centre in Chennai with 4,000 people, 300 of whom are in HR. So it's a distinct compound within a bigger unit and we leverage the same principles behind a global shared services centre."
Shared services, therefore, clearly incorporates many of the operational changes associated
14
3.5
enterprise-level change."13
This is arguably an unfair caricature of others' offerings, clearly highlighting one of the major downsides of the HRO market - namely, the marketing activities of the consulting houses involved, which border on propaganda. Rather than taking Linder's word, a quick view of IBM's own materials reveals that they too have a similar product. See the box.
A definition of what transformation actually is in HRO is problematic. In her book, Outsourcing for Radical Change, Accenture's Jane Linder refers to 'transformational outsourcing' as "big change, fast". She also provides a more formal definition.
Using outsourcing to achieve a rapid, sustainable, step-change improvement in enterprise-level performance.12
Linder is quick to warn off competing providers who also claim their services are transformational. She adopts a strong stance, worth quoting in its entirety.
"Transformational outsourcing has gained some currency. As a result, many outsourcing vendors are touting their work as transformational. In most cases, it is not. And this media hype just confuses executives about exactly what the concept means and how it works. "Just put the words transformational outsourcing into an Internet search engine, and you'll find that Compaq, Cognizant, Schlumberger, IBM global services, Alltel, Collaboratech, Cap Gemini Ernst & Young and others all claim they can transform their clients' businesses through outsourcing by implementing new technologies. "This isn't it. Transformational outsourcing often requires new technologies to be implemented, but the defining factor isn't the new technology. It is the purposeful use of outsourcing to achieve dramatic
15
"I don't think our contract was their number one concern. It was their approach and dealings with us in an holistic way. The way they approach it and the people you meet during the process carries much weight. They had a strong team, and where we thought there might be problems, they did what was necessary to get the A-team on board.
produced from the alignment of people, processes and technology - in line with the clients service requirements. A possible reason for a higher likelihood of success in major BTO projects may lie with the extensive senior executive sponsorship expected by providers. BTO is presented as the direct result of top-level leadership in which CEOs take hands-on roles in guiding the change programme. Real life case studies are often provided in which CEOs either
adopt a hands-on role and drive BTO projects to success or serve as examples of project failure, when they delegate their responsibilities to a lower-level manager with catastrophic results.
There is supposed to be an increased chance of in organisational transformation, achieved partly through third party expertise. This enables a BTO client to realise major economies of scale and comparative advantage in a particular process (in this case, HR) by leveraging superior provider capabilities. These enhance the client's own core capabilities.
success
BTO deals are also financially highly innovative. They have to be. Significant levels of investment are required to underwrite BTO projects, thus raising the level of input - both financially and emotionally - for the success of transformation. See the box opposite. BTO differs from conventional HRO in its tackling of business critical processes. The logic here suggests that a highly skilled and motivated business partner can drive through improvements more effectively than the client. Speed is of the essence. Delaying transformation programmes while deciding what to keep and what to shift, not only precludes accelerated performance but also places at risk the entire strategic agenda. With a focus on results has come a greater
BTO also provides instant financial and operating gratification through accelerated 'time to benefits' or 'speed to value' of HRO interventions. This is mainly because BTO offers large-scale transformation at rapid rates of implementation, supported by expertise in radical change management. Consequently, BTO requires a 'bold agenda'. Without this, BTO providers claim business leaders have little chance of realising the groundbreaking changes they seek. They need to think outside the box. Exactly how this service differs from conventional outsourcing is less clear. One possible point of delineation between HRO and BTO lies in the provider sharing the risks of the transformation. They are held accountable under contract for the expected business results
emphasis on transparency and improved control. Service expectations have increased, requiring tighter contractual obligations for BTO providers. More transparency has been achieved simply through BTO's capacity to provide enhanced timeliness and accuracy in executive reporting, which leads to stronger contractual compliance.
Arguably, the most contentious claim of BTO is its capacity to transform the culture and
16
achieved though a change in mindset from a bureaucratic, 'back office' mentality to what has been labelled a 'front of office mindset'. This is usually associated with BTO providers whose core business is providing a specialised service in the HR area. A more entrepreneurial and business-focused mindset is claimed to prevail. It is this profound change that is the driving force behind enterprise transformation. Finally, the pice de rsistance of BTO is its unashamed focus on enterprise level results.
Conventional HRO is viewed as offering nothing more than respectable improvements in the costs, service levels and support capabilities of HR systems. BTO, claim providers, places unrelenting emphasis on outcomes that shareholders and competitors can see. Examples often promised include a doubling of profits or the achievement of market dominance.
Paul Knowles, of Siemens Business Services, made exactly this point by illustrating how one of the major BTO providers sought to do this but failed. For Knowles, this model - or what some, such as Cohen & Young, refer to as Multisourcing - has yet to take off in HRO. The main problem is what Knowles labels as 'silos'. See the box overleaf. Consequently, BTO has not, as previously claimed by Michel Janssen of Everest, "crossed the chasm from innovative business deal to pragmatic inevitability". BTO, at least in HR terms, has yet to reach a tipping point. There are rejoinders to this observation. Major
deals appear to be back on the horizon. The recent announcement by DuPont of its $1.1 billion HR outsourcing contract with Convergys is an example - see the case study in Section 10. So too, claim BTO advocates, is the recent renewal of the landmark BTO deal between BT and Accenture - see Section 10. The BBC has also recently outsourced the majority of its HR services to Capita.
3.6
Criticisms of BTO
For all the noise made on account of BTO, little supporting evidence has found its way into the public domain. Although the concept is relatively new, this has not precluded a number of providers claiming deep, long-standing expertise. The jury is still out, deliberating on the results of the major BTO deals. This lack of certainty can
These deals are all the more compelling, claims Marc Pramuk of the Outsourcing Institute, because buyers appear to have become smarter. Also, the spotlight of BTO deals has shifted from total cost of ownership to total cost to serve which takes into account all the hidden HR costs
17
much emphasis is placed on cost and headcount reductions - leaving many in HR to question where the HR expertise in BTO is? Such HR transformation is often described in
dramatic cost reduction terms or vast improvements in the number of training days delivered or the reduction of days to fill vacant posts, etc.
These cost and volume metrics highlight the rhetoric underpinning BTO, along with the headline performance of the organisation itself.
"Payroll and pensions are probably the areas that have been most successful in outsourcing because they're regulatory driven, there are clear standards associated with them and there are generic delivery models. Therefore, you can standardise the back office against some form of regulatory framework. "When you look to outsource processes that relate more to the culture of the organisation - how you recruit, how you train, what sort of terms and conditions you offer, whether you offer flexible benefits, career breaks, maternity leave, etc - the ability to standardise the back office for more than one client becomes more complex because you don't have a standardised process. The customer is also concerned that their image, or relationship with their client and their employees, will be damaged if they don't have the ability to flex it to suit their circumstances. "Consequently, most of the big outsourcers will look to sell the idea of 'back office standardisation and front office customisation'. They will claim they can look after you, run your processes, and adapt them so they will not be seen as X Provider but Y Company Service, and so on. That means you end up with a dedicated centre for that client. "And if you consider the market, there are few HR BPO providers able to demonstrate multiple client service from one centre across multiple silos. You can have a payroll or recruitment centre for multiple clients, but as for general HR administration across the disciplines, I can't think of any large-scale provider that provides the administration for two or three clients through one centre. s "They can handle the volume. So they take on a Proctor & Gamble, or a DuPont. But could you put Proctor & Gamble and DuPont in the same service? Nobody has yet done that, in my opinion. Being flexible with different customers across different silos is problematic. In the future, I can see the bigger outsourcers servicing payroll or pensions from one centre. But, general administrative centres will remain specific to the client.' Paul Knowles, General Manager, HR BPO & Transformation Services, Siemens Business Services
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their functions. While perhaps the greater risk is to do nothing, HR directors need to appreciate both the direct and knock-on effects of HRO. Neil McEwen, in an article for HRO Europe Magazine, cites three risks that were especially prevalent during the early days of HRO.
Initial claims for potential cost reduction and improved effectiveness were sometimes exaggerated or unrealistic - leading to disappointment when they were not delivered. People often failed to appreciate the effort required to make HRO work - given that it affects all employees served by HR and has a huge impact on the HR community. Some companies thought that, by outsourcing an organisational mess, they could make it someone else's problem. However, this would boomerang back to them when the HRO supplier experienced the same intractable issues.
Thats because few, if any, current BTO metrics demonstrate how the quality of HR processes the content of training or the quality of people hired, for example - have improved. Or, whether they have delivered overall value to the business. Critics of BTO claim that too much has to be taken on trust. Said one respondent.
"I have never yet found an organisation - and HRO is no exception - that is good at tracking performance. You ask them, 'Two years ago you made a commitment to make this money. Have you made it yet?' They always seem to live in the current year and may look back at the year's budget. But, providers are not good at looking at year-on-year and breaking it down to a divisional level. You have to be specific about it in the contract."
Now, the HR director faces other potentially riskcreating issues - even if the three above may no longer apply.
HRO inevitably involves a loss of direct control over a number of HR activities. HRO will only succeed if the 'left-behind' organisation within the business is also transformed. Different people with different skills doing different things will be needed to support the outsourced transactional piece, to influence and educate the business and to contribute to corporate strategy.
Finally, the theory of partnership has not necessarily stacked up in practice. According to Xchanging's chief executive of HR services, Hugh Morris,
"It's all about trying to avoid having one year of love followed by four years of trench warfare.
HR professionals remain highly circumspect of the capacity of governance to maintain the close working relationships required within a BTO project.
3.7
McEwen notes that such risks are by no means insurmountable, given the right approach, controls and safeguards. He identified five key areas on which an HR director should focus during the deal negotiations and after HRO transition and operation.
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Measurement and metrics: for service levels with 'fit for purpose' metrics. Service management organisation: actively and continuously managing the relationship and contract with the provider. Behavioural change: recognising the scale of change required in employee behaviour for the HRO benefits to be realised - supported by communication and training programmes. Remain realistic: do not make overblown estimates for HRO - and don't promise anything that you cannot deliver.
McEwen's final area of focus is to understand that HRO is a major change both for HR and the organisation as a whole. Even if the drive for outsourcing is primarily initiated by the CEO, the HR director needs to stay actively involved, demonstrating ownership and leadership throughout. Don't let delegation turn into abdication, he cautioned. McEwen, N - The Fab Five HRO Risks and Responses: HRO Europe Magazine, May 2005.
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4.1
For reasons that are not entirely clear, discussion over these attributes often takes place in reverse - with costs to the fore. One respondent, who wished to remain anonymous, neatly summed up this peculiarity of the HRO industry.
"I saw some research recently that had 'reduced costs' down at third or fourth place. That's rubbish. It's always at the top of the list. If anybody tells you differently, they're not telling you the real driver behind their decision to outsource."
Secondly, where HRO differs from conventional business process re-engineering is in the
transfer of control to the vendor for the management of HR as well as its execution. As
Jim Champy, co-author of Re-engineering the Corporation puts it: "Outsourcing is more than throwing work over a wall". Consequently:
major efficiencies can occur from the management of HRO operations and performance, a combination of which is estimated to be in the region of 90% of total HR costs such efficiencies occur when the HRO provider combines standardisation and business transaction prices through one-to-many and many-to-many economies of scale, brought about by the dynamics of the HRO market for services.
4.2
Thirdly, good governance of HRO projects. This is described by Linda Cohen and Allie Young in Multisourcing as
'the assignment of rights and responsibilities for all decisions relating to the use and management of internally and externally provided resources and services, enables enhanced focus on the costs of services'.
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4.3
Increased HR effectiveness
HRO providers readily point to their capability for transforming the operational effectiveness of clients' HR systems, as well as reducing their costs. Indeed, many providers see effectiveness and efficiency as two sides of the same transformational coin. A number of operational improvements can be derived from HRO. First, HR functions and systems evolve over time for increased effectiveness. With evolution comes increased demands, leading to these possibilities from HRO.
Not all HR functions have the requisite skills for their organisation's needs. Using HRO is a way of sourcing scarce skills - the almost universal outsourcing in the US of 401(k) retirement plans is an example. Similarly, not all HR functions and their organisations are either capable of, or willing to meet the costs of, sustaining the technological architectures required for HR administration, such as SAP, ERP, etc. For example, the HRO deal between BAE Systems and Xchanging involved the provider investing 100 million in the client's technology platforms to handle new HR systems. Partnering with HRO providers enables clients to source the latest IT software packages and transfer their costs to providers who, in turn, can deliver these packages cheaper than in-house rates.
Suffice to say that the governance of HRO projects has laid the foundations for service level agreements. Through these, the costs of HR processes become transparent and form targets in contractual agreements. Fourthly, reductions can be realised from the people costs of HR activities - and in streamlining processes such as recruitment, payroll, training and so on. The main reasons for cost reductions here include the following.
Being able to control people costs gains HR respect and credibility among senior executives and reinforces the legitimacy of HR's seat at the table. Organisations going through mergers and acquisitions and other forms of organic growth continually need to centralise and re-integrate, through their HRO provider, newly-acquired HR functions and systems - costs are reduced by eliminating duplication. Operating in global labour markets requires ongoing evaluation of legislation concerning international employment, usually provided by legal teams - it is now a technical service supplied by many HRO specialists.
Secondly, as HR has evolved, so too has the demand for specialised expertise. As one respondent in a separate survey put it:
"You outsource when someone else can do it better than you, at less cost".14
There is a balance to be made between deciding which expertise to retain and invest in, against whether it should be sourced externally. Such decisions are guided by the following.
HR is becoming an increasingly complex and technical profession requiring specific expertise - as in legal matters, pensions and benefits, etc. Many HRO providers specialise in such advice. Much of the expertise once located in HR has been
22
lost, primarily through downsizing in the 1990s. HRO represents a way of buying back - and keeping up with - this expertise, at minimal cost. Organisations may prefer to hire the services of HRO specialists on an intermittent basis when demand arises - therefore minimising expensive HR recruitment costs. Third party providers are arguably more objective than internal staff when conducting, for example, senior management evaluations.
4.4
Thirdly, time pressures are reduced. HRO provides a number of choices, including the following.
Recruitment can be of particular benefit as HR directors often find the demand for new recruits outstrips the time available to recruit them - with HR's operational capacity, therefore, being stretched. Training is another example - providers can supply more customised services which may be delivered more quickly. Extreme demands for HR services can place considerable pressures on HR functions - HRO offers a viable alternative, as peak demand can be handled more effectively.
The arguments put forward by providers for improved strategic focus are not helped by the complexity of HRO solutions, which require new thinking about the concept, formulation and delivery of HR services. Also, innovations in financial accounting can be used for projected cost reductions and added value from operational synergies. A major claim is HRO's capacity to improve the
Fourthly, vendors not only improve efficiencies but can also deliver enhanced service because they specialise in different activities.
Aligning service requirements with specialist providers improves efficiency and also customer satisfaction. Many HRO providers can deliver world class service in niche areas that significantly improves HR service administration - although the potential consequences of reduced service quality through HRO should be borne in mind.
strategic contribution of HR in relation to improved business performance. HRO is either: a reflection of HR achieving influence in the boardroom by shifting its administrative and contingent management roles to act in a more consultative capacity - see the box below or, conversely, HR is regarded as a drain on valuable
Fifthly, HRO providers can effectively act as agents in negotiations on behalf of their clients the delicate negotiations involved in executive level search, for example. The final operational benefit of HRO is a potential reduction in the costs of liability and risk. For example, capitalising on the shift to providers of liabilities behind the complex issues of international legislation concerning employment across multiple global locations.
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A further problem is the lack of suitable evidence to indicate that HRO can impact on business performance - partly because of the difficulty HR has in assuming a strategic role after implementing HRO, unless it already has this role. According to Luis Rojas of Standard Chartered Bank, HR plays, or should play, a fundamental role in helping the organisation achieve its mission.
"I faced these issues when I announced I was moving into HR. 'Luis, what are you doing? Have you lost your marbles, going into HR?' My response was, 'I'm moving into the most important function of the bank', and they all laughed. For me it's very simple. What drives business performance? It's all about people, right? And who's focused on people? HR! The challenge is finding the linkage [between HRM and performance] and for this you need to move to the next level to understand what's going on."
financial resources - no longer does it represent a necessary evil, but a collection of business processes that need to be outsourced to cheaper alternatives.
Many executives outside HR are between these two sides of the debate. Either way, HRO is the beneficiary, acquiring many back office transactional processes as well as more strategic processes further up the HR value curve. Part of the problem relating to the strategic contribution of HRO lies in establishing what it is after reducing the excesses of administration and transactions. What value adding work remains for HR to focus on? Providers and HR practitioners suggest these areas.
An enhanced strategic focus will help HR better align its function to business strategy - talent and its supporting architecture, for example. Such focus introduces a more sophisticated approach to HR in leveraging third party capabilities to improve operational efficiencies - that may drive both business and revenue performance. HR executives are released from onerous management responsibilities to provide business solutions for employee and customer problems. High-performing organisations routinely have a disproportionate strategic emphasis on what they do best - their core competencies - and outsource less strategic, non-core or 'no-longer core' functions. HR's perceived administrative role increases the likelihood of services being outsourced, which explains why HRO, as a $68 billion industry, is now the largest sub-section of the global services market outside IT outsourcing.
Eric Lesser, associate partner with the IBM Institute for Business Value, takes this argument further. He alludes to the capacity of HR outsourcing not just to transform itself and its operating model, but to transform the business model too.
"It's very much a strategic alliance in which the destiny of the business and HR are intertwined. This involves working together with a provider to find the win-win opportunities for the business. It involves rethinking the business model and how, through HR's transformation, you can change it."
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This fit between organisational strategy and insourcing - or the internal business case represents a major challenge to the HRO industry, a point not lost on Stephen Randall at Hewitt.
The balance is shifting. There are more people reaching out and asking us to talk to them about HRO. There are some companies who are genuinely saying that they need to find a better way of doing this, therefore we need to look at outsourcing as a method. Our biggest competitor is the internal business case. We are seeing this more and more. It's not so much us versus IBM or Accenture, but it's more us versus the internal business case. In searching for a more sensible way of doing things organisations look at the internal model as well as the outsourcing model, which is the right thing to do. If you've got the time, talent and money to do this, by all means do it yourself. But most organisations don't have the time, talent or money. The internal case inevitably takes longer and often runs out of steam.
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5.1
Decision-making context
Making the decision whether to outsource or not and who to partner with, is plagued at many stages with possible pitfalls and hazards.
There are masses of information on HRO available from different HR analysts - supplemented by data amounting almost to propaganda from the providers themselves. The situation is further complicated by the growing outsourcing adviser and provider markets. There are many HRO models are on offer. What seem like small differences at the outset may, over the life of a contract, equate to millions of dollars.
Of course, the industry is replete with advice on the 'key decision steps', 'critical pathways' or 'maxims' that 'must' be taken into account if HRO deals are to succeed. Why, then, would HR directors or their CEOs
choose to initiate a major change programme that has the potential to touch or disturb every employee inside the organisation - yet only reduce overall
For HR professionals and CEOs, the choice is mind-boggling. And, this is not all. Leaders face a barrage of marketing and branding campaigns from the 'Big Six' HRO players - its difficult to walk through an airport without seeing a well-known golfer urging you to improve your swing to deliver high performance for your organisation! Such marketing hits leaders where it hurts - their egos. Burning platforms and the compulsion to raise performance quickly or stand down, are well understood, if unspoken, phenomena in leadership circles. The window to deliver on high expectations appears to be dramatically shrinking in time. It is difficult to over-state how tough it is staying at the boardroom table having once reached it. For HR, the challenges appear positively Herculean. The stakes are high - and errors are costly. And, the case for HRO is not helped by the lack of an industry standard as to how a major HRO deal is constructed. In the words of one HRO adviser helping
26
operating costs by around less than half of one per cent? involve themselves in a process shrouded in mystery, without a definitive standard of what an HRO contract should look like?
Not the budget you manage, but the budget you influence
"You have to get the basics right. Take financial management and discipline. You should not discuss budgets without knowing the numbers - that's basic. But you have to have it so you can have that different conversation. If you don't, you're going to be bogged down with questions on your budget, about your forecast and you don't want to do that. You want to demonstrate that you can manage your budget and have a good handle on driving value. "If you think about the budget we have, it's tiny in comparison to the budget that we influence around people and other indirect costs. We don't focus on the budget we control - but on the rest that we influence through adding value. Once you have that, then you start changing the conversations." Luis Rojas, COO HR, Standard
Chartered Bank
The HRO industry is quick to point to the need for every deal to be unique and to reflect client requirements. This has the corollary of creating an image of HRO deals having to be tailormade. No amount of preparation, however extensive, can safeguard outsourcing deals completely. HRO is no different from any other business solution sourced with a third party. Flexibility is not an option, but a given. Below are some experiences of those who have taken this route.
5.2
Thinking strategically
"Being strategic and able to lead, rather than being tactical and following, is a big ask - and is not where most people in HR come from. You either come up to the plate or there's no reason to be there." Nigel
Paine, HRD Director, BBC.
critical. See the typology overleaf which shows how transformation means different things to different businesses. Crucial here is knowing what kind of HR transformation the business is seeking. According to Deborah Kops, former global head of transformation for Deutsche Bank,
"The main reason why organisations don't get transformation is because they don't know what to ask for in the first place."
This is not conveniently side-stepping the responsibility for HRO project failure. Linder argues that leaders need to construct a business model - their core logic for creating value - for HR to demonstrate how HRO will transform the function so it can influence business performance. All too often, HR focuses on the budget it manages and ignores those parts of the business it can dramatically influence. See the box above on this issue. Cost cutting is not a 'strategy' - it is a by-product of HRO deals. But, savings obtained from streamlining people and processes can be reinvested in the business to drive over-arching business models. How the HR function is to be transformed is also
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Enhanced
This type of provision is a major HRO growth area in HR services for SMEs.
3 Standardised
For under-performing organisations in need of re-energising. HRO has a key role in revitalising people, processes and systems. The emphasis is on
streamlining and realigning HR systems - the socalled 'low-hanging fruit' simultaneously conveying the need for culture change and continuous improvement.
The costs of acquiring such systems are minimised by paying a 'price per drink' rate and by keeping the costs of capability and technology to a minimum through leveraging the capacity of the HRO provider's systems, people and expertise.
In such situations, HRO helps improve levels of information and data analytics for decisionmaking.
4 Reflexive
HR Transformation - A Typology
Client Strategy Start-ups u Business Impetus Growth requires more developed HR transactional architecture HR Services Required New HR systems to provide speed, volume and cost-effective roll out for e new capabilities Deeper and wider HR capabilities with continued downward pressure on costs Major impetus on reducing waste, providing improved HR architecture and systems World class capability and execution, matched by speed, volume and efficiency with clear HR value proposition HRO Strategy Embryonic
Growth
Enhanced
Revitalise
Standardised
Transformation
Taking HR to next stage to deliver people strategy to support business strategy and add value
Reflexive
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of critical HR processes and service lines to develop a 'transformed mindset' and focus on HR's value proposition for the business. This is described further in 7.5 below. HRO at a reflexive level occurs through
partnering with a provider of world class capabilities, technology and expertise in HR evidence-based decision-making that enables HR to assume a strategic role transformed HR systems facilitate the delivery of enterprise outcomes the possibility of taking shared services to the next step of outsourcing.
case for the HRO intervention, making clear any cost-savings or windfalls expected - and the anticipated avenues for re-investment within HR and/or across the business. The performance case: keep in mind that HR's future performance will be more important than low HR function headcounts or lower costs.
5.3
In summary, these four types of transformation have fluid boundaries and are not mutually independent - much will depend on the performance of different aspects of the HR system at which HRO is targeted. Indeed, it is not uncommon for organisations to partner with two third party providers. One may deliver more standardisation of processes, with a second providing more reflexive and value adding HR services.
line managers senior management and possibly others - suppliers, for example.
Sourcing their views will help your organisation establish just how good, or otherwise, the HR function is. For many, HRO effectively acts as a truth serum for establishing the benchmark performance or current 'as is' state of HR. The support of stakeholders should not be taken for granted. For example, sponsorship from senior executives is essential for HRO success. Yet, research from the Economist Intelligence Unit suggests that an overwhelming majority of global CEOs think their HR functions are underperforming. This may be construed as evidence for major change interventions. Nevertheless, this source also noted that only 16% of over 500 CEOs felt HR was critical to realising their corporate strategy in the next year - compared to 56% for sales and marketing.15 Employees, too, are key stakeholders in success, as are line managers. An experienced HRO adviser commented:
"Executives are very enthusiastic about the people [stakeholder] issues in HRO strategies until it gets closer to the announcement - and then they begin to soften the strategy."
Managing expectations
A key to developing any HRO strategy or business model is to manage expectations. It is not uncommon to hear of executives keen to ensure a smooth ride for their HRO plans who overstate cost savings or value added. Information vacuums are filled by others' expectations - and thus render a successful HRO strategy delivery a 'failure' because of stakeholders' inflated expectations. Crucial here are four considerations.
HRO objectives: clearly state these and how they are to be achieved and measured. There should be no 'sacred cows'. All aspects of HR should be included until reasons emerge to remove them from the list to outsource. Delivery proposition: identify the critical capabilities required to achieve the HRO strategy and meet stakeholder expectations - while simultaneously rolling out services consistently and profitably. The business case: tightly quantify the business
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Clearly set out your strategy and stick to it. Define the role each stakeholder will play, especially at the top. Think about the HRO implications for all stakeholders. Be transparent about the possible benefits and wider implications of the HRO deal for all stakeholders. Seek the buy-in and input to the HRO strategy from all stakeholders. Roadshows and focus groups are useful approaches to consider.
External benchmarking
If establishing your 'as is' costs is your compass point, externally benchmarking them against other organisations is where 'True North' lies. Without this yardstick, it is virtually impossible to accurately decide whether your current services - be they internal or external - are doing well or poorly.
3 Competitive advantage
Finally, it is crucial to set the key performance indicators that will measure HRO providers against the current in-house HR service offering. Other methods of assessment can be used activity value analysis and activity based costing to map and evaluate different process costs, for example.
A debate in boardrooms and academic circles concerns the competitive advantage lost or gained through HRO. This is effectively the core versus non-core issue - or, as HR is now described in less favourable circles, 'no longer core' debate. Two contrasting points are important.
Outsourcing HR is seen to represent a loss of competitive advantage through investment in largely transactional administration - rather than focusing on those aspects of HR that will deliver such advantage. Talent management and development is an example. Outsourcing is seen as a better deployment of resources. If an HR system is not genuinely world class, an organisation is giving up competitive edge. By outsourcing HR to the best in the world, its value is being increased - while at the same time costs are reduced. 4 Making sense of choices
5.4
Insource or outsource?
As discussed in Section 3, the choice between insourcing and outsourcing can be an emotive one. The decision-making process over whether to keep HR 'captive' - in-house - or outsource some or all HR services requires careful thought. Gartner recommends these four decision stages.16
1 'As is' services
Establishing a baseline of service criteria is essential to guide future choices and decisions. This is not easy - arguably, it is the most difficult and time-consuming part of the decision process. You should evaluate:
Service levels: existing level, service level needed and what the business expects from insourcing and outsourcing. Service cost: 'as is' costs need mapping against expected costs, including any future costs of human capital. Human capital assets: compiling an inventory of the competencies of HR employees. You will need to keep them informed as to why the inventory is taking place, how it will be used and the timelines for decisions. Other assets: these include both physical assets equipment, leases, software licences, etc - and knowledge assets, such as process or industry best practices.
HRO has evolved. When once a simple choice would be made between retaining HR services internally or outsourcing them, different HRO demands, capabilities and models have extended those choices:
Insourcing - internally delivered: this is the classic inhouse HR delivery model without attempts to standardise service delivery across different business units or regions. Insourcing - shared services: an internally-owned company with a different P&L centre offering standardised and centralised HR services to the whole organisation through one or several service centres. Outsourcing - full service: all function lines across HR are offered, with examples being the BAE Systems/Xchanging and BP/Exult/Hewitt deals. There will be a trade-off between economy of scale
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and less complex management versus the scarcity of HRO providers excelling in every aspect of HR and the increased emphasis upon governance. Outsourcing - prime contractor: this model is now widespread across ITO and is an increasing feature of BPO deals in financial services. The option has one prime contractor who has relationships with multiple providers to deliver different HR services. A variation is when the purchasing function negotiates itself with all providers on an individual basis - this gives more control but adds complexity and cost to HRO deals. Outsourcing - joint venture: the creation by two or more partners of a separate business entity by combining their distinctive capabilities. An example is the vertical expertise of Xchanging and BAE Systems' leverage in technology to create Togethr. The e-Peopleserve venture between BT and Accenture is another example.
The choice process: costs involved in arriving at a decision can be prohibitive in opportunity costs alone. Also factored into this should be the costs of external advisers - and, it does not pay to cut corners on advice. Transition costs: these can drive up the costs of contracts and include service interruptions and decreases in quality resulting in underperformance, training and knowledge transfer. Transfer costs: costs are also attached to physical assets (property, leases, etc), people - movements to new centres, for example - or the transfer of contractual arrangements to new providers.
5.5
Weighing up the 'make or buy' decision requires careful thought and, as Linda Cohen and Allie Young of Gartner suggest, exact dollar figures are not crucial at this stage. HR directors and colleagues need to consider the following.
Full costs: the dangers here are failing to recognise the requirements of investment, the time involved in standardisation and the additional costs of choices these hidden costs can erode expected cost savings. Governance costs: managing the client-provider relationship drives up costs significantly - this is discussed further in Section 7.
5.6
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which is one reason why most providers bypass HR in favour of chief executives or finance directors. This is far from satisfactory.
HR professionals must immerse themselves in such financial matters - see the table below for guidance. This will lead to a more informed grasp of the resources required to deliver HRO services and value propositions in relation to the business model. It also raises the credibility of HR directors and colleagues among senior executives.
% Market 36 20 20 8 4 4 8
One HR executive in a separate survey noted, "We gain credibility with senior management when we demonstrate we can manage budget and headcount".17 This point was alluded to by more than one of the HR directors we spoke to. Two sets of costs need considering when devising the HRO business case.
Costs of options: publicly-available costs on other contracts are unreliable because they are subject to financial engineering - consider buying-in consulting support at this stage, although this too, needs to be reflected in your calculations. Cash flow and variable costs: HRO offers
particularly flexible options regarding cash flow and variable costs - shifting the costs of obtaining services from fixed to variable, enables organisations to buy more (or fewer) services, if and when required.
All key choices and decisions can be made with support from a specialist HRO advisory firm. The main ones, with their market share, are listed above. They offer four capabilities.
Depth of subject expertise: expertise in outsourcing is a given. Less clear are the HRO credentials of firms. Equaterra, Nelson Hall and TPI all offer extensive experience in HR. The HR Outsourcing Association (HROA) and its sister organisation, the Shared Services and Business Process Outsourcing Association (SBPOA) have extensive experience, data and educational offerings. Experience: not all HRO deals are the same. Consequently, the best choice is an advisory firm with experience of different clients. They should also understand variations between the value strategies and propositions offered by different providers and their outsourcing methods. Deloitte, McKinsey, AT Kearney, Towers Perrin, Watson Wyatt, Accenture and IBM are examples. Research and market data: a major attraction of HRO advisors is their provision of benchmarking services for costs, quality and complexity. Nelson Hall, Gartner, TPI and Equaterra have extensive datasets - as do Hackett and Morgan & Chambers. Global familiarity: advisers should be able to deal with particular geographies and should understand the global nature of HRO, along with its associated management processes. Equaterra, Everest Consulting and TPI are good examples.
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6.1
6.2
View employee anxiety as a given: it is inevitable that some employees will lose their jobs, others will see their work change beyond recognition and some will be relocated. End-users of HR - other employees and their line managers - may experience major changes in their method of working due to structural and process changes in HR. Clear people plans: such anxieties need to be efficiently planned for and dealt with. People will respond to HRO announcements or rumours by asking, "What does this mean for me?" Answers need to be in place. All people implications, such as redundancies, pensions, relocation packages, Transfer of Undertakings Protection of Employment (TUPE) conditions and career progression must be planned carefully before the announcement of an HRO deal.
Horror stories abound in which employees have been outsourced with just one year to run before triggering their pensions - and companies not being ready with answers as to how such issues should be dealt with. If you drop this ball, employees will not forgive you.
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clearly stated criteria when they are made widely available. Consider these key questions. How many posts can you fill with the people you have? Will they require additional training? What kinds, by whom and at what cost? What is the timescale for selection and induction?
Andrew Kris of the Shared Services and Business Process Outsourcing Association (SBPOA), comments on the issues facing HRO transition.
"Change requires real HR leadership and the ability to implement strategy. It calls for the total support of executive management, employee buy-in, sound technology, solid governance and education. Education? Yes. HR transformation and operating in this new environment demands new skills. A lack of skills in HR is the biggest hurdle to HR transformation and these must be re-learned."
Source: Morgan & Chambers, Outsourcing in the FTSE 100: The Definitive Study: Episode Two: Impact on Financial Performance.
need not always be adversarial - although it often is if unions are invited for discussions at the earliest stage possible. Your community may have more than just a passing interest. Offshoring in particular has become a major issue in the US - attracting the attention of politicians and the media in particular. Plans need to be in place to announce HRO arrangements and to cover issues regarding the offshoring of any related posts. Investors also require clear messages of the strategic intent of HRO deals - and particularly the financial implications. While there is evidence to suggest stock markets like outsourcing - see the box above it is also often a prescription offered by the business media for ailing companies. Note that customers react badly to negative messages of companies they do business with.
6.3
6.4
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from the HRO provider. Testing and phasing will be needed to ensure the technology works before roll out of new HR systems. Many HRO providers and advisers recommend transferring old systems and then transforming them - rather than installing new systems immediately. Fix a timescale and stick to it. Training staff: there are many useful forms, including work shadowing and 'buddying' between previously transferred workers and new movers. This helps people to quickly adapt to their roles and understand where the new service - and their own prospects - are heading. End-users also need training support, particularly line managers who will have to use the new systems.
It is worth highlighting the inevitable emotional factors behind staff moves. These require careful management. Marketing literature from some HRO providers hints at how work-life will be better than with their previous employer. Indeed, data are often used to indicate how salaries of transferred staff increase at faster rates than those left behind, especially in public sector organisations were it can be as much as 25%. But a note of caution. Many employees trade-off higher salaries for the job security of the public sector - the very thing they can lose if they transfer to a new employer. Emotions run high during transitions.
Stories of anger, bitterness and frustration. Individuals have to leave geographic areas and see colleagues being made redundant.
They also have to adapt to new working conditions and feed their tacit knowledge into the vendor's systems that have been installed to reduce the consequences of staff having to leave. With HRO, it's emotional!
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7.1
Added to these points are end-user concerns revealed by Deloitte Consulting's benchmark study of 2005, Calling a Change in the Outsourcing Market: The Reality of the World's Largest Organisations. It analysed so-called 'problem HRO deals' and found that 'customers' in these generally had been poorly serviced. The study raised major questions about how HRO performance can be monitored and managed.
You cannot manage what you cannot measure. To many outside the outsourcing industry looking in, this old McKinsey mantra is alive and well in HRO. Providers and buyers are less convinced, however, as anticipated results are proving elusive. Writing in Harvard Business Review, June 2005, BPO expert, Professor Peter Davenport, predicted a world in which business process standards would dramatically increase the level and breadth of outsourcing and reduce the processes that organisations perform for themselves.
"With objective criteria to evaluate whether a company can save money or get better process performance by outsourcing, it's likely that more firms will take advantage of external capabilities, he said.
7.2
His thinking is being applied by HRO providers as they seek new levels of accountability and transparency for clients to cut costs and drive improved performance. Yet, as we have noted throughout this report, dissatisfaction with the HRO industry and providers is occurring because performance claims have not been forthcoming - at three levels.
The promise of major cuts in costs of up to 50%.
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Outsourcing Metrics
Transformational (Share Price)
Effectiveness metrics can also be contractually set. An example is building service level increases into SLAs as improvement targets for providers, especially for critical services identified by clients.
However, metrics for transformational outsourcing are far from clear because of its intangible elements. According to Accenture's Jane Linder,
Strategic Governance "when the goal is business transformation, the ultimate metric is how much value is created".
Effectiveness (SLAs)
Accountability is a key concept in outsourcing metrics, being seen as synonymous with client power. As Xchanging's head of Xcellence, Bryony Moore, revealed.
"We are very much into measurement because, having taken control of the resource away from BAE Systems - the people who undertake the work - we have to give back to the customer another means of control. That means is through data, measurement and performance statistics."
To recap, traditional HRO performance management and measurement focuses on three areas.
Efficiency: represented and measured by cost reductions. Effectiveness: represented by the delivery of services against agreed criteria through service level agreements (SLAs). Transformational: involves deeper change for the organisation, its employees and systems - and at intangible levels.
In addition, the emerging notion of HRO governance pulls together the management of performance, including
decision rights, rules and processes agreed management processes defined with and before providers are engaged.
Note here Moore's distinction between measurement and performance. Transformational outsourcing uses broadlybased metrics for the financial performance of business units, and outcomes are only loosely related to actions. This diminishing level of control was identified by the Deloitte study as a major source of unease among executives. But, this is precisely where new HRO metrics are taking us.
7.3
Sample metrics
Different levels and types of metrics are currently used in outsourcing contracts.
Metrics for efficiency seek out economies of scale through a combination of labour arbitrage, process re-engineering, scaling processes on technology systems and headcount reductions. Cost reductions tend to be fixed through contractual obligations with heavy downward pressure - they are thus highly visible and accountable.
Impacts on business performance can be measured through the percentage of customers retained each year, new product sales, profit per customer, market share, and so on.
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nature to do that. HR needs to do it. It needs to be more assertive about what it can do and how it contributes to the performance of the organisation. "HR is notoriously bad at articulating where it adds value - partly because people in HR have nonnumerical backgrounds. It's not normal to think about cost-benefit analysis. Some decisions are made, which, if a simple cost-benefit analysis had been used, it would have been an easy win. They should look at cost savings and cost benefits. But HR doesn't do it that way. It's more a case of looking at our three-page paper on the subject. It needs to be much more aligned to how the business works."
One possible answer is to pass responsibility to HRO providers for identifying how transformation is to be achieved. Francisco D'Souza, COO of Cognizant Technology Solutions, made exactly this point to Linda Cohen and Allie Young.
"When a client specifies the work, it reduces our ability to bring best practices to bear. If a client lets us determine the best way to do the work for them, that's when we can add most value."
A major challenge for the HRO industry is how outcomes like these, at a business level, can be attributed to HRO. Part of the problem is that too many clients spend too little time thinking about:
what they seek from their HRO provider how they will measure whether the provider delivers what they seek.
Providers can then, more likely, deliver on the promise of reducing HRO costs while releasing clients from management and other activities to spend more time advising the line. The performance issue then becomes one of getting down to what matters. Initially, work on SLAs essentially defines responsibilities, enabling those managing performance to establish what is important. Both buyer and HRO provider can then talk through performance issues. After this comes simplification. As trust and familiarity with processes evolve, key metrics can be agreed, starting with six-to-ten 'super measures' or high level targets which then break down into layers of more specific metrics. It is an iterative and experiential learning process.
It is not enough for potential clients to leave the answers to their advisers or HRO provider. This challenge led Deborah Kops to argue for 'smart clients' or 'good customers'.
"Good [HR] customers make informed decisions and informed decisions ensure delivery performance," she explains.
One experienced HRO respondent, who requested anonymity, commented on HR's capability to be a 'smart client' and organisations' failure to grasp this concept.
"It's not just what you do, it's how you do it. I think those subjective elements are difficult to put into an SLA. Most HR functions could work more effectively. I haven't yet found one I can honestly look at and admire. HR thinks it has to do everything for everybody and we rarely 'push back' - it's not in our
7.4
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Causality: that which can be counted does not always count, Einstein taught us. And not everything that counts can be counted. The HRO industry has largely overlooked this important distinction, focusing more on trends rather than results - on what HRO does, rather than on what HRO delivers. Method of measurement: part of the problem lies in the observation made by Galileo when referring to our tendency to look for what we have lost in places where we can see - rather than searching places where the lost item might be. Looking for a bunch of keys under a light is an example. In short, do we have the right metrics with which to measure the performance of HRO?
These were questions raised by respondents clients, providers and advisers - during the research. One thing was clear from their responses. HRO's impact on performance is certainly more complex than the simple input-output models used to explain impacts of outsourcing and HR in the past. A consensus on what new HRO metrics should attempt to measure, and how, has yet to emerge. In what follows, we present a new way of understanding the black box into which inputs are made and outputs are hypothesised. Key to understanding the new HRO metrics is the distinction between transactional and transformational processes. This is an important issue.
The HRO industry's response to these problems has been to largely ignore the issue of articulating transformation. A definition is essential if potential clients are to grasp the nettle of HRO performance.
Transformational impact
What does transformation in practice actually mean?
It lies deep in the experiences of individuals and teams working in HRO projects. It brings together underlying patterns of behaviour and activities.
Transactional service
This is represented primarily by behaviour with clear lines of sight to process outcomes which are highly tangible - and consequently, easily quantifiable. They can be measured with straightforward analytics. Examples might include the number of rings to answer a telephone call, the number of days it takes to resolve a pension query or the number required to fill a vacant post. Costs can easily be attributed to many transactional level services. This is the bread and butter of SLAs. Two significant measurement problems face the HRO industry and its providers.
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Ultimately, it shapes the mindsets and cultures of those who deliver services.
demands in the line. A lack of proactivity was lamented - and was seen more widely as a major developmental complication facing HRO and HR.
3 Enhanced capability
Influencing these represents both the challenge and attraction of HRO for two executives who have led outsourcing projects. See the box on the previous page. Not everybody is convinced, however. As one leading HR director active in the HRO industry suggested, when asked to comment on the claims of transformation made by the HRO industry,
"They're all trying to sell something and you have to have a sense of reality on it!"
This is the deepening (knowledge) and widening (expansion) of capability in HR. A particular emphasis is on aligning capability with new HR service lines and the delivery requirements that new systems and operational practices require. But the question still remains as to how HRO enables such transformation to take place. To answer this, we need a new way of explaining the interplay between HRO and organisations' HR systems.
Interpretations of transformation
The reality is that transformation means different things to different people. During the research, at least three interpretations of transformation were voiced.
1 Standardisation and control
7.5
This involves dramatically reducing costs and, consequently, improving the internal standing of HR at board level - along with standardising HR processes/systems and freeing retained HR staff to focus more on strategic activities. The challenges here lie in establishing what retained HR seeks to achieve with its new strategic agenda. This is a challenge not just for HRO, but also for HR itself.
2 Commercial consciousness
One HR director stated, somewhat facetiously, that bringing in outside providers "raises significantly the gene pool in HR". Others referred to it as introducing a more entrepreneurial spirit into the HR function, listening more closely to its customers, and responding to business and operational
"You want to lock in an annual reduction in operating costs. You want to lower the time overhead of shared services in terms of HR distraction. The challenge is to avoid the future investment to keep the service improving. These were our key drivers: get the cost reductions down, have a service that wasn't continually on everybody's agenda and avoid spending more money." John Quinn, Ministry of Defence, on his previous organisation.
We have already defined three points of the diamond in the model. To summarise.
Business value creation: the top-level enterprise performance - as well as share price, other financial proxies may be used at business unit or even team level. Efficiency: the cost reductions associated with streamlining HR - improved services, headcount reductions, etc.
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Reflexive systems
Reflexive systems capture the work and orientations of individuals engaged in actual HR activities. They are reflexive because they cannot simply be executed. They are enacted, which involves interpreting how best to perform them - how to provide assessment feedback or the programming design of an HR portal, for example. HR processes for service delivery are based in open systems - that is, they can influence other processes and people and, in turn, be influenced by them. For example, a 'people portal' may be easy to use by one employee or with difficulty by another. See the box below for a systems example. In addition:
Systems combine activities - other HR tasks, processes, structures, etc - which in turn are shaped by other combinations such as rules, resources, IT software and so on. Reflexive systems act transfactually - that is, sometimes their impact is present and active. At other times, certain attributes - knowledge, for example - is present but inactive. This distinction is crucial in understanding how different combinations interacting in reflexive systems may or may not 'enable' - as opposed to 'cause' - particular outcomes. Certain HRO interventions work well in some places and not in others because of the different actors involved, the situations or structures in which they find themselves, and the nature of the combinations in play. Reflexive systems can, in part, be measured for both cost reductions and SLA outcomes. To understand how such outcomes are generated requires deeper
Transactional
Enabling
Transformational
Reflexive System
Source: Adapted from Anthony Hesketh (2005) Adding Value Beyond Measure (Warwick: AGR) Effectiveness: agreed SLA outcomes - providing three qualified interview candidates for each opening, processing invoices within 72 hours of receipt, etc.
These three points are standard for the industry. The challenge lies in understanding how HRO transforms the HR function's ability to add value to the wider business activities - that is, the fourth point of the diamond, reflexive transformation. Three features of the model help us grasp such a contribution from HRO:
Reflexive systems: actual HR activities and processes - what gets done. Reflexive architecture: People and methodologies to execute HR processes - how HR gets done. Reflexive performance: moving beyond efficiencies and effectiveness to understand and attribute linkages for how HR systems and architectures impact on performance at organisational, people and process levels.
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level reflexivity (interpretation, understanding and expertise) of the HR processes, management tools and technology used to enable their achievement, and the responses of those employed. This is not a straightforward task. Reflexive HRO is not a 'drag-and-drop' approach to change management. One has to be able to grasp the deeper levels of change and their implementation in different contexts - this is why some HRO providers are preferred, or 'fit', with certain clients, and not with others.
through a client/HRO provider partnership - to underpin performance and cultural change. Reflexive architecture can partly be shaped by tangibles such as budgets, the work environment, the availability of technology, etc. But, its transformational capacity comes mainly from intangibles at a systemic or cultural level - mindsets, behavioural models, for example. Crucial to shaping reflexive architecture are the different methodologies used by HRO providers. For example, - Xchanging seeks to transform reflexive systems through their Xcellence methodology, instilled by key values. - CSC does so through its Target Technical Solutions. - Capgemini's approach to transformational change is through a 'service oriented enterprise' (SOE). Key to these systems is the reflexivity of the individuals involved and how both reflexive systems and reflexive architectures are combined to transform HR service activities.
Reflexive architecture
This is based on Ram Charan's notion of social architecture, or the collective ways in which people work together to support the business model. Reflexive architecture extends such collaboration through a more disciplined approach to evaluation - and not just measurement - which features critical reflection on how well processes are working and how the desired changes can be introduced. See the box below. Note these points on reflexive architecture.
Many of its tools are not unique or even new. But when the different operating tools of HR activities (reflexive systems) are brought together, they can change the human side of performance. Reflexive architecture, therefore, brings about change in people's service or commercial orientation through their behaviour, beliefs, social interactions and the nature of their decision-making. HR processes are tightly mapped and articulated
Certain combinations within reflexive architectures may trigger particular transactional results or outcomes in efficiencies and effectiveness - these may or may not replicate across different organisations. Essentially, unlike conventional models of change - where a universal and causal model of change is inferred - HRO transformation is facilitated more by 'complementary' reflexive architectures, as in a cultural and technical fit between the HRO provider and client.
Reflexive performance
This is the mechanism through which reflexive systems and architectures are brought together to achieve enterprise-level results articulated in an HRO contract.
It is not simply about high-level metrics, such as revenues, service margins, and process delivery. Reflexive performance measurement is also complemented by quantifiable statements describing different 'organisational states' - employees are satisfied with the quality of service from a service centre interaction, for example. Reflexive performance focuses, or re-focuses, client/provider discussions of transformation because
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they use the same criteria. Although anecdotal and qualitative information remain crucial, they are judged against their 'contribution' to the transformational template agreed by the two parties. Statements include 'how much are our people focused on customers?' or 'are we getting employees to follow the HR practices we want?' See the box for provider and client comments.
In short, reflexive performance is about discovering what Charan refers to as 'toll gates' - the right combinations of HR practices and processes which are understood to be crucial to the successful completion of any HR service process. This is not just a case of grasping the what, but explaining the why and how. Luis Rojas, chief operating officer, HR, at Standard Chartered Bank has a clear view of the next level for HRO and reflexive performance.
"Each year, investment is required to reach the next level. Eventually, the next level will become harder and harder to reach. Improvements can be in quality, technology, efficiency, unit costs or a combination of factors. It's all about scale and volume."
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Good practice HR
"Good practice HR is now adopting web-based solutions, b communications and administration for their employees. This is the myHR version of HR. It enables individuals to manage everyday transactions, such as changing their address, together with more enticing and appealing operations, such as modelling one's future pension, applying for a job on line, and obtaining information about terms and conditions. "All this was kicked off in BP some years ago and now has widespread acknowledgement with many companies adopting their own style of myHR delivery. HR receives little credit for that but has undeniably improved across the piece in the US and the UK." Nick Starritt, Managing Director,
Sirota Consulting, Europe, reflecting on the original BP/Exult HRO deal - he was Group VP of BPs Global Human Resources function at the time.
Patterns in HRO
Patterns in the development of HRO further up the HR value curve are less clear-cut. However, there are indications.
The so-called HRO 'mega-deal', in which an entire HR function is outsourced, has defied predictions of both its demise and acceleration. Large-scale contracts do continue to be signed (Capita and BBC, Convergys and DuPont) and renewed (Accenture and BT) - with rumours rife of other FTSE 100 companies following suit. Increased outsourcing is occurring in higher value HR processes such as training and development, and recruitment. Confidence in HRO is growing. The majority of HRO deals are motivated by cost reductions, and most contracts have achieved or even surpassed such targets. The trend of HRO under-performance has perhaps been overstated, although there is evidence of 'problem deals' in the market.
HRO contracts
Negotiating tailored HRO arrangements with the provider is crucial. These are the general trends in HRO contracts.
Contracts often last between five and seven years, with various clauses for performance or evaluation built in at three-to-five years. It takes between 6-24 months from preparing the HRO business model to actual procurement. Most organisations invest in advisers to help them select appropriate candidates for shortlisting, initiate requests for proposals (RFP) submissions and use benchmarking. Governance is emerging as a key area, particularly at due diligence, as buyers seek to establish clauses for under-performance and/or changing business conditions. The majority of organisations put together a bespoke team to deal with the outsourcing provider(s), and to plan for transition and implementation. Research suggests the majority of CEOs and CFOs are also involved in early contractual negotiations but then tend to remove themselves from transitioning and implementation. The HR director or equivalent and their team have a vital role to play in scoping HRO deals. Specific roles include: - establishing 'as is' costs
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- mapping existing HR provision - reviewing the HR market - benchmarking services - ensuring the buy-in of internal HR staff and other employees - handling HRO announcement queries. 3
Be a smart, reflexive partner. For advisers Cease to rely on trends in favour of actual performance of HRO. Although benchmarking and cost reduction metrics are important, the future of HRO relies on whether it can deliver transformation to those clients who genuinely require HR change. Encourage smart, reflexive clients and providers.
e-HR H
HR will continue to evolve into new forms of delivery, particularly at transactional levels. E-enabled HR systems make it easier for large organisations to shift responsibilities for managing HR transactions onto managers and employees through sophisticated technology platforms. A rise in the demand side of HR services will occur, with managers and employees pulling information and services from the HRO provider. Increasing volumes of life-event HR advice - pensions, for example - delivered in real time will put pressure on service levels and provision.
8.2
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strategic awareness, influencing and negotiating skills, conflict resolution, adaptability and entrepreneurialism.
HRO strategy
Strategy formulation is a complex process. Attention should be given to the following.
Absolute clarity surrounding the decision to outsource. This includes what - and what not - to outsource, why and how. This is the client's responsibility not the provider's, who will inflate HRO costs for such an additional service. Your HRO provider cannot give you the precise service you want unless you know precisely what it is you want delivering. There is a commercial risk connected with a weakly articulated HRO strategy. The decision to use HRO must be accompanied by a clear statement advising investors how it will drive enterprise performance. Senior management buy-in should be ensured from the start - this may be the first driver of HRO. End-to-end performance management is crucial. Be clear on the expected performance gains, how they will be delivered and, ultimately, how performance will be measured. An appropriate governance system should be used which sets the parameters for responsibility at senior levels in an HRO relationship. Communicate with employees at the outset concerning any HR outsourcing decisions. This applies not just to those working inside the function but also to its end users.
Demand for, and performance against, these skill sets will be an important part of clients' decisions to hire HRO providers or not. Analytics and benchmarking will drive new levels of accountability, transparency and competence among HRO providers.
New roles
A range of new positions is increasingly common in large organisations.
The HRO business partner: an extension of the HR business partner acting as the HR director's right-hand person. The COO - or chief outsourcing officer: mainly responsible for ongoing HRO operations and performance management - along with contract renewal, tendering, new contracts, major transition programmes, etc. HRO associate: represented by the increasing numbers of HR professionals transferred to HRO providers from clients. Together with the skill sets above, associates will also need - ongoing development aligned with the provider's changing and evolving demands from different clients - career management and new career paths, supported by agreed criteria for career enhancement and possible moves between the service provider and retained HR functions.
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9.1
9.3
The authors interviews reflect familiar comments about HR being a soft target because of its perceived weaknesses. For some time, through various reports, CRF has examined these in depth and proposed positive ways for HR specialists to improve their function's reputation. See especially the CRF Publishing report, The Future of HR: Creating a Fit for Purpose Function. There are good reasons for caution in considering the claims of providers.
HRO is a very young 'industry' - much experimentation is underway and track records are just being established. A strong sense of 'hustle' and hype is apparent, with specialist media and trade conferences at times displaying almost evangelical fervour in favour of outsourcing. A community of interests is united in seeking to profit from HRO - and the key players all know each other. A 'bandwagon' effect is in motion, with organisations sometimes considering HR outsourcing simply because others are doing it.
And there's the language. Providers and advocates of HR outsourcing have obscured the subject with terms that value complexity over clarity - and heap acronym on acronym. This ongoing flow of terminology and concepts can appear impenetrable to the uninitiated. CRF decided to invite Anthony Hesketh, an independent academic specialising in this field, to review developments, identify trends and recommend useful practices. Our aim is to enable CRF members to make better decisions and manage any outsourcing processes more effectively after reading this report.
9.2
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The most 'buzz' occurs around the 'mega-deal' large-scale outsourcing. Here, suppliers potentially make most money, and the claims of cost-reduction are ostensibly greatest. Inevitably, it pays then to promote this benefit - which also happens to be where the client risks are also greatest. The baited hook of cost-reduction encourages providers to see the key HRO decision-makers as CEOs, chief operating officers and finance heads more than HR directors. The issues of value and stakeholder benefit become lost in the process - and there is also a suspicion of 'divide and rule' as a sales tactic. Little hard data is evident as yet to quantify the value for stakeholders - independent and clear evaluation is proving elusive. A major mismatch potentially exists between the pace of change in organisations and the kind of long-term deals that providers seek. Even in a fiveto-seven year period, organisations may change structure and strategy significantly, through organic growth, mergers and acquisitions and joint ventures or because of shifts in technology and global markets. Informed advice is in short supply. As this report points out, the HRO industry does include consultants offering such assistance. Here, too, it is incumbent on the client to source well.
opportunity to remove unnecessary duplication, complexity and low value activity. This report provides many pointers for matching needs to possible solutions. Here are the most important ones.
A thorough and independent review of needs including all stakeholders and a future needs focus should precede any HRO decision. (The RBS case study provides a good example of what to do.) Intended goals from stakeholder consultation should clarify a range of benefits, not just save money evaluation needs to be robust in measuring whether these benefits are realised. Be clear about the different types, levels and areas for outsourcing. Selective outsourcing is a useful way of building expertise, learning about the supplier market - and who does what best. Generally, the most advantage from a large outsourcing deal occurs when significant improvements in administration quality and technology investment can be gained. Do not use an outsourcing provider to fill any gaps in needs assessment - nor as sticky tape to improve HR practice in your organisation
CRF argues that it would be wise for the HRO industry to attend to its own reputation, given the points above. In our view, providers may need to be seen to concentrate on articulating and achieving lasting benefits for all types of stakeholder, to avoid HRO being characterised by impressions of sharp sales talk but long-term regrets.
A real issue is what will benefit the organisation, not necessarily the HR function. Ask yourself these questions before initiating outsourcing discussions.
What will benefit the deployment of people resources? What will help people to be truly productive and give of their best, develop their strengths, win their commitment etc? Is the current HR agenda based on a clear assessment of both strategic needs and stakeholder satisfaction goals? How will the tensions between these potentially conflicting needs be managed?
9.4
The message here is clear. A searching review of both organisation and HR choices is critical to avoid a piecemeal, ill-conceived, and fractious approach to HRO. Finally, enter any contractual arrangements with care - and with an eye on the risks. Appreciate
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the possible dangers of having to rely on too few suppliers. Contracts should cover targets, benefits or outcomes, the consequences if they are not delivered, renegotiation terms and exit clauses. Meanwhile, a cautionary note for providers. In practice it is not in your long-term interests to be seen to be too powerful. It is easy for poison to enter a relationship, hard to extract it. That's bad for new business, as it's also easy for word to get out.
understanding of supplier markets, and being able to get the best out of business partners.
New roles to support HRO will typically cover procurement, contract management, service analysis, and internal customer relations. Note, however,
levels of expertise will not be easy to acquire or develop quickly if new people are hired, they will need time to master the internal HRO context new roles and job types have to be clarified and communicated to all stakeholders.
9.5
Staff being transferred under an HRO agreement will need to get used to new ways of working - typically with greater emphasis on service and performance. Selection and development processes should be used as early as possible to ensure that both the provider and the client have a motivated and capable group of transferees. As the author points out, important changes in shaping HR careers, skill-sets and working interrelationships - from HR business partners to contract managers - can be expected. This is against a background of doubts about the extent of talent within the HR function to step up to new opportunities. 'HR talent management' must incorporate smart ways of attracting smart people from varied functional backgrounds. This requires integrated recruitment and development - and acting in advance, not arrears.
9.6
This report makes it clear that new roles and skills need to be defined and developed to ensure that supplier contracts are entered into wisely - but also actively to manage what may be a relationship of strategic and stock-price importance. For instance
to improve HR's metrics ability, skills from outside HR's traditional area can be sourced internally statisticians, finance, IT and consulting, for example managing significant supplier relationships effectively will require purchasing experience, a deep
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outsourcing contract - for example, thorough analysis of needs and capabilities needs doing before designing new structures and processes. Unless there are tangible benefits for the organisation, managers and employees, shared services could be a waste of time and resources. Shared services may serve as a stepping stone towards outsourcing - and in theory it can. However, new investment in systems and ways of doing things will mean that, probably for several years, it is unlikely to be attractive to an outsourcer to take over financially or operationally - given that their systems are likely to be different. Simply moving to a shared services model does not necessarily result in HR staff becoming as focused on internal customer needs as is desirable - in comparison, say, with the transition they would have to make if employed by an outsourcing provider. See the RBS case for some pertinent comments on this point.
management plan. Underinvestment here can fatally undermine the changes. Act early to create understanding and build involvement. Relationship management activity will intensify during any transition process. The way it is undertaken will
be observed and felt most acutely by those involved create the understandings, expectations and atmosphere that will govern what follows.
If off-shoring is involved, the preconceptions, attitudes and behaviours of existing stakeholders requires expert management. Meanwhile, the off-shored staff will want to feel part of the organisation and to empathise with end-clients - whether they are working as part of a shared services structure or an outsourced entity.
9.7
9.8
An outsourcing project of any scale should have a robust communication and relationship
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We know there can be pressures from line managers to creep back towards the 'handholding' service they may have been used to in the past. Some in HR may indeed be willing to do this. Where line managers feel they are being asked to fill a gap in HR administration, attitudes to service centres - insourced or outsourced can be negative from the start. This underlines the importance of investment in line manager understanding and capabilities along with transforming HR - given that it is the line that actually has prime responsibility for managing people. A question we posed at the outset concerned the core functions of HR that should be retained. There are clear answers.
People or human capital strategy. Organisational policies. Recruitment and selection decisions. Employee relations. Pay and bargaining decisions. Talent management. Exit decisions.
All in all, it is critical for both organisational leaders and HR to be clear about the essential core competencies to enable the effective management of human capital.
9.9
As the author stresses, hard data indicating degrees of success is not yet openly available, although there are some positive signs. However, much depends on the judgement and skill of those involved on each side of the contract - and that cannot be regulated. Caveat emptor applies!
While service providers may make advisory and support contributions in many of these areas, the organisation itself must visibly take responsibility - health and safety is an example. Furthermore, it is the chief executive, together with business heads, who are ultimately responsible for all the areas above. Personnel or HR should, in principle, only provide specialist knowledge and day-to-day support. In the lean HR function, top management will have support from HR's strategic and business partners, preferably as full participants of the management team. Business partners in turn need to obtain value from the support and advisory services they do not necessarily 'own' in the old functional sense. Strategic partners - the HR director or equivalent - must ensure that the whole HR architecture delivers value.
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shared services might deliver the same benefits but with greater retained control identified the technological challenges and solutions around outsourcing - have the costs of running and retiring legacy systems been calculated accurately, for example? developed a clear view of the capabilities and reputation of each of the main outsourcing providers standardised and simplified processes and procedures prior to considering outsourcing discussed in detail the concept of outsourcing with customers (employees and business managers) and other key stakeholders in the organisation defined the key success measures that will be used to judge the performance of the outsource provider and the structure of the deal considered the history of the organisation in terms of managing complex transition processes - is there the organisational will to see an outsourcing initiative through to completion?
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10 Case studies
10.1 Once more into the breach: the BT/Accenture HRO renewal18
Introduction
The announcement in February 2005 of the contract renewal for the HRO deal between BT and Accenture was a significant moment in the industry. Not only did the deal represent a shining endorsement for the HRO industry as a whole, it also reflected a significant escalation of the outsourcing process across BT's entire global offering. Not surprisingly, Accenture themselves see this deal as a major endorsement of their product:
"BT took a bold step some five years ago. The resigning of the agreement ... and its extension to 44 countries outside the UK not only vindicated that original decision but is also a clear demonstration of the value that full-scope HR outsourcing can deliver. It is a massive boost for the industry." David Clinton,
Former Managing Director, Accenture HR BPO Services
reduced HR's transactional lines from 26 to nine key sites. Its own in-house shared services model was rolled out in 1992, elevating this to what BT describe as an 'internal trading model'. By 1997, BT was well-positioned to initiate what was seen as a highly innovative strategic move for HR - the outsourcing of transactional services. The aim was simple: to liberate HR professionals from day-to-day functional tasks for them to focus on operational and strategic issues. In August 2000, the company stepped into the HRO market, signing the flagship deal with Accenture and simultaneously launching ePeopleserve. This was a new 50/50 joint venture between the two parties to offer their unique combination of HR and technology expertise to third party clients. BT and Accenture worked together to form a full, end-to-end HR solution covering the typical employee lifecycle - training, performance, reward, employee relations, safety, health, and exit. A total of 1,100 staff were transferred into Accenture. At this time, any plans to incorporate their entire and quickly expanding global offering into HRO were put on hold due to the rapid acquisitions BT were engaged in at the time. There were early problems, as employee relations and HR policy director, Joe McDavid, explained.
"We were persuading people on both sides that we had a commercial, rather than some sort of artificial, relationship. The service wasn't bad and the costs reduced slightly, but the venture didn't deliver the benefits we expected. As a result, we decided to sell our half of the joint venture [ePeopleserve] to Accenture. After that, the quality of the service we received and the quality of the relationship really started to improve."19
The deal
Details of the new contract involve further cost savings for BT. Accenture HR BPO Services now serves all 102,000 BT employees globally, compared to the previous deal's total of 87,000. All 182,000 former BT employees remain under the same aegis with significant developments in the re-engineering of BT's HR traffic. For BT, the journey to outsourcing began in 1990 when 14,500 HR professionals served 250,000 employees. There were 26 separate HR systems, 30 telephone helplines and more than 26 physical sites - each aligned to 26 separate geographic districts. By 1991, the company had
The focus then shifted to delivering enhanced service and relationship management to BT's employees. By April 2004, the companies were locked in discussions about a new and expanded contract, reaching agreement in January 2005. BT certainly had every intention
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case handling frees your business partners for different types of discussions and interaction with the line.
For their part, Accenture were keen to avoid the contract going out to tender. Frantic discussions took place as the provider attempted to hit the stretching cost reductions and service levels BT expected, to prevent progression to the ITT stage. BT fully acknowledged the provider's high project performance to date - a point not lost on Duncan Mears, director for Accenture HR BPO Services:
"On our side was the fact that our customer satisfaction surveys were exceptional, in the high 80s and 90s. Our KPIs were very strong and in excess of our expectations. Meanwhile, our SLAs over the course of the five-year agreement with BT were 'green' in all key areas. The benchmarking activity that BT undertook showed that in the majority of areas, we were among the best in terms of performance, quality, and service, with the lowest position in price."21
Of course, there will always be questions from outsiders regarding the extent to which HRO cuts into the bone of HR's capability to undertake talent management and service effectiveness for the client organisation. For Wilson, this simply meant thinking about not what the business needed in terms of HR services, but what it wanted.
"They gave us more than enough evidence about what could be done to hit the cost reductions we were seeking if we made certain assumptions and changed the nature. It meant taking away Rolls Royce services and becoming more like a Jaguar in a number of HR activities. It meant taking the work away from the UK. They offered us a whole series of different options."
The results
Crucially, BT's decision to renew with Accenture was based on results, not promises. Alex Wilson, global HR director identified three main reasons why Accenture HR BPO Services were awarded the renewal.
"One, they have improved the reputation of the function. Two, they've improved service levels and taken out cost which, in mid-contract, is always a great idea! If you're an HR director and your provider informs you that 'We can do something to help', it may give them a win in terms of performance - but it also gives me a win by improving my margins during the life of the contract. Thirdly, taking on the front-line
For Accenture's part, and contrary to much of the negative media on HRO, the provider began to listen to what BT really wanted and then attempted to fulfil the company's expectations.
"We provided highly skilled people with strong and dedicated HR backgrounds, who also understood the telecommunications business, to articulate and transact with BT in a language of understanding their strategy. This team developed a new set of products and services that enabled BT to accelerate its HR agenda, implementing new products and
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performance management systems services, new reward processes, learning programmes and reporting programmes. BT realised that Accenture was a company that could continue to drive this agenda and HR innovation through the next decade."
Duncan Mears, Director, Accenture HR BPO Services
own shared services model which would reduce some of the cost before outsourcing. In this way, you gain initial benefits which can be supplemented by your provider. "Another view, if you have a disparate function, is to accept that a five or six year contract would give away more margin than you would like, but will get you there in one go. You gain efficiencies with the external group - especially if they have their own system that you can capitalise on when you have none of your own or if you have disparate systems that are outmoded. I know of one big FTSE 100 company thinking about doing this simply because they have a disparate system."
Of course, the journey is still far from finished and BT continues to seek improvements in their services and costs as part of the new deal. Key for Wilson is an inverted emphasis in which value creation and business transformation remain top of the agenda for BT, but Accenture HR BPO Services have, as the main driver of their agenda, the value for money BT seeks.
"One of the board directors commented on how the HR function has progressed. As an analogy: if a successful journey is travelling from London to Edinburgh, we're probably around Leeds and possibly York, but by no means are we near the end. This is not a complete exercise for us in terms of upskilling the function. We have a vision. We are tracking activities and cost, looking at the core capabilities we need, in combination with administration handled by Accenture, and driving this through."
And thirdly, be a good client - and offer clarity about what you seek and how you intend to measure the returns:
"If you do outsource, be clear about the services and processes you are outsourcing, have them marked and defined and have a clear service level. If you're not specific about what you're doing, what the processes look like - if you don't map it and tightly specify it - your provider could say, 'We didn't understand. If you want to do that, it's going to cost more money'.
Learning outcomes
When asked to reflect on the key decisions in assessing any major HRO deal, Wilson pointed to three. First, you have decide what it is you want to achieve.
"You need to be clear about the benefits to be derived. Is it cost? Is it service? Is it something less tangible such as freeing HR resources to be upgraded? Usually, if administration is outsourced, the resources left behind are not capable of performing the higher functioning role expected of them. Be sure of what you're doing and why you're doing it; make sure it's right and test it."
Chrysalis
Roden and his team set about building an agenda for change in which senior managers
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were asked to outline their future hopes and aspirations for the development of the HR function. It soon became apparent that two drivers underpinned the desire for change.
Deliver high quality services, with a strong focus on getting the basics right and delivering significant cost reductions. Signal a shift in culture and activity away from transactional HR administration to more value-added roles with optimum performance.
- Enhancing professionalism. - Value delivery focus. - Change and implementation skills. Less than 10% of the existing HR staff had the ability to immediately step into the 'business partner' role. Crucially, up to a third of HR employees were seen as incapable of making the transition to a new consulting role. This latter group were to be redeployed into the shared services function as they had the right transactional skillset such as supervisory skills, workflow and operations management, etc.
Project Chrysalis, as it became known, set out to centralise HR activities in order to release significant cost reductions. The first exercise was to evaluate the current or 'as is' HR offering in RBS. This revealed the following.
The work of the HR function was broken down into 18 activities, each comprising between four and seven tasks. A team of over 200 HR employees completed a four-week study of their own processes, forming an 'activity dictionary' which was evaluated by different HR managers before being signed off. This activity dictionary revealed that 60% of HR's activities were administrative, 25% advisory, and up to 15% viewed as 'value-adding' or business 'partnering'. A problem was a lack of uniform data and metrics to evaluate the performance of HR across the key activities identified.
Outcomes
The shared services facility has helped the business step up from serving 22,000 employees at the Royal Bank of Scotland to a total employee base of 120,000 across different brands including NatWest, Direct Line, Ulster Bank and different retail networks. In short.
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Shared services now offers a single point of accountability for HR transactions and processes. A new rigour has been applied to management and measurement. Real indicators are now in place for performance, quality, efficiency and productivity with customer feedback and continuous improvement. Full realisation of significant efficiency savings.
"The challenge is scale and multi-branding. But it will happen one day. The Proctor & Gamble and IBM deal involves scale and multi-branding and we've been watching them closely. I think it's possible, but not yet. They are more experienced globally than we are.
Commenting on the achievements of the shared services function at RBS, Tony Williams and Peter Reilly observed.
"The bottom line is that there is no single measure to prove the success or otherwise of shared services. What is needed is the faith to see the job through and create a single centre of excellence for all HR 'manufacturing' activity for the Group - and to review the benefits at the end of the process, not halfway through."23
Nevertheless, the Bank continues to make increasing demands on service quality of HR shared services. Costs have been reduced and services have been improved. For McClaren, the next challenge is developing a commercial mindset within HR services provision.
"We're now at an interesting crossroads with shared services. With efficiency, shared services is still getting a tick in the box. But the challenges in the business now revolve around questions of how much better the service actually is. It's not about efficiencies anymore. It's about how you transform the services of HR."
The process of change has not stopped there. Indeed, RBS itself maintains a constant eye on the feasibility of HRO, although at present it remains doubtful. This was pointed out by its current head of shared services, Brian McClaren.
"You never say never. Currently, we would need to be convinced of a provider's capability to absorb and deal with the scale of our operations. We're serving 120,000 staff in numerous countries, recruiting 25,000 people a year from 165,000 applications. That's the scale of what we do. "I've yet to see a provider on a scale that means we would not absorb too much of their business. But there are elements of HR that we will continue to examine. Every three years, we test the market. There's no fundamental disbelief underlying why we are not taking that route. We simply haven't seen the market mature to the degree expected."
When asked to articulate what would, in his opinion, convince RBS to consider HRO, McClaren pointed to the double-edged sword of combining volume with complexity.
"We haven't seen evidence of dealing with scale and complexity. We have a multi-brand strategy. We have eight business divisions running 48 brands! Nobody has yet offered a service for such volume. They would have to deal with all the intricacies of our different brands in terms of language, paper, etc.
RBS continues to drive a commercial and entrepreneurial spirit into the HR shared services mindset.
"We have culture change programmes. We try to encourage our people to think about engagement.
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For example, the person they are dealing with on the phone may be beginning their career. They need to be dealt with end-to-end. I'm not sure we have the edge as we may have with outsourcing. But I think we have 85% of it and this narrows the point of differentiation to outsourcing. Outsourcing for us has to be 20% more efficient before we can consider it. They have to be 20% more efficient and they have to have that edge. I think we're more efficient. We can always supplement this with culture change programmes. The issue turns on whether the edge is worth it."
account in Whirlpool - DuPont essentially threw everything at it, except the proverbial kitchen sink. It contracted the provider to take over
organisation and employee development workforce planning and deployment compensation management benefits administration payroll integrated health services recruiting employee and labour relations HR process support administration work environment support performance management employee data management vendor management HR consultative services.
The extent to which shared services can evolve from the functional silos to offer services that can optimise business processes and drive value remains one of the central questions of the HRO debate at RBS.
DuPont said it expects the accord will help the company cut HR costs by 20%, with savings reaching 30% after five years. The company declined to say how many layoffs will result from the agreement. The deal will surely shake up the 200-year-old company, a well-recognised corporate name with a pro-worker image. While the Convergys deal is not the first time DuPont has dabbled with HRO - company officials say they have outsourced various
DuPont Background
Few corporate names reach more consumers around the world than DuPont. Its products include everything from Tyvek (used as protective wrap on homes and as gowns in the operating theatre) to paint and coatings (applied on cars, buildings, and many other goods) to well-known Corian and Teflon brands found in most k kitchens. Posting 2004 sales of $27.3 billion, DuPont operates in more than 70 countries, employing over 60,000 people. With a vast network of HR processes to manage its enormous workforce, it was no surprise that DuPont's HRO deal was so sizeable.
The deal
Partnering with Cincinnati-based Convergys which in 2005 also landed another whale-size
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functions over the past decade - this accord is by far the most sweeping in its history. But to hear Jim Borel tell it, this is not a tale about outsourcing. A tall and striking figure, the senior vice president of HR said outsourcing is just one component of DuPont's HR transformation. The goal, he emphasised, is to simplify, standardise, and automate HR processes so that employees spend less effort on administrative and more on strategic functions. Also, the company wants to provide management, at any level, with transparent data, so as to make better decisions. Said Borel:
"It's not just about outsourcing. It's about our HR transformation and putting in place what it takes for HR capabilities to help businesses win. Part of that is standardising and simplifying processes, part is the automation, and the final part is the partnership with Convergys to help us through the journey. It's all about helping DuPont's businesses win."
So, even though outsourcing holds the promise of savings, so did other choices. Lareau explained that the real issue was the value DuPont would gain from a partner, someone who was going to
help with the transformation requirements take a fragmented set of processes from around the world and simplify and standardise them implement them globally on SAP HCM (human capital management software).
"Most people can give you competitive pricing," he said. "The real differentiator is who will be our transformation partner - and have they the skills and capabilities to take us where we want to go?"
Reasons to outsource
Winning is something DuPont has not been able to do recently. In January 2006, the company again issued earnings warnings after failing to meet analyst expectations. This occurred after the company missed targets in 2005 as well. Some of those analysts have publicly called for the company to more aggressively cut costs in order to help revitalise earnings - which have been ruffled in the past year by higher raw material costs and production disruptions as a result of the two major US hurricanes. A renewed focus on profits may be one reason why management is squarely behind the outsourcing push. Cutting costs at a time of weak earnings makes sense, but company officials say savings is only part of the reason. Besides, added Ernie Lareau - a director in DuPont's HR department and one of the key architects behind the outsourcing deal - the company had other alternatives to achieve the savings. These options included the following.
Transforming internally.
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Problems to address
What the HR team found was an organisation mired in transactional services. According to Lareau, the company operated in a very traditional model, with only about 10% of HR's energy fixed on policy and strategy - most of the time, it dealt with administrative and transactional issues. What senior leaders wanted instead were clear HR processes that provided critical data for DuPont to better manage its human capital to meet business needs. For instance, Lareau pointed out, if the company plans to expand its business in China by a predetermined amount, HR should know average revenues per sales employee for that market. Armed with this data, it can better target the ideal number of workers to hire, to enable the business reach its sales goals in the budgeted timeframe.
"Our problem was how to get to [a state] where our people are driving policy-setting activities and strategically supporting the businesses. How do we get our HR leaders, with our business teams, to understand what the business needs are - and then give them access to the data to provide strategic support in the area of people or human capital management? "We were expecting our leadership to focus on policy and strategy planning to support the businesses, with minimal effort on the administrative service-delivery aspect."
(planning started five years ago), and its success showed that DuPont was capable of achieving realignment on its own. Still, the burning question remained - did the company want to tackle transformation on its own or with the help of a partner? Management went back to the basics.
"One of our considerations was, 'Would we consider doing this and becoming a provider?' We quickly concluded that it was not core to DuPont and we would not go there," Lareau recalled.
Borel said that two key factors stood out in the decision to outsource.
Leveraging the knowledge of an experienced provider who has worked with multinationals. Reducing the execution risks. "Having somebody who has been through the experience with a number companies would be a huge help.
Contrary to perception, DuPont's decision to embrace outsourcing did not signal a shift in culture. With some services already outsourced over the past decade, HR had already dealt with third parties. Doing so on such a massive scale only integrated those services under the auspices of Convergys. Furthermore, the decision to automate would give employees the same self-service tools, regardless of whether it was implemented internally or externally. Even in instances when employees needed the 'high touch' of an HR specialist, a seamless transition to a service provider would ensure that workers received the same attention as they did under the old model.
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So how do buyers reconcile a provider's skills gap with their own needs? Convergys, Borel pointed out, assuaged his fears with a proven ability to adapt and grow. As a buyer, he wants assurances that the partner can anticipate his growing and emerging needs. Convergys' track record of acquisitions - as well as its recent wins with large, DuPont-like companies - alleviated some of those concerns. Indeed, Convergys has aggressively sought to fill the gaps in its capabilities, said Karen Bowman, president of the company's Employee Care business. For instance,
in 2004, the company acquired an Asian business to establish a presence in one of the world's fastest growing markets in 2005, it purchased a San Francisco-based talent management business to further bolster its offerings.
Another dominant concern is how the partners will handle change management, perhaps the most critical component in implementation. DuPont's HR leaders say a lot of effort will go into making sure the organisation is ready for change at each stage of the process. However, they also point out that having an experienced provider instils confidence though much of the burden falls on the client to ensure a seamless transition, Lareau said.
"We spent a tremendous amount of time building the governance processes. We identified them all, mapped them, and placed individuals as process owners to manage the various processes with Convergys and with our [employees].
Bowman said Convergys' experience is not unique and that across the board major providers are choosing distinct market segments in which to invest. They understand
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that large customers now expect providers to offer a broad spectrum of services - and more buyers will only look for vendors that can meet all their needs.
"I think companies like DuPont are looking for a holistic, integrated provider who can provide the majority of services being outsourced.
good data or integrated processes. We're in the process of designing that future state. "We don't have robust processes around strategic workforce planning, so that has to be done. And part of that is making sure business leaders understand the potential value that they haven't experienced before."
Another reason why the company chose Convergys was for its strong SAP capabilities, Lareau said. DuPont had already made significant investments in SAP for its own ERP system, so the question of platform was settled by the time RFPs were issued. Beyond assuring buyers that their contracted needs and metrics will be met, HRO vendors are increasingly being asked to provide valueadded intangibles which, while hard to define, help solidify a partnership. In DuPont's case, this was no different. Borel described these requirements as anything that "helps DuPont to win", and other buyers may have a similarly nebulous definition. For instance, having a cultural alignment builds trust on both sides, but how can this be expressed in a contract? Often, offering services and performance above contractual obligations defines the value-adds, but Lareau pointed out that Convergys' datarich, solution-oriented processes are a complete match for DuPont's own approach. "It was just one more merit for the Cincinnati company," he said.
And if DuPont can reach all those goals over the next few years - under the watchful eyes of the industry - it will be able to get back on track towards winning and focusing on its core business of developing the miracles of science.
Future steps
As they look ahead, Borel and Lareau say they are confident that the HR transformation project will be worth the effort. While risks accompany each step of the roll out over the next two years, the rewards will bring DuPont into a new era - a time when HR will become more strategic than it is today and when business leaders turn to the department for input on business growth. Said Borel:
"We wanted to be able to do more and be better, but we were hamstrung because we didn't have
Lareau's experience might have been eyeopening, but it also speaks volumes about the maturity of HRO - providers are playing catchup to the demands of super-size clients. Even as the provider community touts its capabilities and services, some buyers are discovering that market hype sometimes overshadows reality.
"I believe the industry has professed itself to be further forward than it really is - at least with the 16 providers we had dealings with.
Still, he noted, many are building the infrastructure necessary to canvass as much of their clients' needs as possible. And with providers such as Convergys willing to shore up gaps, they are helping to put large clients at ease.
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"When you consider all the processes of a global environment in a legal entity structure that DuPont provides, it is probably one of the largest, most complex challenges the industry is facing. But we think [Convergys] is up to the challenge."
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References
1. These data, and much more, are available from the Everest Institute's home page: http://www.everestresearchinstitute.com/ 2. See http://www.everestresearchinstitute.com/ 3. See http://www.tpi.net 4. Moore, G. - Crossing the Chasm: Marketing and Selling Hi-Tech Products to Mainstream Customers: Harper Business, 2002 5. Hammonds, K - 'Why We Love To Hate HR': Fast Company Magazine, 97, August 2005 6. HRO Today, January/February 2005. 7. For example, see Davis, S - 'Is This The End of HR?' in M Effron, R Gandossy and M Goldsmith (eds) Human Resources in the 21st Century: Wiley, 2003 8. See http://www.idc.com/ 9. Calling a Change in the Outsourcing Market: The Realities of the Worlds Largest Organizations: Deloitte Consulting, 2005 10. Greer, C R, Youngblood, S A and Gray, D A - 'Human Resource Management Outsourcing: The Make or buy Decision': Academy of Management Executive, Vol 13, 85-96, 1999 11. People Management, 26th January 2006, pp 36-7, CIPD 12. Linder, J - Outsourcing for Radical Change: A Bold Approach to Enterprise Transformation: Amacom, p 28, 2004 13. Ibid 14. Greer, C R, Youngblood, S A and Gray, D A - op cit 15. CEO Briefing: Corporate Priorities for 2006 and Beyond: Economist Intelligence Unit, 2006 16. For a deeper examination of these issues, see Cohen, L and Young, A - Multisourcing: Moving Beyound Outsourcing to Achieve Growth and Agility: Harvard Business School Press, 2005 17. Greer, C R, Youngblood, S A and Gray, D A - op cit 18. This case study is based on an interview by the author with Alex Wilson, Group HR Director of BT. Additional data and quotes have been obtained from a combination of press releases and HRO media. 19. See 'Second Time Around': HRO Europe, Spring 2005. 20. Ibid 21. Ibid 22. This case study is based on in interview by the author with Brian McLaren, Head of Shared Services for The Royal Bank of Scotland. Additional material has been used from various sources, especially the book by the former head of shared services at RBS, Tony Williams, with Peter Reilly - How To Get Best Value From HR: The Shared Services Option: Gower, 2003 23. Reilly, P and Williams, T - How To Get Best Value From HR: The Shared Services Option: Gower, 2003
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