Carroll Hern
The CUMIS Group York University
Ronald J. Burke
The CUMIS Group York University
Outsourcing has become an increasingly powerful option for many companies seeking to reduce costs, enhance service and focus on core competencies. Most commonly used for information technology services, this trend of business process outsourcing (BPO) is very prevalent in Human Resources (HR). It is a $1.36 billion industry in Canada alone and is expected to increase 10.6 percent each year over the next five years (Vu, 2004). According to the Gartner Group, HR administrative tasks topped the list of processes outsourced in 2003 and predict that by 2007, HR BPO will be a $37.8 billion-plus industry in the United States, up from $25 billion in 2002, for an 8.6 percent growth rate.
Defining Outsourcing
The word “outsourcing” defines the process of transferring the responsibility for a specific business function from an employee group to a non-employee group. Essentially, outsourcing is the transfer of services or functions previously performed within the organization to a provider outside of the organization and is increasingly a key component in many business strategies. Outsourcing is not new to HR but, until fairly recently, it has been largely confined to functions like reference checking, payroll and benefits administration. Over the past five years, companies have begun expanding the scope of HR activities they are willing to turn over to an outside organization. Outsourcing has therefore migrated to include other functions such as training, recruitment, compensation, HR Information Technology and performance management. According to a recent survey by Hewitt Associates, more than sixty percent of companies outsource part or all of HR administration. Simultaneously, as functions are outsourced, leaders relieve their employees of albeit important, but mundane, repetitive tasks, allowing employees to focus their efforts solely on the core, value-adding activities needed for the organization to maintain its competitive advantage. If the role of HR and the opportunity to contribute to the business strategy is enhanced by HR BPO, then the core responsibilities that are likely to stay in an organization are HR strategy, HR program design, coaching and consulting, workforce analysis and planning, change management, budget and vendor management (Stroh & Trechiboff, 2003).
Why Outsource/Benefits
Motivations to outsource come from many places and are as varied as the companies pursuing the solution and most organizations who decide to outsource are doing so with the objective to achieve a combination of many associated benefits. Some of the main driving factors prompting organizations to outsource include cost savings, a focus on core competencies, access to leading–edge technological advances, access to specialized expertise, improvement in the delivery and quality of services, and/or a solution to resolving organizational politics (Belcourt & McBey, 2004).
Cost Savings
Research on outsourcing typically presents outsourcing as primarily a time and money-saving strategy, as a way to obtain better services at cheaper rates (Jeffay, Bohannon, & Laspisa, 1997) Generally speaking, there is little reason to outsource if contracting out the function incurs more time and money than keeping the activity in-house. Studies of cost savings pertaining to outsourcing arrangements of two or more years showed average savings of fifteen percent (Belcourt & McBey, 2004). Exult, a leading HR BPO provider, say that it is reasonable to expect at least a 20% reduction in HR administrative costs (Lawler, Ulrich, Fitz-enz & Madden, 2004).
According to Bendor-Samual (1998) cost savings occur due to the fact that outsourcing provides certain leverage that is not available to a company’s internal departments. This leverage can have many dimensions: economies of scale, process expertise, access to capital and access to expensive technology. The combination of these dimensions creates the cost savings inherent in outsourcing. Furthermore, cost savings are realized by converting in-house fixed costs, such as HR staff salary to variable costs wherein organizations only purchase and pay for the services related to areas such as design and strategy consultation when they need it (Jeffay, et al, 1997). These costs savings however, are only realized if in fact the organization limits the use of these additional services. This type of arrangement allows financial benefits in that organizations can predict their outsourcing costs and budget without fear of fluctuating costs (IOMA’s Report on Managing Benefits Plans, 2003).
For the supplier, HR outsourcing is likely to require upfront investment in understanding the particular needs of the organization. Where firms emphasize distinctive practices, they will likely limit the ability of the contractor to provide satisfactory services. If outsourcing is argued to result in greater economies of scale due to availability of multiple clients with similar needs ( Abraham & Taylor, 1996); economies of scale will decline when idiosyncratic practices required specific investments. The reduction of economies of scale, will, in turn, adversely impact the cost advantage of HR outsourcing.
Focus on Core Competencies
The new challenge to HR is to take accountability for the return on investment of essential corporate assets, people and organizational processes. HR’s redefined role is to concentrate on providing strategic value that helps the company gain relative advantage against its competition. If HR is largely focussed on administration, many executives may discount its strategic importance. A number of research studies have pointed out that HR executives are often mired in administrative details when they should be dealing with major strategic business issues. Outsourcing non-core activities can allow HR professionals to move away from routine administration to a more strategic role. Outsourcing provides the opportunity for these resources to re-focus on strategic work that adds value to the organizations’ core competencies. In fact, companies who have embraced outsourcing are generally more advanced in the HR shift away from administration towards strategic contribution (HR Focus, 2004). Rather than juggling every aspect of the business, organizations can focus on their core competences, while moving other activities to organizations which excel at these functions (Belcourt & McBey, 2004).
A company should not outsource any activity that directly contributes to its strategic, competitive advantage. If a company believes it can build a sustainable lead in an activity that offers long –term competitive advantage, then it should refrain from outsourcing and focus on building superior capability in that area. Core, strategic HR functions that should not be outsourced in order to ensure a strategic link to the business include orientation, leadership development, employee relations, final selection, performance management and succession management (Belcourt & McBey, 2004). The rationale behind these suggested ‘core functions’ is effective management of these functions depends on a deep understanding of organizational culture, trust, consistency, access to confidential information and a long-term orientation (Belcourt & McBey, 2004). This would help to explain why different companies of different sizes choose to outsource different HR activities.
A strong case can be made that HR needs to develop better metrics and analytics if it is ever to become a true strategic partner in most organizations. Outsourcing not only frees up time for other purposes but, data from outsourcers can provide valuable insights about how strategies are working and what might be expected in different strategic scenarios. As they gain clients, they are likely to be able to provide valuable normative data as well as analytic models. Lawler and Mohrman (2003b) identify the use of metrics as one of four characteristics that lead HR to become a strategic partner. Boudreau and Ramstad (2003) distinguish between providing more HR measures (not a strategic contribution) and providing better logic and analytics for making decisions about talent (a strategic contribution). The adoption of an HR BPO approach should lead to improved metrics about how well the HR function is operating. Analytics can help an organization diagnose what is and what is not working and make improvements in its practices.
Access to Leading-Edge Technology
Managing a successful HR Operation relies on increasingly large investments in technology and it is becoming increasingly complicated to put together and sustain a state-of the art delivery system. Technological advances enable the automation of many HR functions, promoting HR as a top candidate for outsourcing (Logue, 2004). HR outsourcing provides a means for accessing and maintaining the latest technology that may otherwise not be feasible in-house from a cost perspective. “Handling all the different aspects-software, system integration and maintenance, call centres and more-requires tremendous resources. It is more than a lot of companies can handle”. (Bloom & Wallace Consulting Firm) Access to these advancements such as self-service web-based technology allows employees to have improved access to their HR information (Smail, 2003) and benefit from quicker transaction times (Belcourt & McBey, 2004).
Access to Specialized Expertise
One-third of respondents in one study of companies outsourcing Human Resources, indicated access to specialized HR expertise to be the primary motivation for outsourcing (Abrahamson & Ruth, 2003). Results of a recent survey identified vendor expertise, along with time savings, as the most frequently cited rationales for outsourcing HR activities. The demand for specialized expertise is not surprising, given the growing complexity of HR tasks and the decline in HR specialists resulting from organizational downsizing. As companies require more specialized HR expertise, their best alternative is to hire external HR vendors to perform activities that were formerly performed in-house. An outsourcing vendor specialized in HR can apply a portfolio of accomplishments from other organizations facing similar challenges to solving an organization’s HR needs (Martin, 1997). Outsourcing provides organizations with the opportunity to tap into the leading edge “HR thinking, technologies and programs without having to invest in developing and maintaining them” (Jeffay et al, 1997, p.2). HR BPO organizations do not just need a core competency in HR administration, they need a core competency in web-enabled HR administration. If an HR BPO can satisfy a diverse customer base with the same technology, it gains even further economies of scale and is likely to be more profitable.
Additionally, outsourcing an HR activity can reduce liability and risk, which is critical for smaller companies that do not have the resources to employ staff specialists who are fully informed on the legal requirements of HR programs. For example, substantial expertise is required to insure that a retirement program conforms to the Employee Retirement Income Security Act (ERISA). As a result, smaller companies sometimes outsource the administration of their entire retirement program. Employee assistance programs (EAPs) and drug testing are also frequently outsourced regardless of company size, thus reducing legal liability associated with divulgence of confidential information.
Improving the Quality of Service
Data from Hewitt’s annual Best Employers in Canada study, demonstrates that one characteristic that sets “Best Employers” apart from other participating organizations, is their ability to do ”the basics well”. Outsourcing often allows a company to get better quality HR Services. Many companies outsource because they believe they can get the new required level of HR service faster and with more confidence in succeeding, through outsourcing (Jeffay et al, 1997). This is particularly true as companies can choose vendors with excellent track records, wherein acceptable performance standards are written in a contact (Belcourt & McBey, 2004).
Although the anticipated increase in quality of service is linked to the best practices realized through specialized expertise and the technological capabilities, inherent in most outsourced HR service providers, there may be other reasons contributing to the enhanced service level over in-house HR departments. Prospective clients believe that BPO providers offer focus, expertise, and ability to obtain economies of scale which should improve the service that the companies are getting from their internal staff groups. Exult, a leading BPO provider convincingly argues that they can make process improvements that will upgrade service quality, reduce costs, and increase speed to levels that cannot be obtained from a staff group (Lawler, et. Al, 2004). Overall, organizations are finding more flexible, responsive, higher quality services in outsourced HR service providers (Belcourt & McBey, 2004).
Organizational Politics
Organization politics play a part in terms of the perception around acceptable headcount within an organization or function (Belcourt & McBey, 2004). Downsizing has frequently required HR departments to contribute to the organizational restructuring by reducing their staffs. HR outsourcing presents the option of cost reduction and the choice to hold or release control of selected HR activities. The choice depends on whether an activity is deemed a core competency with the HR department. Organizational politics may even be the reason the outsourcing vendor is able to provide better service as contractors are often able to negotiate the necessary improvements and investments more easily than managers of in-house services (Belcourt & McBey, 2004). The use of outsourcing is a way to “syndicate the risk” when the organization cannot stay current on all the new developments in the HR field
HR BPO may also make sense for organizations because they can provide support and flexibility when the firm is growing or scaling down in size. Cost efficiencies can be gained due to adjustments based on the expansion or reduction of an organization’s headcount.
Limitations
Given that many organizations are convinced that the above noted benefits can be achieved through outsourcing, as in many situations, the key to effective outsourcing is to manage the risk downward, while strengthening the factors that lead to success. There are major risk areas that organizations need to consider when making the decision to outsource, some of which include, projected benefits are often not fully realized, flexibility to change service requirements are limited, reduced value of the organization and employee morale is negatively affected (Belcourt & McBey, 2004).
1. Projected Benefits vs. Actual Benefits
HR BPO is still in its infancy and much is still to be learned. Results to date are early indicators and companies are not yet experiencing consistent results. Towers Perrin surveyed 32 companies, nearly all of which had outsourced five or more HR business process between 2000 and 2004. The survey did find that organizations are realizing immediate returns on the cost front, with more than 75% of the respondents saying they had met short-term cost savings. This is not surprising since most contracts hold the outsourcer to some level of required savings, which can range from 12% to 40% of outsourced process costs depending on the nature of the arrangement and a company’s willingness to rely on the outsourcer’s standard approach and practices. Reductions in long-term costs are beginning to emerge as well.
Participants generally have not met broader objectives around shifting their focus to core competence and only 35% cited improvements in service quality beyond what they could have achieved on their own.
In contrast, in a recent Yankee Group report, on HR BPO, only 48% of key decision makers agreed that HR outsourcing had delivered the promised return on investment they expected. In some instances, outsourcing has been found to raise costs. Reasons for increased costs include system incompatibilities requiring further investment or additional services needed beyond the initial contract negotiated (Belcourt & McBey, 2004). In one survey interviewees explained that their existing scale effects of already being part of a large company eliminated any potential savings from outsourcing. What is clear is that organizations need to recognize that cost savings are not immediate, and are typically not recognized for at least five years (IOMA’s Pay for Performance Report, 2004).
2. Service Risks
Even if a company achieves their cost objectives, they must also be mindful of the potential impact on the quality of service. For example, one U.S company’s goal was to reduce administrative costs by 40%, but failed to sufficiently examine the implications such a reduction would have on employee service. The new effect was that the organization’s expectations were never realized and the HR leadership was unable to deliver service at the level needed to sustain the workforce.
Outsourcing HR enables companies to provide new capabilities and services for employees. Once an outsourced vendor takes accountability for delivering services, the organization has limited control in changing the nature of the services to reflect the changing needs of the business (Belcourt & McBey, 2004). In essence, the organization loses the “flexibility and customization it enjoys from its own HR people when it out sources” (Seeley, 1992, p.2). For example, consider whether the outsource provider would be able to respond if the client moved to a new performance management program or how responsive a provider can be if the company was to enter into a merger or acquisition. Companies can mitigate this impact by understanding their anticipated organizational needs at the outset, and then decide to employ a fixed-price or variable priced model, or a combination of both.
In some cases such as dispute resolution, some HR managers noted that it can be difficult for employees to find an HR professional to help them with a problem. In all cases, they can contact a service centre, but some employees feel that it is an impersonal and ineffective way to have their grievances resolved. Another reason why managers may not recognize improvement in service is that HR staff members and the employees they serve can develop a co-dependency relationship when it comes to HR administration and problem resolution. That is, they learn to depend on each other, and although the relationship may not be very efficient and may be quite costly, both become attached to it. It provides the HR staff members with a reason for being and a great deal of satisfaction when they are able to solve a problem or resolve a dispute.
Other related risks are that the third party vendor becomes so familiar with the organization they are able to enter in the same market and position themselves as a competitor. (Belcourt & McBey, 2004).
Reduced Value
Insufficient focus on retaining HR activities that support core competencies can have unintended consequences when key HR activities are hollowed out of the old HR department, resulting in lost capability and diminished customer service quality. This has the potential of reducing HR’s competitive advantage for the firm. In addition, there may be unintended consequences of outsourcing the organization’s knowledge and skills to external firms. The vendor may even sell acquired know-how to competitors (Belcourt & McBey, 2004). Because HR departments run the risk of losing their identities with extreme levels of outsourcing, a mixture of outsourcing and in-house activities seems optimal in many circumstances.
Employee Morale
A decision to outsource needs to take the psychological effects into consideration, as it represents the human cost of the outsourcing activity. “Choosing not to address the emotional toll an outsourcing decision can have may lead to actual costs, in the form of reduced morale and productivity or an unsuccessful outsourcing relationship” (Overby, 2004, p.1). Outsourcing inevitability results in displaced employees (Belcourt & McBey, 2004) ultimately affecting morale and productivity. In an outsourcing arrangement, employees may be transferred to the outsourced vendor, internally to other departments, out-placed or offered voluntary retirement packages (Belcourt & McBey, 2004). All of these options can result in negative reactions or feelings from the affected employees. Although transferring jobs to outsourced vendors can minimize the impact as a job still exists for employees, the terms and conditions of the current contract may not be fulfilled by the new organization, contributing to further anxiety.
Employees identify themselves as part of an organization and, as individuals, thrive on a sense of belongingness (Maslow’s Hierarchy of Needs) that no longer exists if their job is outsourced. The psychological impact even from just rumours of outsourcing can range from fear and uncertainty to more devastating affects such as depression or violence among affected employees (Overby, 2004). These affects in turn influence morale, productivity and ultimately impact achieving the goals of the outsourcing arrangement.
Key Success Factors
Outsourcing is not a small undertaking; it requires planning, communication and follow-up (Zhu, Hsu & Lillie, 2001). Companies that have effectively implemented outsourcing in their organizations point to different reasons for their success, but most employers agree on the following core elements to successful implementation:
1. Planning and Preparation: set realistic objectives and expectations for the process and the transition.
2. Effective Change Management: includes obtaining stakeholder buy-in, communicating early and often and planning for the work that will stay and for the people whose work will go away.
3. Manage the Relationship: design and execute a robust governance structure, promote teamwork and evaluate progress by measuring the right things
4. Contract Negotiations: be thorough in understanding and documenting requirements
5. Vendor Selection: select the right outsourcing provider
Planning and Preparation:
Before making the decision to outsource, companies must plan thoroughly and gain full commitment from the entire organization. Outsourcing must be conducted carefully, systematically and with explicit goals. The primary motives for considering outsourcing should include strategic as well as tactical considerations at both the department and organizational level. It is important that management not use outsourcing to justify relinquishing control of inadequately managed, poorly understood or costly functions, as this would result in an unsatisfactory outcome. Preparation involves examining current internal processes and setting realistic goals for the outsourcer (HR Focus, 2003). It is important to understand what work is done in the current environment, why it is done and why it is done a certain way. Nigel Knight, of IBM Business Consulting Services suggests that a project team be established to assess the potential scope and risks of BPO. An often neglected aspect of the planning stage is the assessment of the current costs and performance of the HR function. Such data analysis provides a baseline for measuring what BPO can achieve and may ultimately be pivotal in developing the business case.
In addition to costs, other considerations that also should be addressed in the business case include: the impact outsourcing a particular function may have on customer service, the impact it may have on the community where is operates as well as the potential political consequences of employee reduction.
Successful outsourcing requires thorough execution of all implementation activities. It is equally critical to not under-estimate the time and effort it will take to make the transition to a new system, particularly if it is WEB based. Allow time for employees to become comfortable with the new approach. In any change of this magnitude, at least 10 to 20 percent of people affected will be opposed.
Change Management:
The shift to HR BPO is a major transformation in the way HR services are delivered and therefore brings a number of significant changes to the organization, raising critical change management issues. This change in delivery requires buy-in and participation from several stakeholders, leaders, managers, employees and HR professionals to ensure the shift is a success. Companies that have the greatest success in driving change designate a leader with credibility to be the champion of the change in order to accelerate the adoption of the new delivery model.
A particularly important feature of the change process concerns how the existing employees will be dealt with. Outsourcing has a major effect on the employees in HR and a significant effect on all other employees. Over prepare the HR employees who will be directly involved. Employees may feel threatened; they may also be suspect of a larger hidden agenda. It is necessary to be completely transparent regarding short term and long term plans and goals. A major communication and training effort is needed to explain what is happening and why and to familiarize employees with the new process.
Although there are varying opinions as to when employees should be informed about the process (Belcourt & McBey, 2004), the reality is that information is bound to leak out and even if it has not been formally announced, rumours are just as likely to heighten anxiety and potentially encourage the best performers to job search. Candid communication wherein the rationale of the merger is shared (Caplan, 2004) and information prepared around how the outsourcing arrangement may impact employees is critical in retaining the trust of employees. Additionally, some of the strongest advice is to involve unions if they will be affected by the change. It will be necessary to keep them educated and informed and let them have an opportunity to understand what is going to unfold.
Manage the Relationship and Monitor the Arrangement:
A crucial factor often overlooked by management when calculating the potential benefits of an outsourcing strategy is that, by nature, outsourcing trades the problems associated with managing a specific service or function for those of managing alliances with external partners.
Organizations in the HR BPO relationship need to work together in a partnership mode. They are in a long-term, multi-year relationship that can only work if the organizations and people trust and respect each other. No contract, no matter how extensive, can cover all of the contingencies that come up, so it is critical that processes be put in place that allow organizations to deal with problems and unexpected events effectively. Some of the key culture fit issues are the value that the organizations involved place on speed and quality and how they resolve conflict.
One of the biggest mistakes organizations make after outsourcing is to assume HR staff is no longer needed (IOMA’s Pay for Performance Report, 2003).The contracts and relationships need to be continuously managed to ensure productivity and efficiency in reaching an organization’s outsourcing goals. The role of the HR person or team dedicated to outsourcing is basically to manage the relationship with the vendor to ensure the organization is receiving effective and efficient services at an acceptable level. Frequent, accurate reports should be reviewed to ensure satisfaction with the vendor(s)’ commitment to these measures (Belcourt & McBey, 2004). Further, client satisfaction surveys should be conducted regularly to gauge the quality of service provided (Belcourt & McBey, 2004).
Research indicates the companies realizing the benefits of outsourcing were the ones who managed the vendor relationship better and built a relationship right from the very start (Tarsh, 2004). This involves a complete partnering between the organizations to review progress and continuously improve the arrangement (Yallof & Morgan, 2003). A relationship should be built between the vendor(s) and the organization to ensure the vendor acts in the organizations best interest (Belcourt & McBey, 2004) and to ensure mechanisms exist to work out issues along the way. Trust between the contractor and purchaser is essential since no set of rules can define the relationship. The required relationship between the parties has been called a “clan” where shared values, common beliefs, and serial equity become foundations for sustaining the contract.
As previously mentioned, for organizations to work together, it is imperative that there be some degree of cultural fit and compatibility between them. As any differences in culture and operating styles between partners are likely to emerge only as the collaboration evolves, much depends on being able to identify such differences quickly and to resolve them effectively.
Governance is a crucial component which ensures a successful long term relationship. Governance is a formal management framework and structure that enables vendors and organizations to mutually manage the relationship, expectations, contractual dependencies and services. The most successful BPO arrangements to date have regular client-provider meetings and also have designated managers on each side and at several levels to keep watch over the relationship. As such, there should be regular meetings scheduled to review progress and discuss and recommend ways to remove barriers that either organization is feeling to ensure a solid relationship. Regular meetings with the vendor provide a critical opportunity to clearly express priorities, review what is working what is not working, identify continuous improvement initiatives and set objectives for both organizations aimed at attaining success (Yallof & Morgan, 2003). Some successful organizations even conduct joint training and development programs focusing on building this relationship such as mutual problem solving workshops providing both organizations with the tools to work together to solve issues (Hunt, 2004). The individual or team managing the relationship will need HR expertise, systems knowledge and management skills to effectively build solid relations and ultimately guide outsourcing operations to success (O’Connell, 1997)
Although governance provides a structural and procedural context for leadership, effective suppliers exercise leadership more directly. One study found that the individuals fulfilling supplier leadership roles had a considerable impact on client relationship success. In unsuccessful cases, the leader of the supplier team was often seen as too focused on delivery and meeting contractual service levels. In successful relationships, the quality of the supplier leader’s personal relationship with the client leader and the relationship between the supplier’s leader and the supplier’s top management can have an important impact on the wider relationship between client and suppler organizations. Selection of the individual to lead the client account would therefore be a key consideration in sustaining an effective ongoing partnership.
Contract Negotiation:
Developing a good contract is critical to HR BPO outsourcing. Entering into contracts that are poorly structured can lead to failure. Due diligence needs to extend into the contract negotiation stage of the process. Too often organizations sign the contract before finalizing all of the fine details such as service level agreements and find they are not attaining the benefits they were seeking (Huber, 2003). Because every aspect of the outsourcing arrangement is governed by the contract, both sides must agree on all the terms and conditions of the partnership agreement. This requires that management consider every possible contingency that could arise during the course of the partnership, including the resolution of disputes after the contract has been signed. Thus, it is advisable that internal as well as external legal experts be consulted when drafting the contract. Experts advise organizations to seek independent council and experts the same way the vendor would, to ensure the organizations interests are being met, acceptable performance standards are determined (Belcourt & McBey, 2004) and an appropriate fee structure and exit strategy is covered. Some experts even recommend having a fallback plan, such as another qualified supplier to ensure organizations do not feel limited if the organizational requirements can not be met. Acceptable service and quality level measures should be explicitly outlined and penalties enforced if the vendor does not meet these levels (Belcourt & McBey, 2004).
There should be clear goals for all relevant criteria including performance indicators such as accessibility, timeliness of service, accuracy, and customer satisfaction (Yallof & Morgan, 2003). Although organizations want to protect themselves with tight agreements leaving no room for misinterpretation, there is also the risk of specifying conditions too tightly. This does not allow the vendor room to apply discretion to respond to a business needs or insert innovation to improve services (Tarsh, 2004). In contracts as large as and complicated as those in HR BPO, many issues will remain vague and depend on trust. Thus, it is particularly important that contracts be clear about expectations, roles and dispute resolution.
Vendor Selection:
Cost, customer service and experience were found to the biggest priorities of firms selecting a provider (Abrahamson & Ruth, 2003), however, many of the outsourcing failures by corporations can be traced to choosing the wrong vendor. Nothing is more fundamental to the success of an outsourcing effort than the fit between an organization and its vendor. The vendor needs to have the right systems and working style that fits with the company it is serving.
One of the most difficult and underestimated issues facing outsourcing relationships is the impact of cultural differences between the client and vendor organizations. Clients tend to believe that the norms, values and ethics of their vendors will be similar to their own. Once into the relationship, they realize that the vendor’s view of time management, organizational structure, business approaches, decision-making processes, long term cooperation and teamwork may be much different from their own. If these issues are not addressed and resolved in a timely manner, the relationship is destined to finger pointing, low productively and mutual dissatisfaction.
Selection criteria should include a high criterion weighting for vendors’ knowledge of the industry because HR practices differ across industries. Finally, organizations that choose a firm with similar culture (HR Focus, 2003) increase compatibility throughout the process, and should have the infrastructure to adapt to changing business needs (Employee Benefit Plan Review, 2000). In addition, vendor stability and continuity are critical to the long term success of an HR BPO contract.
Conclusion
The search for how HR can be more strategic and aligned with the business has been an ongoing goal of HR professionals and certainly outsourcing has become an important strategic tool in today’s competitive business environment. The decision to outsource a function should start with a sound business plan and successful outsourcing process starts with a good contract. The business relationship between the client and the vendor after the outsourcing should be clear to all parties prior to the completion of the vendor agreement. Addressing the key change management issues for employees impacted by the decision is necessary to achieve long term success.
It is clear that the role of outsourcing should not only include cost saving objectives but should look to address other benefits such as improved service, focus on core competencies, access to leading-edge technology and specialized expertise. As indicated in the research findings, organizations can achieve significant benefit from using outside agencies to provide non-core services, however organizations must weigh carefully the specific reasons, costs and benefits associated with the decision.